Question 1

In the basic AD/AS model,the effect of an aggregate demand shock is divided between a change in output and a change in the price level.How the effect is divided depends on the
A)amount of inflation in the economy.
B)position of the AE curve.
C)size of the simple multiplier.
D)slope of the AD curve.
E)slope of the AS curve.

Accepted Answer

The slope of the AS curve determines how the effect of an aggregate demand shock is divided between output and the price level. A steeper AS curve would result in a larger increase in the price level and a smaller increase in output, while a flatter AS curve would result in a smaller increase in the price level and a larger increase in output. Therefore, the slope of the AS curve is the determining factor in how the effect of an aggregate demand shock is divided.

Question 2

Consider the basic AD/AS model with a very steep,positively sloped AS curve.A negative aggregate demand shock will result in
A)an increase in the price level and a decrease in real national income.
B)an increase in both the price level and real national income.
C)a decrease in the price level with almost no change in real national income.
D)a decrease in the price level and an increase in real national income.
E)no change in either price level or output.

Accepted Answer

A very steep, positively sloped AS curve implies that the economy is operating at or near full capacity. Therefore, a negative aggregate demand shock would primarily affect the price level, leading to a decrease, with minimal impact on real national income due to the inelastic nature of the supply at this point.

Question 3

Consider the AD/AS macro model.Suppose there is an increase in aggregate demand and,simultaneously,a decrease in aggregate supply.The result will be a
A)rise in real GDP but price level changes will be indeterminate.
B)rise in real GDP and a rise in the price level.
C)rise in real GDP and a fall in the price level.
D)an indeterminate change in real GDP and a rise in the price level.
E)an indeterminate change in real GDP and a fall in the price level.

Accepted Answer

If there is an increase in aggregate demand and a decrease in aggregate supply, it would lead to an increase in the price level. However, the effect on real GDP is uncertain as it depends on the magnitude of the increase in aggregate demand and the decrease in aggregate supply. Therefore, the change in real GDP would be indeterminate.

Question 4

Consider the basic AD/AS model with an upward-sloping AS curve.A positive aggregate demand shock will initially cause
A)a decrease in the price level.
B)the equilibrium point to move rightward along the AS curve.
C)a movement along the AD curve to the right.
D)a shift to the right in the AS curve.
E)the unemployment rate to remain constant.

Accepted Answer

A positive aggregate demand shock will increase both output and prices. The initial effect will be a movement along the upward-sloping AS curve as prices increase in response to the increase in demand. This will lead to higher output and higher prices, resulting in a new equilibrium point to the right along the AS curve. Therefore, choice B is the correct answer.

Question 5

Which of the following represents a positive aggregate supply shock?
A)an outbreak of war among oil-exporting countries
B)a general labour strike across the country
C)bad weather which cripples telecommunications for one month
D)improved computer literacy for the typical worker
E)an increase in exports

Accepted Answer

An improvement in computer literacy for the typical worker would increase labor productivity and thus positively impact aggregate supply.

Question 6

Which of the following will cause a positive aggregate supply shock?
A)an increase in the price of raw materials
B)a decrease in the price of foreign output
C)an increase in the price of foreign output
D)a decrease in the price of oil
E)a decrease in productivity

Accepted Answer

A decrease in the price of oil will lower the cost of production for firms, leading to a positive aggregate supply shock. The other options would lead to an increase in production costs and therefore would have a negative impact on aggregate supply.

Question 7

An aggregate demand (AD)shock will have a small effect on real GDP and a large effect on the price level when
A)the AS curve is steep.
B)the AD curve intersects the AS curve on the downward-sloping portion of the AS curve.
C)the AS curve is close to horizontal.
D)the AD curve is steep.
E)the AD curve is flat.

Accepted Answer

When the AS (Aggregate Supply) curve is steep, it indicates that the economy is operating at or near full capacity. In this situation, any increase in aggregate demand (AD) will have a limited effect on real GDP because there is little spare capacity to increase output. Instead, the increase in demand is more likely to lead to higher prices, resulting in a large effect on the price level and a small effect on real GDP.

Question 8

Consider the basic AD/AS macro model.A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level
A)and real GDP are higher than in the initial equilibrium.
B)and real GDP are lower than in the initial equilibrium.
C)is lower and real GDP higher than in the initial equilibrium.
D)is higher and real GDP remained the same as in the initial equilibrium.
E)is higher and real GDP lower than in the initial equilibrium.

Accepted Answer

A rise in an input price, such as the price of oil, would shift the aggregate supply curve to the left, leading to a higher price level and lower real GDP in the new equilibrium.

Question 9

Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects.
A)The AD curve shifts to the left; the price level falls and real GDP falls.
B)The AD curve shifts to the right; the price level rises and real GDP rises.
C)The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate.
D)The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate.
E)The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises.

Accepted Answer

The government's plan to undertake massive hospital construction programs will lead to an increase in government spending, which will increase aggregate demand (AD), shifting the AD curve to the right. This will lead to an increase in both the price level and real GDP as businesses increase production to meet the increased demand.

Question 10

Consider the basic AD/AS model.A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium,which in comparison to the original equilibrium,has a price level that is
A)higher and a real GDP that is higher.
B)higher and a real GDP that is lower.
C)higher and a real GDP that is the same.
D)lower and a real GDP that is higher.
E)lower and a real GDP that is lower.

Accepted Answer

A rise in an input price, such as the wage rate, would shift the aggregate supply curve to the left, leading to a higher price level and a lower real GDP in the new equilibrium. This reflects the increased cost of production, which reduces output and increases prices.

Question 11

Consider the basic AD/AS model with an upward-sloping AS curve.A positive aggregate demand shock will result in
A)an increase in prices but not output.
B)an increase in output but not prices.
C)an increase in both output and prices.
D)a decrease in both output and prices.
E)a decrease in output and an increase in prices.

Accepted Answer

An upward-sloping AS curve means that an increase in aggregate demand would lead to higher prices and higher output. Therefore, the correct answer is that a positive aggregate demand shock would result in an increase in both output and prices.

Question 12

Consider the basic AD/AS model.Suppose firms are currently producing beyond their normal capacity.A change in AD leads to a relatively
A)large change in price level and a large change in real GDP.
B)large change in price level and a small change in real GDP.
C)small change in price level and a large change in real GDP.
D)small change in price level and a small change in real GDP.
E)no change in both price and output.

Accepted Answer

When firms are producing beyond their normal capacity, the economy is already at or near full employment, meaning that any increase in AD will primarily lead to an increase in price level rather than real GDP. This is known as the "inflationary gap" and is characterized by a vertical short-run aggregate supply (SRAS) curve. Therefore, a change in AD will lead to a relatively large change in price level but only a small change in real GDP, as represented by choice B.

Question 13

Aggregate supply shocks cause the price level and real GDP to change in
A)the same direction with price changing by more than output.
B)the same direction and by the same amount.
C)opposite directions with price changing by less than output.
D)opposite directions and not necessarily by the same amount.
E)opposite directions but by the same amount.

Accepted Answer

Aggregate supply shocks can affect both the price level and real GDP, but not necessarily in the same direction or by the same amount. For example, a negative supply shock, such as a sudden increase in oil prices, can cause a decrease in aggregate supply and an increase in the general price level, but also a decrease in real GDP as firms face higher production costs and reduce output. The direction and magnitude of these effects depend on the specific nature of the shock and the responsiveness of the economy. Therefore, neither options A nor B are correct. Option C suggests that price changes by less than output, which could happen if the shock is small or if there is excess capacity in the economy, but this is not a general rule. Option E suggests that price changes by the same amount as output, which is unlikely in most cases.

Question 14

Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada.(Remember that Canada is both a producer and a consumer of commodities.)
A)There is no change in either the AD or the AS curves.
B)The AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate.
C)The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases.
D)The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases.
E)The AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate.

Accepted Answer

As Canada is both a producer and a consumer of commodities, a rise in world commodity prices would mean that Canadian exporters would earn more and Canadian consumers would have to pay more for the products they import. This would lead to an increase in domestic supply and a decrease in domestic demand, causing the AD curve to shift right and the AS curve to shift left. The price level would rise, but the effect on real GDP is indeterminate since it depends on the magnitude of the shifts. Therefore, the best choice is E.

Question 15

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand decreases,we expect the AE function to shift to a
A)higher level and stay there.
B)higher level,but then shift part of the way down to its original position as the price level falls.
C)higher level but then return to its original position as the price level falls.
D)lower level and stay there.
E)lower level,but then return to its original position as the price level falls.

Accepted Answer

The answer of If the economy is in macroeconomic equilibrium...

Question 16

Suppose firms are currently producing output at a level beyond their normal capacity.In this situation,the AS curve will be relatively ________ and a positive AD shock will result in ________.
A)steep; an increase in the price level with a small increase in real GDP
B)flat; an equal increase in the price level and in real GDP
C)flat; a very small increase in prices but a large increase in real GDP
D)flat; a very small decrease in the price level and a decrease in real GDP
E)steep; a decrease in the price level and a very small decrease in real GDP

Accepted Answer

When firms are producing beyond their normal capacity, the Aggregate Supply (AS) curve becomes relatively steep. In this situation, a positive Aggregate Demand (AD) shock would primarily increase the price level while resulting in only a small increase in real GDP, as firms have less capacity to increase production further.

Question 17

Consider the AD/AS model.Suppose there is a decrease in aggregate demand and,simultaneously,an increase in aggregate supply.The result will be a
A)rise in real GDP but price level changes will be indeterminate.
B)rise in real GDP and a rise in the price level.
C)rise in real GDP and a fall in the price level.
D)an indeterminate change in real GDP and a rise in the price level.
E)an indeterminate change in real GDP and a fall in the price level.

Accepted Answer

The answer of Consider the AD/AS model.Suppose there is a...

Question 18

An aggregate demand shock will have a large effect on real GDP and a small effect on the price level when
A)the AS curve is steep.
B)the AD curve intersects the AS curve on the downward-sloping portion of the AS curve.
C)the AS curve is close to horizontal.
D)the AS curve is vertical.
E)the AD curve is steep.

Accepted Answer

When the AS curve is close to horizontal, it means that there is a lot of spare capacity in the economy, and firms can increase output without having to increase prices significantly. This means that an increase in aggregate demand will lead to a large increase in real GDP but only a small increase in the price level.

Question 19

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand increases,we expect the AE function to shift to a
A)higher level and stay there.
B)higher level,but then shift part of the way down to its original position as the price level rises.
C)higher level but then return to its original position as the price level rises.
D)lower level and stay there.
E)lower level,but then return to its original position as the price level rises.

Accepted Answer

When the economy is in macroeconomic equilibrium with a vertical Aggregate Supply (AS) curve, an increase in Aggregate Demand (AD) leads to a higher price level without changing the output level. The Aggregate Expenditure (AE) function initially shifts to a higher level due to increased demand. However, as prices rise, the real value of money decreases, reducing consumption and investment, which causes the AE function to return to its original position.

Question 20

Which of the following would cause a positive aggregate demand shock,but leave the aggregate supply curve unaffected?
A)A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures.
B)A severe drought lasting for six months that destroys agricultural and forestry production.
C)A medical report confirming that improved health for Canadian workers caused fewer lost days of production.
D)An improvement in the computer literacy of workers.
E)A substantial increase in world oil prices.

Accepted Answer

A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures would increase demand for goods and services, causing a positive aggregate demand shock. However, it would not affect the aggregate supply curve, as there would be no change in the production capacity of the economy.

Quiz 23: Real Gdp and the Price Level in the Short Run

In the basic AD/AS model,the effect of an aggregate demand shock is divided between a change in output and a change in the price level.How the effect is divided depends on the

Consider the basic AD/AS model with a very steep,positively sloped AS curve.A negative aggregate demand shock will result in

Consider the AD/AS macro model.Suppose there is an increase in aggregate demand and,simultaneously,a decrease in aggregate supply.The result will be a

Consider the basic AD/AS model with an upward-sloping AS curve.A positive aggregate demand shock will initially cause

Which of the following represents a positive aggregate supply shock?

Which of the following will cause a positive aggregate supply shock?

An aggregate demand (AD) shock will have a small effect on real GDP and a large effect on the price level when

Consider the basic AD/AS macro model.A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level

Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects.

Consider the basic AD/AS model.A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium,which in comparison to the original equilibrium,has a price level that is

Consider the basic AD/AS model with an upward-sloping AS curve.A positive aggregate demand shock will result in

Consider the basic AD/AS model.Suppose firms are currently producing beyond their normal capacity.A change in AD leads to a relatively

Aggregate supply shocks cause the price level and real GDP to change in

Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada.(Remember that Canada is both a producer and a consumer of commodities.)

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand decreases,we expect the AE function to shift to a

Suppose firms are currently producing output at a level beyond their normal capacity.In this situation,the AS curve will be relatively and a positive AD shock will result in .

Consider the AD/AS model.Suppose there is a decrease in aggregate demand and,simultaneously,an increase in aggregate supply.The result will be a

An aggregate demand shock will have a large effect on real GDP and a small effect on the price level when

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand increases,we expect the AE function to shift to a

Which of the following would cause a positive aggregate demand shock,but leave the aggregate supply curve unaffected?