Question 1

Figure 24-3 
-Refer to Figure 24-3. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D

Accepted Answer

A decrease in government spending will shift the aggregate demand curve to the left, moving the economy from point C to point A in the long-run equilibrium.

Question 2

Which of the following is considered a negative supply shock?
A) increasing immigration in the economy causes the labor supply to rise
B) an improvement in technology
C) an increase in unemployment
D) an unexpected decrease in the refining capacity for oil

Accepted Answer

A negative supply shock is an unexpected decrease in the availability of key inputs such as material, labor or capital. An unexpected decrease in refining capacity for oil would cause an increase in the price of gasoline and other petroleum products, leading to higher production costs and reducing the supply of goods and services in the economy.

Question 3

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?
A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
B) Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
C) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.
D) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.

Accepted Answer

In the long run, prices and wages are more flexible and can adjust to changes in the economy. Therefore, when aggregate demand decreases, prices and wages adjust downwards as workers and firms adjust their expectations. This results in a lower cost of production and a shift of the short-run aggregate supply curve to the right.

Question 4

A negative supply shock in the short run causes
A) the aggregate supply curve to shift to the left.
B) the price level to fall.
C) unemployment to fall.
D) equilibrium real GDP to rise.

Accepted Answer

A negative supply shock, such as an increase in the price of oil or a natural disaster, will cause a decrease in aggregate supply, leading to a shift of the aggregate supply curve to the left. This will result in higher prices and lower output in the short run, but does not necessarily lead to a change in unemployment or equilibrium GDP.

Question 5

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium
A) GDP will be below potential GDP.
B) aggregate demand will increase.
C) GDP will be above potential GDP.
D) GDP will be equal to potential GDP.

Accepted Answer

If the short-run aggregate supply increases by less than the long-run aggregate supply, then at the short-run equilibrium, GDP will be below potential GDP. This is because the economy has not yet fully adjusted to the long-run equilibrium, and there is still a gap between actual output and potential output. As a result, there will be downward pressure on prices and wages, which will eventually lead to an increase in short-run aggregate supply and a move towards the long-run equilibrium.

Question 6

Figure 24-3 
-Refer to Figure 24-3. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D

Accepted Answer

If investment spending decreases, aggregate demand will decrease, shifting the AD curve to the left. In the long run, the economy will move to a new equilibrium at a lower output level, typically represented by point A in such diagrams, assuming point A is to the left of point C.

Question 7

Figure 24-3 
-Refer to Figure 24-3. Suppose the economy is at point A. If the economy experiences a negative supply shock, where will the eventual short-run equilibrium be?
A) A
B) B
C) C
D) D

Accepted Answer

The negative supply shock will shift the short-run aggregate supply curve to the left, causing the short-run equilibrium to move from point A to point B.

Question 8

A decrease 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 be unaffected.
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, a decrease in aggregate demand will lead to a lower price level, but the level of GDP will return to its potential output or full employment level, as wages and prices adjust.

Question 9

Figure 24-3 
-Refer to Figure 24-3. Which of the points in the above graph are possible short-run equilibria?
A) A and B
B) A and C
C) A and D
D) A, B, C, and D

Accepted Answer

The answer of Figure 24-3 
-Refer to Figure 24-3. Which...

Question 10

Figure 24-3 
-Refer to Figure 24-3. Suppose the economy is at point A. If government spending increases in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D

Accepted Answer

An increase in government spending shifts the aggregate demand curve to the right, moving the economy from point A to point C in the long-run equilibrium, assuming the economy was initially at full employment.

Question 11

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

Accepted Answer

When interest rates fall, firms and households will increase their spending on investment and consumption, leading to an increase in aggregate demand. This will shift the aggregate demand curve to the right, causing both the equilibrium price level and the equilibrium level of GDP to rise.

Question 12

Where the aggregate demand curve and the short-run aggregate supply curve intersect
A) the long-run aggregate supply curve must also intersect at the same point.
B) inflation must be increasing.
C) structural and frictional unemployment equal zero.
D) the economy is in short-run macroeconomic equilibrium.

Accepted Answer

The intersection of the aggregate demand and short-run aggregate supply curves shows where the economy is in short-run macroeconomic equilibrium. At this point, the quantity of goods and services demanded equals the quantity of goods and services supplied in the short run. The long-run aggregate supply curve may or may not intersect at the same point, depending on the state of the economy's potential output. Inflation and unemployment levels will also depend on the specific point of intersection.

Question 13

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

Accepted Answer

The automatic mechanism that adjusts the economy back to potential GDP is known as the self-correcting mechanism. When the economy is in a recessionary gap (short-run equilibrium GDP below potential GDP), the self-correcting mechanism will cause the short-run aggregate supply (SRAS) to shift to the right. This shift will occur because the lower output levels in the economy will lead to lower resource prices, such as wages, resulting in lower production costs for firms. As a result, firms will be able to supply more output at each price level, causing the SRAS curve to shift to the right. This shift will eventually lead to a new equilibrium at potential GDP. Therefore, the correct answer is D.

Question 14

Figure 24-3 
-Refer to Figure 24-3. Which of the points in the above graph are possible long-run equilibria?
A) A and B
B) A and C
C) A and D
D) B and D

Accepted Answer

In the long run, equilibrium occurs where the aggregate demand curve intersects the long-run aggregate supply curve, which is typically represented by a vertical line at the full employment level of output. Points A and C are likely on this line, indicating potential long-run equilibria.

Question 15

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

Accepted Answer

When firms become more optimistic about future profitability, they are likely to invest more, increasing aggregate demand. This can lead to higher output and employment in the short run, reducing unemployment.

Question 16

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as
A) monetary policy.
B) an automatic mechanism.
C) "releasing sticky prices."
D) fiscal policy.

Accepted Answer

The process described in the question refers to the automatic mechanism, which allows the economy to self-correct and return to potential GDP. This is mainly driven by market forces, such as changes in prices, wages, and interest rates, and without any direct intervention from the government. Monetary policy (A) and fiscal policy (D) are government tools that can be used to stabilize the economy during a recession, but they involve deliberate actions by policymakers. "Releasing sticky prices" (C) is not a recognized economic concept or policy action.

Question 17

Figure 24-3 
-Refer to Figure 24-3. Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?
A) A
B) B
C) C
D) D

Accepted Answer

An increase in investment spending shifts the aggregate demand curve to the right, moving the economy from point A to point C in the long-run equilibrium.

Question 18

Figure 24-3 -Refer to Figure 24-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y₁ represents potential GDP. A) A and B B) A and C C) C and D D) B and D

Accepted Answer

The answer of Figure 24-3 
-Refer to Figure 24-3. Which...

Question 19

________ of unemployment during ________ make it easier for workers to ________ wages.
A) High levels; a recession; negotiate higher
B) Low levels; an expansion; negotiate higher
C) Low levels; a recession; accept lower
D) High levels; an expansion; accept lower

Accepted Answer

Low levels of unemployment during an economic expansion create a favorable environment for workers to negotiate higher wages due to increased demand for labor.

Question 20

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.
A) raises; recession; lowers; expansion
B) raises; expansion; raises; recession
C) lowers; expansion; lowers; recession
D) lowers; recession; raises; expansion

Accepted Answer

During a recession, the automatic mechanism lowers the price level since there is a decrease in demand for goods and services. During an expansion, the automatic mechanism raises the price level since there is an increase in demand for goods and services.

Quiz 24: Aggregate Demand and Aggregate Supply Analysis

Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point C. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

Which of the following is considered a negative supply shock?

Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

A negative supply shock in the short run causes

If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the short-run equilibrium

Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point C. If investment spending decreases in the economy, where will the eventual long-run equilibrium be?

Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point A. If the economy experiences a negative supply shock, where will the eventual short-run equilibrium be?

A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

Figure 24-3 -Refer to Figure 24-3. Which of the points in the above graph are possible short-run equilibria?

Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point A. If government spending increases in the economy, where will the eventual long-run equilibrium be?

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

Where the aggregate demand curve and the short-run aggregate supply curve intersect

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

Figure 24-3 -Refer to Figure 24-3. Which of the points in the above graph are possible long-run equilibria?

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

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Figure 24-3 -Refer to Figure 24-3. Suppose the economy is at point A. If investment spending increases in the economy, where will the eventual long-run equilibrium be?

Figure 24-3 -Refer to Figure 24-3. Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y₁ represents potential GDP.

of unemployment during make it easier for workers to wages.

The automatic mechanism the price level in the case of and the price level in the case of .