Question 1

What is measured on the vertical axis of the short-run aggregate supply curve?

Accepted Answer

The price level is measured on the vertical axis of the short-run aggregate supply curve. This is because the curve shows the relationship between the price level and the quantity of output supplied in the short-run, assuming other factors remain constant. As the price level increases, firms are willing to supply more output, and the curve shifts upward. Conversely, as the price level decreases, firms are willing to supply less output, and the curve shifts downward. Therefore, the vertical axis represents the price level, while the horizontal axis represents the quantity of output.

Question 2

Short run changes in the ________ can affect real output because some production costs are relatively fixed.

Accepted Answer

Short run changes in the price level can affect real output because some production costs, such as wages and contracts for raw materials, are relatively fixed in the short term. This means that as the price level changes, the real cost of these inputs does not adjust immediately, affecting the overall production cost and thus the output.

Question 3

The short-run aggregate supply curve represents the relationship between

Accepted Answer

The short-run aggregate supply curve represents the relationship between the price level and the real output of goods and services in the economy without full adjustment or full information. In the short run, producers may not have enough time to adjust their production processes fully, and therefore, output may not respond fully to changes in prices. Additionally, there may be information lags that prevent producers from adjusting their production processes in a timely manner. Therefore, the short-run aggregate supply curve is upward sloping, indicating that higher prices lead to higher output.

Question 4

If the price level kept increasing,the short-run aggregate supply curve would get ________ because there are limits to how long workers can work long hours and capital can go without proper maintenance.

Accepted Answer

The short-run aggregate supply curve would get steeper because in the short-run, there are limits to how much output can be produced due to constraints on input factors such as labor and capital. As the price level increases, firms face higher costs for inputs, leading to a decrease in profitability and a reduction in the quantity of goods and services supplied at each price level. Eventually, firms will exhaust their ability to increase output due to limitations on labor and capital, causing the short-run aggregate supply curve to become steeper.

Question 5

If the price level kept increasing,the ________ would get steeper because there are limits to how long workers can work long hours and capital can go without proper maintenance.

Accepted Answer

The short-run aggregate supply curve would get steeper because in the short run, there are limits to how much workers can work overtime and capital can go without proper maintenance. As the price level increases, firms may increase production in the short run, but eventually, their output will be limited by factors such as worker fatigue and machinery breakdown. Therefore, the short-run aggregate supply curve becomes steeper as the price level increases.

Question 6

Figure 8-1 
-According to Figure 8-1,an increase in aggregate demand between real GDP levels Q₀ and Q₁

Accepted Answer

According to the figure, an increase in aggregate demand leads to a shift of the AD curve from AD₀ to AD₁, resulting in an increase in both real GDP and the price level. Therefore, an increase in aggregate demand between real GDP levels Q₀ and Q₁ would most likely result in some inflation (choice A). B is incorrect because the economy is not at full capacity at Q₀, but below it. C and D are also incorrect because an increase in aggregate demand leads to an increase in the price level.

Question 7

Short run changes in the price level can affect real output because

Accepted Answer

In the short run, some production costs are relatively fixed, meaning that they do not change in response to changes in the level of output. Therefore, an increase in the price level may cause the nominal cost of production to increase, but the fixed costs remain the same. As a result, the profitability of producing additional output decreases, and some firms may reduce their output. This reduction in output can lead to a decrease in real output in the short run.

Question 8

Figure 8-1 
-According to Figure 8-1,________ in aggregate demand between real GDP levels Q₀ and Q₁ would most likely result in some inflation.

Accepted Answer

According to the figure, if there is an increase in aggregate demand between real GDP levels Q₀ and Q₁, the economy would reach a higher price level, indicating some inflation. This is because the increase in demand would lead to a shortage of goods and services, causing prices to rise. Therefore, option A is the correct choice.

Question 9

The ________ represents the relationship between the price level and the real output of goods and services in the economy without full adjustment or full information.

Accepted Answer

The short-run aggregate supply curve represents the relationship between the price level and the real output of goods and services in the economy without full adjustment or full information. This curve assumes that input prices remain constant in the short run, which means that the full adjustment to changes in the price level has not occurred yet. In contrast, the long-run aggregate supply curve assumes full adjustment and reflects the economy's potential output level at full employment. The aggregate demand curve represents the relationship between the price level and the quantity of goods and services demanded by households, firms, and the government, while the labour supply curve represents the relationship between the wage rate and the quantity of labour supplied by workers.

Question 10

If the price level kept decreasing,the short-run aggregate supply curve would get ________ because we could hire any and all resources at the going rate without increasing prices or the price of inputs.

Accepted Answer

If the price level kept decreasing, the short-run aggregate supply curve would get flatter because lower prices would mean that producers could hire resources without having to raise prices, indicating a more elastic (or flatter) supply response to changes in demand.

Question 11

In the short run,a decrease in the price level induces firms to contract production because

Accepted Answer

When the price level decreases, firms receive lower revenue from selling their products. Since the prices of inputs are held constant in the short run, the cost of producing the product remains the same. This implies that the profit margin for producing the product decreases or might even be negative. Hence, it is not profitable for firms to produce and they contract production.

Question 12

If the price level kept increasing,the short-run aggregate supply curve would get steeper because

Accepted Answer

As the price level increases, firms' profits increase, which encourages them to produce more in the short run. However, there are limits to how much workers can work and how long capital can go without proper maintenance. Eventually, as firms try to produce more and more in the face of these constraints, the cost of production will rise, causing the short-run aggregate supply curve to become steeper. Choice A is not necessarily true, as even at high price levels, there may still be some unemployed workers. Choice C is not true, as there are always limits to how much capacity can be expanded in the short run. Choice D is not directly relevant to the question of the shape of the short-run aggregate supply curve.

Question 13

In the short run,if the price level rises then the overall economy can temporarily produce beyond its nominal capacity.One reason for this is that

Accepted Answer

In the short run, existing capital and resources can be utilized more intensively to increase productivity, allowing the economy to produce beyond its nominal capacity. Switching workers from counted to uncounted production or the simultaneous rise of wage rates with the price level may also occur but are not the main reasons why the economy can temporarily produce beyond its nominal capacity. The unemployment rate may not necessarily rise dramatically with the price level.

Question 14

Figure 8-1 
-According to Figure 8-1,an increase in aggregate demand beyond real GDP level Q₁ will result in

Accepted Answer

According to the figure, the economy is already producing at potential GDP(Q1) and any increase in aggregate demand beyond this level will result in a rise in the price level without any further increase in output. This is because the economy has already utilized all its productive resources and any increase in demand will only lead to higher prices due to demand-pull inflation. Therefore, the correct answer is C, higher prices, but no change in output.

Question 15

If the price level kept decreasing,the short-run aggregate supply curve would get flatter because

Accepted Answer

If the price level kept decreasing, it would mean that the prices of inputs and resources would also be decreasing. In such a context, businesses would be able to hire any and all resources they need at the going rate without having to increase prices or production costs. Therefore, the short-run aggregate supply curve would become flatter as the economy has more available resources to produce goods and services at the same price level.

Question 16

Figure 8-1 
-According to Figure 8-1,________ in aggregate demand between real GDP levels Q₁ and Q₀ would most likely result in some inflation.

Accepted Answer

According to the figure, if there is an increase in aggregate demand between real GDP levels Q₀ and Q₁, the economy would reach a higher price level, indicating some inflation. This is because the increase in demand would lead to a shortage of goods and services, causing prices to rise. Therefore, option A is the correct choice.

Question 17

The short-run aggregate supply curve represents the relationship between the ________ and the real output of goods and services in the economy without full adjustment or full information.

Accepted Answer

The short-run aggregate supply curve represents the relationship between the price level and the real output of goods and services in the economy without full adjustment or full information. This means that in the short run, producers may not be able to fully adjust their production levels or prices in response to changes in the economy, resulting in a curve that shows a positive relationship between the price level and output.

Question 18

In the short run,an increase in the price level induces firms to expand production because

Accepted Answer

In the short run, the prices of inputs are typically fixed, so when the price level increases, firms can charge higher prices for their products. This means that the profit margin per unit sold increases, making it profitable for firms to expand production to meet the increased demand.

Question 19

In the ________,an increase in the price level induces firms to expand production because prices of inputs are held constant so the higher prices for their product implies that it is profitable to expand production.

Accepted Answer

In the short run, firms often face fixed costs and input prices, meaning that when the price level for the goods or services they sell increases, they can potentially make higher profits by increasing production. This is because their costs do not immediately adjust to the higher price level, making it profitable to expand production in response to higher demand or prices.

Question 20

Figure 8-1 
-According to Figure 8-1,a decrease in aggregate demand between real GDP levels Q₁ and Q₀

Accepted Answer

According to Figure 8-1, a decrease in aggregate demand between real GDP levels Q₁ and Q₀ would cause the price levels to fall. This is indicated by the downward sloping line of aggregate demand intersecting with the upward sloping line of short-run aggregate supply at a lower price level (P₀) than the initial price level (P₁). As a result, businesses may lower prices to stimulate demand and output may decrease due to reduced profits, resulting in a decrease in real GDP.

Quiz 8: Modelling Real Gdp and the Price Level in the Short Run