Question 1

The short-run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in prices will
A) increase aggregate demand as consumers buy more.
B) decrease aggregate demand as consumers buy less.
C) cause firms to expand output since the higher product prices will improve profitability.
D) cause firms to reduce output since the higher product prices will decrease profit margins.

Accepted Answer

The upward slope of the SRAS curve indicates that firms are willing to increase output as prices rise in the short run. This is because higher prices will improve their profitability and they will have an incentive to produce more. Thus, unexpected increases in prices will cause firms to expand output, leading to an upward shift in the SRAS curve.

Question 2

The short-run aggregate supply curve shows the relationship between
A) the general level of prices and the quantity of goods and services purchased by all consumers in the economy.
B) the general level of prices and the quantity of goods and services that domestic firms will supply.
C) the interest rate and the quantity of goods and services that domestic firms will supply.
D) the money supply and the quantity of goods and services that domestic firms will supply.

Accepted Answer

The short-run aggregate supply curve shows the relationship between the general level of prices and the quantity of goods and services that domestic firms will supply. This means that as the level of prices increase, firms will be willing to supply more goods and services in the short-run. This relationship is influenced by factors such as input costs and technology, as well as changes in demand. Therefore, the short-run aggregate supply curve is upward sloping.

Question 3

Which of the following explains why higher prices in the goods and services market will lead to an upward sloping short-run aggregate supply curve?
A) The higher prices will temporarily improve profit margins because many of the cost components of firms will be fixed in the short run.
B) The higher prices will reduce the purchasing power of the fixed quantity of money and, thereby, stimulate additional output.
C) The higher prices will expand the economy's resource base and, thereby, stimulate additional output.
D) The higher prices will improve technology and, thereby, stimulate additional output.

Accepted Answer

In the short run, many of the cost components of firms are fixed, such as labor contracts and lease agreements. Therefore, when prices rise, the increased revenue can temporarily improve profit margins, providing an incentive for firms to increase output and causing the short-run aggregate supply curve to slope upwards.

Question 4

If the actual price level is lower than the expected price level reflected in long-term contracts,
A) many firms will find production more profitable than they had expected and will increase the quantity of output supplied
B) many firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C) many firms will find production more profitable than they had expected and will decrease the quantity of output supplied
D) many firms will find production less profitable than they had expected and will increase the quantity of output supplied

Accepted Answer

When the actual price level is lower than expected, firms receive lower revenues than anticipated, making production less profitable, leading them to decrease output.

Question 5

In the short run, if prices were above equilibrium,
A) excess aggregate demand for goods and services would place downward pressure on prices.
B) excess aggregate supply of goods and services would place upward pressure on prices.
C) excess aggregate demand for goods and services would place upward pressure on prices.
D) excess aggregate supply of goods and services would place downward pressure on prices.

Accepted Answer

If prices were above equilibrium, it would mean that the market is in a state of excess supply, as suppliers would be producing more than consumers are willing to buy at that price. Hence, suppliers would be forced to lower their prices in order to sell their goods, putting downward pressure on prices. This would ultimately move the market back towards the equilibrium price.

Question 6

Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?
A) An increase in prices temporarily improves profit margins because important components of costs are fixed in the short run.
B) An increase in prices leads to higher interest rates, which temporarily improves profit margins.
C) An increase in prices leads to an expansion in the money supply, which stimulates additional output.
D) An increase in prices increases real wage rates and thereby expands the size of the economy's resource base.

Accepted Answer

In the short run, some costs are fixed, and an increase in prices can temporarily improve profit margins for firms. This is the reason why short-run aggregate supply is upward sloping. Choices B, C, and D are incorrect because they do not accurately describe the relationship between short-run aggregate supply and changes in prices.

Question 7

The aggregate supply curve indicates the
A) relationship between prices and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports).
B) relationship between prices and the natural rate of unemployment.
C) relationship between the real wage rate and the quantity of labor supplied by households.
D) quantity of goods and services producers will supply at different price levels.

Accepted Answer

The aggregate supply curve shows the relationship between the price level and the quantity of goods and services that firms are willing to supply. As the price level increases, firms are generally willing to produce more output, so the aggregate supply curve slopes upward.

Question 8

Resource prices that are fixed by long-term contracts help explain why, in the short run, firms will
A) increase output when product prices increase.
B) keep production levels constant when product prices decrease.
C) keep their product prices constant even if the demand for their good increases.
D) keep their product prices constant even if the demand for their good decreases.

Accepted Answer

In the short run, if resource prices are fixed by long-term contracts, firms can increase output when product prices increase because their costs remain stable, allowing them to take advantage of higher prices to increase profits.

Question 9

If resource prices are fixed and the product selling price rises, then
A) profits will decrease.
B) profits will increase.
C) profits will remain constant.
D) both profits and output will decrease.

Accepted Answer

If the product selling price rises while the resource prices remain fixed, the profit margin will increase. This is because the revenue generated from selling the product will exceed the cost of resources used to produce it, resulting in higher profits.

Question 10

Because many resource prices are set by long-term contracts, in the short run
A) costs will increase by more than product prices when demand increases.
B) costs will decrease when the demand for products increases.
C) costs will increase by less than product prices when demand increases.
D) costs will decrease by more than product prices when demand decreases.

Accepted Answer

Since resource prices are set by long-term contracts, in the short run the costs for producing products will not immediately reflect changes in demand. Therefore, when demand increases, product prices will increase but costs will only increase by a smaller amount, leading to higher profit margins for firms. Similarly, when demand decreases, product prices will decrease but costs will decrease by a larger amount, allowing firms to maintain profit margins.

Question 11

An unanticipated increase in the level of prices in the goods and services market, which results in a temporary reduction in real wage rates, will
A) decrease the natural rate of unemployment.
B) increase the natural rate of unemployment.
C) result in an actual rate of unemployment that is less than the natural rate of unemployment.
D) result in an actual rate of unemployment that is greater than the natural rate of unemployment.

Accepted Answer

An unanticipated increase in prices reduces real wages temporarily, making labor cheaper and encouraging firms to hire more workers, thus reducing unemployment below the natural rate.

Question 12

If the actual price level exceeds the expected price level reflected in long-term contracts,
A) firms will find production more profitable than they had expected and will decrease the quantity of output supplied
B) firms will find production less profitable than they had expected and will decrease the quantity of output supplied
C) firms will find production less profitable than they had expected and will increase the quantity of output supplied
D) unemployment will decrease

Accepted Answer

When the actual price level exceeds the expected price level, firms find production more profitable, leading to an increase in output and a decrease in unemployment.

Question 13

An unanticipated reduction in the level of prices in the goods and services market, which results in a temporary increase in real wage rates, will
A) increase the natural rate of unemployment.
B) reduce the natural rate of unemployment.
C) result in an actual rate of unemployment that is less than the natural rate of unemployment.
D) result in an actual rate of unemployment that is greater than the natural rate of unemployment.

Accepted Answer

A reduction in price levels increases real wages, leading to higher unemployment as firms reduce hiring due to increased labor costs, resulting in unemployment above the natural rate.

Question 14

Which of the following will most likely result from an unexpected increase in prices that decreases real wages and resource prices?
A) a decrease in unemployment
B) an increase in unemployment
C) a decrease in the nominal interest rate
D) a decrease in aggregate supply and real output

Accepted Answer

An unexpected increase in prices that decreases real wages and resource prices typically leads to a decrease in unemployment because firms can hire more workers at lower real wage costs, thus increasing employment.

Question 15

In the context of aggregate supply, the short run is defined as the period during which
A) some prices are set by contracts and cannot be adjusted.
B) prices can change, but neither aggregate supply nor aggregate demand can shift.
C) individuals have sufficient time to modify their behavior in response to price changes.
D) quantity changes cannot occur in response to changes in relative prices.

Accepted Answer

In the short run, some prices are set by contracts and cannot be adjusted, leading to sticky prices and a temporary inability for the economy to adjust to changes in supply and demand.

Question 16

Within the framework of the AD/AS model, when the current price level in the goods and services market is above the level anticipated at the time decision makers agreed to long-term resource contracts,
A) producer profits will fall, leading to a reduction in output.
B) the natural rate of unemployment will rise.
C) the actual rate of unemployment will fall below the natural rate of unemployment.
D) output will be temporarily below the economy's long-run sustainable output.

Accepted Answer

When the price level is higher than anticipated, firms experience higher profits, leading to increased production and employment, causing the actual unemployment rate to fall below the natural rate.

Question 17

If scientific research produces a technological breakthrough in the production of computer memory, then
A) business costs will increase, profits will fall, and production will decrease.
B) business costs will fall, but profits will also fall, and production will decrease.
C) business costs will fall, profits will improve, and production will increase.
D) profits will increase because businesses will cut back production.

Accepted Answer

A technological breakthrough in computer memory production will lead to lower business costs due to increased efficiency, allowing for increased profits. This increase in profits can lead to an increase in production as well.

Question 18

An unexpected sharp reduction in inflation will most likely result in
A) the rapid growth of output and employment.
B) a reduction in the actual rate of unemployment.
C) a reduction in the natural rate of unemployment.
D) a temporary increase in unemployment and a decline in real output.

Accepted Answer

An unexpected sharp reduction in inflation, also known as disinflation, can lead to a decline in demand for goods and services as consumers and businesses curtail their spending. This can lead to a temporary decrease in production, which can cause firms to lay off workers and result in an increase in unemployment. The decline in demand can also result in a decline in real output. Therefore, the correct choice is D.

Question 19

If the actual price level exceeds the expected price level reflected in long-term contracts,
A) many firms will find production more profitable than they had expected and will increase the quantity of output supplied.
B) many firms will find production less profitable than they had expected and will decrease the quantity of output supplied.
C) many firms will find production more profitable than they had expected and will decrease the quantity of output supplied.
D) many firms will find production less profitable than they had expected and will increase the quantity of output supplied.

Accepted Answer

When the actual price level exceeds the expected price level reflected in long-term contracts, many firms will find it more profitable to produce and will increase the quantity of output supplied. This is because they can sell their output for a higher price than they had anticipated when they signed the long-term contracts, leading to an increase in profits. Thus, the increase in profitability will incentivize firms to increase the quantity of output supplied.

Question 20

In the context of aggregate supply, the long run is defined as the period during which
A) some prices are set by contracts and cannot be adjusted.
B) prices can change, but neither aggregate supply nor aggregate demand can shift.
C) individuals have sufficient time to modify their behavior in response to price changes.
D) quantity changes cannot occur in response to changes in relative prices.

Accepted Answer

In the long run, individuals and firms have enough time to adjust their behavior and production decisions in response to changes in prices, leading to a situation where all prices, including wages, are flexible.

Quiz 9: An Introduction to Basic Macroeconomic Markets

The short-run aggregate supply curve (SRAS) slopes upward to the right because unexpected increases in prices will

The short-run aggregate supply curve shows the relationship between

Which of the following explains why higher prices in the goods and services market will lead to an upward sloping short-run aggregate supply curve?

If the actual price level is lower than the expected price level reflected in long-term contracts,

In the short run, if prices were above equilibrium,

Within the framework of the AS/AD model, which of the following is a true statement regarding short-run aggregate supply?

The aggregate supply curve indicates the

Resource prices that are fixed by long-term contracts help explain why, in the short run, firms will

If resource prices are fixed and the product selling price rises, then

Because many resource prices are set by long-term contracts, in the short run

An unanticipated increase in the level of prices in the goods and services market, which results in a temporary reduction in real wage rates, will

If the actual price level exceeds the expected price level reflected in long-term contracts,

An unanticipated reduction in the level of prices in the goods and services market, which results in a temporary increase in real wage rates, will

Which of the following will most likely result from an unexpected increase in prices that decreases real wages and resource prices?

In the context of aggregate supply, the short run is defined as the period during which

Within the framework of the AD/AS model, when the current price level in the goods and services market is above the level anticipated at the time decision makers agreed to long-term resource contracts,

If scientific research produces a technological breakthrough in the production of computer memory, then

An unexpected sharp reduction in inflation will most likely result in

If the actual price level exceeds the expected price level reflected in long-term contracts,

In the context of aggregate supply, the long run is defined as the period during which