This quiz may have caused some difficulty. Read the explanations carefully; it is important to master the AD/AS framework.

1. The long run aggregate supply curve (LRAS) reflects a belief about the capacity of the economy to produce output and the natural rate of unemployment. This belief suggests an LRAS which is:

a. negatively sloped b. vertical c. positively sloped d. horizontal

The belief is that, ceteris paribus, the economy will tend to return to producing the level of output corresponding to the natural rate of unemployment, i.e. in the long run, output will return to the same level [capital stock, technology, etc, unchanged], i.e. LRAS is vertical,

the price level does not matter in the long run with respect to how much output the economy will produce.

2. When the price level increases while the stock of money is constant, wealth is decreased (the money will buy less) and therefore aggregate demand decreases. This is called:

a. Goods market equilibrium b. Real balance effect c. interest-sensitive demand effect

Definition.. Read the book!

3. If the money interest rate is 11% per annum, and everybody expects inflation of 5%, then the real interest rate is:

a. 16% b. roughly 2.2% [11/5 = 2.2] c. roughly 6% d. insufficient info to answer.

"Real = money - inflation," 11 - 5 = 6.

4. In the loanable funds market, the main reason we believe that the supply of loanable funds slopes upward, i.e. more funds are offered for borrowing if the real interest rate is higher, is that

a. loanable funds are mobile internationally b. households are bound to save more if real interest rates go up

c. if the real interest rate is higher, it is more expensive to borrow d. the real balance effect

Question asks about "more funds offered for borrowing" -- i.e., supply of loanable funds. That increases when the real interest rate increases because if interest rates abroad have not changed (that is the ceteris paribus assumption), controllers of assets abroad will offer them for borrowing in the US. c., the answer many give, is true in itself but is why demand for loans decreases, not why the supply curve slopes up.

5. In terms of expenditure on final goods, aggregate demand is

a. C+I+G+S+T b. C+I+G c. C+S+T-P d. C+I+G+X-M

Another definition; you need to know it.

6. Which of the following is an intermediate good?

a. Paperclips bought by a pizza company b. Paperclips bought by the City of Tallahassee

c. Paperclips bought by an FSU student d. Paperclips bought by FSU.

The material is cumulative -- try not to forget it. Intermediate goods are goods that are not final, and fully used up in the production of other goods. b. and d. are final because government purchased; c. is final because in national accounting terms that is consumption -- household purchases are consumption. An intermediate good has to be bought by a firm, a private sector producer.

For questions 7 through 10, for the event listed on its own, indicate whether (a) aggregate demand increases, (b) aggregate supply increases, (c) both aggregate demand and aggregate supply increase, or (d) neither changes.

"Increase" means 'shift to the right' -- at the same price level, more output will be purchased (AD) or supplied (AS) by the economy.

7. Technology improves, increasing both productivity [output from existing resources] and investment in the new technology. (c); the productivity improvement shifts AS to the right, the new investment shifts AD to the right.

8. More people continue working beyond normal retirement age. (c). The right answer is not (d). Think about it; if more people continue working beyond normal retirement age, the labor force has increased, i.e. the economy has more resources; that shifts AS to the right. Plus, those people now have earnings they would not have had, so incomes are higher and consumption expenditure will be higher, so AD shifts to the right.

9. The federal government reduces income taxes by $500 per person. (a). People's disposable income increases, so their consumption expenditure increases, so AD shifts to the right. [over]

10. The world price of soybeans (a major US export) increases. (a). When the world price of (exported from the US) soybeans goes up, at the domestic US price level the value of exports [X] goes up, X is part of AD, so AD has shifted to the right. AS has not changed.

Tuesday 14 through Thursday 23 October I expect Professor Gapinski to be guest-lecturing to you. He will be covering the material in chapters 10, 11, and 12 of the text, though he tends to hue less closely to the text than I do. He is likely to give you at least one quiz during that time.

In those chapters, and in chapter 9, useful and good workbook Problems and Projects are:

Chapter 9: 1 (p.92), 4 (p. 94)

Chapter 10: 6, 7, 8 (pp. 102 — 103)

Chapter 11: 1, 2, 4 (pp. 110 —111)

Chapter 12: 4, 6 (pp. 118 - 120)

In these chapters in particular, it is also useful to work through the multiple choice questions in the workbook because both the vocabulary and the concepts are somewhat unfamiliar to people at first.

Remember, if you don't understand why the right answer given by the workbook is what it says it is, feel free to ask me or Mr Yoshimine in office hours, or send an email.