Question 1

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?

Accepted Answer

When the negative aggregate demand shock occurs and AD shifts left from AD1 to AD2, there is a short-run equilibrium at point B where output and prices both decrease. In the long run, wages and prices are flexible, so wages will eventually fall, causing the AS curve to shift right. This adjustment process continues until the economy reaches a new long-run equilibrium at point E, where output returns to potential output (1000) and prices remain at their original level. Therefore, choice B is the best answer.

Question 2

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

Accepted Answer

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

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.

Accepted Answer

In the short run, a permanent expansionary AD shock increases the price level as demand exceeds supply. In the long run, the price level increases even more as the economy adjusts to the new higher demand level, leading to higher inflation.

Question 4

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 .

Accepted Answer

A positive AS shock will shift the AS curve to the right, causing both GDP and price level to increase in the short run. However, in the long run, wages and other input prices will adjust to the higher price level, causing the AS curve to shift back to its original position, and output will return to potential level. Therefore, the effect on real GDP will be reversed, and the AS curve will shift leftward in the long run.

Question 5

What is meant by the term ʺstagflationʺ?

Accepted Answer

Stagflation refers to a situation in which an economy experiences both stagnant economic growth (falling real GDP) and high levels of inflation (rising price level). This is in contrast to traditional economic theory, which suggests that inflation is typically associated with an expanding economy, and falling prices are associated with economic contraction. Stagflation is generally considered to be a difficult economic situation for policymakers to address, as traditional monetary and fiscal policies may be ineffective or even counterproductive in addressing both inflation and recession at the same time.

Question 6

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,
)

Accepted Answer

In the short run, an increase in world demand for Canada's goods would lead to an increase in 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 7

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 .

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 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. 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 .

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 9

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 .

Accepted Answer

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

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 24-4
-Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short -run equilibrium where the price level is and real GDP is .

Accepted Answer

A positive aggregate supply shock will shift the AS curve to the right, leading to lower prices and higher output. From the diagram, we can see that point B represents the new short-run equilibrium after the positive AS shock. The price level is around 90 and real GDP is around 1200. Therefore, choice D is the correct answer.

Question 11

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

Accepted Answer

The answer of Consider the basic AD/AS macro model in...

Question 12

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.

Accepted Answer

In the long run, the AD/AS model returns to potential output and the economy is at full employment. Therefore, an expansionary AD shock would only have a positive output effect in the short run as prices adjust to the higher demand. In the long run, prices have fully adjusted and the economy returns to its potential output level, so there would be no further increase in output.

Question 13

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
)

Accepted Answer

In the short run, an expansionary aggregate demand (AD) shock increases both the price level and output. In the long run, the price level continues to increase as the economy adjusts, but output is restored to its potential level as the economy self-corrects.

Question 14

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?

Accepted Answer

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

Question 15

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, .

Accepted Answer

A decrease in the Canadian price of all imported raw materials will cause a decrease in the overall cost of production, increasing short-run aggregate supply. This will lead to a temporary increase in real GDP and a decrease in the price level. However, in the long run, wages and other input prices will adjust to the lower cost of production, causing the short-run aggregate supply curve to shift back to the left, returning the economy to its original long-run equilibrium level of real GDP. The price level will fall initially but return to its original level in the long run, resulting in real GDP rising and the price level falling initially and then returning to its original level in the long run.

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 the Canadian-dollar price of all imported raw materials. In the short run,
) In the long run, .

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 17

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

Accepted Answer

A large increase in the price of raw materials would cause the AS (aggregate supply) curve to shift upwards, resulting in higher prices and lower output. This would lead to stagflation, which is characterized by high inflation and low economic growth. None of the other choices would directly cause stagflation.

Question 18

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

Accepted Answer

A widespread outbreak of a serious infectious disease can cause a negative AS shock because it can lead to a decrease in the supply of labor and other inputs, which increases the cost of production and reduces the overall level of output. This can lead to a leftward shift in the AS curve, causing both lower output and higher prices in the short-run.

Question 19

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, .

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 back to its potential output (original level of real GDP) but with a lower price level due to the initial decrease in aggregate demand and subsequent adjustments in the economy.

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 24-4
-Refer to Figure 24-4. The initial effect of the positive AS shock shown in the diagram results in

Accepted Answer

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

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

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

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.

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 .

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 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 .

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 .

The diagram below shows an AD/AS model for a hypothetical economy. The economy begins in long-run equilibrium at point A. FIGURE 24-4 -Refer to Figure 24-4. The positive aggregate supply shock shown in the diagram results in a new short -run equilibrium where the price level is and real GDP is .

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

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 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 )

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?

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, .

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, .

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

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 unexpected and sharp reduction in desired business investment expenditure. 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 24-4 -Refer to Figure 24-4. The initial effect of the positive AS shock shown in the diagram results in