Question 1

Figure 14.1 
-Suppose the economy is at point A in Figure 14.1.If consumer spending increases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

In the long run, an increase in consumer spending will shift the aggregate demand curve to the right, moving the economy to a new equilibrium at a higher output level, typically represented by Point C.

Question 2

When the price of oil rises unexpectedly,the price level ________ and the unemployment rate ________ in the short run.

Accepted Answer

When the price of oil rises unexpectedly, it causes an increase in the cost of production for firms, leading to a decrease in aggregate supply. This decrease in aggregate supply causes the price level to rise in the short run, as firms pass on the increased costs to consumers. Additionally, firms may also reduce their production and employment levels, leading to an increase in the unemployment rate in the short run. Therefore, the correct choice is B) rises; rises.

Question 3

Figure 14.1 
-Suppose the economy is at point C in Figure 14.1.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

In the long run, a decrease in government spending will shift the aggregate demand curve to the left, leading to a new equilibrium at a lower output level, which is represented by Point A.

Question 4

________ of unemployment during ________ make it easier for workers to ________ wages.

Accepted Answer

During a recession, unemployment levels tend to be high, which means there are more people looking for jobs than there are available jobs. This gives employers an advantage in negotiating lower wages with workers who are willing to accept lower pay in order to secure employment.

Question 5

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Accepted Answer

In the short run, when GDP is above potential, the economy is overheating, leading to higher prices and wages. This causes the short-run aggregate supply to shift left, reducing output back to potential GDP.

Question 6

Figure 14.1 
-In Figure 14.1,which of the points are possible long-run equilibriums?

Accepted Answer

Points A and C are unstable equilibriums (also known as saddle points), meaning that if you deviate slightly from these points, the system will move away from them. Point D is a stable equilibrium, but it is not a long-run equilibrium as it is not feasible or sustainable in the long-term. Point B, however, is a stable long-run equilibrium where the system will naturally tend towards and stay at in the long-term.

Question 7

Because of a supply shock,in the short run

Accepted Answer

When there is a supply shock, such as a decrease in the availability or increase in the cost of key inputs, the short-run aggregate supply curve shifts to the left. This means that for any given level of aggregate demand, there will be a lower level of real GDP and higher price level. Therefore, the correct answer is A, the aggregate supply curve shifts to the left.

Question 8

When the short-run aggregate supply curve and the aggregate demand curve intersect,the economy is at full-employment equilibrium.

Accepted Answer

The intersection of the short-run aggregate supply curve and the aggregate demand curve determines the equilibrium level of output and prices in the economy at a particular time, but it does not necessarily mean the economy is at full employment equilibrium. Full employment equilibrium specifically refers to a situation where all available labor resources are being used efficiently, and the economy is producing at its potential output. The actual equilibrium can occur at, above, or below this level of output.

Question 9

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Accepted Answer

During a recession, the automatic mechanism lowers the price level since there is a decrease in demand for goods and services. During an expansion, the automatic mechanism raises the price level since there is an increase in demand for goods and services.

Question 10

At a long-run macroeconomic equilibrium,real GDP is always equal to potential GDP.

Accepted Answer

At long-run macroeconomic equilibrium, the economy is operating at full capacity and there is no output gap. This means that real GDP is equal to potential GDP.

Question 11

Which of the following is considered to be a supply shock?

Accepted Answer

A supply shock is an unexpected event that disrupts the supply of goods or services in a market. An unexpected large increase in the price of natural gas would increase the production cost of many goods and services, leading to a decrease in supply and potentially higher prices for consumers.

The other choices do not represent a supply shock. Choice A represents an increase in the capital stock, which could lead to increased production and higher economic growth but is not a sudden unexpected event. Choice C represents a decline in wages, which would affect the cost of labor but is not necessarily unexpected or sudden. Choice D represents an improvement in technology, which can increase efficiency and productivity in the long run but is not a sudden event that disrupts the supply of goods or services.

Question 12

In the long run

Accepted Answer

In the long run, the economy will reach its potential output level where all resources are fully utilized, leading to the equality of real GDP with potential GDP. This happens due to the flexibility of prices and wages, which adjust to eliminate any short-run imbalances in the economy. Therefore, in the long run, the economy operates on its LRAS (long-run aggregate supply) curve, which coincides with potential GDP.

Question 13

Why might the short-run aggregate supply curve shift to the right in the long run,following a decrease in aggregate demand?

Accepted Answer

In the short run, a decrease in aggregate demand leads to an excess supply of goods and services, causing firms to lower their prices and reduce output. However, in the long run, workers and firms adjust their expectations of wages and prices downward, which makes it easier for firms to hire workers and produce goods at lower costs. As a result, the short-run aggregate supply curve shifts to the right, leading to an increase in output and a decrease in prices. Thus, choice A is the best answer.

Question 14

Stagflation is often a result of

Accepted Answer

Stagflation is typically caused by a negative supply shock, which reduces the overall supply of goods and services while simultaneously driving up prices. This can lead to a situation where economic growth grinds to a halt while inflation continues to rise.

Question 15

An adverse supply shock causes the short-run aggregate supply curve to shift left,increasing the price level.

Accepted Answer

An adverse supply shock, such as an increase in oil prices, can cause a decrease in the quantity of output supplied at every price level, leading to a leftward shift of the short-run aggregate supply curve. This results in higher prices in the short run, as the economy experiences both higher inflation and lower output.

Question 16

During an economic expansion or boom,it is possible for a short-run equilibrium to occur at a point that exceeds potential GDP.

Accepted Answer

During an economic expansion or boom, there may be a temporary increase in demand for goods and services that exceeds the economy's capacity to produce at potential GDP. This can result in inflationary pressures and a short-run equilibrium point that is above potential GDP. However, in the long run, the economy will tend to adjust back to potential GDP as firms increase production and investment in response to the higher demand.

Question 17

Stagflation occurs when

Accepted Answer

Stagflation occurs when there is a simultaneous increase in inflation and decrease in GDP. This means that prices are rising while the economy is contracting, leading to a decrease in purchasing power and a decrease in overall economic activity.

Question 18

Figure 14.1 
-Which of the points in Figure 14.1 are possible short-run equilibriums but not long-run equilibriums?

Accepted Answer

The answer of Figure 14.1 
-Which of the points in...

Question 19

Why does the short-run aggregate supply curve shift to the left in the long run,following an increase in aggregate demand?

Accepted Answer

In the short run, an increase in aggregate demand leads to higher prices and profits, so workers and firms have higher expectations of wages and prices. However, in the long run, these expectations adjust upwards, causing workers to push for higher wages and firms to push for higher prices. As a result, the short-run aggregate supply curve shifts to the left, leading to higher prices but no change in output.

Question 20

The long-run adjustment to a supply shock results in

Accepted Answer

In the long-run adjustment to a supply shock, the economy tends to stabilize, and one way this happens is through the adjustment of the short-run aggregate supply curve, which shifts to the right as firms adjust their production and prices stabilize. This shift helps the economy return to its long-run equilibrium, where output is at its potential level.

Quiz 14: Economic Growth, the Financial System and Business Cycles

Figure 14.1 -Suppose the economy is at point A in Figure 14.1.If consumer spending increases in the economy,where will the eventual long-run equilibrium be?

When the price of oil rises unexpectedly,the price level and the unemployment rate in the short run.

Figure 14.1 -Suppose the economy is at point C in Figure 14.1.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

of unemployment during make it easier for workers to wages.