Question 1

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Accepted Answer

The automatic mechanism that will adjust the economy back to potential GDP is the decrease in aggregate demand due to the rising prices that would result from the excess output. This decrease in aggregate demand will lead to a leftward shift in the short-run aggregate supply curve, ultimately bringing the economy back to potential GDP. Thus, the correct choice is D, as none of the other options will occur due to the automatic adjustment mechanism.

Question 2

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment.Which of the following will happen in the short run?

Accepted Answer

If firms become more pessimistic about future profitability, they will likely reduce investment which leads to a decreased demand for labor. As a result, unemployment will rise in the short run.

Question 3

On average,in the recessions since 1950,it has taken ________ for employment to return to its cyclical peak.

Accepted Answer

On average, since 1950, it has typically taken almost 2.5 years for employment to recover to its peak levels following a recession. This reflects the time it often takes for the economy to rebound and for job growth to fully resume after a downturn.

Question 4

A decrease in aggregate demand results in a(n)________ in the ________.

Accepted Answer

A decrease in aggregate demand will lead to a decrease in output and employment in the short run, resulting in a recession. In the long run, the economy will adjust to the lower level of demand, but in the short run, there will be a decrease in economic activity.

Question 5

When the price of oil rises unexpectedly,the equilibrium price level ________ and the unemployment rate ________ in the short run.

Accepted Answer

When the price of oil rises unexpectedly, the cost of production for many firms rises, resulting in a leftward shift of the short-run aggregate supply curve. As a result, the equilibrium price level rises, but real output falls. This leads to an increase in the unemployment rate in the short run. Therefore, the correct option is B, which suggests that the equilibrium price level rises, and the unemployment rate also rises when the unexpected rise in the price of oil occurs.

Question 6

Short-run macroeconomic equilibrium occurs when

Accepted Answer

Short-run macroeconomic equilibrium occurs when aggregate demand and short-run aggregate supply intersect. This point represents the level of output where the quantity demanded of goods and services in the economy equals the quantity supplied, taking into account the current level of input prices.

Question 7

Declines in spending on residential construction are often due to increases in interest rates.The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.

Accepted Answer

The financial crisis that began in 2007 was the main factor that led to the collapse in residential construction. The crisis led to a tightening of credit, making it difficult for homebuyers to obtain mortgages, and resulted in a significant decline in housing demand. This, in turn, led to a sharp decrease in residential construction activity. While interest rates do affect residential construction spending, they were not the primary cause of the collapse in the housing market during the recession.

Question 8

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

Accepted Answer

In the long run, an increase in aggregate demand typically results in a higher price level while the level of real GDP remains unaffected due to the economy's return to its potential output or full employment level.

Question 9

In the long run

Accepted Answer

In the long run, unemployment is at its natural rate, which is the rate associated with the economy's potential output level. The other options are not necessarily true in the long run - GDP may be above or below potential, LRAS and SRAS may not necessarily lie on the same line, and there may be some level of inflation present.

Question 10

Stagflation usually results from

Accepted Answer

Stagflation occurs when there is a supply shock, such as an increase in the price of oil or a decrease in the availability of important raw materials. This reduces the supply of goods and services, which drives up their prices, and can lead to a slowdown in economic output and employment growth. Stagflation is not caused by a decrease in aggregate demand or an increase in aggregate supply, and it is not typically associated with an increase in aggregate demand.

Question 11

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

Accepted Answer

The automatic mechanism through which the economy adjusts to long-run equilibrium is known as the self-correcting mechanism. It involves the rightward shift of the short-run aggregate supply curve that occurs after a recession, which is caused by adjustments in input prices and wages, leading to a decrease in production costs. This shift, in turn, leads to an increase in output with no change in the price level, returning the economy to its long-run equilibrium.

Question 12

Stagflation occurs when

Accepted Answer

Stagflation occurs when there is a simultaneous increase in inflation and decrease in GDP. This situation is often caused by supply-side shocks such as rising energy prices or increased regulations that reduce the productive capacity of the economy while driving up prices. Option A reflects a combination of a favorable macroeconomic situation with increasing output and controlled inflation, while option B doesn't reflect an economic reality where inflation falls while GDP rises. Option D reflects a negative situation of depressed economic output and falling prices.

Question 13

An increase in investment causes the price level to ________ in the short run and ________ in the long run.

Accepted Answer

An increase in investment increases aggregate demand, which leads to an increase in the price level in the short run. In the long run, the increase in investment leads to an increase in the productive capacity of the economy, which shifts the aggregate supply curve to the right and decreases the price level.

Question 14

There has been a decrease in investment.As a result,real GDP will ________ in the short run,and ________ in the long run.

Accepted Answer

In the short run, a decrease in investment leads to a decrease in real GDP due to reduced spending. In the long run, economies tend to adjust and return to their potential output, meaning real GDP will increase back to its initial level as markets and prices adapt.

Question 15

After an unexpected ________ in the price of oil,the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.

Accepted Answer

An unexpected increase in the price of oil can initially lead to higher inflation and potentially higher unemployment due to cost-push inflation. However, in the long run, the economy adjusts, and both the price level and the unemployment rate tend to return to their original levels, with the unemployment rate decreasing as the economy recovers.

Question 16

Interest rates in the economy have risen.How will this affect aggregate demand and equilibrium in the short run?

Accepted Answer

When interest rates rise, it becomes more expensive to borrow money for investment and consumption purposes. This leads to a decrease in aggregate demand as consumers and businesses reduce their spending. As aggregate demand falls, the equilibrium price level will also fall, as suppliers will need to reduce prices to clear their inventories. Finally, the equilibrium level of GDP will fall, as the decrease in aggregate demand results in lower output and employment levels. Therefore, the correct choice is A.

Question 17

On average,in the recessions since 1950,it has taken ________ for real GDP to return to its cyclical peak.

Accepted Answer

According to historical data, it has taken an average of about 18 months for real GDP to return to its cyclical peak in the recessions since 1950. This is based on analysis of the NBER recession dates and the subsequent recoveries in real GDP growth.

Question 18

The long-run adjustment to a negative supply shock results in

Accepted Answer

In the long run, the short-run aggregate supply curve shifts to the right as the economy adjusts back to its potential output level after a negative supply shock.

Question 19

Long-run macroeconomic equilibrium occurs when the aggregate demand curve ________ the short-run aggregate supply curve,and they ________ the long-run supply curve.

Accepted Answer

Long-run macroeconomic equilibrium occurs when the economy is operating at the potential GDP, which is determined by the factors of production and technology. In the long run, the aggregate demand curve intersects the long-run supply curve at the potential GDP level. In the short run, prices and wages are sticky, so the short-run aggregate supply curve is upward sloping. Therefore, long-run equilibrium occurs when the aggregate demand curve intersects the short-run aggregate supply curve at a point on the long-run supply curve. Choice (B) is the only option that accurately represents this concept.

Question 20

A decrease in aggregate demand causes a decrease in ________ only in the short run,but causes a decrease in ________ in both the short run and the long run.

Accepted Answer

The answer of A decrease in aggregate demand causes a...

Quiz 13: Aggregate Demand and Aggregate Supply Analysis

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment.Which of the following will happen in the short run?

On average,in the recessions since 1950,it has taken ________ for employment to return to its cyclical peak.

A decrease in aggregate demand results in a(n) in the .

When the price of oil rises unexpectedly,the equilibrium price level and the unemployment rate in the short run.

Short-run macroeconomic equilibrium occurs when

Declines in spending on residential construction are often due to increases in interest rates.The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

In the long run

Stagflation usually results from

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

Stagflation occurs when

An increase in investment causes the price level to in the short run and in the long run.

There has been a decrease in investment.As a result,real GDP will in the short run,and in the long run.

After an unexpected in the price of oil,the long-run adjustment decreases the price level and the unemployment rate as they return to their original levels.

Interest rates in the economy have risen.How will this affect aggregate demand and equilibrium in the short run?

On average,in the recessions since 1950,it has taken ________ for real GDP to return to its cyclical peak.

The long-run adjustment to a negative supply shock results in

Long-run macroeconomic equilibrium occurs when the aggregate demand curve the short-run aggregate supply curve,and they the long-run supply curve.

A decrease in aggregate demand causes a decrease in only in the short run,but causes a decrease in in both the short run and the long run.

Quiz 13: Aggregate Demand and Aggregate Supply Analysis

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Suppose the economy is at full employment and firms become more pessimistic about the future profitability of new investment.Which of the following will happen in the short run?

On average,in the recessions since 1950,it has taken ________ for employment to return to its cyclical peak.

A decrease in aggregate demand results in a(n) ________ in the ________.

When the price of oil rises unexpectedly,the equilibrium price level ________ and the unemployment rate ________ in the short run.

Short-run macroeconomic equilibrium occurs when

Declines in spending on residential construction are often due to increases in interest rates.The collapse in residential construction prior to and during the recession of 2007-2009 was due more to ________ than to higher interest rates.

An increase in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

In the long run

Stagflation usually results from

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

Stagflation occurs when

An increase in investment causes the price level to ________ in the short run and ________ in the long run.

There has been a decrease in investment.As a result,real GDP will ________ in the short run,and ________ in the long run.

After an unexpected ________ in the price of oil,the long-run adjustment decreases the price level and ________ the unemployment rate as they return to their original levels.

Interest rates in the economy have risen.How will this affect aggregate demand and equilibrium in the short run?

On average,in the recessions since 1950,it has taken ________ for real GDP to return to its cyclical peak.

The long-run adjustment to a negative supply shock results in

Long-run macroeconomic equilibrium occurs when the aggregate demand curve ________ the short-run aggregate supply curve,and they ________ the long-run supply curve.

A decrease in aggregate demand causes a decrease in ________ only in the short run,but causes a decrease in ________ in both the short run and the long run.

A decrease in aggregate demand results in a(n) in the .

When the price of oil rises unexpectedly,the equilibrium price level and the unemployment rate in the short run.

An increase in investment causes the price level to in the short run and in the long run.

There has been a decrease in investment.As a result,real GDP will in the short run,and in the long run.

After an unexpected in the price of oil,the long-run adjustment decreases the price level and the unemployment rate as they return to their original levels.

Long-run macroeconomic equilibrium occurs when the aggregate demand curve the short-run aggregate supply curve,and they the long-run supply curve.

A decrease in aggregate demand causes a decrease in only in the short run,but causes a decrease in in both the short run and the long run.