Question 1

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:
A)a positive demand shock.
B)a negative inflation shock.
C)a decrease in taxes.
D)an increase in the money supply.

Accepted Answer

A negative inflation shock would typically reduce aggregate demand or increase costs, leading to a contractionary effect rather than an expansionary gap.

Question 2

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:
A)a negative demand shock.
B)a positive inflation shock.
C)an increase in taxes.
D)a decrease in the money supply.

Accepted Answer

A positive inflation shock would typically lead to an inflationary gap, not a recessionary gap, as it increases the price level rather than reducing output.

Question 3

When using the AD-AS model to understand business cycles, the question, "what are the fundamental causes of business cycles?" can be thought of as the question:
A)"what factors move the economy away from long-run equilibrium?"
B)"what factors move aggregate demand and aggregate supply in different directions?"
C)"what factors increase or decrease potential GDP?"
D)"what factors increase or decrease the expected rate of inflation?"

Accepted Answer

The fundamental causes of business cycles are factors that move the economy away from long-run equilibrium, causing fluctuations in output and employment.

Question 4

Graphically, long-run equilibrium occurs at the intersection of the aggregate demand curve and:
A)the aggregate supply curve and potential output.
B)the planned aggregate expenditure line.
C)the aggregate supply curve.
D)potential output.

Accepted Answer

In the long-run equilibrium, the aggregate demand curve intersects both the aggregate supply curve and the potential output, indicating that the economy is producing at its full capacity.

Question 5

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the ______ curve to the right and generate ______.
A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Accepted Answer

Increased investment by firms raises aggregate demand, shifting the aggregate demand curve to the right, leading to an expansionary output gap as actual output exceeds potential output.

Question 6

Refer to the figure below.The economy pictured in the figure has a(n) ______ gap with a short-run equilibrium indicated by point ___. 
A)recessionary; A
B)recessionary; B
C)recessionary; C
D)expansionary; A

Accepted Answer

The answer of Refer to the figure below.The economy pictured...

Question 7

When actual output equals potential output, there is ______ output gap and the inflation rate will ____.
A)an expansionary; exceed the expected rate of inflation
B)an expansionary; be lower than the expected rate of inflation
C)no; be equal to the expected rate of inflation
D)a recessionary; exceed the expected rate of inflation

Accepted Answer

When actual output equals potential output, there is no output gap, and the inflation rate will be stable, equating to the expected rate of inflation.

Question 8

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will shift the ______ curve to the left and generate ______.
A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Accepted Answer

A decrease in consumer confidence leads to reduced consumer spending, shifting the aggregate demand curve to the left, resulting in a recessionary output gap.

Question 9

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:
A)a negative demand shock.
B)a negative inflation shock.
C)a decrease in government spending.
D)a decrease in the inflation rate.

Accepted Answer

A decrease in the inflation rate does not directly cause a recessionary gap; it may be a result of other factors but not a direct cause.

Question 10

When actual output is less than potential output, there is ______ output gap and the inflation rate will ____.
A)an expansionary; exceed the expected rate of inflation
B)an expansionary; be lower than the expected rate of inflation
C)a recessionary; be lower than the expected rate of inflation
D)a recessionary; exceed the expected rate of inflation

Accepted Answer

When actual output is less than potential output, there is a recessionary output gap, leading to lower demand pressures and thus a lower inflation rate than expected.

Question 11

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ______ equilibrium.
A)long-run
B)recessionary
C)expansionary
D)short-run

Accepted Answer

When actual output equals potential output, it means that the economy is producing at its maximum capacity in the long run. This implies that prices are stable and there is no upward or downward pressure on prices. When the inflation rate is equal to the expected rate of inflation, it means that there is no surprise or unexpected inflation in the economy. Together, these conditions create a long-run equilibrium.

Question 12

Graphically, short-run equilibrium occurs at the intersection of the aggregate demand curve and:
A)the aggregate supply curve and potential output.
B)the planned aggregate expenditure line.
C)the aggregate supply curve.
D)potential output.

Accepted Answer

In the short run, equilibrium in the economy is determined by the intersection of the aggregate demand curve and the aggregate supply curve.

Question 13

An example of a negative inflation shock is:
A)an increase in interest rates.
B)an increase in government purchases.
C)a significant rise in oil prices.
D)a tax increase.

Accepted Answer

A significant rise in oil prices can lead to higher production costs and consumer prices, contributing to inflation, which is a negative inflation shock.

Question 14

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will shift the ______ curve to the right and generate ______.
A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Accepted Answer

An increase in consumer confidence leads to higher consumer spending, which shifts the aggregate demand curve to the right, resulting in an expansionary output gap as actual output exceeds potential output.

Question 15

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with ___ inflation and ____ output.
A)higher; higher
B)higher; lower
C)lower; higher
D)lower; lower

Accepted Answer

The answer of Starting from long-run equilibrium, a positive inflation...

Question 16

Starting from potential output, if firms become less optimistic and decide to decrease their investment in new capital, then this will shift the ______ curve to the left and generate ______.
A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Accepted Answer

A decrease in investment reduces aggregate demand, shifting the aggregate demand curve to the left, leading to a recessionary output gap.

Question 17

When the economy is in short-run equilibrium, there will be ______ output gap.
A)no
B)only a recessionary
C)either a recessionary or an expansionary
D)only an expansionary

Accepted Answer

Short-run equilibrium occurs when aggregate demand equals short-run aggregate supply. At this point, there may still be a gap between actual output and potential output, which is known as the output gap. This gap can be either recessionary (when actual output is below potential output) or expansionary (when actual output is above potential output). Therefore, the best choice is C: either a recessionary or an expansionary output gap.

Question 18

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:
A)a positive demand shock.
B)a positive inflation shock.
C)an increase in government spending.
D)an increase in the inflation rate.

Accepted Answer

An increase in the inflation rate does not directly cause an expansionary gap; it is typically a result of an expansionary gap. An expansionary gap is caused by factors that increase aggregate demand, such as a positive demand shock or increased government spending.

Question 19

When actual output exceeds potential output, there is ______ output gap and the inflation rate will ____.
A)an expansionary; exceed the expected rate of inflation
B)an expansionary; be lower than the expected rate of inflation
C)no; be equal to the expected rate of inflation
D)a recessionary; exceed the expected rate of inflation

Accepted Answer

When actual output exceeds potential output, it creates an expansionary output gap, leading to demand-pull inflation, where the inflation rate exceeds the expected rate of inflation.

Question 20

Starting from long-run equilibrium, a negative inflation shock results in a short-run equilibrium with ___ inflation and ____ output.
A)higher; higher
B)higher; lower
C)higher; potential
D)lower; lower

Accepted Answer

The answer of Starting from long-run equilibrium, a negative inflation...

Quiz 13: Aggregate Demand, Aggregate Supply, and Business Cycles

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

When using the AD-AS model to understand business cycles, the question, "what are the fundamental causes of business cycles?" can be thought of as the question:

Graphically, long-run equilibrium occurs at the intersection of the aggregate demand curve and:

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the curve to the right and generate .

Refer to the figure below.The economy pictured in the figure has a(n) ____ gap with a short-run equilibrium indicated by point _.

When actual output equals potential output, there is __ output gap and the inflation rate will .

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will shift the curve to the left and generate .

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

When actual output is less than potential output, there is __ output gap and the inflation rate will .

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ______ equilibrium.

Graphically, short-run equilibrium occurs at the intersection of the aggregate demand curve and:

An example of a negative inflation shock is:

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will shift the curve to the right and generate .

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with _ inflation and __ output.

Starting from potential output, if firms become less optimistic and decide to decrease their investment in new capital, then this will shift the curve to the left and generate .

When the economy is in short-run equilibrium, there will be ______ output gap.

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:

When actual output exceeds potential output, there is __ output gap and the inflation rate will .

Starting from long-run equilibrium, a negative inflation shock results in a short-run equilibrium with _ inflation and __ output.