Question 1

In the 1970s, the world price of oil was driven upward due to an increase in demand.

Accepted Answer

The 1970s oil price increase was primarily due to oil embargoes and production cuts by OPEC, not an increase in demand.

Question 2

One of the goals of macroeconomic policy is to achieve economic growth without inflation.

Accepted Answer

Achieving economic growth without inflation is one of the primary goals of macroeconomic policy. Inflation can have negative effects on the economy, including decreasing purchasing power and increasing uncertainty. Therefore, policymakers often strive to implement policies that balance economic growth with price stability to avoid inflation.

Question 3

A change in both the domestic price level and the foreign price level will translate into a parallel shift of the domestic aggregate demand curve.

Accepted Answer

A change in the domestic price level will cause a movement along the aggregate demand curve, while a change in the foreign price level will affect net exports and cause a shift of the aggregate demand curve. Therefore, a change in both price levels will result in a shift, not a parallel movement.

Question 4

The substitution effect, based on relative commodity price changes, represents one reason for the downward slope of the aggregate demand curve.

Accepted Answer

The substitution effect explains the downward slope of the demand curve for individual goods based on relative price changes, not the aggregate demand curve, which is influenced by factors like income levels, expectations, and changes in the prices of all goods and services.

Question 5

In the long run, increased government spending is ineffective in raising equilibrium real GDP.

Accepted Answer

This is based on the concept of crowding out, where government spending can cause an increase in interest rates, leading to a decrease in private investment and offsetting the initial increase in aggregate demand. Additionally, if the government financing the spending through borrowing, it could lead to future tax increases, which can also decrease private consumption and investment. These factors can limit the overall effectiveness of government spending in raising equilibrium real GDP in the long run.

Question 6

Suppose an increase in investment spending results in an increase in equilibrium real GDP and a rise in the equilibrium price level. This implies that the aggregate supply curve must be vertical.

Accepted Answer

If an increase in investment spending leads to an increase in both equilibrium real GDP and the equilibrium price level, it suggests that the aggregate supply curve is upward sloping, not vertical. Vertical aggregate supply curve implies that changes in aggregate demand do not affect the equilibrium price level, which is not the case here.

Question 7

The aggregate quantity of goods and services produced increases at every price level when overall productivity in the economy improves.

Accepted Answer

This statement is true. When overall productivity in the economy improves, it means that firms are producing more output with the same amount of inputs, which increases the aggregate quantity of goods and services produced. This increase in output occurs at every price level because the increase in productivity affects all sectors of the economy.

Question 8

In the mid-2000s, the world price of oil has been driven upward primarily due to an increase in demand.

Accepted Answer

Demand for oil increased significantly in growing economies such as China and India, leading to a surge in oil prices in the mid-2000s. Other factors such as supply disruptions and geopolitical tensions also contributed to the price hike, but the primary driver was the increase in demand.

Question 9

The short-run aggregate supply curve shows that increases in production are accompanied by higher prices.

Accepted Answer

The short-run aggregate supply curve is upward sloping, indicating that as production increases, so do prices. This is due to the fact that in the short run, many input prices are fixed, leading to higher costs of production as output increases. As a result, firms must increase prices to maintain profitability.

Question 10

Assume that a large number of workers no longer depend on fixed labor contracts but instead tie their wages to cost of living adjustments. Other things equal, this implies that the slope of the long-run aggregate supply curve is relatively steep.

Accepted Answer

If workers tie their wages to cost of living adjustments, any increase in prices will be immediately reflected in their wages. This will lead to an increase in the cost of production for firms and a decrease in the profitability of firms, leading to a relatively steep long-run aggregate supply curve.

Question 11

Technological advance shifts the aggregate supply curve outward and increases output.

Accepted Answer

Technological advance allows for more efficient production and increases productivity, leading to an increase in output and a shift of the aggregate supply curve to the right/outward.

Question 12

The long-run aggregate supply curve corresponds to an economy that operates at its maximum potential GDP level.

Accepted Answer

The long-run aggregate supply curve represents the level of potential output that can be produced when all factors of production are fully employed, including capital, labor, and technology. This level of output corresponds to the economy's maximum potential GDP level.

Question 13

In deriving the short-run aggregate supply curve, we assume that wages, rent, business profits, and interest are fixed.

Accepted Answer

In the short-run aggregate supply curve, we don't assume that wages, rent, business profits, and interest are fixed. Instead, we assume that they adjust slowly to changes in the overall level of prices in the economy.

Question 14

The aggregate supply curve relates real national output produced to the general price level.

Accepted Answer

The statement is true. The aggregate supply curve shows the relationship between the price level and the quantity of real GDP that firms are willing and able to supply, holding constant other factors such as technology and input prices.

Question 15

The main reason the short-run aggregate supply curve is upward sloping is that input costs decline as more goods and services are produced.

Accepted Answer

The main reason the short-run aggregate supply curve is upward-sloping is due to the sticky wages and prices. As output increases, firms need to hire more workers, causing a shortage of labor, which leads to higher wages. Similarly, an increase in output leads to higher demand for inputs, causing an increase in input prices, which reduces the profitability of firms, and they reduce output. Therefore, the SRAS curve is upward sloping because of these temporary sticky prices and wages.

Question 16

The slope of the aggregate supply curve becomes steeper the faster the costs of production adjust and the smaller the amount of excess capacity in the economy.

Accepted Answer

When costs of production adjust quickly and there is little excess capacity, firms may experience difficulty increasing output beyond their current capacity, causing the aggregate supply curve to become steeper. This is because as firms reach full capacity, they are unable to produce more and must increase costs in order to expand production, causing the curve to become steeper. Conversely, if production costs adjust slowly, firms may be able to increase output without having to raise prices, leading to a less steep aggregate supply curve.

Question 17

Changes in technology have dramatically increased productivity, shifting many countries' aggregate supply curves to the right.

Accepted Answer

Advances in technology, such as automation and digitalization, have increased efficiency and reduced costs in many industries. This has led to an increase in aggregate supply, as businesses are able to produce more output with the same amount of resources. As a result, many countries' aggregate supply curves have shifted to the right, reflecting the increased productivity and output potential of their economies.

Quiz 12: Macroeconomic Equilibrium: Aggregate Demand and Supply