ECON 214 InQuizitive ch. 14 Liberty University Solution

In 2009 dollars, U.S. GDP was $1057 billion at the start of the Great Depression but fell to $778 billion by 1933. What percentage decline does this represent?

In 1928 and 1929, the federal government’s tightening of the money supply was one of the policies that contributed to the Great Depression.

Compared to other recessions post–World War II, what did the Great Recession have?

Suppose that a new Federal Reserve administration inspires greater public confidence in a stable inflation rate, and citizens begin to expect lower prices five years in the future. As a result, prices and nominal wages fall in the present and remain low, while GDP and real wages fall for a few months but then return to normal.

True or false: this economy is well described by classical economics.

Assume that Y0 is the full employment level of the economy. Match each scenario to the corresponding level of output.

Match each statement with the portion of the aggregate demand–aggregate supply model that would be affected by it.

The figure below depicts U.S. real GDP (the red line) and the long-run trend in GDP that prevailed before the Great Recession (the dotted blue line). After the Great Recession, there does not appear to be any tendency for real GDP to return to the long-run trend line. This situation is most consistent with a – in aggregate –.

The aggregate supply and aggregate demand model is a useful tool for analyzing recessions. The graph below is a model of the Great Recession. Correctly label the long-run aggregate supply (LRAS) and aggregate demand (AD) curves below to complete this model.

Assume that a country is currently producing at a level of output equal to $600 billion. The government decides to increase expenditures by $25 billion, and the nation’s MPC is 0.8. Based on the spending multiplier, what is the nation’s new level of total output (in billions of dollars)?

Along with the aggregate demand–aggregate supply model, there is another model that economists use to analyze people’s overall spending patterns.

The aggregate – model is essentially another way of viewing a country’s aggregate –. In this model, the economy is viewed from a – economist’s perspective, and it assumes that in the –, prices are –.

The Great Depression is generally regarded as beginning with the – crash of October 29, –. Including that day, stock prices fell by almost – over the next few years. The Great Depression ended in –.

The graph below plots the unemployment rate over time from the start of the Great Recession. Click on the unemployment rate range that contains the maximum unemployment rate reached during the Great Depression of the 1930s.

Economists use the –, which is graphed above, as a measure of consumers’ confidence in their financial future. One cause of the Great Recession was a fall in aggregate demand, and one cause of this decline in aggregate demand was – in expected income. Looking at the graph, one can see that the index began falling in 2007 and fell – during the recession. In 2012, the index – pre-recession levels.

The Great Depression challenged the prevailing – economic belief that the macroeconomy – returns to long-run equilibrium following a – shock, since it wasn’t until – after the Depression began that real GDP returned to pre-Depression levels.