Question 1

The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century.

Accepted Answer

The recession of 2008-2009 is considered to be one of the worst macroeconomic events since the Great Depression in the 1930s. It resulted in a global financial crisis, widespread unemployment, and significant declines in GDP and asset values.

Question 2

If aggregate demand shifts right, then eventually price level expectations rise. This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

Accepted Answer

An increase in price level expectations would not cause the aggregate demand curve to shift back to its original position. Rather, it would cause a movement along the curve, resulting in a higher price level and a lower level of output.

Question 3

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Accepted Answer

Policymakers, through their actions such as adjusting interest rates, government spending or taxes, can influence aggregate demand and stabilize economic fluctuations.

Question 4

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

Accepted Answer

The answer of Explain how an increase in the price...

Question 5

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

Accepted Answer

The primary purpose of the aggregate demand and aggregate supply model is to explain fluctuations in real GDP and the price level in the short run, not to demonstrate the classical dichotomy.

Question 6

If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Accepted Answer

Increasing the money supply would lead to an increase in aggregate demand, which would partially alleviate the unemployment caused by the decrease in short-run aggregate supply. However, the increase in aggregate demand would also put additional pressure on prices, causing them to rise even more. This is known as demand-pull inflation.

Question 7

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

Accepted Answer

The fall in housing prices reduced consumers’ wealth and confidence, which led to a decrease in consumption expenditures, shifting the aggregate demand curve to the left.

Question 8

What do most economists believe concerning the relation between the price level and real output?

Accepted Answer

The answer of What do most economists believe concerning the...

Question 9

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

Accepted Answer

This is because an increase in aggregate demand leads to higher output and lower unemployment in the short-run, but as prices increase due to higher demand, suppliers will also raise prices, leading to a decrease in the quantity supplied and a shift of the short-run aggregate-supply curve to the left.

Question 10

If aggregate demand and aggregate supply both shift right, we can be sure that the price level is higher in the short run.

Accepted Answer

When both aggregate demand and aggregate supply shift right, the effect on the price level is uncertain without knowing the magnitude of the shifts. If the supply increase is larger than the demand increase, the price level could actually decrease.

Question 11

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Accepted Answer

Increased government expenditures during World War II, which began in the early 1940s, led to increased production and higher prices due to increased demand for goods and services.

Question 12

What variables besides real GDP tend to decline during recessions? Given the definition of real GDP, argue that declines in these variables are to be expected.

Accepted Answer

The answer of What variables besides real GDP tend to...

Question 13

The long-run trend in real GDP is upward. How is this possible given business cycles? What explains the upward trend?

Accepted Answer

The answer of The long-run trend in real GDP is...

Question 14

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

Accepted Answer

Most economists agree that the Great Depression was caused by a combination of factors, including a decrease in aggregate demand, stock market crash, banking failures, and trade restrictions, all of which led to a significant decrease in both short-run and long-run aggregate supply.

Question 15

Make a list of expenditures whose sum equals GDP.

Accepted Answer

The answer of Make a list of expenditures whose sum...

Question 16

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Accepted Answer

This statement is true. Keynes believed that government policies aimed at increasing aggregate demand, such as fiscal stimulus and monetary policy, could help to offset the negative effects of recessions on employment levels.

Question 17

During World War II government expenditures increased almost five-fold and output almost doubled.

Accepted Answer

Government spending during WWII had a huge impact on the economy, increasing almost five-fold from pre-war levels. This spending also stimulated economic growth, with output almost doubling during the war years.

Question 18

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

Accepted Answer

In the long-run, an economy's output is determined by its supply-side factors (such as labor, capital, and technology), not by the level of aggregate demand. Thus, while an increase in aggregate demand can lead to higher prices (inflation), it does not increase the economy's capacity to produce goods and services, leaving real GDP unchanged in the long run.

Question 19

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation is a condition of both high inflation and high unemployment, which is typically caused by supply-side factors such as increases in production costs or decreases in productivity, not decreases in aggregate demand.

Question 20

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

Accepted Answer

If the decrease in output is caused by a decrease in aggregate demand, it would lead to a decrease in both prices and output. However, if the decrease in output is caused by a decrease in short-run aggregate supply, it would lead to an increase in prices and a decrease in output. Therefore, the economy would not necessarily revert to its original level of prices and output.

Quiz 15: Aggregate Demand and Aggregate Supply