Question 1

If the short-run aggregate supply increases by less than the long-run aggregate supply,then,at the short-run equilibrium

Accepted Answer

If the short-run aggregate supply increases by less than the long-run aggregate supply, there will be a temporary increase in real GDP but it will still be below potential GDP. This is because the increase in aggregate supply is not enough to fully meet the increase in aggregate demand. Therefore, the economy will operate at a point below full employment equilibrium and there will still be some level of unemployment or underutilization of resources.

Question 2

Figure 13-3 
-Refer to Figure 13-3.Suppose the economy is at point A.If the economy experiences a negative supply shock,where will the eventual short-run equilibrium be?

Accepted Answer

A negative supply shock will shift the aggregate supply curve to the left, causing the short-run equilibrium to move from point A to point B.

Question 3

Figure 13-3 
-Refer to Figure 13-3.Suppose the economy is at point A.If investment spending increases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

When investment spending increases in an economy, it leads to an increase in aggregate demand. Starting from point A, this increase in aggregate demand would initially move the economy towards a higher level of output and price, following the short-run aggregate supply curve. However, in the long run, as prices adjust, the economy would move to a new equilibrium point where the long-run aggregate supply curve intersects the new aggregate demand curve. This point is represented by C, indicating a higher price level and the same level of output as the full employment output does not change in the long run due to an increase in investment spending.

Question 4

Figure 13-3 
-Refer to Figure 13-3.Suppose the economy is at point C.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

A decrease in government spending would lead to a decrease in aggregate demand. This would shift the aggregate demand curve to the left, moving the economy from point C to a new equilibrium point at a lower price level and output, which corresponds to point A in a typical aggregate demand and supply model.

Question 5

A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

Accepted Answer

In the long run, a decrease in aggregate demand will lead to a lower price level, but the level of GDP will return to its potential output or full employment level, as wages and prices adjust.

Question 6

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Accepted Answer

An automatic mechanism refers to the natural process by which an economy adjusts from a recession back to potential GDP in the long run without any government intervention. This can occur as wages and prices adjust to balance supply and demand and as resources are reallocated to more productive uses. Monetary policy and fiscal policy involve deliberate government intervention to stabilize the economy, while "releasing sticky prices" is not a recognized term or concept.

Question 7

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y₁ represents potential GDP.

Accepted Answer

In the short run, the economy may experience equilibrium at point B or point D. However, in the long run, the economy will adjust to the potential GDP level and only the equilibrium point A will be sustainable. Therefore, points B and D are possible short-run equilibria but not long-run equilibria.

Question 8

Figure 13-3 
-Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria?

Accepted Answer

All the points (A, B, C, and D) are possible short-run equilibria because in the short run, equilibrium occurs where the aggregate demand curve intersects the short-run aggregate supply curve, regardless of whether this point is at, above, or below potential output.

Question 9

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Accepted Answer

During a recession, the automatic mechanism lowers the price level since there is a decrease in demand for goods and services. During an expansion, the automatic mechanism raises the price level since there is an increase in demand for goods and services.

Question 10

Which of the following is considered a negative supply shock?

Accepted Answer

A negative supply shock is an unexpected event that decreases the availability of goods or services or increases their costs. An unexpected decrease in refining capacity for oil would cause a decrease in the supply of oil, which could lead to higher prices and reduced output in industries that rely on oil. This would be a negative supply shock. The other options do not fit the definition of a negative supply shock.

Question 11

A negative supply shock in the short run causes

Accepted Answer

A negative supply shock, such as an increase in the price of oil or a natural disaster disrupting production, will lead to a decrease in the supply of goods and services. This will cause the aggregate supply curve to shift to the left, indicating a decrease in the quantity of output. It is unlikely that the price level will fall since the decrease in supply will cause an increase in the price level. Unemployment is also unlikely to fall since the decrease in supply will lead to a decrease in employment opportunities. Equilibrium real GDP is not likely to rise since the decrease in supply will cause a decrease in the quantity of output.

Question 12

________ of unemployment during ________ make it easier for workers to ________ wages.

Accepted Answer

Low levels of unemployment during an economic expansion create a favorable environment for workers to negotiate higher wages due to increased demand for labor.

Question 13

Where the aggregate demand curve and the short-run aggregate supply curve intersect

Accepted Answer

The intersection of the aggregate demand curve and the short-run aggregate supply curve represents the point of short-run macroeconomic equilibrium, where the output level and price level are determined in the short run. The other options are not necessarily true or relevant to this intersection point.

Question 14

Figure 13-3 
-Refer to Figure 13-3.Suppose the economy is at point C.If investment spending decreases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

If investment spending decreases in the economy, aggregate demand will decrease. This will shift the aggregate demand curve to the left, leading to a new equilibrium at a lower price level and output, which corresponds to point A in a typical aggregate demand and supply model.

Question 15

Figure 13-3 
-Refer to Figure 13-3.Suppose the economy is at point A.If government spending increases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

If government spending increases, the aggregate demand curve shifts to the right. In the short run, equilibrium moves to point B with a higher price level and output. However, as the higher price level leads to an increase in input prices, the SRAS curve shifts up, and the economy moves along the AD curve to point C, where the economy operates at its long-run equilibrium with full employment output and the original price level. Therefore, the eventual long-run equilibrium will be at point C.

Question 16

Suppose the economy is at a short-run equilibrium GDP that lies below 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 adjusts the economy back to potential GDP is the self-correcting mechanism of the economy. This mechanism is driven by the adjustments in prices and wages in response to changes in demand and supply. When the economy is at a short-run equilibrium GDP that lies below potential GDP, there is excess capacity in the economy, which puts downward pressure on prices and wages. This, in turn, leads to a decrease in production costs for firms, which increases their profitability and encourages them to increase production. As a result, short-run aggregate supply (SRAS) will shift to the right, which will increase output and decrease the unemployment rate. Therefore, the best choice is D, as none of the other options accurately represents the automatic mechanism of the self-correcting mechanism of the economy.

Question 17

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

Accepted Answer

When interest rates fall, it becomes cheaper to borrow money. As a result, spending by consumers and businesses increases, leading to higher aggregate demand. This increase in aggregate demand will lead to a rise in both the equilibrium price level and the equilibrium level of GDP in the short run. Therefore, option A is correct.

Question 18

Figure 13-3 
-Refer to Figure 13-3.Which of the points in the above graph are possible long-run equilibria?

Accepted Answer

In the long-run equilibrium of a perfectly competitive market, firms operate where the average total cost (ATC) is at its minimum and where the price equals the marginal cost (MC) and the average total cost. Point C represents this situation, where the demand curve (which is also the price line) touches the ATC at its lowest point. Point A is not a long-run equilibrium because, although the price equals MC, it is not at the minimum of the ATC, indicating the firm could lower its costs further. Points B and D are not at the minimum of the ATC curve either, making A and C the correct choices for possible long-run equilibria.

Question 19

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

Accepted Answer

When firms become more optimistic about future profitability, they are likely to invest more, increasing aggregate demand. This can lead to higher output and employment in the short run, reducing unemployment.

Question 20

Why does the short-run aggregate supply curve shift to the right in the long run,following a decrease in aggregate demand?

Accepted Answer

In the short run, a decrease in aggregate demand leads to lower prices and output. However, over time, workers and firms adjust their expectations of wages and prices downward, which allows for lower wages and prices to be accepted in the long run. This leads to a decrease in production costs and an increase in short-run aggregate supply, shifting the curve to the right.

Quiz 13: Aggregate Demand and Aggregate Supply Analysis

If the short-run aggregate supply increases by less than the long-run aggregate supply,then,at the short-run equilibrium

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point A.If the economy experiences a negative supply shock,where will the eventual short-run equilibrium be?

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point A.If investment spending increases in the economy,where will the eventual long-run equilibrium be?

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point C.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y₁ represents potential GDP.

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria?

The automatic mechanism the price level in the case of and the price level in the case of .

Which of the following is considered a negative supply shock?

A negative supply shock in the short run causes

of unemployment during make it easier for workers to wages.

Where the aggregate demand curve and the short-run aggregate supply curve intersect

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point C.If investment spending decreases in the economy,where will the eventual long-run equilibrium be?

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point A.If government spending increases in the economy,where will the eventual long-run equilibrium be?

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

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

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible long-run equilibria?

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

Why does the short-run aggregate supply curve shift to the right in the long run,following a decrease in aggregate demand?

Quiz 13: Aggregate Demand and Aggregate Supply Analysis

If the short-run aggregate supply increases by less than the long-run aggregate supply,then,at the short-run equilibrium

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point A.If the economy experiences a negative supply shock,where will the eventual short-run equilibrium be?

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point A.If investment spending increases in the economy,where will the eventual long-run equilibrium be?

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point C.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium in the long run?

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y1 represents potential GDP.

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria?

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Which of the following is considered a negative supply shock?

A negative supply shock in the short run causes

________ of unemployment during ________ make it easier for workers to ________ wages.

Where the aggregate demand curve and the short-run aggregate supply curve intersect

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point C.If investment spending decreases in the economy,where will the eventual long-run equilibrium be?

Figure 13-3 -Refer to Figure 13-3.Suppose the economy is at point A.If government spending increases in the economy,where will the eventual long-run equilibrium be?

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

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

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible long-run equilibria?

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

Why does the short-run aggregate supply curve shift to the right in the long run,following a decrease in aggregate demand?

Figure 13-3 -Refer to Figure 13-3.Which of the points in the above graph are possible short-run equilibria but not long-run equilibria? Assume that Y₁ represents potential GDP.

The automatic mechanism the price level in the case of and the price level in the case of .

of unemployment during make it easier for workers to wages.