rev ch 23 - 1. 2 macroeconomic variables that fall: real...

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1. 2 macroeconomic variables that fall: real GDP, economy’s output of goods and services. Macroeconomic variable that rises: rate of unemployment. 2. 3. Wealth effect: a lower price level raises the real value of households’ money holdings, which stimulates consumer spending. Interest rate effect: a lower price level reduces the quantity of money households demand; as households try to convert money into interest-bearing assets, interest rates fall, which stimulates investment spending. Exchange rate effect: lower price level reduces interest rates, the dollar depreciates in the market for foreign currency exchange, which stimulates net exports. 4. Because in the long run, the quantity of goods and services supplied depends on the economy’s labor, capital, natural resources, and technology but not the overall level of prices. 5. Sticky- wage theory: an expected fall in price level temporarily raises real wages, which induces firms to reduce employment and production. Sticky- price theory:
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This note was uploaded on 06/20/2011 for the course ECON 123 taught by Professor Mrews during the Spring '11 term at Korea Advanced Institute of Science and Technology.

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