Question 1

Starting from short-run equilibrium,the following occurs: personal income taxes are cut,business taxes are cut,and labor productivity rises.What is the effect on the price level and Real GDP in the short run?
A) Real GDP rises and the price level necessarily falls.
B) Real GDP rises and the price level necessarily rises.
C) Real GDP falls and the price level necessarily remains the same.
D) Real GDP rises and the effect on the price level cannot be determined.
E) Real GDP rises and the price level necessarily remains the same.

Accepted Answer

Cutting personal and business taxes increases disposable income and investment, boosting demand and potentially increasing Real GDP. Rising labor productivity also increases Real GDP by making production more efficient. However, the effect on the price level is ambiguous because while increased demand can lead to higher prices, higher productivity can lower production costs, potentially offsetting inflationary pressures.

Question 2

Which set of changes is definitely predicted to raise Real GDP in the short run?
A) Wealth increases and there is an adverse supply shock.
B) Individuals expect higher (future) incomes and wage rates fall.
C) Business taxes rise and wage rates fall.
D) The U.S. dollar appreciates and there is a beneficial supply shock.
E) none of the above

Accepted Answer

Expectations of higher future incomes can increase current consumption, and falling wage rates can lower production costs, encouraging more output. Both factors can raise Real GDP in the short run.

Question 3

Which set of changes is definitely predicted to lower Real GDP in the short run?
A) Interest rates rise and wage rates fall.
B) Interest rates rise and there is a beneficial supply shock.
C) Interest rates rise and labor productivity increases.
D) Interest rates rise and individuals expect lower (future) incomes.
E) c and d

Accepted Answer

When interest rates rise, it becomes more expensive for businesses and consumers to borrow money, therefore decreasing consumption and investment spending in the short run. Additionally, if individuals expect lower incomes in the future, they may also reduce their current spending. These factors together can lead to a decrease in Real GDP in the short run.

Question 4

If wages are "sticky",a decline in the price level will
A) raise the real wage and lower the quantity demanded of labor.
B) lower the real wage and lower the quantity supplied of labor.
C) raise the real wage and lower the quantity supplied of labor.
D) a and b
E) none of the above

Accepted Answer

When wages are "sticky," they do not adjust quickly to changes in the price level. A decline in the price level increases the purchasing power of wages (i.e., raises the real wage) because workers' nominal wages remain the same while the prices of goods and services they buy fall. This increase in real wages makes labor more expensive for firms, leading to a decrease in the quantity of labor demanded by employers.

Question 5

The short-run aggregate supply curve is ________ and the long-run aggregate supply curve is _________.
A) upward sloping; horizontal
B) vertical; upward sloping
C) vertical; horizontal
D) upward sloping; vertical
E) none of the above

Accepted Answer

The short-run aggregate supply curve is upward sloping because, in the short run, firms adjust their production in response to changes in price levels. The long-run aggregate supply curve is vertical, reflecting the idea that in the long run, an economy's production is determined by its resources, technology, and institutions, and is not affected by the price level.

Question 6

As the U.S.dollar appreciates and the Japanese yen depreciates,
A) U.S.-produced goods become more expensive for the Japanese and Japanese-produced goods become cheaper for Americans.
B) U.S.-produced goods become cheaper for the Japanese and Japanese-produced goods become more expensive for Americans.
C) U.S.-produced goods become cheaper for both the Japanese and Americans.
D) Japanese-produced goods become more expensive for both the Japanese and Americans.
E) none of the above

Accepted Answer

When the U.S. dollar appreciates against the Japanese yen, it means that each dollar can buy more yen. Consequently, goods produced in the U.S. become more expensive for Japanese consumers, as they need more of their currency to buy the same amount of goods. Conversely, Japanese-produced goods become cheaper for Americans, as they need fewer dollars to buy the same amount of goods.

Question 7

Which set of changes will definitely shift the aggregate demand (AD)curve to the right?
A) Business taxes decline and foreign real national income rises.
B) Businesses become pessimistic about future sales and the U.S. dollar depreciates.
C) Wealth increases and individuals expect higher (future) incomes.
D) a and b
E) a and c

Accepted Answer

A decrease in business taxes and an increase in foreign real national income will increase consumer and business spending, leading to an increase in aggregate demand. Similarly, an increase in wealth and expected future incomes will increase consumer spending, further shifting the aggregate demand curve to the right. The other options listed may have varying effects on aggregate demand or may not have a significant impact on the curve.

Question 8

Which of the following statements is false?
A) Some prices in an economy adjust faster than other prices.
B) Aggregate demand curves slope downward.
C) Firms may not adjust their prices immediately because they may be unable to figure out whether a decline in demand is temporary or permanent.
D) The absolute price of a good is the dollar or money price of the good.
E) none of the above

Accepted Answer

All the statements A through D are true, reflecting various economic principles such as price stickiness, the nature of aggregate demand curves, reasons for delayed price adjustments by firms, and the definition of absolute price.

Question 9

The economy suffers an adverse supply shock.As a result,in the short run Real GDP will __________ and the price level will __________.
A) rise; rise
B) fall; fall
C) fall; remain constant
D) fall; rise
E) rise; fall

Accepted Answer

An adverse supply shock, such as a sudden increase in oil prices or a natural disaster disrupting production, can lead to a decrease in the availability of inputs for production. This causes a leftward shift of the aggregate supply curve, resulting in a decrease in Real GDP and an increase in the price level in the short run. Therefore, Choice D is the correct answer as it predicts a fall in Real GDP and a rise in the price level.

Question 10

The wage rate rises.As a result,in the short run Real GDP will __________ and the price level will __________.
A) rise; rise
B) fall; fall
C) remain constant; fall
D) fall; rise
E) rise; fall

Accepted Answer

In the short run, an increase in the wage rate typically leads to higher production costs for businesses. This often results in a decrease in the quantity of goods and services produced (fall in Real GDP) as companies may cut back on production due to higher costs. Additionally, the higher costs of production can lead to higher prices for goods and services, thus increasing the price level.

Question 11

A business firm's profitability is based in part on the
A) prices of their nonlabor inputs.
B) productivity of their workers.
C) wages they must pay their workers.
D) business taxes they must pay.
E) all of the above

Accepted Answer

A business firm's profitability is influenced by various factors including the prices of nonlabor inputs, worker productivity, wages, and business taxes. All these elements can affect the cost structure and revenue potential of a firm, thereby impacting its overall profitability.

Question 12

Which of the following statements is false?
A) If the SRAS curve shifts rightward, the price level falls in the short run.
B) If AD rises and SRAS is constant, the price level rises in the short run.
C) If both SRAS and AD decline, Real GDP falls in the short run.
D) If both SRAS and AD increase, the price level necessarily rises in the short run.
E) none of the above

Accepted Answer

This statement is false because a shift in both SRAS and AD does not necessarily lead to an increase in the price level in the short run. It depends on the magnitude of the shifts and their relative positions. It is possible for AD to shift more than SRAS, leading to an increase in Real GDP and a decrease in the price level.

Question 13

Which set of changes is definitely predicted to lower Real GDP in the short run?
A) The money supply rises and labor productivity rises.
B) The U.S. dollar depreciates and wage rates fall.
C) The U.S. dollar appreciates and labor productivity rises.
D) Foreign real national income falls and wage rates rise.
E) none of the above

Accepted Answer

If foreign real national income falls, this will decrease demand for U.S. goods and services, leading to a decrease in Real GDP in the short run. If wage rates rise, this will increase production costs and potentially lead to a decrease in output, further lowering Real GDP.

Question 14

Which of the following is consistent with the sticky-wage explanation of the upward-sloping SRAS curve?
A) The price level rises, the real wage falls, and the quantity demanded of labor declines.
B) The price level falls, the real wage rises, and the quantity demanded of labor falls.
C) The price level rises, the real wage rises, and the quantity demanded of labor falls.
D) The nominal wage rises, the real wage rises, and the quantity demanded and supplied of labor rise.
E) a and b

Accepted Answer

The answer of Which of the following is consistent with...

Question 15

If the nominal wage is $12 per hour and the price level (as measured by a price index)is 2,it follows that the real wage is _________ per hour.
A) $24.00
B) $6.00
C) $2.50
D) $14.00.
E) none of the above

Accepted Answer

Real wage is calculated by dividing nominal wage by the price level. Therefore, real wage = $12/2 = $6 per hour.

Question 16

The worker-misperception explanation of the SRAS curve is used to explain why
A) SRAS curves shift to the right
B) SRAS curves shift to the left
C) the AD curve cannot change the price level if the SRAS curve is operational.
D) the SRAS curve slopes downward.
E) none of the above

Accepted Answer

The worker-misperception explanation of the SRAS curve is used to explain why the SRAS curve slopes upward, not downward or reasons for its shifts. This explanation suggests that workers may temporarily misperceive real wages when the price level changes unexpectedly, affecting their supply of labor and thus the aggregate supply, but it does not directly explain the shape or shifts of the SRAS curve in the options provided.

Question 17

The nominal wage is $40 an hour and the price level as measured by a price index is 2.00.If the nominal wage falls to $30 and the price index declines to 1.50,according to the worker misperception explanation of the upward-sloping SRAS curve,workers will initially perceive the
A) real wage as something greater than $20.
B) real wage as something less than $20.
C) real wage as $20.
D) nominal wage as something more than $30.
E) nominal wage as something less than $30.

Accepted Answer

According to the worker misperception explanation, workers initially perceive the nominal wage change but not the price level change. Therefore, if the nominal wage falls to $30, workers will perceive that their nominal wage has decreased. However, since the price index has also decreased, the real wage has not changed as much as the nominal wage, and workers initially perceive a decrease in the real wage. The real wage can be calculated as nominal wage divided by the price index, so the real wage initially perceived by workers will be 30/1.5 = $20.

Question 18

A change in Real GDP in the short run can be brought about by a change in
A) the exchange rate.
B) labor productivity.
C) expectations of future sales.
D) wealth.
E) all of the above

Accepted Answer

A change in Real GDP in the short run can be brought about by a change in any of the factors listed. Changes in the exchange rate can affect exports and imports, which in turn affect aggregate demand and Real GDP. Labor productivity can affect the output of goods and services, which directly affects Real GDP. Expectations of future sales can affect investment, which can then affect aggregate demand and Real GDP. Wealth can lead to changes in consumption and investment, affecting aggregate demand and Real GDP. Therefore, all of the above can cause a change in Real GDP in the short run.

Question 19

Starting from short-run equilibrium,the following occurs: the money supply increases and labor productivity increases.What is the effect on the price level and Real GDP in the short run?
A) Real GDP falls and the price level necessarily rises.
B) Real GDP rises and the price level necessarily rises.
C) Real GDP rises and the effect on the price level cannot be determined.
D) Real GDP falls and the effect on the price level cannot be determined.
E) none of the above

Accepted Answer

When the money supply increases, there is an increase in aggregate demand, which can lead to an increase in Real GDP in the short run. When labor productivity increases, there is a decrease in production costs, which can also lead to an increase in Real GDP in the short run. However, the effect on the price level cannot be determined as it depends on the relative magnitude of the increase in aggregate demand and the decrease in production costs. Therefore, the correct answer is C.

Question 20

Which set of changes is definitely predicted to raise the price level in the short run?
A) The money supply falls and wage rates rise.
B) The money supply falls and wage rates fall.
C) The money supply rises and wage rates fall.
D) Labor productivity rises and there is a beneficial supply shock.
E) The prices of nonlabor inputs rise and individuals expect higher (future) incomes.

Accepted Answer

The answer of Which set of changes is definitely predicted...

Quiz 8: Aggregate Demand and Aggregate Supply

Starting from short-run equilibrium,the following occurs: personal income taxes are cut,business taxes are cut,and labor productivity rises.What is the effect on the price level and Real GDP in the short run?

Which set of changes is definitely predicted to raise Real GDP in the short run?

Which set of changes is definitely predicted to lower Real GDP in the short run?

If wages are "sticky",a decline in the price level will

The short-run aggregate supply curve is and the long-run aggregate supply curve is _.

As the U.S.dollar appreciates and the Japanese yen depreciates,

Which set of changes will definitely shift the aggregate demand (AD) curve to the right?

Which of the following statements is false?

The economy suffers an adverse supply shock.As a result,in the short run Real GDP will and the price level will .

The wage rate rises.As a result,in the short run Real GDP will and the price level will .

A business firm's profitability is based in part on the

Which of the following statements is false?

Which set of changes is definitely predicted to lower Real GDP in the short run?

Which of the following is consistent with the sticky-wage explanation of the upward-sloping SRAS curve?

If the nominal wage is $12 per hour and the price level (as measured by a price index) is 2,it follows that the real wage is _________ per hour.

The worker-misperception explanation of the SRAS curve is used to explain why

The nominal wage is $40 an hour and the price level as measured by a price index is 2.00.If the nominal wage falls to $30 and the price index declines to 1.50,according to the worker misperception explanation of the upward-sloping SRAS curve,workers will initially perceive the

A change in Real GDP in the short run can be brought about by a change in

Starting from short-run equilibrium,the following occurs: the money supply increases and labor productivity increases.What is the effect on the price level and Real GDP in the short run?

Which set of changes is definitely predicted to raise the price level in the short run?