Question 1

When the ________ decreases, then potential output decreases.
A) short-run aggregate supply
B) long-run aggregate supply
C) short-run aggregate demand
D) long-run aggregate demand

Accepted Answer

Long-run aggregate supply represents the level of potential output in the economy, which is determined by the factors of production such as labor, capital, and technology. When these factors decrease, potential output decreases and shifts the long-run aggregate supply curve to the left.

Question 2

Assuming a long-run aggregate supply curve, an increase in government spending results in ________ in output and ________ in prices.
A) no change; a decrease
B) no change; an increase
C) a decrease; a decrease
D) an increase; no change

Accepted Answer

In the context of a long-run aggregate supply curve, an increase in government spending typically does not change the output because the economy is already at its full employment level. However, it leads to an increase in prices due to higher demand, resulting in inflation.

Question 3

If ________ equilibrium output ________, the price level decreases.
A) potential; is equal to actual aggregate output
B) potential; is below actual aggregate output
C) actual; is below potential aggregate output
D) actual; exceeds potential aggregate output

Accepted Answer

According to the classical model, if actual output is below potential output (i.e. there is a recessionary gap), there will be a decrease in the price level as producers lower their prices to stimulate demand and increase output. Options A and B refer to potential output, which does not have a direct impact on the price level. Option D refers to an inflationary gap, where actual output exceeds potential output, leading to an increase in the price level.

Question 4

If wages and other costs fully adjust to changes in prices in the long run, the long-run aggregate supply curve is
A) vertical.
B) horizontal.
C) positively sloped.
D) negatively sloped.

Accepted Answer

In the long run, wages and other costs will fully adjust to changes in prices, which means that the economy will be able to produce the potential output regardless of the price level. This results in a vertical long-run aggregate supply curve.

Question 5

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, the economy has a
A) clearly defined capacity.
B) set price level.
C) downward sloping aggregate supply curve.
D) horizontal aggregate demand curve.

Accepted Answer

In the simple Keynesian view, the economy is often seen as having a clearly defined capacity, beyond which output cannot increase without causing inflation.

Question 6

Long-run aggregate supply is equal to
A) short-run aggregate demand.
B) short-run aggregate supply.
C) inflation minus unemployment.
D) potential output.

Accepted Answer

Long-run aggregate supply represents the total quantity of goods and services that all firms in an economy are capable of producing without experiencing an increase in average price levels in the long run. This level of output is also known as potential output, which is determined by the available resources, technology, and institutions of an economy. Therefore, the correct choice is D.

Question 7

If the economy produces full employment output, an increase in government spending increases output but not the price level.

Accepted Answer

At full employment output, the economy is producing at its maximum sustainable level, so an increase in government spending is more likely to increase the price level (inflation) rather than output, because the capacity to increase production is limited.

Question 8

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, the aggregate supply curve
A) is downward sloping.
B) is completely horizontal.
C) is completely vertical.
D) is horizontal in part, and vertical in part.

Accepted Answer

The answer of Related to the Economics in Practice on...

Question 9

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. If the economy is currently at Point B producing output level Y₁ A) the economy is operating above full employment. B) input prices are likely to rise. C) aggregate supply shifts to the left and the economy ends up at Point C. D) all of the above.

Accepted Answer

If the economy is at Point B producing output level Y1, it is likely operating above full employment, leading to increased demand for inputs and potential rises in input prices. This can cause the aggregate supply to shift left, moving the economy towards Point C.

Question 10

Potential output is the most that can be produced in an economy at a particular point in time.

Accepted Answer

Potential output refers to the maximum amount of goods and services an economy can produce when it is most efficiently using all its resources, not just what can be produced at a particular point in time. It is a theoretical concept used to estimate the capacity of an economy over the long term, considering factors like technology, labor, and capital, rather than immediate production capabilities.

Question 11

If wages do not fully adjust to changes in prices, the aggregate supply curve is vertical.

Accepted Answer

The aggregate supply curve being vertical is indicative of an economy at full employment where output cannot increase, regardless of price changes. Wages not fully adjusting to price changes affects the slope of the aggregate supply curve but does not make it vertical; it typically makes it upward sloping in the short run, reflecting some price/wage stickiness.

Question 12

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. If the economy is at Point A currently producing Y₀ and the Z factors decrease, the economy will move to Point ________ in the short run and to Point ________ in the long run. A) B; C B) D; E C) E; D D) C; B

Accepted Answer

In the short run, a decrease in Z factors (such as a decrease in aggregate demand) will move the economy from Point A to Point B, indicating a lower level of output. In the long run, the economy will adjust and move to Point C, where full employment output is restored.

Question 13

Potential output is the level of aggregate output that can be sustained in the long run without
A) unemployment.
B) government regulation.
C) taxes.
D) inflation.

Accepted Answer

Potential output refers to the level of output that an economy can sustain over the long term without generating inflation. It does not imply the absence of unemployment, government regulation, or taxes, but rather a state where resources, including labor, are utilized in a way that does not lead to increasing price levels.

Question 14

In the long run
A) the level of output is independent of the price level.
B) the level of output is depends on the price level.
C) price and output levels are mutually dependent.
D) the price level is independent of the level of output.

Accepted Answer

In the long run, the level of output is determined by factors such as technology, capital stock, and available resources, which are independent of the price level. Therefore, the level of output is independent of the price level in the long run.

Question 15

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. This economy cannot continue to produce Y_{2 (or at Point}_D₎ because A) the price of raw material and wages will decrease shifting the aggregate supply curve to AS₂. B) the price of inputs will increase, shifting the aggregate supply curve to AS₁. C) the price of raw material will decrease, shifting the aggregate demand curve to AD₁. D) all of the above.

Accepted Answer

The answer of Refer to the information provided in Figure...

Question 16

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow.  Figure 26.8
-Refer to Figure 26.8. For this economy to produce at Point B and sustain it without inflation,
A) the price of oil must increase.
B) government spending must increase.
C) government spending must decrease.
D) potential output must increase.

Accepted Answer

To sustain production at Point B without inflation, the economy needs to increase its potential output. This can be achieved through investments in technology, education, infrastructure, and other factors that improve productivity. Increasing government spending may lead to inflation, while decreasing government spending may lead to a slowdown in economic growth. The price of oil is not relevant to sustaining production at Point B.

Question 17

The long-run aggregate supply curve reflects the idea that in the long run, output is determined only by
A) the factors of production.
B) given technology.
C) aggregate demand.
D) both A and B.

Accepted Answer

The long-run aggregate supply curve shows that in the long run, output is determined by both the factors of production (such as labor, capital, and natural resources) and given technology. In the long run, the economy can adjust its production capabilities and adopt new technologies, leading to an increase in potential output. Therefore, the long-run aggregate supply curve is not affected by changes in aggregate demand.

Question 18

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, maximum output is not defined by the
A) existing labor force.
B) current capital stock.
C) existing state of technology.
D) level of consumption.

Accepted Answer

In the simple "Keynesian" view, maximum output is not defined by the level of consumption. Instead, it is determined by the level of aggregate demand, which can be influenced by government spending and other factors.

Question 19

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, if planned aggregate expenditure and aggregate demand exceed capacity output, there is
A) an inflationary gap and price level rises.
B) an inflationary gap and price level falls.
C) a recessionary gap and price level rises.
D) a recessionary gap and price level falls.

Accepted Answer

According to the simple Keynesian view, if planned aggregate expenditure and aggregate demand exceed capacity output, there will be an inflationary gap. This means that there is an excess demand for goods and services, which will cause prices to rise. The increase in prices will help to bring the economy back to full-employment equilibrium by reducing demand.

Question 20

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. Suppose the economy is currently at Point A producing potential output Y₀. If the government decreases spending, the economy moves to Point ________ in the short run and to Point ________ in the long run. A) D; E B) B; C C) C; B D) B; D

Accepted Answer

The correct answer is A because a decrease in government spending will shift the aggregate demand curve to the left, causing the economy to move from Point A to Point D in the short run. In the long run, the economy will move to Point E as the price level adjusts.

Quiz 26: The Determination of Aggregate Output, the Price Level, and the Interest Rate

When the ________ decreases, then potential output decreases.

Assuming a long-run aggregate supply curve, an increase in government spending results in in output and in prices.

If equilibrium output , the price level decreases.

If wages and other costs fully adjust to changes in prices in the long run, the long-run aggregate supply curve is

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, the economy has a

Long-run aggregate supply is equal to

If the economy produces full employment output, an increase in government spending increases output but not the price level.

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, the aggregate supply curve

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. If the economy is currently at Point B producing output level Y₁

Potential output is the most that can be produced in an economy at a particular point in time.

If wages do not fully adjust to changes in prices, the aggregate supply curve is vertical.

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. If the economy is at Point A currently producing Y₀ and the Z factors decrease, the economy will move to Point in the short run and to Point in the long run.

Potential output is the level of aggregate output that can be sustained in the long run without

In the long run

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. This economy cannot continue to produce Y_{2 (or at Point}_D₎ because

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. For this economy to produce at Point B and sustain it without inflation,

The long-run aggregate supply curve reflects the idea that in the long run, output is determined only by

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, maximum output is not defined by the

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, if planned aggregate expenditure and aggregate demand exceed capacity output, there is

Quiz 26: The Determination of Aggregate Output, the Price Level, and the Interest Rate

When the ________ decreases, then potential output decreases.

Assuming a long-run aggregate supply curve, an increase in government spending results in ________ in output and ________ in prices.

If ________ equilibrium output ________, the price level decreases.

If wages and other costs fully adjust to changes in prices in the long run, the long-run aggregate supply curve is

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, the economy has a

Long-run aggregate supply is equal to

If the economy produces full employment output, an increase in government spending increases output but not the price level.

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, the aggregate supply curve

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. If the economy is currently at Point B producing output level Y1

Potential output is the most that can be produced in an economy at a particular point in time.

If wages do not fully adjust to changes in prices, the aggregate supply curve is vertical.

Potential output is the level of aggregate output that can be sustained in the long run without

In the long run

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. This economy cannot continue to produce Y2 (or at Point D) because

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. For this economy to produce at Point B and sustain it without inflation,

The long-run aggregate supply curve reflects the idea that in the long run, output is determined only by

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, maximum output is not defined by the

Related to the Economics in Practice on p. 547: In the simple "Keynesian" view, if planned aggregate expenditure and aggregate demand exceed capacity output, there is

Assuming a long-run aggregate supply curve, an increase in government spending results in in output and in prices.

If equilibrium output , the price level decreases.

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. If the economy is currently at Point B producing output level Y₁

Refer to the information provided in Figure 26.8 below to answer the question(s) that follow. Figure 26.8 -Refer to Figure 26.8. This economy cannot continue to produce Y_{2 (or at Point}_D₎ because