Question 1

Consider the basic AD/AS macro model.A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level
A)and real GDP are higher than in the initial equilibrium.
B)and real GDP are lower than in the initial equilibrium.
C)is lower and real GDP higher than in the initial equilibrium.
D)is higher and real GDP remained the same as in the initial equilibrium.
E)is higher and real GDP lower than in the initial equilibrium.

Accepted Answer

A rise in an input price, such as the price of oil, would shift the aggregate supply curve to the left, leading to a higher price level and lower real GDP in the new equilibrium.

Question 2

Aggregate demand shocks have a large effect on real GDP and a small effect on the price level
A)the steeper the AS curve.
B)on the downward-sloping portion of the AS curve.
C)the flatter the AS curve.
D)when the AS curve is vertical.
E)if the AD curve is steep.

Accepted Answer

When the aggregate supply (AS) curve is flatter, changes in aggregate demand (AD) have a larger impact on real GDP and a smaller impact on the price level, as the economy can increase output without significant increases in prices.

Question 3

Which of the following will cause a negative aggregate demand shock?
A)an increase in the price of raw materials
B)a decrease in the domestic price level
C)an increase in the domestic price level
D)an increase in government expenditures
E)an increase in tax rates

Accepted Answer

An increase in tax rates will decrease disposable income and therefore decrease consumer spending, leading to a negative aggregate demand shock. The other options may potentially cause a negative supply shock but not a negative demand shock.

Question 4

Consider the basic AD/AS model.Suppose firms are currently producing beyond their normal capacity.A change in AD leads to a relatively
A)large change in price level and a large change in real GDP.
B)large change in price level and a small change in real GDP.
C)small change in price level and a large change in real GDP.
D)small change in price level and a small change in real GDP.
E)no change in both price and output.

Accepted Answer

If firms are already producing beyond their normal capacity, an increase in AD (i.e. higher demand) will lead to a significant increase in the price level as firms are not able to increase output as much in the short run. This is known as the inflationary gap. However, the increase in real GDP will be relatively small due to the fact that firms are already operating beyond normal capacity and hence cannot increase output significantly. Therefore, B is the correct option as it reflects a large change in price level and a small change in real GDP.

Question 5

If the economy's AS curve is upward sloping,a positive aggregate demand shock will result in
A)an increase in prices but not output.
B)an increase in output but not prices.
C)an increase in both output and prices.
D)a decrease in both output and prices.
E)a decrease in output and an increase in prices.

Accepted Answer

If the economy's AS curve is upward sloping, a positive aggregate demand shock will lead to an increase in both output and prices. An upward sloping AS curve signifies the existence of surplus capacity and resources at lower levels of output. Hence, firms can increase output in response to an increased demand for their goods and services, leading to a positive output shock. However, since the economy is already operating at a level of potential output, the increase in demand would lead to higher prices due to a shortage of resources and capacity at higher levels of output. Therefore, both output and prices increase as a result of the positive aggregate demand shock.

Question 6

FIGURE 23-3
-Refer to Figure 23-3.Suppose the price level in Economy A is above  .Which of the following statements describes what would occur?
A)The AD curve would shift to the right until macro equilibrium is reached.
B)Real GDP would be below its equilibrium level which would put downward pressure on the price level until it reaches macro equilibrium at  .
C)The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at  .
D)Real GDP would be below its equilibrium level which would put upward pressure on the price level until it reaches macro equilibrium.
E)The AS curve would shift to the left until macro equilibrium is reached.

Accepted Answer

The answer of  FIGURE 23-3
-Refer to Figure 23-3.Suppose the...

Question 7

Aggregate supply shocks cause the price level and real GDP to change in
A)the same direction with price changing by more than output.
B)the same direction and by the same amount.
C)opposite directions with price changing by less than output.
D)opposite directions but not necessarily by the same amount.
E)opposite directions but by the same amount.

Accepted Answer

Aggregate supply shocks can cause the price level and real GDP to move in opposite directions. For example, a negative supply shock such as an increase in the cost of inputs can cause a decrease in output and an increase in prices. However, the magnitude of the change in price and output may not necessarily be the same.

Question 8

Consider the basic AD/AS model.A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium,which in comparison to the original equilibrium,has a price level that is
A)higher and a real GDP that is higher.
B)higher and a real GDP that is lower.
C)higher and a real GDP that is the same.
D)lower and a real GDP that is higher.
E)lower and a real GDP that is lower.

Accepted Answer

An increase in input prices such as wages will shift the short-run aggregate supply (SRAS) curve to the left. This will lead to a higher equilibrium price level and a lower equilibrium level of real GDP. This is because firms face higher costs, reducing their profits and discouraging them from producing as much output. The lower output leads to lower employment and lower real GDP in the economy.

Question 9

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand decreases,we expect the AE function to shift to a
A)higher level and stay there.
B)higher level,but then shift part of the way down to its original position as the price level falls.
C)higher level but then return to its original position as the price level falls.
D)lower level and stay there.
E)lower level,but then return to its original position as the price level falls.

Accepted Answer

The answer of If the economy is in macroeconomic equilibrium...

Question 10

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand increases,we expect the AE function to shift to a
A)higher level and stay there.
B)higher level,but then shift part of the way down to its original position as the price level rises.
C)higher level but then return to its original position as the price level rises.
D)lower level and stay there.
E)lower level,but then return to its original position as the price level rises.

Accepted Answer

When the economy is in macroeconomic equilibrium with a vertical Aggregate Supply (AS) curve, an increase in Aggregate Demand (AD) leads to a higher price level without changing the output level. The Aggregate Expenditure (AE) function initially shifts to a higher level due to increased demand. However, as prices rise, the real value of money decreases, reducing consumption and investment, which causes the AE function to return to its original position.

Question 11

In the basic AD/AS model,the effect of an aggregate demand shock is divided between a change in output and a change in the price level.How the effect is divided depends on the
A)amount of inflation in the economy.
B)position of the AE curve.
C)size of the simple multiplier.
D)slope of the AD curve.
E)slope of the AS curve.

Accepted Answer

The division of the effect of an aggregate demand shock between a change in output and a change in the price level in the basic AD/AS model depends on the slope of the AS curve. A steep AS curve (i.e. a low level of potential output) implies that the increase in aggregate demand will lead to a larger increase in the price level than in output, while a flatter AS curve (i.e. a higher level of potential output) implies that the increase in aggregate demand will lead to a larger increase in output than in the price level. Therefore, the slope of the AS curve is the most relevant factor to determine the division of the effect of an aggregate demand shock.

Question 12

If the economy's AS curve is very steep and there is a negative aggregate demand shock,the result will be
A)an increase in the price level and a decrease in real national income.
B)an increase in both the price level and real national income.
C)a decrease in the price level with almost no change in real national income.
D)a decrease in the price level and an increase in real national income.
E)no change in either price level or output.

Accepted Answer

The answer of If the economy's AS curve is very...

Question 13

Suppose firms are currently producing output at a level beyond their normal capacity.In this situation,the AS curve will be relatively ________ and a positive AD shock will result in ________.
A)steep; an increase in the price level with a small increase in real GDP
B)flat; an equal increase in the price level and in real GDP
C)flat; a very small increase in prices but a large increase in real GDP
D)flat; a very small decrease in the price level and a decrease in real GDP
E)steep; a decrease in the price level and a very small decrease in real GDP

Accepted Answer

If firms are producing beyond their normal capacity, it means they are already operating at a high level of output, which typically leads to a relatively steep AS curve. A positive AD shock would then result in an increase in the price level with a limited increase in real GDP, as the economy is already operating at a high level of output. Therefore, option A is the correct answer.

Question 14

Consider the basic AD/AS model with an upward-sloping AS curve.A positive aggregate demand shock will initially cause
A)a decrease in the price level.
B)the equilibrium point to move rightward along the AS curve.
C)a movement along the AD curve to the right.
D)a shift to the right in the AS curve.
E)the unemployment rate to remain constant.

Accepted Answer

A positive aggregate demand shock will increase equilibrium output and price level in the short run, as the AD curve shifts rightward. As the higher prices increase profit margins for producers, they will expand production and hire more workers, leading to an increase in the quantity of goods and services supplied in the economy. This movement along the AS curve will lead to higher prices and higher output, until the AS curve shifts upward to reflect the higher costs of production, causing a new equilibrium at a higher price level but with the same output level as before the shock. Therefore, the equilibrium point moves rightward along the upward-sloping AS curve. The unemployment rate may initially decrease due to higher output, but it may eventually rise if the AS curve shifts upward enough to limit output growth.

Question 15

FIGURE 23-3
-Refer to Figure 23-3.Which of the following statements best describes the supply side of Economy A in its current equilibrium position?
A)Unit costs are rising,but firms can produce more output by employing standby capacity and overtime labour,for example,with no increase in the price level.
B)Firms are producing well below their capacity and are willing to produce more only if prices rise.
C)Unit costs are rising rapidly as firms are producing beyond their capacity.Firms will produce more only if prices increase.
D)Firms are producing well below their capacity and are willing to produce more output with no increase in price.
E)Unit costs are rising,but firms are able to produce more output because there is excess capacity in the economy.

Accepted Answer

In the current equilibrium position, firms are producing beyond their capacity, leading to rapidly rising unit costs. They will only produce more if prices increase to cover these higher costs.

Question 16

Which of the following will cause a positive aggregate supply shock?
A)an increase in the price of raw materials
B)a decrease in the price of foreign output
C)an increase in the price of foreign output
D)a decrease in the price of oil
E)a decrease in productivity

Accepted Answer

A decrease in the price of oil will cause a positive aggregate supply shock because it will lower production costs for firms and allow them to produce more output at every price level, shifting the short-run aggregate supply curve to the right.

Question 17

FIGURE 23-3
-Refer to Figure 23-3.Which of the following statements best describes the supply side of Economy B?
A)Unit costs are rising rapidly,but firms can produce more output by employing standby capacity and overtime labour,for example,with no increase in the price level.
B)Firms are producing well below their capacity and are willing to produce more only if prices rise.
C)Unit costs are rising rapidly as firms are producing beyond their capacity.Firms will produce more only if prices increase.
D)Firms are producing well below their capacity and are willing to produce more output with no increase in price.
E)Firms are not able to produce more output because there is no excess capacity in the economy.

Accepted Answer

The answer of  FIGURE 23-3
-Refer to Figure 23-3.Which of...

Question 18

Which of the following would cause a positive aggregate demand shock,but leave the aggregate supply curve unaffected?
A)A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures.
B)A severe drought lasting for six months that destroys agricultural and forestry production.
C)A medical report confirming that improved health for Canadian workers caused fewer lost days of production.
D)An improvement in the computer literacy of workers.
E)A substantial increase in world oil prices.

Accepted Answer

A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures would cause an increase in exports and therefore an increase in aggregate demand, but it would not affect the aggregate supply curve.

Question 19

Aggregate demand (AD)shocks have a smaller effect on real GDP and a larger effect on the price level
A)the steeper the AS curve.
B)on the downward-sloping portion of the AS curve.
C)the flatter the AS curve.
D)on the upward-sloping portion of the AS curve.
E)if the AD curve is flatter.

Accepted Answer

A steeper AS curve indicates that output is less responsive to changes in AD, leading to larger changes in the price level and smaller changes in real GDP.

Question 20

Which of the following represents a positive aggregate supply shock?
A)an outbreak of war among oil-exporting countries
B)a general labour strike across the country
C)bad weather which cripples telecommunications for one month
D)improved computer literacy for the typical worker
E)an increase in exports

Accepted Answer

Improved computer literacy for the typical worker is a positive aggregate supply shock because it increases productivity and efficiency in the workforce.

Quiz 23: Output and Prices in the Short Run

Consider the basic AD/AS macro model.A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level

Aggregate demand shocks have a large effect on real GDP and a small effect on the price level

Which of the following will cause a negative aggregate demand shock?

Consider the basic AD/AS model.Suppose firms are currently producing beyond their normal capacity.A change in AD leads to a relatively

If the economy's AS curve is upward sloping,a positive aggregate demand shock will result in

FIGURE 23-3 -Refer to Figure 23-3.Suppose the price level in Economy A is above .Which of the following statements describes what would occur?

Aggregate supply shocks cause the price level and real GDP to change in

Consider the basic AD/AS model.A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium,which in comparison to the original equilibrium,has a price level that is

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand decreases,we expect the AE function to shift to a

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand increases,we expect the AE function to shift to a

In the basic AD/AS model,the effect of an aggregate demand shock is divided between a change in output and a change in the price level.How the effect is divided depends on the

If the economy's AS curve is very steep and there is a negative aggregate demand shock,the result will be

Suppose firms are currently producing output at a level beyond their normal capacity.In this situation,the AS curve will be relatively and a positive AD shock will result in .

Consider the basic AD/AS model with an upward-sloping AS curve.A positive aggregate demand shock will initially cause

FIGURE 23-3 -Refer to Figure 23-3.Which of the following statements best describes the supply side of Economy A in its current equilibrium position?

Which of the following will cause a positive aggregate supply shock?

FIGURE 23-3 -Refer to Figure 23-3.Which of the following statements best describes the supply side of Economy B?

Which of the following would cause a positive aggregate demand shock,but leave the aggregate supply curve unaffected?

Aggregate demand (AD) shocks have a smaller effect on real GDP and a larger effect on the price level

Which of the following represents a positive aggregate supply shock?