Question 1

Stagflation occurs when
A) inflation rises and GDP rises.
B) inflation falls and GDP rises.
C) inflation rises and GDP falls.
D) inflation falls and GDP falls.

Accepted Answer

Stagflation occurs when there is a simultaneous increase in inflation and decrease in GDP. This situation is unfavorable as it represents a stagnant economy with high prices and low economic growth.

Question 2

Short-run macroeconomic equilibrium occurs when
A) aggregate demand and short-run aggregate supply intersect.
B) the equilibrium lies on the long-run aggregate supply curve.
C) structural and frictional unemployment equal zero.
D) A and B

Accepted Answer

Short-run macroeconomic equilibrium occurs when aggregate demand and short-run aggregate supply intersect. This is where the economy is producing at its potential level of output in the short-run, and there is neither a surplus nor a shortage in the goods and services market.

Question 3

An increase in investment causes the price level to ________ in the short run and ________ in the long run.
A) increase; increase further
B) increase; decrease
C) decrease; decrease further
D) decrease; increase

Accepted Answer

The answer of An increase in investment causes the price...

Question 4

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?
A) Output will increase.
B) Prices will decline.
C) Unemployment will decline.
D) Short-run aggregate supply will shift to the left.

Accepted Answer

The automatic mechanism that will adjust the economy back to potential GDP is the decrease in aggregate demand due to the rising prices that would result from the excess output. This decrease in aggregate demand will lead to a leftward shift in the short-run aggregate supply curve, ultimately bringing the economy back to potential GDP. Thus, the correct choice is D, as none of the other options will occur due to the automatic adjustment mechanism.

Question 5

Declines in spending on residential construction are often due to increases in interest rates. The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.
A) the financial crisis that began in 2007
B) the rapid inflation of the early 2000s
C) increases in the price of lumber
D) rising wages in the construction industry

Accepted Answer

The collapse in residential construction prior to and during the recession of 2007-2009 was due to the financial crisis that began in 2007, which led to a tightening of credit and a decline in consumer confidence, rather than higher interest rates or other factors such as inflation or rising wages in the construction industry.

Question 6

Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run?
A) Aggregate demand will fall, the equilibrium price level will fall, and the equilibrium level of GDP will fall.
B) Aggregate demand will fall, the equilibrium price level will rise, and the equilibrium level of GDP will fall.
C) Aggregate demand will rise, the equilibrium price level will rise, and the equilibrium level of GDP will rise.
D) Aggregate demand will rise, the equilibrium price level will fall, and the equilibrium level of GDP will rise.

Accepted Answer

When interest rates rise, the cost of borrowing money increases, which leads to a decrease in investment and consumption spending. This causes aggregate demand to fall. The decrease in aggregate demand will lead to a decrease in both the equilibrium price level and the equilibrium level of GDP. Therefore, option A is the most appropriate choice.

Question 7

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?
A) Output will rise.
B) Prices will rise.
C) Unemployment will rise.
D) The aggregate demand curve will shift to the right.

Accepted Answer

If firms become more pessimistic about the future profitability of new investment, they will reduce investment spending which will lead to a decrease in aggregate demand. This will cause output to decrease and unemployment to rise. In the short run, prices are unlikely to rise since there is reduced demand for goods and services.

Question 8

Long-run macroeconomic equilibrium occurs when the aggregate demand curve ________ the short-run aggregate supply curve, and they ________ the long-run supply curve.
A) intersects; intersect at a point to the right of
B) intersects; intersect at a point on
C) is steeper than; intersect at a point to the left of
D) is flatter than; intersect at a point to the right of

Accepted Answer

Long-run macroeconomic equilibrium occurs when the aggregate demand curve intersects the short-run aggregate supply curve at a point on the long-run supply curve. This is because in the long run, wages and prices are flexible and can adjust to changes in demand or supply, leading to a movement along the short-run aggregate supply curve until it intersects the long-run supply curve. At this point, production and prices have adjusted to their long-run equilibrium levels, and there is no tendency for them to change further. Therefore, long-run macroeconomic equilibrium occurs where the aggregate demand curve intersects the short-run aggregate supply curve at a point on the long-run supply curve.

Question 9

Stagflation usually results from
A) a supply shock.
B) a decrease in aggregate demand.
C) an increase in aggregate supply.
D) an increase in aggregate demand.

Accepted Answer

Stagflation occurs when there is a combination of high inflation and stagnant economic growth. This is usually the result of a supply shock, which could be a sudden increase in the price of raw materials or a disruption in production due to natural disasters or political instability. A decrease in aggregate demand and an increase in aggregate supply would both lead to lower inflation and higher economic growth, while an increase in aggregate demand would lead to higher inflation and higher economic growth but not stagflation.

Question 10

On average, in the recessions since 1950, it has taken ________ for employment to return to its cyclical peak.
A) about 6 months
B) about 1 year
C) about 18 months
D) almost 2.5 years

Accepted Answer

On average, since 1950, it has typically taken almost 2.5 years for employment to recover to its peak levels following a recession. This reflects the time it often takes for the economy to rebound and for job growth to fully resume after a downturn.

Question 11

On average, in the recessions since 1950, it has taken ________ for real GDP to return to its cyclical peak.
A) about 6 months
B) about 1 year
C) about 18 months
D) almost 2.5 years

Accepted Answer

According to historical data, it takes about 18 months for real GDP to return to its cyclical peak after a recession.

Question 12

There has been a decrease in investment. As a result, real GDP will ________ in the short run, and ________ in the long run.
A) increase; increase further
B) increase; decrease to its initial value
C) decrease; decrease further
D) decrease; increase to its initial level

Accepted Answer

In the short run, a decrease in investment leads to a decrease in real GDP due to reduced spending. In the long run, economies tend to adjust and return to their potential output, meaning real GDP will increase back to its initial level as markets and prices adapt.

Question 13

A decrease in aggregate demand causes a decrease in ________ only in the short run, but causes a decrease in ________ in both the short run and the long run.
A) the price level; real GDP
B) real GDP; real GDP
C) the price level; the price level
D) real GDP; the price level

Accepted Answer

The answer of A decrease in aggregate demand causes a...

Question 14

After an unexpected ________ in the price of oil, the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.
A) increase; increases
B) increase; decreases
C) decrease; increases
D) decrease; decreases

Accepted Answer

An unexpected increase in the price of oil can initially lead to higher inflation and potentially higher unemployment due to cost-push inflation. However, in the long run, the economy adjusts, and both the price level and the unemployment rate tend to return to their original levels, with the unemployment rate decreasing as the economy recovers.

Question 15

In the long run,
A) GDP > potential GDP.
B) unemployment is at its natural rate.
C) LRAS and SRAS lie on the same line.
D) the inflation rate is zero.

Accepted Answer

In the long run, the economy will reach its natural rate of unemployment, meaning that all available resources will be fully utilized and there will be no cyclical unemployment. However, it is possible for actual GDP to be either above or below potential GDP, depending on the state of the economy. Additionally, LRAS and SRAS may not necessarily intersect, indicating potential shifts in the long-run potential of an economy. Inflation may also occur in the long run, although it will generally be at a steady, predictable rate.

Question 16

The long-run adjustment to a negative supply shock results in
A) the short-run aggregate supply curve shifting to the right.
B) the price level rising.
C) unemployment rising.
D) workers being willing to accept higher wages.

Accepted Answer

The answer of The long-run adjustment to a negative supply...

Question 17

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?
A) The price level will fall, and the level of GDP will rise.
B) The price level will fall, and the level of GDP will fall.
C) The price level will rise, and the level of GDP will fall.
D) The price level will rise, and the level of GDP will be unaffected.

Accepted Answer

In the long run, an increase in aggregate demand will cause firms to increase production and hire more workers. As employment and production increase, the economy will approach its potential output, but the only effect on the price level will be inflationary pressure. Therefore, the price level will rise, but the level of GDP will be unaffected. This is known as the long-run vertical Phillips curve.

Question 18

When the price of oil rises unexpectedly, the equilibrium price level ________ and the unemployment rate ________ in the short run.
A) rises; falls
B) rises; rises
C) falls; falls
D) falls; rises

Accepted Answer

When the price of oil rises unexpectedly, the cost of production for firms that use oil as a production input increases, leading to a decrease in the supply of goods and services. As a result, the equilibrium price level will rise. This decrease in supply may cause firms to cut back on production, therefore leading to an increase in the unemployment rate.

Question 19

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?
A) the leftward shift of the short-run aggregate supply curve that occurs after a recession
B) the rightward shift of the short-run aggregate supply curve that occurs after a recession
C) the leftward shift of the aggregate demand curve that occurs after a recession
D) the rightward shift of the aggregate demand curve that occurs during a recession

Accepted Answer

The automatic mechanism through which the economy adjusts to long-run equilibrium is through the rightward shift of the short-run aggregate supply curve that occurs after a recession. This is because during a recession, there is slack in the economy, leading to lower prices and wages. As businesses adjust to lower input costs, they can lower their prices, which increases aggregate demand and stimulates economic growth. As the economy recovers, the short-run aggregate supply curve shifts to the right, ultimately returning the economy to long-run equilibrium where output is at its potential level and prices have stabilized.

Question 20

A decrease in aggregate demand results in a(n) ________ in the ________.
A) recession; long run
B) expansion; long run
C) expansion; short run
D) recession; short run

Accepted Answer

According to the macroeconomic theory, a decrease in aggregate demand leads to a decrease in overall economic activity, resulting in a recession in the short run. In the long run, the economy adjusts to these changes, and the effects are less severe. Therefore, option D - recession in the short run is the correct choice.

Quiz 24: Aggregate Demand and Aggregate Supply Analysis

Stagflation occurs when

Short-run macroeconomic equilibrium occurs when

An increase in investment causes the price level to in the short run and in the long run.

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Declines in spending on residential construction are often due to increases in interest rates. The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.

Interest rates in the economy have risen. How will this affect aggregate demand and equilibrium in the short run?

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment. Which of the following will happen in the short run?

Long-run macroeconomic equilibrium occurs when the aggregate demand curve the short-run aggregate supply curve, and they the long-run supply curve.

Stagflation usually results from

On average, in the recessions since 1950, it has taken ________ for employment to return to its cyclical peak.

On average, in the recessions since 1950, it has taken ________ for real GDP to return to its cyclical peak.

There has been a decrease in investment. As a result, real GDP will in the short run, and in the long run.

A decrease in aggregate demand causes a decrease in only in the short run, but causes a decrease in in both the short run and the long run.

After an unexpected in the price of oil, the long-run adjustment decreases the price level and the unemployment rate as they return to their original levels.

In the long run,

The long-run adjustment to a negative supply shock results in

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

When the price of oil rises unexpectedly, the equilibrium price level and the unemployment rate in the short run.

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

A decrease in aggregate demand results in a(n) in the .