MacroeconomicsMacroeconomics

Dr. Mo’een RajabDr. Mo’een Rajab

Questions for Revision (5)

on chapter (9)

10/5/2011

Section I:Section I:Answer the following questionsAnswer the following questions::

1.1. Explain how we can derive the Aggregate Explain how we can derive the Aggregate Demand curve.Demand curve.

To derive the aggregate demand curve, To derive the aggregate demand curve, we examine what happens to we examine what happens to aggregate output (income) (aggregate output (income) (YY) when ) when the price level (the price level (PP) changes, ) changes, assuming no changes in assuming no changes in government spending (government spending (GG), net taxes ), net taxes ((TT), or the monetary policy variable ), or the monetary policy variable ((MMss).).

2. Explain the relationship aggregate 2. Explain the relationship aggregate output (Income) and the price level. Use output (Income) and the price level. Use a graph.a graph.

The relationship between these variables The relationship between these variables is negative according to the following is negative according to the following graph.graph.

Section (II)Section (II)mention whether these sentences true or falsemention whether these sentences true or false::

1. 1. Aggregate demandAggregate demand is the total supply is the total supply for goods and services in the for goods and services in the economy.economy. (×)

2. 2. The The aggregate demand (AD) curveaggregate demand (AD) curve is a is a curve that shows the negative curve that shows the negative relationship between aggregate output relationship between aggregate output

(income) and the price level.(income) and the price level. (√)(√)

3. The Aggregate demand 3. The Aggregate demand curve (AD) is not a market curve (AD) is not a market demand curve. It is a more demand curve. It is a more complex concept.complex concept. (√)

4. We can use the ceteris 4. We can use the ceteris paribus assumption to paribus assumption to draw an AD curve.draw an AD curve. (×)

5- A higher price level 5- A higher price level causes the demand for causes the demand for money to rise. money to rise. (√)(√)

6- All points along the 6- All points along the ADAD curve, both the goods market curve, both the goods market and the money market are in and the money market are in equilibrium. equilibrium. (√)(√)

Questions for Revision (5)

on chapter (10)

Section I:Section I:Answer the following questionsAnswer the following questions::

1.1. Define the unemployment rate.Define the unemployment rate.

The The unemployment rateunemployment rate is is the ratio of the number of the ratio of the number of people unemployed to people unemployed to the total number of the total number of people in the labor force.people in the labor force.

2- Define the Cyclical 2- Define the Cyclical unemploymentunemployment

It is the increase in It is the increase in unemployment that unemployment that occurs during occurs during recessions and recessions and depressions.depressions.

3- Compare between frictional unemployment $ 3- Compare between frictional unemployment $ Structural Unemployment.Structural Unemployment.

• Frictional unemploymentFrictional unemployment is the portion is the portion of unemployment that is due to the of unemployment that is due to the normal working of the labor market; normal working of the labor market; used to denote short-run job/skill used to denote short-run job/skill matching problems.matching problems.

• Structural unemploymentStructural unemployment is the portion is the portion of unemployment that is due to of unemployment that is due to changes in the structure of the changes in the structure of the economy that result in a significant economy that result in a significant loss of jobs in certain industries.loss of jobs in certain industries.

4- What are the effects of rising and falling 4- What are the effects of rising and falling wage rates according to classical wage rates according to classical economists.economists.

According to classical economists, According to classical economists, the quantity of labor demanded the quantity of labor demanded and supplied are brought into and supplied are brought into equilibrium by rising and falling equilibrium by rising and falling wage rates. There should be no wage rates. There should be no persistent unemployment above persistent unemployment above the frictional and structural the frictional and structural amount.amount.

Section (II)Section (II)mention whether these sentences true or falsemention whether these sentences true or false::

1.1. The The unemployment rateunemployment rate is the ratio of is the ratio of the number of people employed to the the number of people employed to the total number of people in the labor total number of people in the labor

force.force. (×)

2.2. Classical economists believe Classical economists believe that the labor market always that the labor market always clears.clears. (√)(√)

3- If labor demand 3- If labor demand decreases, the equilibrium decreases, the equilibrium wage will rise.wage will rise. (×)

4- The unemployment rate is The unemployment rate is necessarily an accurate necessarily an accurate indicator of whether the labor indicator of whether the labor market is working properly.market is working properly. (×)