Question 1

Which one of the following would constitute a positive supply shock?

Accepted Answer

A positive supply shock, such as a decrease in the price of oil, can lower production costs for many industries, thereby increasing the overall supply of goods and services in the economy.

Question 2

The short-run aggregate supply curve is upward sloping because the nominal wages are sticky. What is the difference between real and nominal wages? Why does stickiness in nominal wages lead to the upward-sloping short-run aggregate supply curve? Would the short-run aggregate supply curve be upward sloping when the real wage is sticky?

Accepted Answer

The answer of The short-run aggregate supply curve is upward...

Question 3

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the federal income tax will lead to:

Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is operating below full capacity, and prices are sticky. An increase in federal income tax reduces disposable income, leading to a decrease in aggregate demand, which results in a decrease in equilibrium output without affecting the price level significantly.

Question 4

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the money supply will lead to:

Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is at a level of output below full employment, where the aggregate supply is perfectly elastic. Therefore, an increase in the money supply would primarily increase aggregate demand, leading to an increase in equilibrium output without affecting the equilibrium price.

Question 5

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the government's discretionary spending will lead to:

Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is at a level of output below full employment, where the aggregate supply is perfectly elastic. Therefore, an increase in government spending will increase aggregate demand, leading to an increase in equilibrium output without affecting the equilibrium price.

Question 6

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then a decrease in the income tax rate will lead to:

Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is at a level of output below full employment, where the aggregate supply is perfectly elastic. A decrease in the income tax rate increases disposable income, leading to an increase in consumption and aggregate demand. This results in an increase in the equilibrium output without affecting the equilibrium price.

Question 7

When all else is equal, if an increase in government spending leads to an increase in equilibrium output and no change in equilibrium price, then we can conclude that the economy must be operating on the:

Accepted Answer

This scenario describes the Keynesian range of the short-run aggregate supply curve, where increases in demand (such as from increased government spending) lead to increases in output without changing the price level, indicating excess capacity or underemployment in the economy.

Question 8

When all else is equal, if an increase in federal income tax leads to a decrease in equilibrium output and no change in the equilibrium price, then we can conclude that the economy must be operating on the:

Accepted Answer

The Keynesian range of the short-run aggregate supply curve is characterized by a horizontal segment, indicating that output can change without affecting the price level. This is consistent with the scenario where an increase in federal income tax decreases equilibrium output without changing the equilibrium price.

Question 9

If an economy is operating on the Keynesian range of the short-run aggregate supply curve, which of the following will lead to a decrease in the equilibrium output?

Accepted Answer

In the Keynesian range of the short-run aggregate supply curve, the economy is below full employment, and output can be increased without causing inflation. An increase in federal income tax reduces consumers' disposable income, leading to a decrease in consumption and thus a decrease in aggregate demand. This results in a decrease in equilibrium output. Choices A, B, and D would typically increase aggregate demand, leading to an increase in equilibrium output.

Question 10

When an economy is operating on the classical range on the short-run aggregate supply curve, a decrease in _____ will NOT lead to a decrease in equilibrium price.

Accepted Answer

In the classical range of the short-run aggregate supply curve, the economy is at full employment, and output is not affected by changes in aggregate demand. A decrease in income taxes would increase disposable income, potentially increasing aggregate demand, which would not lead to a decrease in equilibrium price.

Question 11

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve, then an increase in input prices will lead to _____ in output and _____ in the price level.

Accepted Answer

An increase in input prices will lead to a decrease in output as firms reduce production due to higher costs, and an increase in the price level as firms pass on the higher costs to consumers, leading to inflation.

Question 12

If the short-run macroeconomic equilibrium occurs in the classical range of the short-run aggregate supply curve, then an increase in money supply will _____ output and will _____ the price level.

Accepted Answer

In the classical range of the short-run aggregate supply curve, the economy is at or near full employment, and output cannot increase significantly. Therefore, an increase in the money supply primarily affects the price level, leading to inflation without changing output.

Question 13

If the short-run macroeconomic equilibrium occurs in the classical range of the short-run aggregate supply curve, then a decrease in income tax will _____ output and will _____ the price level.

Accepted Answer

The answer of If the short-run macroeconomic equilibrium occurs in...

Question 14

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve, then an increase in government spending will lead to:

Accepted Answer

In the upward-sloping range of the short-run aggregate supply curve, an increase in government spending will increase aggregate demand, leading to higher output as the economy moves along the supply curve to a higher equilibrium point.

Question 15

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve and the Federal Reserve increases the money supply, then which of the following will be true in the long run?

Accepted Answer

In the long run, an increase in the money supply leads to inflationary pressures, causing nominal wages to adjust upwards as workers demand higher wages to keep up with the increased cost of living. Output tends to return to its natural level, not remaining permanently higher due to the money supply increase.

Question 16

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve and government increases personal income tax, then which of the following will be true in the long run?

Accepted Answer

In the long run, the economy will move along the long-run aggregate supply curve, which is vertical. This means that output will not change, but the price level will increase. The nominal wage of workers will also increase, as workers demand higher wages to compensate for the higher cost of living.

Question 17

Suppose that a short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. From this point, the government cuts the personal income tax rate. Compared to what it was in the short run, the nominal wage in the long run will be ____, and the price level will be:

Accepted Answer

In the long run, a cut in the personal income tax rate increases aggregate demand, leading to higher prices and higher nominal wages as the economy adjusts to a new equilibrium at a higher price level and workers demand higher wages to compensate for the increased cost of living.

Question 18

The long-run aggregate supply curve is vertical because, in the long run:

Accepted Answer

In the long run, the economy is at full employment, and output is determined by factors like technology and resources, not by the price level. The real wage adjusts to ensure that labor supply equals labor demand, making the long-run aggregate supply curve vertical.

Question 19

Suppose that the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. If government spending increases, then in the short run, the _____ will fall. However, in the long run, the _____ wage will rise.

Accepted Answer

In the short run, an increase in government spending shifts the aggregate demand curve to the right, leading to higher output and prices. This can reduce the real wage (wage adjusted for inflation) as prices rise faster than nominal wages. In the long run, as the economy adjusts, nominal wages will rise in response to the higher price levels, restoring the real wage to its original level.

Question 20

Suppose that the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. If the government increases the federal income tax, then in the short run, _____ will fall. However, in the long run, the _____ will return to the level that it was prior to the imposition of the tax.

Accepted Answer

In the short run, an increase in federal income tax reduces disposable income, leading to a decrease in consumption and aggregate demand. This results in a lower price level and output. In the long run, the economy adjusts, and output returns to its potential level, but the question does not specify what happens to the price level or wages in the long run, making A the best answer given the information provided.

Quiz 14: Aggregate Demand and Aggregate Supply