Chaper 29 Workbook Section 29.1 1. F 2. F 3. F 4. T 1. B 2. A 3. B 4. C 5. C 6. A 1.

The standard definition of a recession is a decrease in real GDP that lasts for at least two quarters or 6 months 2.

3. The economy experiences recession at the 3rd quarter of 2004 to the 2nd quarter of 2005 and also the 1st quarter of 2006 to the 3rd quarter of 2006. Section 29.2 1. F 2. F 3. T 4. T 1. C 2. A 3. E 4. A 5. C 1. A) a fall in the money wage rate and E) an increase in productivity increase aggregate supply and shift the AS curve rightward. D) A rise in the price of oil and H) Government regulations severely restrict the amount of pollution firms decrease aggregate supply and shift the AS curve leftward. The remaining letters b, c, f, and g doesnt shift the AS.

2a.

2b. If there was a fall in the money wage rate, then it would have no effect on potential GDP therefore the potential GDP line does not change, but the aggregate supply increases so the AS curve shifts rightward. 2c.

2d. Both the potential GDP line and the aggregate supply curve would both shift rightward by $2 trillion. 1. The AS curve would slope upward and brings a change in the real wage rate therefore if the price level rises, the real wage rate falls. 2. The aggregate supply shifts because an increase in the money wage rate increases firms costs. Also, aggregate supply decreases and the AS curve shifts leftward resulting that changes in the money wage rate does not change potential GDP 3. The effect on aggregate supply if the money price of oil rises is that if the money price of oil rises, firms cost increases, Aggregate supply decreases and the aggregate supply curve shifts leftward.

Section 29.3 1. T 2. F 3. F 4. F 1. D 2. C 3. A 4. B 5. A 6. A 1. B) and C) would increase aggregate demand and shift the AD curve rightward. F) and G) would decrease aggregate demand and shift the AD curve leftward. A) D) E) and H) would not shift the AD curve. 2a. 2b.

1. An increase in the price level decreases the quantity of real GDP demanded because an increase in the price level lowers the buying power of money, which decreases consumption expenditure. 2. The effect of this is that there would be an increase in expected future profit increasing the investment therefore would increase aggregate demand. 3. If the government increases its taxes, the effect of aggregate demand and consumers disposable income is that they both decrease. 4. The aggregate demand multiplier is an effect that magnifies changes in expenditure and increases fluctuations in aggregate demand. Section 29.4 1. T 2. F 3. T 4. F

1. D 2. B 3. C 4. B 5. E 6. B 7. C 8. A 9. A 1. Stagflation is a combination of recession and inflation and stagflation can be created by a decrease in aggregate supply. 2. If a government decreases its taxes, it increases aggregate demand and the price level would rise as well as the real GDP increasing. 3. If the government decreases its expenditure, it decreases aggregate demand and shifts the AD curve leftward resulting in the price level falling and real GDP decreasing. 4. A fall in the money wage rate increases aggregate supply and shifts the AS curve rightward. Also, the price level rises and the real GDP would also increase. 1a. 1b.

2. A rise in the price of oil, the aggregate supply decreases and the AS curve shifts leftward from AS to AS1. Therefore, the real GDP would decrease and the price level would rise. 3. An inflationary gap is a gap that exists when real GDP exceeds potential GDP. Inflationary gap is eliminated when eventually real GDP returns to the potential GDP and therefore eliminating the inflationary gap.