Question 1

Increased uncertainty and pessimism about the future of the economy leads firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Accepted Answer

Uncertainty and pessimism can lead firms to reduce their investment spending, which ultimately reduces overall demand in the economy. This shift in investment behavior can cause a leftward shift in the aggregate-demand curve.

Question 2

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 both changes in aggregate demand and changes in aggregate supply. For example, a negative supply shock such as a sudden increase in oil prices can reduce aggregate supply, causing a decrease in GDP. Similarly, a positive supply shock such as a technological breakthrough can increase aggregate supply, causing an increase in GDP.

Question 3

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 4

If not all prices adjust instantly to changing economic circumstances,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 is known as the "menu cost" or "price-stickiness" theory, where some firms are slower to adjust their prices to match changes in the economy, leading to higher prices than the current market equilibrium, which could result in a decrease in sales and production quantities.

Question 5

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

Accepted Answer

All explanations for the upward slope of the short-run aggregate supply curve are based on the idea that firms are willing to increase their output and prices when the actual price level is higher than what they expected. This can be due to factors such as sticky wages, prices, and input costs.

Question 6

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

Accepted Answer

This is true, as the United States government heavily invested in the military and defense industry during World War II, leading to increased production and higher prices.

Question 7

Other things the same,technological progress raises the price level..

Accepted Answer

Technological progress usually lowers the price level as it leads to increased efficiency and productivity. This can result in lower production costs and lower prices for consumers.

Question 8

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

Accepted Answer

Keynesian economics focuses on the role of aggregate demand in causing and resolving economic downturns. Keynes believed that government intervention was necessary to stimulate the economy during times of recession by increasing spending and investment to increase aggregate demand, which would in turn reduce unemployment.

Question 9

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

Accepted Answer

The primary purpose of the AD-AS model is to explain how changes in aggregate demand and supply affect the level of real GDP and the price level in the short run. The classical dichotomy is a principle of classical economics which states that changes in the money supply only affect nominal variables such as prices, and do not affect real variables such as output and employment.

Question 10

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

Accepted Answer

When people are more optimistic about the future, they tend to increase their spending and investment, which leads to increased demand and production. This can lead to rising prices and falling unemployment in the short run. However, the long-term effects may depend on various factors such as monetary policy, trade policies, and technological advancements.

Question 11

If the central bank 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 central bank increases the money supply, it stimulates demand and can help lower unemployment. However, if the decrease in aggregate supply is due to factors such as a shortage of inputs or natural disasters, increasing the money supply may result in higher prices instead of increased output. This is due to a phenomenon called cost-push inflation, where producers raise prices to compensate for their higher costs. Thus, while unemployment may return towards its natural rate, prices would also rise even more.

Question 12

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

Accepted Answer

If only aggregate demand shifts right, it would lead to higher output and price levels initially, but continued increases in both would require shifts in aggregate supply as well, otherwise, output would eventually be constrained by supply limitations.

Question 13

The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run.

Accepted Answer

There are multiple reasons for the upward slope of the short-run aggregate-supply curve, including not only sticky wages but also sticky prices, misperceptions about relative prices, and short-run adjustments in resource utilization.

Question 14

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, not short-run aggregate supply. This includes factors such as a stock market crash, bank failures, and a decrease in consumer spending.

Question 15

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 16

If aggregate demand shifts right,then eventually price level expectations rise.The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

Accepted Answer

When aggregate demand shifts right, there is an increase in demand for goods and services, which can lead to an increase in prices in the short run. This can cause suppliers to anticipate higher prices, leading to an increase in the costs of production, which shifts the short-run aggregate-supply curve to the left.

Question 17

Because the price level does not affect the long-run determinants of real GDP,the long-run aggregate-supply is vertical.

Accepted Answer

In the long run, the determinants of real GDP such as technology, capital, and labor are unaffected by changes in the price level. Therefore, the long-run aggregate supply curve is vertical, indicating that changes in the price level do not affect the potential output of an economy.

Question 18

If aggregate demand and aggregate supply both shift right,we can be sure that the price level is higher in the short run.

Accepted Answer

When both aggregate demand and aggregate supply shift right, the effect on the price level is uncertain without knowing the magnitude of the shifts. If the supply increase is larger than the demand increase, the price level could actually decrease.

Question 19

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

Accepted Answer

This statement is true. Government expenditures during World War II increased from approximately $9 billion in 1939 to over $91 billion in 1945, and real GDP nearly doubled from 1939 to 1945 due to increased government spending and the need for war-related production.

Question 20

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation is a situation where there is both high inflation and low economic growth, usually resulting from supply-side shocks such as sudden increases in the price of raw materials or energy, rather than a decrease in aggregate demand.

Quiz 33: Aggregate Demand and Aggregate Supply