Question 1

The dynamic aggregate demand and aggregate supply model assumes that potential GDP is constant across time.

Accepted Answer

The dynamic aggregate demand and aggregate supply model allows for changes in potential GDP over time as a result of changes in technology, capital stock, and labor force.

Question 2

An increase in government spending will result in an increase in the price level and an increase in real GDP in the long run.

Accepted Answer

In the long run, an increase in government spending is typically thought to affect the composition of output rather than increasing the overall level of real GDP, due to the economy's return to its potential output. Long-term increases in the price level can occur due to demand-pull inflation if the spending is excessive and not offset by taxes or other measures.

Question 3

The basic (static)aggregate demand and aggregate supply model assumes that

Accepted Answer

The basic (static) aggregate demand and aggregate supply model assumes that potential GDP is fixed in the short run, and thus, the economy does not experience long-run growth. This means that the economy may experience fluctuations in output and prices, but potential GDP remains the same, and there are no sustained increases in economic growth over time.

Question 4

In the dynamic aggregate demand and aggregate supply model,the rate of inflation will increase if

Accepted Answer

Inflation is the rate at which the overall price level is increasing. If aggregate demand shifts faster than aggregate supply, it means there is increased demand for goods and services without a corresponding increase in supply, leading to a shortage and upward pressure on prices. Therefore, a faster shift in AD will lead to an increase in the rate of inflation.

Question 5

Starting from long-run equilibrium,use the basic (static)aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

Accepted Answer

The answer of Starting from long-run equilibrium,use the basic (static)aggregate...

Question 6

What is the relationship among the AD,SRAS and LRAS curves when the economy is in long-run equilibrium?

Accepted Answer

The answer of What is the relationship among the AD,SRAS...

Question 7

Figure 14.2 
-In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the growth rate in real GDP between those two years?

Accepted Answer

The growth rate in real GDP is calculated by taking the difference in GDP between the two years, dividing by the GDP in the first year, and then multiplying by 100 to get a percentage. The given options suggest that the correct calculation results in a 7.3% growth rate.

Question 8

Figure 14.2 
-In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what will happen to the unemployment rate in year 2?

Accepted Answer

Point B is to the right and above Point A on the production possibilities curve, indicating an increase in economic output. This increase in production typically leads to a decrease in the unemployment rate, but we cannot say for certain without more information about the labor market and other factors affecting employment. Therefore, the best choice is A) It will rise because this is the most likely outcome.

Question 9

In the dynamic aggregate demand and aggregate supply model,the rate of inflation will decrease if

Accepted Answer

If AS shifts faster than AD, then supply exceeds demand, causing prices to fall and consequently decreasing the rate of inflation. A slow shift in AS, as in option B, may still lead to inflation if AD increases at a faster rate. Option A is incorrect since a faster shift in AD will increase demand and potentially lead to inflation. Option D is only a possible consequence of a shift in AS or AD rather than a decisive causal factor.

Question 10

Stagflation occurs when short-run aggregate supply decreases.

Accepted Answer

Stagflation is a situation in which an economy experiences stagnant economic growth, high unemployment, and high inflation. This is caused by a decrease in short-run aggregate supply, which results in a decrease in output and an increase in prices.

Question 11

Beginning at long-run equilibrium,(i)use the basic (static)aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a supply shock,and (ii)use the basic (static)aggregate supply and demand model to illustrate what happens in the long run following this supply shock.

Accepted Answer

The answer of Beginning at long-run equilibrium,(i)use the basic (static)aggregate...

Question 12

Figure 14.2 
-Refer to Figure 14.2.Given the economy is at point A in year 1,what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?

Accepted Answer

At point A, the actual growth rate in year 1 is 2 per cent and the potential growth rate is 3 per cent. Therefore, the output gap is -1 per cent. In year 2, the actual growth rate is 5 per cent and the potential growth rate is 7.7 per cent at point B. The difference between the actual and potential growth rates in year 2 is 2.7 per cent (7.7 - 5).

Question 13

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Accepted Answer

The dynamic model of aggregate demand and aggregate supply assumes that potential GDP increases continuously, and that aggregate demand shifts to the right during most periods. It also assumes that aggregate supply shifts to the right except during periods when workers and firms expect higher wages. It does not assume that aggregate demand and potential GDP decrease continuously, making option D the correct answer.

Question 14

Explain how the economy moves back to full employment after a recession.

Accepted Answer

The answer of Explain how the economy moves back to...

Question 15

Figure 14.2 
-In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the growth rate in potential GDP between those two years?

Accepted Answer

The answer of Figure 14.2 
-In Figure 14.2,given the economy...

Question 16

Figure 14.2 
-In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the rate of increase in the price level (the inflation rate)between those two years?

Accepted Answer

The answer of Figure 14.2 
-In Figure 14.2,given the economy...

Question 17

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

Accepted Answer

In the long run, the economy adjusts to shocks such as an unexpected increase in the price of oil, and both the price level and the unemployment rate return to their original levels, implying that the price level decreases from the shock-induced high and the unemployment rate decreases back to its natural rate.

Question 18

What is a supply shock,and why might a supply shock lead to stagflation?

Accepted Answer

The answer of What is a supply shock,and why might...

Question 19

Technological change can reduce the inflationary effects of total spending rising over time.

Accepted Answer

Technological change can increase productivity and efficiency, which can lead to lower prices and reduce the inflationary effects of total spending rising over time. This is because more goods and services can be produced at a lower cost, which can keep prices down even as demand increases.

Question 20

The dynamic aggregate demand and aggregate supply model illustrates that,during most years,aggregate demand and long-run aggregate supply increase.

Accepted Answer

This is because of factors such as population growth, technological progress, and increases in the availability of capital and labor, which all contribute to economic growth and an increase in both aggregate demand and long-run aggregate supply.

Quiz 14: Economic Growth, the Financial System and Business Cycles

The dynamic aggregate demand and aggregate supply model assumes that potential GDP is constant across time.

An increase in government spending will result in an increase in the price level and an increase in real GDP in the long run.

The basic (static) aggregate demand and aggregate supply model assumes that

In the dynamic aggregate demand and aggregate supply model,the rate of inflation will increase if

Starting from long-run equilibrium,use the basic (static)aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

What is the relationship among the AD,SRAS and LRAS curves when the economy is in long-run equilibrium?

Figure 14.2 -In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the growth rate in real GDP between those two years?

Figure 14.2 -In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what will happen to the unemployment rate in year 2?

In the dynamic aggregate demand and aggregate supply model,the rate of inflation will decrease if

Stagflation occurs when short-run aggregate supply decreases.

Figure 14.2 -Refer to Figure 14.2.Given the economy is at point A in year 1,what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Explain how the economy moves back to full employment after a recession.

Figure 14.2 -In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the growth rate in potential GDP between those two years?

Figure 14.2 -In Figure 14.2,given the economy is at point A in year 1 and point B in year 2,what is the rate of increase in the price level (the inflation rate) between those two years?

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

What is a supply shock,and why might a supply shock lead to stagflation?

Technological change can reduce the inflationary effects of total spending rising over time.

The dynamic aggregate demand and aggregate supply model illustrates that,during most years,aggregate demand and long-run aggregate supply increase.