Question 1

Some European countries such as Ireland have difficulty closing recessionary gaps with expansionary macroeconomic policies because

Accepted Answer

Countries like Ireland have limited fiscal flexibility due to their large budget deficits. This means that they are forced to pursue contractionary fiscal policies, which are not effective in closing recessionary gaps. Additionally, the European Central Bank sets fiscal policy for Eurozone countries, which further reduces the ability of individual countries to pursue expansionary policies.

Question 2

The AD-AS model in the diagram above shows that at the initial short-run equilibrium point A,the economy is experiencing ___________ gap.Other factors remaining the same,the self-correcting mechanism of the economy will result in ___________ prices and ___________ output until the economy eventually moves the point at B,thus eliminating the output gap.

Accepted Answer

The economy is experiencing an expansionary gap at point A, meaning output is above potential. The self-correcting mechanism will lead to rising prices and falling output as the economy moves to point B, closing the gap.

Question 3

Some European countries such as Ireland have difficulty closing recessionary gaps with expansionary macroeconomic policies because

Accepted Answer

European countries such as Ireland have difficulty using expansionary macroeconomic policies to close recessionary gaps because their monetary policy is set by the European Central Bank, limiting their ability to control interest rates and stimulate economic growth through monetary policy.

Question 4

Stagflation is a combination of

Accepted Answer

Stagflation refers to a situation where there is a combination of inflation (rising price level) and recession (recessionary gap). Option B is the only choice that describes this combination. Option A describes deflation rather than inflation, while option C and D describe only one of the two components of stagflation. Option E is an incorrect option as inflation and deflation are mutually exclusive terms.

Question 5

One reason why the AD-AS model became popular with economists in the late 1970s and early 1980s is that economists had to find an explanation for ___________,the simultaneous combination of ___________ and ___________ economic activity.

Accepted Answer

The AD-AS model became popular in the late 1970s and early 1980s as economists were trying to explain the phenomenon of stagflation - a combination of high inflation and reduced economic activity. Therefore, the best choice is D, which includes stagflation and rising prices.

Question 6

The AD-AS model predicts that,in a country whose net exports of oil are zero,a sudden decrease in the price of oil will shift the ___________ curve ___________,resulting in a ___________ price level and ___________ output level in the short run.

Accepted Answer

The answer of The AD-AS model predicts that,in a country...

Question 7

According to the AD-AS model,the short-run impact of a temporary increase in oil price is ___________;output ___________ and the price level ___________.

Accepted Answer

According to the AD-AS model, a temporary increase in oil prices will lead to a decrease in aggregate supply (AS) due to higher production costs for firms. This will cause a leftward shift of the AS curve, resulting in a decrease in output (GDP) and an increase in the price level. Therefore, the correct answer is C, which states that the short-run impact of a temporary increase in oil price is negative: output decreases and the price level increases.

Question 8

The AD-AS model predicts that,in a country whose net exports of energy are zero,a sudden increase in the price of oil will shift the ___________ curve ___________,resulting in a ___________ price level and ___________ output level in the short run.

Accepted Answer

In the AD-AS model, a sudden increase in the price of oil will increase the production costs for firms, causing the short-run aggregate supply (SRAS) curve to shift upward. As a result, the equilibrium price level will increase, while the equilibrium output level will decrease in the short run. Therefore, choice D is the correct answer.

Question 9

During a period of stagflation,

Accepted Answer

Stagflation is characterized by a combination of stagnant economic growth (output) and inflation (rising price level). Therefore, during a period of stagflation, output falls and the price level rises.

Question 10

In the AD-AS model,stagflation does not persist,because the working of the self-correcting mechanism of the economy ___________ the level of output and ___________ the price level until the economy eventually returns to a long-run equilibrium state,where actual output ___________ potential output.

Accepted Answer

In the AD-AS model, the self-correcting mechanism of the economy leads to a decrease in output and a decrease in the price level in the short run, as shown by a leftward shift in the AD curve. This eventually leads to an increase in output and a decrease in the price level, as shown by a rightward shift in the AS curve, until the economy returns to a long-run equilibrium state where actual output equals potential output. Therefore, the best choice is D, where the self-correcting mechanism leads to an increase in output and a decrease in the price level until the economy eventually returns to a long-run equilibrium state, where actual output equals potential output.

Question 11

Starting from the initial long-run equilibrium at point A in the diagram below,an adverse price shock which shifts up the SRAS curve to SRAS' will move the economy to point B,resulting in a temporary ___________ in output and a temporary ___________ in the price level.However,the working of the self-correcting mechanism will return the economy to ___________ in the long run.

Accepted Answer

The answer of Starting from the initial long-run equilibrium at...

Question 12

If European countries such as Ireland are unable to close recessionary gaps with expansionary macroeconomic policies,then according to the AD-AS model,recovery will depend upon a(n)

Accepted Answer

According to the AD-AS model, if European countries like Ireland are unable to close recessionary gaps with expansionary macroeconomic policies, then the only option left is for the price level to decrease to shift the aggregate demand curve to the right, resulting in a higher equilibrium output level. This is known as a self-correcting mechanism where the economy adjusts on its own to regain equilibrium. Therefore, a lower price level is the only option from the given choices that will help in recovering from the recessionary gap.

Question 13

-The AD-AS model in the diagram above shows that at the initial short-run equilibrium point B,the economy is experiencing ___________ gap.Starting from point B,an increase in government purchases that shifts the aggregate demand curve from AD to AD' will lead to the long-run equilibrium at point C,thus raising output at a ___________ price level.

Accepted Answer

The answer of 
-The AD-AS model in the diagram above...

Question 14

Stagflation arises in the context of the AD-AS model when some external factor causes

Accepted Answer

Stagflation occurs when there is high inflation and stagnant economic growth, typically caused by a leftward shift (upward in price level terms) of the SRAS curve, leading to higher prices and lower output.

Question 15

The AD-AS model in the diagram below shows that,at the initial short-run equilibrium point B,the economy is experiencing ___________ gap.Starting from point B,an income tax cut that shifts the aggregate demand curve from AD to AD' will lead to a new short-run equilibrium at point ___________.In this case,the tax cut,instead of eliminating the initial recessionary gap has,in fact,created ___________ gap.The tax authorities,in this case,have __________ the size of the initial output gap.

Accepted Answer

At the initial short-run equilibrium point B, the economy is experiencing a recessionary gap as the actual output Y is less than the potential output Y*. A tax cut that shifts the aggregate demand curve to AD' will lead to a new short-run equilibrium at point D, where the output level increases, but it is still less than the potential output Y*. Therefore, the tax cut has created an expansionary gap, which is the distance between the actual output level at point D and the potential output. The tax authorities have overestimated the size of the initial output gap as their policy has not eliminated the recessionary gap.

Question 16

Starting from the long-run equilibrium at point A,an adverse price shock that shifts up the SRAS curve to SRAS' will move the short run equilibrium to point B,resulting in ___________ output and a ___________ price level.This amounts to ___________.

Accepted Answer

An adverse price shock shifts the SRAS curve upward, which leads to a higher price level and lower output in the short run. This is known as stagflation. The long-run equilibrium output level remains the same, but the price level is permanently higher due to the adverse shock. Thus, choice B is the best answer. Choices A, C, D, and E are incorrect because they imply either deflation, permanently higher inflation, or no change in output, which do not accurately describe the impact of an adverse price shock on the economy.

Question 17

The AD-AS model predicts that,in a country whose net exports of oil are zero,a sudden decrease in the price of oil will shift the ___________ curve ___________,resulting in a ___________ price level and ___________ output level in the short run.

Accepted Answer

A sudden decrease in the price of oil will lead to a decrease in production costs for firms, causing the short-run aggregate supply (SRAS) curve to shift downwards. This will result in a decrease in the price level and an increase in output level in the short run. None of the other options accurately describe the effects of a decrease in oil prices on the AD-AS model.

Question 18

The AD-AS model in the diagram above shows that at the initial short-run equilibrium point A,the economy is experiencing ___________ gap.Starting from point A,a decrease in government purchases that shifts the aggregate demand curve from AD to AD' will lead to the long-run equilibrium at point C,thus decreasing output at a ___________ price level and eliminating the output gap.

Accepted Answer

The answer of The AD-AS model in the diagram above...

Question 19

The AD-AS model in the diagram below shows that,in the initial short-run equilibrium point D,the economy is experiencing ___________ gap.Starting from point D,an income tax increase that shifts the aggregate demand curve from AD to AD' will lead to a new short-run equilibrium at point ___________.In this case,the tax hike,instead of eliminating the initial expansionary gap has,in fact,created ___________ gap.The tax authorities,in this case,have ___________ the size of the initial output gap.

Accepted Answer

The answer of The AD-AS model in the diagram below...

Question 20

According to the AD-AS model,the short-run impact of a temporary drop in oil prices is __________;output ___________ and the price level ___________.

Accepted Answer

According to the AD-AS model, a temporary drop in oil prices would lead to a decrease in production costs for firms, which would cause the short-run aggregate supply (SRAS) curve to shift to the right. As a result, output would increase and the price level would decrease. This is known as a positive supply shock. Option A is incorrect because the price level would decrease, not increase. Option B is incorrect because output would increase, not decrease. Option D and E are incorrect because a decrease in oil prices would lead to a positive supply shock in the short run.

Quiz 11: The Economy in the Long Run: an Introduction to Economic Growth

Some European countries such as Ireland have difficulty closing recessionary gaps with expansionary macroeconomic policies because

Some European countries such as Ireland have difficulty closing recessionary gaps with expansionary macroeconomic policies because

Stagflation is a combination of

One reason why the AD-AS model became popular with economists in the late 1970s and early 1980s is that economists had to find an explanation for _____,the simultaneous combination of _ and _______ economic activity.

The AD-AS model predicts that,in a country whose net exports of oil are zero,a sudden decrease in the price of oil will shift the _____ curve _,resulting in a _ price level and _____ output level in the short run.

According to the AD-AS model,the short-run impact of a temporary increase in oil price is _____;output _ and the price level _______.

The AD-AS model predicts that,in a country whose net exports of energy are zero,a sudden increase in the price of oil will shift the _____ curve _,resulting in a _ price level and _____ output level in the short run.

During a period of stagflation,

In the AD-AS model,stagflation does not persist,because the working of the self-correcting mechanism of the economy _____ the level of output and _ the price level until the economy eventually returns to a long-run equilibrium state,where actual output _______ potential output.

If European countries such as Ireland are unable to close recessionary gaps with expansionary macroeconomic policies,then according to the AD-AS model,recovery will depend upon a(n)

Stagflation arises in the context of the AD-AS model when some external factor causes

Starting from the long-run equilibrium at point A,an adverse price shock that shifts up the SRAS curve to SRAS' will move the short run equilibrium to point B,resulting in _____ output and a _ price level.This amounts to _______.

The AD-AS model predicts that,in a country whose net exports of oil are zero,a sudden decrease in the price of oil will shift the _____ curve _,resulting in a _ price level and _____ output level in the short run.

According to the AD-AS model,the short-run impact of a temporary drop in oil prices is ____;output _ and the price level _______.