Question 1

An economy is at full employment. Which of the following events can create a recessionary gap?
A) a decrease in money wages
B) a decrease in the quantity of capital
C) an increase in foreign income
D) an increase in taxes

Accepted Answer

An increase in taxes would decrease consumer spending, decreasing aggregate demand and potentially leading to a recessionary gap. None of the other choices would necessarily lead to a recessionary gap in an economy at full employment.

Question 2

If aggregate demand decreases and neither short-run nor long-run aggregate supply changes, then
A) there is a recessionary gap.
B) in the long run, the long-run aggregate supply will decrease.
C) the price level increases in the short-run and decreases in the long-run.
D) there is an inflationary gap.

Accepted Answer

A decrease in aggregate demand without any change in either short-run or long-run aggregate supply would result in a decrease in real GDP below potential GDP, creating a recessionary gap.

Question 3

A recessionary gap occurs when
A) nominal GDP is less than potential GDP.
B) nominal GDP is greater than potential GDP.
C) real GDP is less than potential GDP.
D) high rates of inflation occur.

Accepted Answer

A recessionary gap occurs when real GDP is less than potential GDP, meaning that the economy is producing less than it is capable of producing. Nominal GDP and inflation rates are not necessarily indicative of a recessionary gap.

Question 4

An above full-employment equilibrium occurs when
A) the equilibrium level of real GDP is greater than potential GDP.
B) the equilibrium level of real GDP is less than potential GDP.
C) short-run aggregate supply decreases while neither aggregate demand nor long -run aggregate supply changes.
D) aggregate demand decreases while neither the short-run nor long-run aggregate supply changes.

Accepted Answer

An above full-employment equilibrium occurs when the equilibrium level of real GDP is greater than potential GDP. This means that the economy is producing at a level that is unsustainable in the long-run as it is exceeding the maximum level of output that can be produced with the available resources and technology. This can lead to inflationary pressures and may result in a decrease in aggregate demand in the long-run.

Question 5

The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a____________
A) recessionary gap
B) inflationary gap
C) full-employment equilibrium
D) long-run equilibrium

Accepted Answer

The Great Depression was marked by a significant contraction in output and a rise in unemployment, which indicates a recessionary gap. A recessionary gap occurs when actual output is lower than potential output, which leads to high unemployment and low inflation.

Question 6

If real GDP is less than potential GDP, then the economy is ____________equilibrium.
A) at a below full-employment
B) not in short-run macroeconomic
C) in long-run macroeconomic
D) at an above full-employment

Accepted Answer

When real GDP is less than potential GDP, it means that the economy is operating below its full-employment level. This is because potential GDP represents the maximum level of output that an economy can produce in the long run with all resources fully employed. Therefore, the economy is not in equilibrium and there are unused resources such as labor and capital.

Question 7

-The above figure illustrates
A) a recessionary gap.
B) an inflationary gap.
C) a full-employment equilibrium.
D) an equilibrium at the economyʹs physical limits.

Accepted Answer

An inflationary gap occurs when the actual output in an economy exceeds the potential output, leading to upward pressure on prices.

Question 8

A recessionary gap means that short-run macroeconomic equilibrium GDP
A) equals full-employment GDP.
B) is less than full-employment GDP.
C) is more than full-employment GDP.
D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP.

Accepted Answer

A recessionary gap occurs when the short-run equilibrium level of GDP is less than the full-employment level of GDP. This means there is a deficiency in aggregate demand, leading to unemployment and underutilization of resources.

Question 9

-In the above figure, the inflationary gap when AD₂is the aggregate demand curve equals A) the difference between $12.5 trillion and $12.0 trillion. B) LAS minus SAS at a price level of 100. C) AD₁. D) the difference between 110 and 100.

Accepted Answer

The inflationary gap is the difference between the actual output and the potential output at full employment. In this context, it is the difference between $12.5 trillion (actual output) and $12.0 trillion (potential output).

Question 10

A below full-employment equilibrium
A) occurs when the price level is rising very quickly.
B) occurs when real GDP is less than potential GDP.
C) occurs when real GDP exceeds potential GDP.
D) is not possible in the U.S. economy.

Accepted Answer

A below full-employment equilibrium occurs when real GDP is less than potential GDP. This means that the economy is not utilizing all of its resources and is experiencing unemployment or underemployment. The other choices are incorrect as they do not accurately describe a below full-employment equilibrium.

Question 11

$$\begin{array}{l}
\text { Real GDP supplied }\
\begin{array} { | l | l | l | l | } 
\hline \text { Price level } & \begin{array} { l } 
\text { Real GDP } \
\text { demanded } \
\text { (dollars) }
\end{array} & \begin{array} { l } 
\text { Short run } \
\text { (dollars) }
\end{array} & \begin{array} { l } 
\text { Long run } \
\text { (dollars) }
\end{array} \
\hline 90 & 700 & 300 & 600 \
\hline 100 & 600 & 400 & 600 \
\hline 110 & 500 & 500 & 600 \
\hline 120 & 400 & 600 & 600 \
\hline
\end{array}
\end{array}$$
-The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. The short-run macroeconomic equilibrium is a price level of ____________and a real GDP of____________ .
A) 100; $400
B) 120; $400
C) 110; $500
D) 90; $400

Accepted Answer

In the short run, equilibrium occurs where the quantity of real GDP demanded equals the quantity of real GDP supplied. At a price level of 110, both the real GDP demanded and the short-run real GDP supplied are $500.

Question 12

When the economy is at an above full-employment equilibrium, ____________.
A) a recessionary gap exists
B) nominal GDP exceeds real GDP
C) real GDP is less than potential GDP
D) an inflationary gap exists

Accepted Answer

An above full-employment equilibrium means that the economy is already producing at a level beyond its potential. This means that there is a high demand for goods and services and the overall economy is growing rapidly. This situation leads to an inflationary gap as prices start to rise due to an excess in demand.

Question 13

-In the above figure, point A represents
A) an increase in aggregate demand.
B) a recessionary gap.
C) an inflationary gap.
D) a full-employment equilibrium.

Accepted Answer

Point A represents a recessionary gap, where the actual output is less than the potential output, indicating underutilization of resources and unemployment.

Question 14

Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate , ____________unemployment ,____________ and the price level____________
A) falls; falls; falls
B) rises; rises; rises
C) rises; falls; rises
D) falls; rises; falls

Accepted Answer

In the long run, if aggregate demand does not change, the money wage rate will eventually fall due to high unemployment. This will lead to a decrease in production costs, causing the short-run aggregate supply to increase, which reduces unemployment and lowers the price level.

Question 15

-An inflationary gap means that short-run macroeconomic equilibrium GDP
A) equals full-employment GDP.
B) is less than full-employment GDP.
C) is more than full-employment GDP.
D) may be less than, more than, or the same as full-employment GDP depending on the level of potential GDP.

Accepted Answer

An inflationary gap occurs when the actual GDP exceeds the full-employment GDP, indicating that the economy is producing beyond its sustainable capacity, leading to upward pressure on prices.

Question 16

$$\begin{array}{l}
\text { Real GDP supplied }\
\begin{array} { | l | l | l | l | } 
\hline \text { Price level } & \begin{array} { l } 
\text { Real GDP } \
\text { demanded } \
\text { (dollars) }
\end{array} & \begin{array} { l } 
\text { Short run } \
\text { (dollars) }
\end{array} & \begin{array} { l } 
\text { Long run } \
\text { (dollars) }
\end{array} \
\hline 90 & 700 & 300 & 600 \
\hline 100 & 600 & 400 & 600 \
\hline 110 & 500 & 500 & 600 \
\hline 120 & 400 & 600 & 600 \
\hline
\end{array}
\end{array}$$
-The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. In short-run equilibrium, there is____________ .
A) a recessionary gap of $100
B) a recessionary gap of $200
C) an inflationary gap of $100
D) an inflationary gap of $200

Accepted Answer

In the short run, the equilibrium occurs where SRAS intersects AD. At a price level of 110, SRAS is 500 and AD is also 500. Thus, there is no gap.

Question 17

-The above figure illustrates
A) an inflationary gap.
B) a full-employment equilibrium.
C) a recessionary gap.
D) an equilibrium at the economyʹs physical limits.

Accepted Answer

The answer of 
-The above figure illustrates
A) an inflationary gap.
B)...

Question 18

An above full-employment equilibrium is
A) when real GDP exceeds potential GDP.
B) the period of time when prices are falling.
C) the equilibrium in which the economy is in most of the time.
D) a theoretical possibility but cannot happen in reality.

Accepted Answer

An above full-employment equilibrium is when real GDP exceeds potential GDP, meaning that the economy is producing at a level beyond its maximum sustainable level of output. This is a theoretical possibility and has occurred in the past, though it is not sustainable in the long run and can lead to inflation.

Question 19

$$\begin{array}{l}
\text { Real GDP supplied }\
\begin{array} { | l | l | l | l | } 
\hline \text { Price level } & \begin{array} { l } 
\text { Real GDP } \
\text { demanded } \
\text { (dollars) }
\end{array} & \begin{array} { l } 
\text { Short run } \
\text { (dollars) }
\end{array} & \begin{array} { l } 
\text { Long run } \
\text { (dollars) }
\end{array} \
\hline 90 & 700 & 300 & 600 \
\hline 100 & 600 & 400 & 600 \
\hline 110 & 500 & 500 & 600 \
\hline 120 & 400 & 600 & 600 \
\hline
\end{array}
\end{array}$$
-The table above gives the aggregate demand and aggregate supply schedules in Lotus Land. Lotus Land is in short-run macroeconomic equilibrium. In the long run, if aggregate demand does not change then Lotus Land will return to full-employment as____________ .
A) businesses cut their imports
B) the money wage rate falls
C) the government cuts taxes
D) the money wage rate rises

Accepted Answer

In the long run, the economy will return to full employment as the money wage rate falls. This is because the lower wage rate will make it more profitable for businesses to hire workers, which will increase employment and output.

Question 20

-The reason that it is possible for the economy in the above figure to be at equilibrium E₂rather than at E₁is that A) in the short run the economy can produce more than it can in a long -run situation. B) in the long run there is always less than full employment. C) AD always shifts rightward and never shifts leftward. D) the economy must be in a recession.

Accepted Answer

In the short run, the economy can produce beyond its long-run potential due to factors like increased demand or temporary resource utilization, allowing it to reach equilibrium at E2.

Quiz 10: Aggregate Supply and Aggregate Demand

An economy is at full employment. Which of the following events can create a recessionary gap?

If aggregate demand decreases and neither short-run nor long-run aggregate supply changes, then

A recessionary gap occurs when

An above full-employment equilibrium occurs when

The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a____________

If real GDP is less than potential GDP, then the economy is ____________equilibrium.

-The above figure illustrates

A recessionary gap means that short-run macroeconomic equilibrium GDP

-In the above figure, the inflationary gap when AD₂is the aggregate demand curve equals

A below full-employment equilibrium

When the economy is at an above full-employment equilibrium, ____________.

-In the above figure, point A represents

Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate , unemployment , and the price level

-An inflationary gap means that short-run macroeconomic equilibrium GDP

-The above figure illustrates

An above full-employment equilibrium is

-The reason that it is possible for the economy in the above figure to be at equilibrium E₂rather than at E₁is that

Quiz 10: Aggregate Supply and Aggregate Demand

An economy is at full employment. Which of the following events can create a recessionary gap?

If aggregate demand decreases and neither short-run nor long-run aggregate supply changes, then

A recessionary gap occurs when

An above full-employment equilibrium occurs when

The Great Depression, in which real GDP fell and unemployment rose, can be characterized as a____________

If real GDP is less than potential GDP, then the economy is ____________equilibrium.

-The above figure illustrates

A recessionary gap means that short-run macroeconomic equilibrium GDP

-In the above figure, the inflationary gap when AD2 is the aggregate demand curve equals

A below full-employment equilibrium

When the economy is at an above full-employment equilibrium, ____________.

-In the above figure, point A represents

Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate , ____________unemployment ,____________ and the price level____________

-An inflationary gap means that short-run macroeconomic equilibrium GDP

-The above figure illustrates

An above full-employment equilibrium is

-The reason that it is possible for the economy in the above figure to be at equilibrium E2 rather than at E1 is that

-In the above figure, the inflationary gap when AD₂is the aggregate demand curve equals

Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change the money wage rate , unemployment , and the price level

-The reason that it is possible for the economy in the above figure to be at equilibrium E₂rather than at E₁is that