Question 1

-Refer to the above figure. Suppose the economy's initial equilibrium is represented by the intersection of LRAS₁and AD₁. Now there is an increase in labor productivity which increases total planned production at any given price level and aggregate demand remains stable. The resulting change in the economy's long-run equilibrium position would be represented by a A) movement from B to D. B) movement from C to D. C) movement from C to B. D) movement from A to B.

Accepted Answer

An increase in labor productivity shifts the Long-Run Aggregate Supply (LRAS) curve to the right, moving the equilibrium from the initial point to a new point where the new LRAS intersects the unchanged Aggregate Demand (AD) curve.

Question 2

Which of the following would unambiguously generate inflation?
A) a decrease in aggregate demand accompanied by an increase in aggregate supply
B) an increase in aggregate demand accompanied by an increase in aggregate supply
C) a decrease in aggregate demand accompanied by a decrease in aggregate supply
D) an increase in aggregate demand accompanied by a decrease in aggregate supply

Accepted Answer

An increase in aggregate demand combined with a decrease in aggregate supply would lead to unambiguously high inflation, as both demand-pull and cost-push factors are at work. As demand rises, prices of goods and services will increase. However, as the supply of goods and services decreases, firms will face higher input costs, which they will pass on to consumers in the form of higher prices. This is known as stagflation. A decrease in aggregate demand (choices A and C) could lead to deflation, while an increase in aggregate demand accompanied by an increase in aggregate supply (choice B) could lead to either inflation or stable prices depending on the magnitude of the shifts.

Question 3

What pattern would you observe in an economy in which aggregate demand is increasing but in which long-run aggregate supply remained the same?
A) secular deflation
B) inflation accompanied by no change in real GDP
C) inflation accompanied by declines in real GDP
D) a decline in consumption spending

Accepted Answer

If aggregate demand is increasing but long-run aggregate supply remains the same, then there will likely be upward pressure on prices without a corresponding increase in real output. This is because there are no new productive resources or technologies that enable greater efficiency or output. Thus, we would observe inflation (an increase in the general price level) without any increase in real GDP.

Question 4

When the economy is in long-run equilibrium, the price level adjusts so as to equate which two values with one another?
A) import and export spending
B) the inflation rate and the unemployment rate
C) government spending and tax revenues
D) total planned real expenditures and total planned production

Accepted Answer

In long-run equilibrium, total planned real expenditures (which includes consumption, investment, government spending, and net exports) are equal to total planned production. This means that the economy is producing at its potential output and there are no unplanned changes in inventory levels. The price level adjusts to ensure that this equilibrium is maintained, as changes in the price level affect both planned expenditures and production.

Question 5

What are three causes of supply-side inflation?

Accepted Answer

The answer of What are three causes of supply-side inflation?...

Question 6

What causes demand-side inflation? What causes supply-side inflation?

Accepted Answer

The answer of What causes demand-side inflation? What causes supply-side...

Question 7

What would likely happen to the long-run aggregate supply curve if the U.S. federal government increases marginal tax rates on wages?
A) The LRAS curve would shift rightward.
B) The LRAS curve would shift leftward.
C) The LRAS curve would remain stable while the AD curve would shift leftward.
D) The LRAS curve would remain stable while the AD curve would shift rightward.

Accepted Answer

If the federal government increases marginal tax rates on wages, this would reduce incentives for individuals to work and invest, which would lead to a decrease in productivity and a decrease in potential output in the long run. This would cause the LRAS curve to shift leftward, reflecting the decrease in the economy's productive capacity.

Question 8

Steadily improving improvements in technology, other things being equal, will result in
A) no change in the price level and steadily increasing output.
B) persistent deflation
C) steadily rising price level (inflation) and steadily increasing output.
D) a steadily falling price level with no change in output.

Accepted Answer

The answer of Steadily improving improvements in technology, other things...

Question 9

If long-run economic growth is not accompanied by a change in aggregate demand, the result will be
A) persistent inflation.
B) secular deflation.
C) devaluation of the dollar.
D) appreciation of the dollar.

Accepted Answer

Long-run economic growth refers to an increase in the production capacity of an economy over time. If this growth is not accompanied by a change in aggregate demand, there will be a surplus supply of goods and services in the market, leading to a decrease in prices, also known as deflation. If the deflation persists over a longer period, it is called secular deflation.

Question 10

When the aggregate demand curve shifts ________ than the long-run aggregate supply shifts rightward, the result will be inflation.
A) rightward at a slower rate
B) leftward at a slower rate
C) rightward at a faster rate
D) leftward at the same rate

Accepted Answer

When the aggregate demand curve shifts rightward at a faster rate than the long-run aggregate supply shifts rightward, the result will be inflation. This is because the faster increase in demand outpaces the increase in supply, leading to upward pressure on prices.

Quiz 10: Real GDP and the Price Level in the Long Run

Which of the following would unambiguously generate inflation?

What pattern would you observe in an economy in which aggregate demand is increasing but in which long-run aggregate supply remained the same?

When the economy is in long-run equilibrium, the price level adjusts so as to equate which two values with one another?

What are three causes of supply-side inflation?

What causes demand-side inflation? What causes supply-side inflation?

What would likely happen to the long-run aggregate supply curve if the U.S. federal government increases marginal tax rates on wages?

Steadily improving improvements in technology, other things being equal, will result in

If long-run economic growth is not accompanied by a change in aggregate demand, the result will be

When the aggregate demand curve shifts ________ than the long-run aggregate supply shifts rightward, the result will be inflation.