Question 1

Make a list of things that would shift the long-run aggregate supply curve to the right.

Accepted Answer

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Question 2

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Accepted Answer

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

Question 3

Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.

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Question 4

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

Accepted Answer

Pessimism about the future can lead to a decrease in consumer and business spending, which can cause falling prices and reduced demand for goods and services, resulting in rising unemployment.

Question 5

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 6

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.

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Question 7

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

Accepted Answer

When the government increases the money supply, it leads to an increase in aggregate demand which can help bring unemployment towards its natural rate. However, if short-run aggregate supply decreases, it means that the cost of production has increased which will lead to higher prices. So, if the money supply is increased in response to a decrease in short-run aggregate supply, prices will rise even more. This is known as demand-pull inflation. Therefore, option A is correct.

Question 8

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

Accepted Answer

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Question 9

Make a list of expenditures whose sum equals GDP.

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Question 10

Use sticky-wage theory to explain why an increase in the expected price level shifts the aggregate supply curve.

Accepted Answer

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Question 11

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

Accepted Answer

This is because uncertainty and pessimism makes investors hesitate to allocate funds for long-term projects or purchases, resulting in a decrease in investment spending. As a result, aggregate demand shifts to the left.

Question 12

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, a decrease in aggregate demand due to a recession can lead to a decrease in real GDP, but a decrease in aggregate supply due to a natural disaster can also cause a decrease in real GDP.

Question 13

Stagflation would result from the aggregate supply curve shifting left.

Accepted Answer

Stagflation is a combination of stagnant economic growth and rising inflation. It occurs when the aggregate supply curve shifts leftward, resulting in higher prices and lower output.

Question 14

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

Accepted Answer

An increase in the actual price level affects the quantity of goods and services supplied in the short run but does not shift the short-run aggregate supply (SRAS) curve itself. However, if producers expect higher prices in the future, they might adjust their production plans, which can shift the SRAS curve to the left as they anticipate higher costs or demand higher prices for their products.

Question 15

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?

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Question 16

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

Accepted Answer

This is a key tenet of Keynesian economics, which emphasizes the importance of government intervention in the economy to support demand during downturns. Keynes believed that in times of economic distress, individuals and businesses would reduce spending and investment, leading to a spiral of declining demand and rising unemployment. To counter this, he proposed that governments should increase spending, cut taxes, and employ other policy tools to stimulate demand, thereby supporting economic growth and reducing joblessness.

Question 17

During World War II government expenditures increased almost five-fold and output almost doubled.

Accepted Answer

This statement is true. Government expenditures and output increased significantly during World War II, largely due to increased military spending and production.

Question 18

Make a list of things that would shift the aggregate demand curve to the right.

Accepted Answer

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Question 19

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 20

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

Accepted Answer

Economists mostly agree that the Great Depression was principally caused by factors that shifted aggregate demand left. This includes a decrease in consumer and investment spending, a decline in exports, and an increase in protectionist trade policies.

Quiz 33: Aggregate Demand and Aggregate Supply

Make a list of things that would shift the long-run aggregate supply curve to the right.

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.

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

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.

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.

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

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

Make a list of expenditures whose sum equals GDP.

Use sticky-wage theory to explain why an increase in the expected price level shifts the aggregate supply curve.

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

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

Stagflation would result from the aggregate supply curve shifting left.

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

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?

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

During World War II government expenditures increased almost five-fold and output almost doubled.

Make a list of things that would shift the aggregate demand curve to the right.

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

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.