Question 1

In the basic AD/AS macro model,which of the following events could cause a negative AS shock?
A)a large decrease in wages
B)a large increase in business confidence
C)a large decrease in the net tax rate
D)a widespread outbreak of a serious infectious disease
E)a large increase in labour productivity

Accepted Answer

A widespread outbreak of a serious infectious disease would cause a negative AS (aggregate supply) shock by reducing the availability of labor and potentially disrupting supply chains, causing a decrease in aggregate output and an increase in prices. The other events listed may cause an increase in AS (e.g. a large increase in labor productivity) or have no direct impact on AS (e.g. a decrease in the net tax rate).

Question 2

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in the Canadian-dollar price of all imported raw materials.In the short run,________. In the long run,________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP and the price level return to their original levels

Accepted Answer

In the short run, the increase in imported raw material prices will increase production costs for firms, leading to a decrease in short-run aggregate supply (SRAS). This will cause a temporary increase in the price level and a decrease in real GDP below its potential level. 
However, in the long run, firms will adjust their production processes and negotiate lower prices for inputs, leading to an increase in SRAS and a return to potential output. The increase in imported raw material prices will also cause an increase in the price level in the long run, but real GDP will return to its original level. Thus, the correct choice is E.

Question 3

Consider the basic AD/AS macro model in long -run equilibrium.A permanent expansionary AD shock has price-level effect in the short run and price -level effect in the long run.
A)a positive; no
B)a negative; no
C)a positive; an even larger
D)a positive; a smaller
E)a negative; a positive

Accepted Answer

A permanent expansionary AD (Aggregate Demand) shock increases the price level in the short run due to the upward slope of the AS (Aggregate Supply) curve in the short run. In the long run, as the economy adjusts and the AS curve shifts, the price level effect is even larger because the economy moves to a new long-run equilibrium at a higher price level, reflecting the increased demand throughout the economy.

Question 4

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an unexpected and sharp reduction in desired business investment expenditure.In the short run,________. In the long run,________.
A)real GDP and the price level both fall; real GDP is at its original level with a lower price level
B)real GDP and the price level both fall; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Accepted Answer

In the short run, a sharp reduction in desired business investment expenditure would lead to a decrease in aggregate demand, causing both real GDP and the price level to fall. In the long run, the economy would adjust, and real GDP would return to its potential output (original level), but with a lower price level due to the initial decrease in aggregate demand.

Question 5

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from AD1 to AD2), the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.
A)110; 1000
B)60; 1000
C)90; 900
D)110; 800
E)90; 1250

Accepted Answer

In the long-run, the economy adjusts to its potential output level, which is the level of real GDP that the economy was at before the negative AD shock. The adjustment process involves changes in prices and wages that move the economy back to its natural level of output. Since the question implies a return to long-run equilibrium following a negative AD shock, the correct answer is the one that maintains the original level of real GDP (1000) but at a lower price level (60) due to the negative demand shock, which is option B.

Question 6

Consider the basic AD/AS macro model in long -run equilibrium.An expansionary AD shock would have output effect in the short run and output effect in the long run.
A)a positive; no
B)a positive; a positive
C)no; a positive
D)no; no
E)not enough information to know

Accepted Answer

In the long run, the economy returns to its potential output level, so an expansionary AD shock would have no effect on output. However, in the short run, the increase in AD would cause output to increase. Therefore, the correct answer is A: a positive output effect in the short run, but no effect in the long run.

Question 7

Consider an economy with a relatively steep AS curve.If the AD curve shifts to the left,then the price level will ________ and national output will ________.
A)increase slightly; significantly increase
B)increase slightly; significantly decrease
C)increase sharply; increase slightly
D)fall sharply; will not change.
E)fall sharply; decrease slightly.

Accepted Answer

In an economy with a steep AS curve, a leftward shift in the AD curve will lead to a significant decrease in national output and a sharp fall in the price level. This is because the steep AS curve implies that the economy has a limited ability to increase output in response to changes in demand, and as a result, shifts in AD have a greater impact on prices and output. Therefore, option E is the best choice as it reflects the expected outcome of a leftward shift in the AD curve in an economy with a steep AS curve.

Question 8

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from AD1 to AD2.The initial effect is
A)a recessionary output gap of 100.
B)a recessionary output gap of 300.
C)a recessionary output gap of 550.
D)an inflationary output gap of 200.
E)an inflationary output gap of 100.

Accepted Answer

The negative shock to the economy shifts the AD curve to the left, from AD1 to AD2. This results in a decrease in aggregate demand, which leads to a recessionary output gap. The output gap is the difference between actual output and potential output. In this case, the output gap is 100, which means that actual output is 100 units below potential output.

Question 9

In the basic AD/AS macro model,which of the following events would cause stagflation?
A)a large decrease in wages
B)a large increase in business confidence
C)a large increase in the net tax rate
D)a large increase in the price of raw materials
E)a large increase in labour productivity

Accepted Answer

A large increase in the price of raw materials would shift the aggregate supply (AS) curve leftward causing higher inflation (due to higher price of inputs) and lower output (as firms reduce production in response to higher costs). This phenomenon is known as stagflation. None of the other options listed would necessarily lead to stagflation.

Question 10

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from AD1 to AD2.At the new short-run equilibrium,the price level is ________ and real GDP is ________.
A)90; 900
B)110; 800
C)60; 1000
D)60; 700
E)90; 1250

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 11

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with  a ________ shift in ________.
A)rightward; AS
B)rightward; AD
C)leftward; AS
D)leftward; AD
E)leftward; Y*

Accepted Answer

If the economy is initially at potential output, a positive AS shock will cause output to increase in the short run as prices and wages adjust more slowly than output. However, in the long run, prices and wages will fully adjust, and the economy will return to potential output. The long-run effect of the AS shock will be a leftward shift in the AS curve, as the economy is producing at potential output with higher prices. This will eventually cause a decrease in output to return the economy to potential. Therefore, the correct answer is (C) leftward shift in the AS curve.

Question 12

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,________. In the long run,________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP and the price level return to their original levels
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Accepted Answer

In the short run, the decrease in the Canadian price of all imported raw materials will cause a decrease in the cost of production for firms, leading to an increase in their profits. As a result, firms will increase their output, leading to an increase in real GDP. However, in the short run, the price level may not necessarily fall as the decrease in the cost of production could offset the downward pressure on prices from the increase in output.
In the long run, however, the increase in profits will lead to an increase in the supply of goods and services, causing a shift in the aggregate supply curve to the right. This will lead to an increase in real GDP and a decrease in the price level, returning the economy to its long-run equilibrium. Therefore, in the long run, real GDP will rise and the price level will fall, and both will return to their original levels.

Question 13

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3.Which of the following events could have shifted the AD curve from AD1 to AD2?
A)an increase in net exports
B)an increase in government purchases
C)an increase in desired investment
D)an increase in autonomous household saving
E)an increase in autonomous consumption

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 14

Consider an economy with a relatively steep AS curve.If there is a shift to the right in the AD curve,there will be a ________ in the price level and ________ in national output.
A)small increase; a large increase
B)small increase; a large decrease
C)large increase; a small increase
D)large increase; a small decrease
E)large increase; no change

Accepted Answer

With a steep AS curve, an increase in AD will lead to a larger increase in price level and a smaller increase in national output. This is because the economy is already producing near its full capacity, so any increase in demand will lead to higher prices instead of an increase in output. Thus, a shift to the right in AD will cause a large increase in price level and a small increase in national output.

Question 15

What is meant by the term ʺstagflationʺ?
A)the combination of falling real GDP and a rising price level
B)a persistent inflationary gap
C)a persistent recessionary gap
D)the sluggish downward wage adjustment in response to a recessionary gap
E)the combination of inflation and rising real GDP

Accepted Answer

Stagflation refers to a situation in which there is a combination of high inflation and stagnant economic growth, typically measured by low or negative real GDP growth. This is different from a persistent inflationary gap, which implies high inflation with strong economic growth, or a persistent recessionary gap, which implies low economic growth with low inflation. The sluggish downward wage adjustment in response to a recessionary gap is an example of what can contribute to stagflation, but it is not the definition of the term itself. The combination of inflation and rising real GDP is not stagflation, as rising real GDP would indicate economic growth rather than stagnation.

Question 16

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in world demand for Canadaʹs goods.In the short run,________. In the long run, ________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Accepted Answer

In the short run, an increase in world demand for Canada's goods would lead to an increase in both real GDP and the price level due to higher demand for Canadian products. In the long run, the economy would adjust, and real GDP would return to its potential output (original level), but the price level would remain higher due to the initial demand increase.

Question 17

Consider an AD/AS model in long-run equilibrium.An output gap,caused by a leftward shift of the AD curve,will be eliminated if
A)wages rise quickly.
B)the AS curve shifts upward.
C)wages and other factor prices fall sufficiently.
D)real national income decreases.
E)prices rise quickly.

Accepted Answer

In the long-run, the economy will adjust to eliminate any output gap through changes in factor prices, such as wages. If wages and other factor prices fall, the AS curve will shift to the right, bringing the economy back to potential output and eliminating the output gap. None of the other options given would lead to a long-run equilibrium without causing other distortions to the economy.

Question 18

Consider the AD/AS model and suppose the economy begins at potential output.The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
A)rightward; AS
B)rightward; AD
C)leftward; AS
D)leftward; AD
E)leftward; Y*

Accepted Answer

In the long run, the economy tends to return to its potential output level after a negative aggregate supply (AS) shock. This adjustment occurs through a rightward shift in the AS curve, as prices and wages adjust over time, allowing the economy to return to its natural level of output.

Question 19

Consider the basic AD/AS macro model in long -run equilibrium.An expansionary AD shock will the price level and output in the short run.In the long run,the price level will and output will .
A)decrease; decrease; decrease further; decrease further
B)decrease; decrease; decrease further; be restored to potential output
C)increase; increase; increase further; increase further
D)increase; decrease; increase further; be restored to potential output
E)increase; increase; increase further; be restored to potential output

Accepted Answer

In the short run, an expansionary aggregate demand (AD) shock will increase both the price level and output due to the upward sloping nature of the short-run aggregate supply (SRAS) curve. In the long run, the economy self-adjusts, and output returns to its potential level (the level of output at full employment), but the price level remains higher than before the shock. This adjustment happens as wages and other input prices fully adjust to the higher price level, shifting the SRAS curve leftward until the economy is back at its potential output.

Question 20

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.
  FIGURE 24-3
-Refer to Figure 24-3.After the negative aggregate demand shock shown in the diagram (from AD1 to AD2),which of the following describes the adjustment process that would return the economy to its long -run equilibrium?
A)Wages would eventually fall,causing the AD curve to shift to the right,returning to the original equilibrium at point A.
B)Wages would eventually fall,causing the AS curve to shift slowly to the right,reaching a new equilibrium at point E.
C)Wages would increase,causing the AS curve to shift to the right,reaching a new equilibrium at point E.
D)Wages would increase,causing the AD curve to shift to the right,returning to the original equilibrium at point A.
E)Potential output would decrease from 1000 to 900 and a new long -run equilibrium would be established at point D.

Accepted Answer

After the negative aggregate demand shock, the economy experiences a short-run decrease in output and an increase in unemployment. This creates downward pressure on wages, causing them to eventually fall. As wages fall, firms are willing to produce more at any given price level, causing the AS curve to slowly shift to the right. This process continues until the economy reaches a new long-run equilibrium at point E, where output returns to its potential level of 1000 and the price level is lower than the original equilibrium at point A. Therefore, the best choice is B.

Quiz 24: From the Short Run to the Long Run: the Adjustment of Factor Prices

In the basic AD/AS macro model,which of the following events could cause a negative AS shock?

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in the Canadian-dollar price of all imported raw materials.In the short run,. In the long run,.

Consider the basic AD/AS macro model in long -run equilibrium.A permanent expansionary AD shock has price-level effect in the short run and price -level effect in the long run.

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an unexpected and sharp reduction in desired business investment expenditure.In the short run,. In the long run,.

Consider the basic AD/AS macro model in long -run equilibrium.An expansionary AD shock would have output effect in the short run and output effect in the long run.

Consider an economy with a relatively steep AS curve.If the AD curve shifts to the left,then the price level will and national output will .

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-3 -Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from AD1 to AD2.The initial effect is

In the basic AD/AS macro model,which of the following events would cause stagflation?

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-3 -Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from AD1 to AD2.At the new short-run equilibrium,the price level is and real GDP is .

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a shift in .

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,. In the long run,.

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-3 -Refer to Figure 24-3.Which of the following events could have shifted the AD curve from AD1 to AD2?

Consider an economy with a relatively steep AS curve.If there is a shift to the right in the AD curve,there will be a in the price level and in national output.

What is meant by the term ʺstagflationʺ?

Suppose Canadaʹs economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in world demand for Canadaʹs goods.In the short run,. In the long run, .

Consider an AD/AS model in long-run equilibrium.An output gap,caused by a leftward shift of the AD curve,will be eliminated if

Consider the AD/AS model and suppose the economy begins at potential output.The effect of a negative AS shock on real GDP will be reversed in the long run with a shift in .

Consider the basic AD/AS macro model in long -run equilibrium.An expansionary AD shock will the price level and output in the short run.In the long run,the price level will and output will .