AP Unit 5 Ch. 15-17

1. In terms of aggregate supply, the difference between the long run and the short run is that in the long run:

• the price level is variable.

• employment is variable.

• real output is variable.

• nominal wages and other input prices are fully responsive to price-level changes

The long-run aggregate supply curve is vertical:

• because the rate of inflation is steady in the long run.

• because resource prices eventually rise and fall with product prices.

• because product prices always increase at a faster rate than resource prices.

• only when the money supply increases at the same rate as real GDP.

The short-run aggregate supply curve is upsloping because:

• of the interest rate effect.

• higher price levels create incentives to expand output when resource prices are unresponsive to price-level changes.

• of the net export effect.

• higher price levels create an expectation among producers of still higher price levels.

Refer to the above diagram. If the price level rises above P1 because of an increase in aggregate demand, the:

• economy will move up along curve B and output will temporarily increase.

• long-run aggregate supply curve C will shift upward.

• short-run aggregate supply curve B will automatically shift to the right.

• economy's output first will decline, then increase, and finally return to Q1

Refer to the above diagram. The initial aggregate demand curve is AD1 and the initial aggregate supply curve is AS1. Demand-pull inflation in the short run is best shown as:

• a shift of the aggregate demand curve from AD1 to AD2.

• a move from d to b to a.

• a move directly from d to a.

• a shift of the aggregate supply curve from AS1 to AS2.

1. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the extended AD-AS model:

• demand-pull inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C.

• cost-push inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C.

• recession would involve a leftward shift of curve A followed by a leftward shift of curve C.

• recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.

Refer to the above diagram, relating to short run and long run aggregate supply. The

• Short-run aggregate supply line is A.

• Short-run aggregate supply line is B.

• Long-run aggregate supply curve is B.

• Long-run aggregate supply curve is D.

Refer to the above diagram and assume the economy is operating at equilibrium point w. In the short run, an increase in the price level from P2 to P3 would move the economy from point w to point:

• v

• x

• u

• y

Refer to the above diagram and assume the economy is operating at equilibrium point w. If wages and other resource prices are flexible downward, in the long run a decrease in the price level from P2 to P1 would move the economy from point w to point:

• v

• x

• t

• y

The basic problem portrayed by the traditional Phillips Curve is:

• that a level of aggregate demand sufficiently high to result in full employment may also cause inflation.

• that changes in the composition of total labor demand tend to be deflationary.

• that unemployment rises at the same time the general price level is rising.

• the possibility that automation will increase the level of noncyclical unemployment.