Naiki sells 10,000 pair of shoes each year. If the total cost of placing an order is 6.5 and it costs 13per year to carry one pair in inventory, use the EOQ formula to calculate the optimal order size. Macro tut 7

cNaiki sells 10,000 pair of shoes each year. If the total cost of placing an order is 6.5 and it costs 13per year to carry one pair in inventory, use the EOQ formula to calculate the optimal order size.Naiki sells 10,000 pair of shoes each year. If the total cost of placing an order is 6.5 and it costs 13per year to carry one pair in inventory, use the EOQ formula to calculate the optimal order size.Choice Identify the choice that best completes the statement or answers the question 1 When we say that economic fluctuations are “irregular.

Macro Tut 7: Aggregate Demand and Aggregate Supply

Multiple Choice: Identify the choice that best completes the statement or answers the question.

1 When we say that economic fluctuations are “irregular and unpredictable,” we mean that

a the relationship between output and unemployment is erratic and difficult to characterize

b when one macroeconomic variable that measures income or spending is falling, other macroeconomic variables that measure income or spending are likely to be rising

c recessions do not occur at regular intervals

d All of the above are correct

2 Real GDP

a is the current dollar value of all goods produced by the citizens of an economy within a given time

b measures economic activity and income

c is used primarily to measure long-run changes rather than short-run fluctuations

d All of the above are correct

3 As recessions begin, production

a and unemployment both rise

b rises and unemployment falls

c falls and unemployment rises

d and unemployment both fall

4 The classical model is appropriate for analysis of the economy in the

a long run, since evidence indicates that money is not neutral in the long run

b long run, since real and nominal variables are essentially determined separately in the long run

c short run, provided money is not neutral

d short run, provided real and nominal variables are highly intertwined

5 Most economists believe that money neutrality holds

a in the short run but not the long run

b in the long run but not the short run

c in both the short run and the long run

d in neither the short run nor the long run

6 The aggregate demand and aggregate supply graph has

a the price level on the horizontal axis The price level can be measured by the GDP deflator

b the price level on the horizontal axis The price level can be measured by real GDP

c the price level on the vertical axis The price level can be measured by the GDP deflator

d the price level on the vertical axis The price level can be measured by GDP

7 The model of aggregate demand and aggregate supply explains the relationship between

a the price and quantity of a particular good

b unemployment and output

c wages and employment

d real GDP and the price level

8 The curve that shows the quantity of goods and services that firms produce and sell

a as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-demand curve

b as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-supply curve

c as it relates to the overall price level is called the aggregate-demand curve

d as it relates to the overall price level is called the aggregate-supply curve

9 When the price level falls the quantity of

a consumption goods demanded rises, while the quantity of net exports demanded falls

b consumption goods demanded and the quantity of net exports demanded both rise

c consumption goods demanded and the quantity of net exports demanded both fall.

d consumption goods demanded falls, while the quantity of net exports demand rises

10 The effect of an increase in the price level on the aggregate-demand curve is represented by a

a shift to the right of the aggregate-demand curve

b shift to the left of the aggregate-demand curve

c movement to the left along a given aggregate-demand curve

d movement to the right along a given aggregate-demand curve

11 Other things the same, an increase in the price level makes consumers feel

a less wealthy, so the quantity of goods and services demanded falls

b less wealthy, so the quantity of goods and services demanded rises

c more wealthy, so the quantity of goods and services demanded rises

d more wealthy, so the quantity of goods and services demanded falls

12 Other things the same, an increase in the price level induces people to hold

a less money, so they lend less, and the interest rate rises

b less money, so they lend more, and the interest rate falls

c more money, so they lend more, and the interest rate falls

d more money, so they lend less, and the interest rate rises

13 Other things the same, when the price level falls, interest rates

a rise, which means consumers will want to spend more on homebuilding.

b rise, which means consumers will want to spend less on homebuilding

c fall, which means consumers will want to spend more on homebuilding

d fall, which means consumers will want to spend less on homebuilding

14 Other things the same, as the price level falls, which of the following increases?

a lending and investment spending

b lending, but not investment spending

c investment spending, but not lending

d neither investment spending nor lending

15 Other things the same, as the price level rises, the real value of a dollar

a rises, and interest rates rise

b rises, and interest rates fall

c falls, and interest rates rise

d falls, and interest rates fall

16 Other things the same, the aggregate quantity of goods demanded in the U.S increases if

a real wealth falls

b the interest rate rises

c the dollar depreciates

d None of the above is correct

17 Suppose a fall in stock prices makes people feel poorer The decrease in wealth would induce people to desire

a decreased consumption, shown as a movement to the left along a given aggregate-demand curve

b increase consumption, shown as a movement to the right along a given aggregate-demand curve

c decreased consumption, shifting the aggregate-demand curve to the left

d increased consumption, shifting the aggregate-demand curve to the right

18 When taxes decrease, consumption

a decreases as shown by a movement to the left along a given aggregate-demand curve

b decreases as shown by a shift of the aggregate demand curve to the left

c increases as shown by a movement to the right along a given aggregate-demand curve

d increases as shown by a shift of the aggregate demand curve to the right

19 Other things the same, an increase in the amount of capital firms wish to purchase would initially shift

a aggregate demand right

b aggregate demand left

c aggregate supply right

d aggregate supply left

20 The Central Bank of Wiknam increases the money supply at the same time the Parliament of Wiknam passes a new investment tax credit Which of these policies shift aggregate demand to the right?

a both the money supply increase and the investment tax credit

b the money supply increase but not the investment tax credit

c the investment tax credit but not the money supply increase

d neither the investment tax credit nor the money supply increase

EXERCISES AND PROBLEMS:

Excise 1

1 Recessions do not occur at ………regular ………intervals

2 As recessions begin, production ……falls…… and…unemployment ………… rises

3 The model of Aggregate Demand and Aggregate Supply explains the relationship between the

price level and …………real GDP ………

4 A fall in stock prices induces people to …decrease………… consumption, shifting the aggregate-demand curve to the …left…………

5 Other things the same, the aggregate quantity of goods demanded in the U.S increases if the

dollar ………Depreciates………

6 Other things the same, an increase in the price level induces people to hold …more ………… money, so they lend ……less………., and the interest rate …rises………

7 Most economists believe that ……money neutrality……… holds in the long run but not the short run

Exercise 2: Find the underlined parts that are incorrect in these statements and correct them:

8 Technological progress shifts the short-run AS and the long-run AS curve to the left

A B C

Dright

9 Increased pessimism about the future leads to rising prices and falling unemployment in the

A optimism B

C

short run

D

10 A decrease in the money demand causes the interest rate to rise so that investment falls

A Bmoney supply C

D

11 Stagflation results from continued decreases in aggregate demand

A B C D aggregate supply

12 A change in the money supply changes only nominal variables in the short run

A B C D long run

Problem 1:

Draw an AD-AS graph showing long-run macroeconomic equilibrium Label AD, SRAS, LRAS, potential output, equilibrium aggregate price level, and output

PRICE LEVEL

Long run aggregate supply Short run aggregate supply

A

GGREGATE DEMAND Real output

POTENTIAL OUTPUT

equilibri

um

aggrega

te price

level

Problem 2:

For each of the following, describe the effect on the AD, SRAS, and LRAS curves, identify whether the effect causes a shift of or a movement along the curve, and identify the direction of the shift/movement

a An increase in the money supply causes interest rates to fall

The AD curve shifts to the right and there is movement upward along the SRAS curve There

will be no change in the LRAS curve

b The price of commodities increases by 10% this year

This causes the SRAS curve to shift to the left There will be a movement along the AD curve There will be no change in LRAS

c The price of oil falls

SRAS shifts to the right and results in a downward movement along the AD curve There is no change in the LRAS

d Labor unions successfully negotiate an increase in nominal wages for their workers SRAS shifts to the left

e The supply of unsold houses in an economy increases by 20%

When the inventory of unsold houses increases in an economy, this implies that the level of investment is high and there is therefore less incentive for firms to invest in

this economy As investment spending falls, AD shifts to the left

f There is an increase in labor productivity due to increases in human capital

SRAS shifts the the right, but also causes LRAS to shift to the right because the economy can now produce a higher potential output level

g The government increases spending in order to finance a war

AD shifts to the right

Problem 3:

Consider an economy in long-run equilibrium Draw a graph of the AD-AS model to show the effect of each of the following (ceteris paribus) changes

a The economy’s central bank decreases the money supply.=)) IR INCREASES , INVESTMENT SPENDING INCREASE (negative demand shock=) demand decrease )

PRICE LEVEL

LRAS SRAS

P1

P2

Real gdp Y2 Y1

b Productivity decreases in the economy

For both a and b, answer the following sub-questions:

i What happens to the aggregate output and price level? Y↓, PL↑

ii Does this economy face a short-run recessionary gap or an inflationary gap? recessionary

iii What active stabilization policy can offset this particular shock? Expansionary monetary or fiscal policy

i What would happen in the long run to the aggregate price and output levels without an active stabilization policy? ? Nominal wages become flexible and fall, SRAS shifts to the right, output ↑ to potential output