Question 1

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 increases demand for goods and services, which can lead to a temporary output gap and inflationary pressure. As firms try to meet the higher demand, they may increase their prices and wages, leading to higher expectations for future price levels. This, in turn, reduces the incentive for firms to produce and supply goods and services in the short run, causing the short-run aggregate supply curve to shift leftward.

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 would lead to an increase in aggregate demand and would help to bring unemployment back towards its natural rate. However, in the short run, this increase in demand would also lead to further price increases, aggravating the initial inflationary shock caused by the decrease in short-run aggregate supply.

Question 3

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation results from a combination of stagnant economic growth (low aggregate supply) and high inflation. It does not necessarily result from decreases in aggregate demand alone.

Question 4

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 mainly caused by factors that shifted aggregate demand left, such as a decrease in consumer spending, investment, and international trade. This led to a decrease in production, which further lowered aggregate demand and exacerbated the economic downturn.

Question 5

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 was one of the worst recessions in the history of the United States, comparable only to the Great Depression of the 1930s. It caused widespread job losses, significant declines in housing prices, and a sharp contraction in economic activity. Its effects were felt globally, with many countries experiencing their own economic downturns in its aftermath.

Question 6

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

Accepted Answer

When people are optimistic about the future, they tend to spend more money and invest more, which leads to an increase in demand for goods and services. This, in turn, leads to rising prices and falling unemployment as businesses hire more workers to meet the increased demand. However, this effect is only in the short run and may not be sustainable in the long run.

Question 7

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

Accepted Answer

Policymakers have the ability to use various tools such as monetary policy and fiscal policy to influence aggregate demand in order to stabilize the economy and lessen the impact of economic fluctuations such as recessions and booms.

Question 8

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

Accepted Answer

While the aggregate demand and aggregate supply model may have some implications for the classical dichotomy, its primary purpose is to illustrate the determination of output and prices in the short run. The classical dichotomy refers to the idea that changes in nominal variables, such as the money supply or price level, do not affect real variables like output and employment in the long run.

Question 9

Increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Accepted Answer

When firms are uncertain and pessimistic about the future of the economy, they tend to decrease their investment spending. This reduction in investment spending leads to a shift in the aggregate-demand curve to the left, as there is less demand for goods and services in the economy.

Question 10

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

If the decrease in output is caused by a decrease in aggregate demand, then the economy may reach a lower level of output and prices compared to its original level. However, if the decrease in output is caused by a decrease in short-run aggregate supply, then the economy would experience higher prices and lower output, which can be referred to as stagflation. Therefore, the statement is false.

Question 11

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

Accepted Answer

This is a central tenet of Keynesian economics. Keynes believed that during a recession, there is a shortfall in aggregate demand, leading to unemployment. To combat this, he advocated for government intervention in the economy through increased spending and/or tax reductions to stimulate demand and create jobs.

Question 12

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

If aggregate demand shifts right, it indicates that there is an increase in demand for goods and services at the current price level. This, in turn, leads to an increase in production and employment, resulting in higher income levels and further increasing demand. As a result, there is an upward pressure on the price level, leading to an increase in actual inflation. This increase in the price level does not cause the aggregate demand curve to shift to the left, but rather leads to movement along the aggregate demand curve to a higher price level. Hence, the statement is false.

Question 13

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

Accepted Answer

This is a true statement. During World War II, government expenditures increased from $9 billion in 1940 to $98 billion in 1945, and output increased by almost 50%. The war effort led to increased production and employment, which helped to bring the United States out of the Great Depression.

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

An increase in the actual price level does not shift the short-run aggregate supply curve, but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Accepted Answer

An increase in the actual price level affects the quantity of goods and services supplied in the short run but does not shift the short-run aggregate supply (SRAS) curve itself. However, if producers expect higher prices in the future, they might adjust their production plans, which can shift the SRAS curve to the left as they anticipate higher costs or demand higher prices for their products.

Question 16

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 17

An increase in the expected price level shifts the short-run aggregate supply curve to the right.

Accepted Answer

An increase in the expected price level shifts the short-run aggregate supply curve to the left, as firms will produce less at any given price level.

Question 18

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

Accepted Answer

The fall in housing prices reduced consumer wealth and confidence, causing a decrease in spending and ultimately shifting the aggregate demand curve to the left.

Question 19

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

Accepted Answer

The increased government expenditures were largely due to the country's entry into World War II and the subsequent increase in military spending. This increased demand led to an increase in output and prices as businesses and industries ramped up production to meet the needs of the government.

Question 20

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP can be caused by changes in both aggregate demand and aggregate supply, for example, a decrease in aggregate supply due to a natural disaster could cause a decrease in GDP, while an increase in aggregate demand due to increased consumer confidence could cause an increase in GDP.

Quiz 20: Aggregate Demand and Aggregate Supply