Question 1

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this
A) it is only necessary that long-run aggregate supply shifts right over time.
B) it is only necessary that aggregate demand shifts right over time.
C) both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must shift farther.
D) None of the above cases would produce rising prices and growing real GDP over time.

Accepted Answer

Both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must shift farther in order to explain the consistent rising prices and upward trend in real GDP since the end of World War II.

Question 2

Within the AD/AS model, an increase in capital formation that permits the economy to achieve a larger output will
A) increase long-run aggregate supply.
B) increase short-run aggregate supply, but long-run aggregate supply will be unaffected.
C) increase aggregate demand.
D) decrease aggregate demand.

Accepted Answer

An increase in capital formation will lead to an increase in the productive capacity of the economy, which will shift the long-run aggregate supply curve to the right. This will result in a higher potential output level and lower prices in the long run. The short-run aggregate supply curve may also shift to the right in the short term, but this effect is temporary as prices adjust to the new level of output. Therefore, the increase in capital formation will have a greater impact on long-run aggregate supply than on short-run aggregate supply or aggregate demand.

Question 3

When an economy experiences long-run economic growth, a larger output can be achieved
A) only if there is a reduction in the natural rate of unemployment.
B) only if the economy's actual unemployment is less than the natural rate.
C) if prices increase.
D) even though unemployment remains at its natural rate.

Accepted Answer

Long-run economic growth refers to an increase in a country's potential output or the maximum amount of goods and services that can be produced with existing resources and technology. This can occur even if unemployment remains at its natural rate, as the growth is generated by factors such as technological advancements, increased capital investment, and improved productivity.

Question 4

The usual results of an adverse supply shock are
A) a rise in prices and a fall in output.
B) a fall in prices and a rise in output.
C) increased growth and lower inflation.
D) a rise in prices and a rise in output.

Accepted Answer

An adverse supply shock is usually caused by factors such as natural disasters, war or political instability, and can lead to a decrease in the supply of goods and services. As a result, the economy faces a situation where demand exceeds supply, leading to an increase in prices known as inflation. At the same time, due to the limited supply of goods, the output of the economy falls. Therefore, option A is the best choice that describes the usual results of an adverse supply shock.

Question 5

The expected price level is important because
A) it is the equilibrium price level in the short run
B) it determines the actual price level in the short run
C) it determines the actual price level in the long run
D) firms and resource owners make long-term agreements based on the expected price level

Accepted Answer

Firms and resource owners make long-term agreements based on the expected price level. This means that they make decisions on investments, production, and hiring based on their expectations of future prices. If the actual price level turns out to be different from their expectations, it can lead to inefficiencies and adjustments in the economy. Therefore, the expected price level is an important factor in shaping economic outcomes in the long run.

Question 6

If the U.S. price level increased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
A) the aggregate supply curve would shift outward and the aggregate demand curve would remain unchanged
B) the aggregate supply curve would shift inward and the aggregate demand curve would remain unchanged
C) the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged
D) the aggregate demand curve would shift inward and the aggregate supply curve would remain unchanged
E) the domestic aggregate demand and supply curves would remain unchanged

Accepted Answer

If the U.S. price level increased relative to price levels in foreign countries, domestic goods would become relatively more expensive and foreign goods would become relatively cheaper. This would lead to a decrease in aggregate demand for domestic goods and an increase in aggregate demand for foreign goods. As a result, the aggregate demand curve would shift inward. On the other hand, the increase in the price level would make it less expensive for domestic producers to produce goods which would lead to an increase in domestic aggregate supply. As a result, the aggregate supply curve would shift outward. Therefore, the correct answer is D.

Question 7

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?
A) Aggregate quantity supplied is greater than potential output.
B) Aggregate quantity demanded is less than potential output.
C) Aggregate quantity demanded is equal to potential output.
D) The aggregate demand curve is horizontal at the potential output level.

Accepted Answer

If the economy is in long-run and short-run equilibrium, it means that the economy is producing at its potential output (the output level at which there is full employment of resources) and the price level is stable (no inflation or deflation). In this situation, aggregate quantity demanded is equal to potential output because firms are willing to produce the same amount that consumers are willing to purchase at the current price level.

Question 8

Suppose the economy is in long-run equilibrium. In a short span of time, there is a pessimistic revision of expectations about future business conditions and an unexpected rise in the value of the dollar. In the short run, we would expect
A) the price level and real GDP both to rise.
B) the price level and real GDP both to fall.
C) the price level and real GDP both to stay the same.
D) All of the above are possible.

Accepted Answer

A pessimistic revision of expectations about future business conditions would cause a decrease in aggregate demand (AD), shifting the AD curve to the left. An unexpected rise in the value of the dollar would cause a decrease in net exports, shifting the net exports component of AD to the left as well. In the short run, this decrease in AD would lead to a decrease in both price level and real GDP. However, in the long run, prices and wages would adjust, shifting the SRAS curve to the right, and the economy would return to potential output with a lower price level.

Question 9

When economic growth (a gradual shift of LRAS to the right) expands the production possibilities of an economy,
A) a higher rate of real output can be achieved in the short run, but it cannot be sustained in the long run.
B) a larger output can be attained even if unemployment remains at its natural rate.
C) the general level of prices will rise if the money supply is held constant.
D) the equilibrium in the goods and services market will be disrupted.

Accepted Answer

Economic growth allows an economy to produce more goods and services, expanding its production possibilities. This means that a larger output can be attained even if unemployment remains at its natural rate, as there are more resources available to produce goods and services. Option A is incorrect as economic growth can be sustained in the long run through investment and technological advancements. Option C is incorrect as the general level of prices may rise due to an increase in demand or supply shocks, but this is not necessarily a direct result of economic growth. Option D is incorrect as economic growth does not disrupt the goods and services market equilibrium, but rather expands it.

Question 10

Over the last 60 years, the average annual growth of real GDP in the United States has been approximately
A) 1 percent.
B) 3 percent.
C) 5 percent.
D) 9 percent.

Accepted Answer

According to data from the Bureau of Economic Analysis, the average annual growth of real GDP in the United States between 1950 and 2019 was approximately 3 percent.

Question 11

Which of the following would be most likely to shift the long-run aggregate supply curve (LRAS) to the right?
A) favorable weather conditions that increased the size of this year's grain harvest
B) an increase in resource prices relative to product prices
C) an increase in labor productivity as the result of improved computer technology and expansion of the Internet
D) an increase in the cost of security as the result of terrorist activities

Accepted Answer

An increase in labor productivity due to improved technology and expansion of the Internet would increase the productive capacity of the economy, leading to a rightward shift in the LRAS curve. Option A, favorable weather conditions, would increase short-run aggregate supply (SRAS) but not LRAS. Option B, an increase in resource prices relative to product prices, would shift the SRAS leftward and not LRAS. Option D, an increase in the cost of security, would increase production costs and shift SRAS leftward, thereby causing a contraction in both short-run and long-run aggregate supply.

Question 12

Which of the following would cause prices and real GDP to rise in the short run?
A) Short-run aggregate supply shifts right.
B) Short-run aggregate supply shifts left.
C) Aggregate demand shifts right.
D) Aggregate demand shifts left.

Accepted Answer

When aggregate demand shifts right, it leads to an increase in both prices and real GDP in the short run. This is because firms increase their production in response to the increased demand, leading to an increase in real GDP. However, since there is a limited supply of goods and services in the short run, the increased demand leads to rising prices.

Question 13

Suppose we observe an economy experiencing an economic expansion and high inflation. This means the expansion is attributed to
A) an anticipated increase in aggregate demand.
B) an increase in long-run aggregate supply.
C) an unanticipated decrease in aggregate demand.
D) an unanticipated decrease in aggregate supply.

Accepted Answer

High inflation during an economic expansion indicates that aggregate demand is growing faster than the economy's production capacity. This suggests that the expansion is being fueled by an anticipated increase in aggregate demand.

Question 14

Which of the following would cause prices to fall and output to rise in the short run?
A) Short-run aggregate supply shifts right.
B) Short-run aggregate supply shifts left.
C) Aggregate demand shifts right.
D) Aggregate demand shifts left.

Accepted Answer

When the short-run aggregate supply curve shifts right, it means that the economy can produce more output at any given price level. This leads to an increase in output and a decrease in prices in the short run.

Question 15

Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices
A) and output are higher than in the original long-run equilibrium.
B) and output are lower than in the original long-run equilibrium.
C) are higher and output is the same as the original long-run equilibrium.
D) are the same and output is lower than in the original long-run equilibrium.

Accepted Answer

In the long run, the economy returns to its potential output level, so output remains the same. However, the increase in aggregate demand leads to higher prices.

Question 16

If the U.S. price level decreased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?
A) the aggregate supply curve would shift outward and the aggregate demand curve would remain unchanged
B) the aggregate supply curve would shift inward and the aggregate demand curve would remain unchanged
C) the aggregate demand curve would shift outward and the aggregate supply curve would remain unchanged
D) the aggregate demand curve would shift inward and the aggregate supply curve would remain unchanged
E) the domestic aggregate demand and supply curves would remain unchanged

Accepted Answer

A decrease in the U.S. price level relative to foreign countries makes U.S. goods cheaper for foreign buyers, increasing exports and shifting the aggregate demand curve outward.

Question 17

During the past 50 years, the production possibilities of the United States have expanded, increasing both short-run and long-run aggregate supply. Other things constant, this would lead to
A) an expansion in output and an increase in prices.
B) an expansion in output and a decrease in prices.
C) no change in either output or prices.
D) no change in output and a decrease in prices.

Accepted Answer

An expansion in short-run and long-run aggregate supply means that the economy can produce more goods and services at lower production costs. This leads to an increase in output and a decrease in prices. Therefore, choice B is the correct answer.

Question 18

An economic contraction caused by a shift in aggregate demand causes prices to
A) rise in the short run, and rise even more in the long run.
B) rise in the short run, and fall back to their original level in the long run.
C) fall in the short run, and fall even more in the long run.
D) fall in the short run, and rise back to their original level in the long run.

Accepted Answer

The answer of An economic contraction caused by a shift...

Question 19

Which of the following, other things the same, would make the price level decrease and real GDP increase?
A) long-run aggregate supply shifts right
B) long-run aggregate supply shifts left
C) aggregate demand shifts right
D) aggregate demand shifts left

Accepted Answer

If the long-run aggregate supply shifts right, it means that the economy is able to produce more goods and services at a lower price level. This would result in a decrease in the price level and an increase in real GDP.

Question 20

An increase in capital formation that expands long-run aggregate supply will
A) increase output and decrease prices.
B) increase both output and prices.
C) decrease both output and prices.
D) decrease output and increase prices.

Accepted Answer

An increase in capital formation will lead to an increase in productivity and efficiency, resulting in an increase in long-run aggregate supply. This will lead to an increase in output, while prices will decrease due to the increased supply of goods and services.

Quiz 10: Dynamic Change, Economic Fluctuations, and the Ad--As Model

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this

Within the AD/AS model, an increase in capital formation that permits the economy to achieve a larger output will

When an economy experiences long-run economic growth, a larger output can be achieved

The usual results of an adverse supply shock are

The expected price level is important because

If the U.S. price level increased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?

Suppose the economy is in long-run equilibrium. In a short span of time, there is a pessimistic revision of expectations about future business conditions and an unexpected rise in the value of the dollar. In the short run, we would expect

When economic growth (a gradual shift of LRAS to the right) expands the production possibilities of an economy,

Over the last 60 years, the average annual growth of real GDP in the United States has been approximately

Which of the following would be most likely to shift the long-run aggregate supply curve (LRAS) to the right?

Which of the following would cause prices and real GDP to rise in the short run?

Suppose we observe an economy experiencing an economic expansion and high inflation. This means the expansion is attributed to

Which of the following would cause prices to fall and output to rise in the short run?

Suppose the economy is initially in long-run equilibrium and aggregate demand rises. In the long run prices

If the U.S. price level decreased relative to price levels in foreign countries, what would be the impact on domestic aggregate supply and aggregate demand curves?

During the past 50 years, the production possibilities of the United States have expanded, increasing both short-run and long-run aggregate supply. Other things constant, this would lead to

An economic contraction caused by a shift in aggregate demand causes prices to

Which of the following, other things the same, would make the price level decrease and real GDP increase?

An increase in capital formation that expands long-run aggregate supply will