Question 1

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

Accepted Answer

The economy's response to a decrease in output depends on the underlying cause. If the decrease is due to a fall in aggregate demand, prices might adjust downward, leading to a potential restoration of output in the long run. However, if the decrease is due to a fall in short-run aggregate supply, prices are likely to increase, and the economy might not revert to its original levels of prices and output without intervention or adjustments in other factors. The adjustment mechanisms and time frames differ significantly between demand-induced changes and supply-induced changes.

Question 2

If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Accepted Answer

Increasing the money supply can stimulate economic activity, reducing unemployment towards its natural rate. However, it also increases the demand for goods and services more than the economy's capacity to produce them, leading to higher inflation and thus, higher prices.

Question 3

The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century.

Accepted Answer

The recession of 2008-2009, also known as the Global Financial Crisis, was indeed the worst macroeconomic event since the Great Depression of the 1930s, causing widespread economic downturn, high unemployment rates, and significant financial distress globally.

Question 4

The term ​business cycle​ implies that economic fluctuations follow a regular, predictable pattern.​

Accepted Answer

The term "business cycle" refers to the fluctuations in economic activity that an economy experiences over a period of time, but these fluctuations do not follow a regular, predictable pattern. They are influenced by various unpredictable factors such as changes in consumer preferences, technological innovations, and government policies.

Question 5

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

Accepted Answer

In the long-run, an economy's output is determined by its supply-side factors (such as labor, capital, and technology), not by the level of aggregate demand. Thus, while an increase in aggregate demand can lead to higher prices (inflation), it does not increase the economy's capacity to produce goods and services, leaving real GDP unchanged in the long run.

Question 6

During World War II government expenditures increased almost five-fold and output almost doubled.

Accepted Answer

During World War II, government expenditures indeed increased significantly, nearly five-fold, to finance the war effort, which also led to a substantial increase in industrial output and overall economic activity, nearly doubling as industries ramped up production to meet wartime needs.

Question 7

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

Accepted Answer

Economists mostly agree that the Great Depression was caused by a combination of factors, including monetary contraction, banking crises, and declines in consumer and investor confidence, which affected both aggregate demand and aggregate supply, rather than being primarily due to shifts in short-run aggregate supply.

Question 8

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

Accepted Answer

When aggregate demand shifts right, it initially causes an increase in both the price level and output in the short run. Over time, as workers and firms adjust their expectations of prices upwards, they will demand higher wages and prices for their goods and services, respectively. This adjustment leads to an increase in the costs of production, which causes the short-run aggregate-supply curve to shift to the left, reflecting a decrease in the quantity of goods and services supplied at any given price level.

Question 9

The theory of short-run economic fluctuations is uncontroversial.​

Accepted Answer

The theory of short-run economic fluctuations, often discussed in the context of business cycles, is subject to considerable debate among economists. Different schools of thought, such as Keynesians, Monetarists, and New Classical economists, offer varying explanations for the causes and remedies of economic fluctuations.

Question 10

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Accepted Answer

Keynes believed that during recessions, increased government spending and lower taxes could stimulate demand, leading to increased production and reduced unemployment.

Question 11

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

Accepted Answer

The primary purpose of the aggregate demand and aggregate supply model is to analyze the determination of total output and the general price level in the economy, not to demonstrate the classical dichotomy, which separates real and nominal variables.

Question 12

A change in the supply of labor, all else remaining the same, will shift the short-run aggregate-supply curve.​

Accepted Answer

A change in the supply of labor affects the overall production capacity of an economy, thereby shifting the short-run aggregate-supply curve as it alters the amount of goods and services that can be produced at various price levels.

Question 13

The model of aggregate demand and aggregate supply is nothing more than a large version of the model of market demand and market supply.​

Accepted Answer

The aggregate demand and supply model considers the entire economy's output and price level, while the market demand and supply model focuses on individual markets for specific goods or services.

Question 14

If aggregate demand and aggregate supply both shift right, we can be sure that the price level is higher in the short run.

Accepted Answer

When both aggregate demand and aggregate supply shift right, the effect on the price level is uncertain without knowing the magnitude of the shifts. If the supply increase is larger than the demand increase, the price level could actually decrease.

Question 15

If aggregate demand shifts right, then eventually price level expectations rise. This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

Accepted Answer

While an increase in price level expectations can lead to higher costs for firms and potentially decrease aggregate supply, it does not directly cause the aggregate demand curve to shift left. Aggregate demand shifts due to changes in factors like consumer spending, investment, government spending, and net exports, not directly due to changes in price level expectations.

Question 16

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Accepted Answer

The increased output and prices in the early 1940s in the United States were primarily due to increased government expenditures related to World War II, which significantly boosted economic activity and demand.

Question 17

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

Accepted Answer

The recession of 2008-2009, also known as the Great Recession, was significantly triggered by a fall in housing prices. This decline in housing prices reduced household wealth, leading to decreased consumer spending and investment by businesses, effectively shifting the aggregate demand curve to the left.

Question 18

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation is characterized by slow economic growth and high unemployment (stagnation) occurring simultaneously with high inflation, typically resulting from a supply shock that raises prices even as demand remains weak, not from decreases in aggregate demand.

Question 19

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Accepted Answer

Policymakers can use fiscal and monetary policies to influence aggregate demand, thereby potentially mitigating the severity of economic fluctuations by stimulating the economy during downturns or cooling it during overheating periods.

Question 20

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

Accepted Answer

Increased optimism about the future can lead to higher consumer and business spending, which in turn boosts demand for goods and services. This increased demand can cause prices to rise (due to higher demand relative to supply) and unemployment to fall as businesses hire more workers to meet the increased demand.

Quiz 33: Aggregate Demand and Aggregate Supply

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century.

The term business cycle implies that economic fluctuations follow a regular, predictable pattern.

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

During World War II government expenditures increased almost five-fold and output almost doubled.

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

The theory of short-run economic fluctuations is uncontroversial.

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

A change in the supply of labor, all else remaining the same, will shift the short-run aggregate-supply curve.

The model of aggregate demand and aggregate supply is nothing more than a large version of the model of market demand and market supply.

If aggregate demand and aggregate supply both shift right, we can be sure that the price level is higher in the short run.

If aggregate demand shifts right, then eventually price level expectations rise. This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

Stagflation results from continued decreases in aggregate demand.

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

Quiz 33: Aggregate Demand and Aggregate Supply

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century.

The term ​business cycle​ implies that economic fluctuations follow a regular, predictable pattern.​

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

During World War II government expenditures increased almost five-fold and output almost doubled.

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

The theory of short-run economic fluctuations is uncontroversial.​

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

A change in the supply of labor, all else remaining the same, will shift the short-run aggregate-supply curve.​

The model of aggregate demand and aggregate supply is nothing more than a large version of the model of market demand and market supply.​

If aggregate demand and aggregate supply both shift right, we can be sure that the price level is higher in the short run.

If aggregate demand shifts right, then eventually price level expectations rise. This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

Stagflation results from continued decreases in aggregate demand.

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

The term business cycle implies that economic fluctuations follow a regular, predictable pattern.

The theory of short-run economic fluctuations is uncontroversial.

A change in the supply of labor, all else remaining the same, will shift the short-run aggregate-supply curve.

The model of aggregate demand and aggregate supply is nothing more than a large version of the model of market demand and market supply.