Question 1

In the extended aggregate demand-aggregate supply model:
A) long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B) the long-run aggregate supply curve is horizontal.
C) the level of real output is the same in the long run regardless of the location of the aggregate demand curve.
D) the short-run aggregate supply curve is downsloping.

Accepted Answer

The long-run aggregate supply curve is vertical, reflecting the idea that the level of real output in the long run is determined by factors such as capital, labor, and technology, rather than the price level. This means that in the long run, the economy's output is the same regardless of where the aggregate demand curve is located.

Question 2

Suppose the full employment level of real output (Q)for a hypothetical economy is $500,the price level (P)initially is 100,and prices and wages are flexible both upward and downward.Use the following short-run aggregate supply schedules to answer the question.  Refer to the information given.If the price level unexpectedly declines from 100 to 75,the level of real output in the short run will:
A) rise from $500 to $560.
B) fall from $500 to $440.
C) fall from $560 to $500.
D) rise from $440 to $500.

Accepted Answer

According to the short-run aggregate supply, when the price level declines from 100 to 75, the quantity supplied of real output declines from 550 to 450, indicating a movement along the SRAS curve. Thus, the level of real output in the short run will fall from $500 to $440.

Question 3

In the extended analysis of aggregate supply,the short-run aggregate supply curve is:
A) vertical and the long-run aggregate supply curve is horizontal.
B) horizontal and the long-run aggregate supply curve is vertical.
C) upsloping and the long-run aggregate supply curve is vertical.
D) horizontal and the long-run aggregate supply curve is upsloping.

Accepted Answer

In the extended analysis of aggregate supply, the short-run aggregate supply curve is upsloping because it takes time for input prices to adjust to changes in output prices. This means that in the short run, changes in output prices will affect firms' profits and therefore their willingness to produce. The long-run aggregate supply curve, on the other hand, is vertical because in the long run, input prices have fully adjusted to changes in output prices. This means that changes in output prices will not affect firms' profits and therefore their willingness to produce. Instead, the long-run aggregate supply curve is determined by the economy's potential output, which is influenced by factors such as technology, labor force growth, and capital accumulation.

Question 4

One policy dilemma posed by cost-push inflation is that:
A) an increase in aggregate demand will increase inflation and the unemployment rate simultaneously.
B) tax rates can be reduced without lowering tax revenues.
C) the reduction of aggregate demand to restrain inflation will cause a further reduction in the real GDP.
D) the adjustment of aggregate demand can neither increase real GDP nor reduce inflation.

Accepted Answer

Cost-push inflation occurs when the cost of production increases, causing an increase in prices for the final product. The policy dilemma that arises from this is that if the government tries to reduce inflation by reducing aggregate demand, it can lead to a reduction in real GDP because businesses will produce less due to lower demand. This can lead to a decrease in employment and economic growth. Therefore, trying to reduce inflation through demand management policies can have unintended consequences on the overall economy.

Question 5

In terms of aggregate supply,the difference between the long run and the short run is that in the long run:
A) the price level is variable.
B) employment is variable.
C) real output is variable.
D) nominal wages and other input prices are fully responsive to price-level changes.

Accepted Answer

In the long run, nominal wages and other input prices are fully responsive to price-level changes, meaning that changes in the price level do not affect the economy's ability to produce goods and services. This is because in the long run, all input prices adjust to changes in the price level, resulting in a vertical aggregate supply curve. In the short run, however, input prices may be sticky or slow to adjust, resulting in a positively sloped aggregate supply curve. Therefore, the primary difference between the long run and short run in terms of aggregate supply is the degree of price flexibility in input markets.

Question 6

Which of the following statements is true?
A) The short-run aggregate supply curve is downsloping.
B) The short-run aggregate supply curve is vertical.
C) The long-run aggregate supply curve is vertical.
D) The long-run aggregate supply curve is upsloping.

Accepted Answer

The long-run aggregate supply curve is vertical because in the long run, all input costs and production factors can be adjusted, allowing the economy to produce at its potential output level regardless of the price level. The short-run aggregate supply curve, on the other hand, is upsloping because in the short run, some input costs may be fixed and unable to be adjusted immediately in response to changes in the price level.

Question 7

In terms of aggregate supply,a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the:
A) long run.
B) short run.
C) immediate market period.
D) very long run.

Accepted Answer

In the long run, nominal wages and other resource prices are flexible and fully responsive to price-level changes, allowing for adjustments to occur and returning the economy to potential output. This is in contrast to the short run, where wages and prices may be sticky, leading to deviations from potential output in response to changes in the price level. The immediate market period refers to a period where firms are unable to adjust their output levels in response to price changes, typically due to fixed inputs. The very long run is a theoretical concept that assumes all inputs can be adjusted, leading to potential output being determined by technological advancements and available resources.

Question 8

The natural rate of unemployment:
A) can vary over time and defines the location of the long-run aggregate supply curve.
B) is constant over time and defines the location of the long-run aggregate supply curve.
C) varies over time in response to changes in aggregate demand.
D) is inversely related to the price level.

Accepted Answer

The answer of The natural rate of unemployment:
A) can vary...

Question 9

In the extended aggregate demand-aggregate supply model:
A) long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve.
B) the long-run aggregate supply curve is horizontal.
C) the price level is the same regardless of the location of the aggregate demand curve.
D) long-run equilibrium occurs at the intersection of the aggregate demand curve,the short-run aggregate supply curve,and the long-run aggregate supply curve.

Accepted Answer

Long-run equilibrium occurs where the aggregate demand curve intersects both the short-run aggregate supply curve and the long-run aggregate supply curve. This is because in the long run, prices and wages can adjust fully to changes in supply and demand, resulting in a horizontal long-run aggregate supply curve. Therefore, the intersection of all three curves is necessary for long-run equilibrium.

Question 10

If government uses fiscal policy to restrain cost-push inflation,we can expect:
A) the unemployment rate to rise.
B) the unemployment rate to fall.
C) the aggregate demand curve to shift rightward.
D) tax-rate declines and increases in government spending.

Accepted Answer

If the government uses fiscal policy to restrain cost-push inflation, it may decrease aggregate demand, which can lead to a decrease in production and a decrease in the demand for labor. This, in turn, can result in an increase in unemployment.

Question 11

Other things equal,the short-run aggregate supply curve shifts positions when:
A) the price level changes.
B) the rate of inflation changes.
C) nominal wages and other input prices change.
D) aggregate demand changes.

Accepted Answer

The short-run aggregate supply curve is based on the current prices of inputs, such as nominal wages, which can change over time. As a result, a change in nominal wages and other input prices will cause the short-run aggregate supply curve to shift position, as it reflects a change in the cost of producing goods and services. The other options, such as changes in the price level or inflation rate, are movements along the short-run aggregate supply curve, rather than shifts in its position. Changes in aggregate demand, on the other hand, affect the overall level of output and prices in the economy, but do not directly impact the position of the short-run aggregate supply curve.

Question 12

The long-run aggregate supply curve is vertical:
A) because the rate of inflation is steady in the long run.
B) because resource prices eventually rise and fall with product prices.
C) because product prices tend to increase at a faster rate than resource prices.
D) only when the money supply increases at the same rate as real GDP.

Accepted Answer

The long-run aggregate supply curve is vertical because resource prices eventually rise and fall with product prices, meaning that firms cannot make permanent profits or losses. In the long run, firms will adjust their prices and production levels to reflect changes in resource prices, leading to a vertical supply curve at the potential output level. The other choices are not correct because the rate of inflation can fluctuate in the long run, product prices may not increase faster than resource prices, and the money supply does not have a direct impact on the shape of the long-run aggregate supply curve.

Question 13

The short-run aggregate supply curve is upsloping because higher price levels:
A) lower interest rates and encourage firms to invest and produce more.
B) create incentives to expand output when resource prices are unresponsive to price-level changes.
C) encourage importation of foreign goods.
D) create an expectation among producers of still higher price levels.

Accepted Answer

When the price level increases, firms are incentivized to increase output because they can earn greater profits by selling more goods at the higher price. In the short run, resource prices may not increase immediately in response to the higher price level, allowing firms to increase output without incurring higher costs. Therefore, the short-run aggregate supply curve is upsloping as output increases in response to higher price levels.

Question 14

In terms of aggregate supply,a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the:
A) long run.
B) short run.
C) immediate market period.
D) very long run.

Accepted Answer

In the short run, nominal wages and other resource prices are typically fixed or slow to adjust, leading to a relatively flat aggregate supply curve. The long run and very long run involve more flexibility in wages and prices, allowing for a steeper aggregate supply curve. The immediate market period involves no time for adjustments at all, resulting in a perfectly inelastic aggregate supply curve.

Question 15

Suppose the full employment level of real output (Q)for a hypothetical economy is $500,the price level (P)initially is 100,and prices and wages are flexible both upward and downward.Use the following short-run aggregate supply schedules to answer the question.  Refer to the information given.If the price level unexpectedly increases from 100 to 125,the level of real output in the short run will:
A) rise from $500 to $560.
B) fall from $500 to $440.
C) fall from $560 to $500.
D) rise from $440 to $500.

Accepted Answer

The answer of Suppose the full employment level of real...

Question 16

Suppose the full employment level of real output (Q)for a hypothetical economy is $500,the price level (P)initially is 100,and prices and wages are flexible both upward and downward.Use the following short-run aggregate supply schedules to answer the question.  Refer to the information given.In the long run,an increase in the price level from 100 to 125 will:
A) increase real output from $500 to $560.
B) decrease real output from $500 to $440.
C) change the aggregate supply schedule from (a)to (c)and result in an equilibrium level of real output of $560.
D) change the aggregate supply schedule from (a)to (b)and result in an equilibrium level of real output of $500.

Accepted Answer

An increase in the price level from 100 to 125 will shift the short-run aggregate supply schedule from (a) to (b). However, since prices and wages are flexible in both directions, the economy will adjust and move to a new equilibrium in the long run. In the long run, the economy will produce at the full employment level of real output, which is $500. Therefore, the increase in the price level will not affect the long-run equilibrium level of real output, which remains at $500.

Question 17

Suppose the full employment level of real output (Q)for a hypothetical economy is $500,the price level (P)initially is 100,and prices and wages are flexible both upward and downward.Use the following short-run aggregate supply schedules to answer the question.  Refer to the information given.In the long run,a fall in the price level from 100 to 75 will:
A) decrease real output from $500 to $440.
B) increase real output from $500 to $620.
C) change the aggregate supply schedule from (a)to (c)and produce an equilibrium level of real output of $500.
D) change the aggregate supply schedule from (a)to (b)and produce an equilibrium level of real output of $500.

Accepted Answer

The answer of Suppose the full employment level of real...

Question 18

In terms of aggregate supply,the short run is a period in which:
A) the price level is constant.
B) employment is constant.
C) real output is constant.
D) nominal wages and other resource prices are unresponsive to price-level changes.

Accepted Answer

In the short run, nominal wages and other resource prices are generally sticky and do not adjust quickly to changes in the price level. This means that changes in demand or production costs, such as an increase in the price level, will temporarily affect firms' profits and output. Therefore, real output is not necessarily constant in the short run.

Question 19

The level of potential output and location of the long-run aggregate supply curve are determined by:
A) Federal Reserve policy.
B) the price level.
C) the intersection of aggregate demand and short-run aggregate supply.
D) the natural rate of unemployment.

Accepted Answer

The level of potential output and the location of the long-run aggregate supply curve are largely determined by the natural rate of unemployment, as it reflects the economy's productive capacity and potential output in the long run. Federal Reserve policy and the price level may affect short-run output and employment, but not the long-run potential output level. The intersection of aggregate demand and short-run aggregate supply determines short-run output and price level, but not necessarily the long-run potential output.

Question 20

Other things equal,a decrease in the price level will:
A) shift the aggregate supply curve to the left.
B) shift the aggregate demand curve to the left.
C) cause a movement up a short-run aggregate supply curve.
D) cause a movement down an aggregate supply curve.

Accepted Answer

A decrease in the price level will cause a movement down an aggregate supply curve, as firms will be willing to produce less output at a lower price level. This is because the costs of production, such as wages and raw materials, will remain the same in the short run. There will be no shift in the aggregate demand curve, as this is determined by factors such as consumer spending, investment, and government spending.

Quiz 37: Extending the Analysis of Aggregate Supply

In the extended aggregate demand-aggregate supply model:

In the extended analysis of aggregate supply,the short-run aggregate supply curve is:

One policy dilemma posed by cost-push inflation is that:

In terms of aggregate supply,the difference between the long run and the short run is that in the long run:

Which of the following statements is true?

In terms of aggregate supply,a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the:

The natural rate of unemployment:

In the extended aggregate demand-aggregate supply model:

If government uses fiscal policy to restrain cost-push inflation,we can expect:

Other things equal,the short-run aggregate supply curve shifts positions when:

The long-run aggregate supply curve is vertical:

The short-run aggregate supply curve is upsloping because higher price levels:

In terms of aggregate supply,a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the:

In terms of aggregate supply,the short run is a period in which:

The level of potential output and location of the long-run aggregate supply curve are determined by:

Other things equal,a decrease in the price level will: