Question 1

Stagflation is the result of a leftward shift in the economy's aggregate supply curve.

Accepted Answer

Stagflation occurs when there is a decrease in the aggregate supply (leftward shift in the aggregate supply curve) in the economy, leading to higher prices (inflation) and lower output (stagnation), which can be caused by factors such as increased production costs or reduced productivity.

Question 2

An increase in aggregate demand will increase the economy's price level, but not the level of real output, if the aggregate supply curve is vertical.

Accepted Answer

When the aggregate supply curve is vertical, it indicates that the economy is at full capacity (full employment level), and any increase in aggregate demand will only lead to higher prices (inflation) without affecting the level of real output.

Question 3

In the aggregate supply-aggregate demand model, an increase in the economy's price level reduces the size of the multiplier.

Accepted Answer

In the aggregate supply-aggregate demand model, an increase in the price level can reduce the real value of money, leading to higher interest rates and lower investment and consumption, which in turn reduces the size of the multiplier effect on aggregate demand.

Question 4

To combat demand-pull inflation, government might reduce taxes for households in order to encourage additional consumption spending.

Accepted Answer

To combat demand-pull inflation, the government would typically reduce consumption by increasing taxes or cutting spending, not by reducing taxes, as reducing taxes would increase disposable income and potentially exacerbate inflation by boosting demand further.

Question 5

According to John Maynard Keynes, the market economy automatically adjusts to ensure the full employment of its resources.

Accepted Answer

John Maynard Keynes argued that the market economy does not automatically adjust to ensure full employment of its resources, and instead often requires government intervention to address unemployment and stabilize the economy.

Question 6

Say's Law indicates that when something is produced, this process will create the income necessary to purchase that production.

Accepted Answer

Say's Law, often summarized as "supply creates its own demand," posits that the act of producing goods or services generates the necessary income for consumers to purchase those goods or services, assuming a competitive market without intervention.

Question 7

According to John Maynard Keynes, prices and wages are rather inflexible in a downward direction because powerful labor unions and corporations will resist wage and price reductions during an economic slump.

Accepted Answer

John Maynard Keynes argued that prices and wages are inflexible downwards due to resistance from labor unions and corporations, which would rather cut production or employment than reduce wages or prices during economic downturns. This concept is part of his broader theory on why economies can remain in a state of underemployment equilibrium.

Question 8

To avoid a depression, John Maynard Keynes recommended that the government decrease spending and make less money available for loans.

Accepted Answer

John Maynard Keynes recommended that to avoid a depression, the government should increase spending and make more money available for loans to stimulate economic activity.

Question 9

According to the interest-rate effect, a higher price level decreases interest rates, which, in turn, causes investment spending on equipment and factories to decrease.

Accepted Answer

According to the interest-rate effect, a higher price level increases interest rates, which, in turn, causes investment spending on equipment and factories to decrease.

Question 10

Suppose that a recession in Canada slows growth there, thus decreasing the demand for U.S. computers and automobiles. Therefore, the aggregate demand curve will shift leftward for the United States.

Accepted Answer

A recession in Canada would lead to a decrease in Canadian demand for U.S. exports such as computers and automobiles. This decrease in demand for exports would reduce the overall demand for U.S. goods and services, leading to a leftward shift in the U.S. aggregate demand curve.

Question 11

According to the multiplier effect, changes in aggregate supply are magnified into larger changes in output and income.

Accepted Answer

The multiplier effect primarily refers to how changes in autonomous spending (like investment, government spending, or exports) lead to magnified changes in aggregate demand, output, and income, rather than changes in aggregate supply.

Question 12

The MPS and MPC always add up to 1 because all consumer income that is not spent on goods and services must be saved.

Accepted Answer

MPS (Marginal Propensity to Save) and MPC (Marginal Propensity to Consume) always add up to 1 because they represent the two possible uses of income: either it is spent (consumed) or saved, with no other options available.

Question 13

The formula for the multiplier is 1 / MPC or 1 / (1 - MPS).

Accepted Answer

The correct formula for the multiplier is 1 / (1 - MPC) or 1 / MPS, where MPC is the marginal propensity to consume and MPS is the marginal propensity to save.

Question 14

For the full multiplier effect to occur, the economy must be in the vertical region of its aggregate supply curve.

Accepted Answer

The full multiplier effect occurs when the economy is in the horizontal region of its aggregate supply curve, indicating that there are idle resources and output can increase without leading to inflation.

Question 15

An increase in the economy's price level will reduce the size of the spending multiplier.

Accepted Answer

An increase in the price level will reduce the real value of spending, which will in turn reduce the size of the spending multiplier.

Question 16

In the upward-sloping region of the aggregate supply curve, higher price levels provide an incentive for firms to produce additional real output.

Accepted Answer

In the upward-sloping region of the aggregate supply curve, as price levels increase, firms are incentivized to increase production because the higher prices can lead to higher profits, assuming costs do not increase at the same rate.

Question 17

The aggregate supply curve would shift leftward if there is a decrease in resource prices, an increase in the availability of resources, or an increase in labor productivity.

Accepted Answer

The aggregate supply curve would shift rightward, not leftward, with a decrease in resource prices, an increase in the availability of resources, or an increase in labor productivity, as these factors lower production costs and increase the total output an economy can produce at every price level.

Question 18

Demand-pull inflation would take place if the level of total spending rises in the economy and the aggregate supply curve is horizontal.

Accepted Answer

Demand-pull inflation occurs when aggregate demand in an economy outpaces aggregate supply, leading to higher prices. It doesn't require the aggregate supply curve to be horizontal; it can happen under various supply curve slopes, but typically with some degree of upward slope, indicating that as demand increases, prices rise.

Question 19

To combat demand-pull inflation, policy makers could reduce the growth rate of the money supply or government spending.

Accepted Answer

Reducing the growth rate of the money supply or government spending can help combat demand-pull inflation by decreasing the overall demand in the economy, which in turn can help stabilize prices.

Question 20

Aggregate demand policies are especially suited for combating stagflation.

Accepted Answer

Stagflation, characterized by high inflation and high unemployment, is difficult to address with aggregate demand policies alone because stimulating demand to reduce unemployment can further increase inflation, while contractionary policies to reduce inflation can increase unemployment.

Quiz 12: Macroeconomic Instability: Aggregate Demand and Aggregate Supply