Question 1

Stagflation would result from the aggregate-supply curve shifting left.

Accepted Answer

Stagflation occurs when there is a decrease in aggregate supply, which leads to simultaneous inflation and stagnant economic growth.

Question 2

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply.

Accepted Answer

The economy would not necessarily revert to its original level of prices and output in response to a decrease in output caused by a decrease in aggregate demand or aggregate supply. The specific factors causing the decrease in output would need to be addressed in order to bring the economy back to its original level.

Question 3

We could explain continued increases in both output and the price level by supposing that only long-run aggregate supply shifted right over time.

Accepted Answer

Continued increases in both output and price level could not be explained solely by a rightward shift in long-run aggregate supply, as a rightward shift in short-run aggregate supply or an increase in aggregate demand could also be contributing factors.

Question 4

What variables besides real GDP tend to decline during recessions? Given the definition of real GDP, argue that declines in these variables are to be expected.

Accepted Answer

The answer of What variables besides real GDP tend to...

Question 5

Discuss what economists believe is different about the long and short run.

Accepted Answer

The answer of Discuss what economists believe is different about...

Question 6

During World War II, output increased by a larger percentage than government expenditures.

Accepted Answer

During World War II, government expenditures increased by a larger percentage than output, as massive government spending on the war effort significantly outpaced the increase in overall economic output.

Question 7

All explanations for the upward slope of the short-run aggregate-supply curve suppose that output supplied increases when the price level increases more than expected.

Accepted Answer

This statement is true. The upward slope of the short-run aggregate-supply curve is typically attributed to the sticky wages or prices of inputs, which leads to firms receiving higher-than-expected profits when the price level increases. This incentive to produce more output in the short run results in an upward sloping aggregate supply curve.

Question 8

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Accepted Answer

This statement accurately portrays John Maynard Keynes' economic theories, which outlined the importance of government intervention and spending to stimulate demand during economic downturns.

Question 9

Economists mostly agree that the Great Depression was the result of a very large adverse supply shock.

Accepted Answer

While some economists argue that supply shock played a role, the predominant view is that the Great Depression was caused by a combination of factors including monetary policy, financial instability, and international trade imbalances.

Question 10

An unexpected increase in the price level does not shift the aggregate-supply curve, but an expected increase in the price level shifts the aggregate-supply curve to the left.

Accepted Answer

An unexpected increase in the price level affects the short-run aggregate supply because producers might temporarily increase production due to higher prices, but it doesn't shift the curve itself. An expected increase in the price level can lead to a leftward shift in the aggregate-supply curve as producers anticipate higher costs and might reduce the quantity supplied at every price level.

Question 11

Make a list of expenditures whose sum equals GDP.

Accepted Answer

The answer of Make a list of expenditures whose sum...

Question 12

If the government increased the money supply in response to a decrease in aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Accepted Answer

Increasing the money supply would increase aggregate demand and push employment towards its natural rate. However, because aggregate supply has decreased, prices would rise even more due to the increased demand for fewer goods and services. This is known as demand-pull inflation.

Question 13

The long-run trend in real GDP is upward. How is this possible given business cycles? What explains the upward trend?

Accepted Answer

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Question 14

Increased output and prices in Canada in the early 1940s was mostly the result of increased government expenditures.

Accepted Answer

Increased government expenditures during World War II led to increased demand for goods and services, which in turn led to increased production and higher prices in Canada.

Question 15

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP can be caused by changes in both aggregate demand and aggregate supply. For example, an increase in aggregate demand can lead to an increase in real GDP, but at some point, the economy may not be able to keep up with the increased demand, leading to higher prices and a decrease in real GDP. Similarly, a negative shock to aggregate supply, such as a natural disaster or increase in costs, can lead to a decrease in real GDP.

Question 16

Pessimism about the future leads to falling prices and rising unemployment.

Accepted Answer

Pessimism can lead to decreased consumer and business confidence, which can result in lower spending and investment. This, in turn, can lead to falling prices and decreased demand for goods and services, potentially resulting in rising unemployment.

Question 17

Increased uncertainty and pessimism about the future of the economy decreases investment spending, shifting aggregate demand to the left.

Accepted Answer

This is because if businesses and consumers are unsure about the future of the economy, they may be less likely to invest in long-term projects or make large purchases, causing a decrease in aggregate demand.

Question 18

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

Accepted Answer

The answer of Explain how an increase in the price...

Question 19

When all prices rise together, there is no change in the overall quantity of goods and services supplied.

Accepted Answer

When all prices rise together, it means that the value of money has decreased uniformly. Hence, there won't be any change in the overall quantity of goods and services supplied in the economy.

Question 20

Because not all prices adjust instantly to changing conditions, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Accepted Answer

This statement is consistent with the concept of sticky prices, where prices do not adjust immediately to changes in the overall price level, leading to reduced demand and production in response to unexpected price movements.

Quiz 14: Aggregate Demand and Aggregate Supply