Question 1

During cost-push inflation, aggregate output _____ and the aggregate price level _____.

Accepted Answer

During cost-push inflation, the costs of production increase due to factors such as increased wages or raw material costs. As a result, firms have to increase prices to maintain their profit margins, leading to a decrease in aggregate output and an increase in the aggregate price level. Therefore, choice D (falls; rises) is the correct answer.

Question 2

Suppose the economy is at full employment and companies suddenly increase their level of investment. A short-run increase in output will be followed by a reduction in output, resulting in an overall decrease in output.

Accepted Answer

An increase in investment will lead to an increase in output, with no reason for a subsequent reduction in output. Additionally, it is possible for full employment to be surpassed in the long run as a result of increased investment.

Question 3

An increase in government spending will increase aggregate demand.

Accepted Answer

When the government spends more money, it injects funds into the economy and creates demand for goods and services. This leads to an increase in aggregate demand.

Question 4

Demand-pull inflation occurs when aggregate demand expands so much that equilibrium output exceeds full employment output.

Accepted Answer

When aggregate demand exceeds the economy's capacity to produce goods and services, it causes increased demand for labor and inputs, leading to higher prices for goods and services, which is known as demand-pull inflation. When equilibrium output exceeds full employment output, the market does not have enough resources to produce the demanded quantity of goods and services, causing an increase in prices.

Question 5

Which of these BEST illustrates the wealth effect?

Accepted Answer

The answer of Which of these BEST illustrates the wealth...

Question 6

A vertical aggregate supply curve represents full employment in the long run.

Accepted Answer

The vertical aggregate supply curve represents the economy's potential output when all resources are fully employed. In the long run, the economy will reach full employment and operate at its potential output.

Question 7

Which statement partly explains why the aggregate demand curve is negatively sloped?

Accepted Answer

The aggregate demand curve is negatively sloped because, among other reasons, an increase in the general price level can lead to a substitution effect where consumers opt for cheaper alternatives, such as buying cars manufactured abroad when domestic prices rise. This reflects a decrease in the quantity of overall goods and services demanded as prices increase.

Question 8

One reason real output declines when the aggregate price level rises is the reduction in the purchasing power of money.

Accepted Answer

When the aggregate price level rises, each unit of currency can purchase fewer goods and services, reducing the purchasing power of money. As a result, consumers and businesses may reduce their spending, leading to a decline in real output.

Question 9

(Figure: Shifting the AD and SRAS) Assume the economy depicted in the figure is in long-run equilibrium, where the aggregate demand curve is AD₀ and the short-run aggregate supply curve is SRAS_0. If there is a supply shock, such as a drastic increase in the price of oil, this will cause a _____ and a movement to a short-run equilibrium at point _____.

Accepted Answer

A supply shock, such as an increase in oil prices, would cause a leftward shift in the short-run aggregate supply curve (SRAS) from SRASS1U1B10 to SRASS1U1B12, resulting in a movement to a short-run equilibrium at point a, where aggregate demand (AD) intersects the new SRAS curve. The new long-run equilibrium would occur at point A, with a lower level of output and a higher price level compared to the previous long-run equilibrium. Therefore, choice D is the best choice.

Question 10

When the monopoly power of firms increases, short-run aggregate supply shifts to the left.

Accepted Answer

When the monopoly power of firms increases, they have the ability to restrict output and raise prices, causing a decrease in aggregate supply in the short run.

Question 11

A falling aggregate price level _____ demand for a country's exports and therefore _____ output demanded.

Accepted Answer

A falling aggregate price level makes a country's goods cheaper relative to foreign goods, increasing demand for its exports and therefore increasing the output demanded.

Question 12

Which item is NOT a determinant of aggregate demand?

Accepted Answer

Consumption, investment, and government spending are all determinants of aggregate demand. However, government saving, which refers to the excess of government revenue over government spending, does not directly affect aggregate demand.

Question 13

Economic growth is shown as a _____ aggregate supply curve.

Accepted Answer

Economic growth is shown as a rightward shift of the long-run aggregate supply curve (LRAS). This is because economic growth represents an increase in the potential output of an economy, which is captured by an increase in the factors of production such as capital, labor, and technology. As a result, the LRAS curve shifts to the right, indicating that the economy can produce more goods and services at any given price level.

Question 14

When the price of a product falls, causing consumers to purchase more of that product and less of other products, this is known as the _____ effect.

Accepted Answer

This is known as the substitution effect, as consumers are substituting the now cheaper product for other products.

Question 15

(Figure: Determining SRAS Shifts) If there are advancements in technology, the short-run aggregate supply curve will shift from SRAS₀ to _____, and the price level will shift to _____.

Accepted Answer

The answer of (Figure: Determining SRAS Shifts) If there are...

Question 16

A breakthrough in solar energy research that halves the cost of electricity will

Accepted Answer

A breakthrough in solar energy research that halves the cost of electricity will likely increase the supply of solar energy, which will shift the aggregate supply curve to the right. As a result, the economy will have more goods and services at a lower price level, leading to an increase in real output and a decrease in the general price level.

Question 17

The _____ curve is vertical at full employment.

Accepted Answer

The long-run aggregate supply curve is vertical at full employment because in the long run, all resources are fully utilized and the economy operates at its potential output level. Any increase in aggregate demand will only lead to an increase in prices, not output, in the long run.

Question 18

Which of these would shift the short-run aggregate supply curve but not have any impact on the long-run aggregate supply curve?

Accepted Answer

An increase in market concentration across many industries can affect short-run aggregate supply by reducing competition and potentially increasing prices, but it does not affect the long-run aggregate supply, which is determined by factors like resources, technology, and labor force.

Question 19

Suppose when John's income increases from $10,000 to $15,000, his consumption increases from $3,000 to $4,500. What is the value of his marginal propensity to save?

Accepted Answer

The marginal propensity to consume (MPC) is the change in consumption divided by the change in income, which is ($4,500 - $3,000) / ($15,000 - $10,000) = $1,500 / $5,000 = 0.3. The marginal propensity to save (MPS) is 1 - MPC, so MPS = 1 - 0.3 = 0.7.

Question 20

Which statement regarding the short-run aggregate supply curve is TRUE?

Accepted Answer

A reduction in burdensome regulations would decrease the costs businesses face, leading to an increase in short-run aggregate supply and a shift to the right of the curve. Lowering tax rates on businesses (A) would increase their profitability, but it would not necessarily reduce costs, so this would not shift the short-run aggregate supply curve. Similarly, rising costs of capital (B) would increase costs for businesses, leading to a decrease in short-run aggregate supply and a shift to the left of the curve. Positive business expectations (C) might encourage more investment, but they would not directly impact costs, so this would not shift the short-run aggregate supply curve.

Quiz 9: Aggregate Demand and Supply

During cost-push inflation, aggregate output _ and the aggregate price level _.

Suppose the economy is at full employment and companies suddenly increase their level of investment. A short-run increase in output will be followed by a reduction in output, resulting in an overall decrease in output.

An increase in government spending will increase aggregate demand.

Demand-pull inflation occurs when aggregate demand expands so much that equilibrium output exceeds full employment output.

Which of these BEST illustrates the wealth effect?

A vertical aggregate supply curve represents full employment in the long run.

Which statement partly explains why the aggregate demand curve is negatively sloped?

One reason real output declines when the aggregate price level rises is the reduction in the purchasing power of money.

When the monopoly power of firms increases, short-run aggregate supply shifts to the left.

A falling aggregate price level _ demand for a country's exports and therefore _ output demanded.

Which item is NOT a determinant of aggregate demand?

Economic growth is shown as a _____ aggregate supply curve.

When the price of a product falls, causing consumers to purchase more of that product and less of other products, this is known as the _____ effect.

(Figure: Determining SRAS Shifts) If there are advancements in technology, the short-run aggregate supply curve will shift from SRAS₀ to _, and the price level will shift to _.

A breakthrough in solar energy research that halves the cost of electricity will

The _____ curve is vertical at full employment.

Which of these would shift the short-run aggregate supply curve but not have any impact on the long-run aggregate supply curve?

Suppose when John's income increases from $10,000 to $15,000, his consumption increases from $3,000 to $4,500. What is the value of his marginal propensity to save?

Which statement regarding the short-run aggregate supply curve is TRUE?

Quiz 9: Aggregate Demand and Supply

During cost-push inflation, aggregate output _____ and the aggregate price level _____.

Suppose the economy is at full employment and companies suddenly increase their level of investment. A short-run increase in output will be followed by a reduction in output, resulting in an overall decrease in output.

An increase in government spending will increase aggregate demand.

Demand-pull inflation occurs when aggregate demand expands so much that equilibrium output exceeds full employment output.

Which of these BEST illustrates the wealth effect?

A vertical aggregate supply curve represents full employment in the long run.

Which statement partly explains why the aggregate demand curve is negatively sloped?

One reason real output declines when the aggregate price level rises is the reduction in the purchasing power of money.

When the monopoly power of firms increases, short-run aggregate supply shifts to the left.

A falling aggregate price level _____ demand for a country's exports and therefore _____ output demanded.

Which item is NOT a determinant of aggregate demand?

Economic growth is shown as a _____ aggregate supply curve.

When the price of a product falls, causing consumers to purchase more of that product and less of other products, this is known as the _____ effect.

(Figure: Determining SRAS Shifts) If there are advancements in technology, the short-run aggregate supply curve will shift from SRAS0 to _____, and the price level will shift to _____.

A breakthrough in solar energy research that halves the cost of electricity will

The _____ curve is vertical at full employment.

Which of these would shift the short-run aggregate supply curve but not have any impact on the long-run aggregate supply curve?

Suppose when John's income increases from $10,000 to $15,000, his consumption increases from $3,000 to $4,500. What is the value of his marginal propensity to save?

Which statement regarding the short-run aggregate supply curve is TRUE?

During cost-push inflation, aggregate output _ and the aggregate price level _.

A falling aggregate price level _ demand for a country's exports and therefore _ output demanded.

(Figure: Determining SRAS Shifts) If there are advancements in technology, the short-run aggregate supply curve will shift from SRAS₀ to _, and the price level will shift to _.