Question 1

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation is a phenomenon where there is a combination of stagnant economic growth and rising inflation. It can occur even when there is no decrease in aggregate demand, and can be caused by factors such as supply shocks or cost push inflation.

Question 2

Increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Accepted Answer

This is because firms are less willing to invest in capital when they are uncertain about the future prospects of the economy. This decrease in investment spending reduces overall consumer and government spending as well, leading to a leftward shift in the aggregate-demand curve.

Question 3

If aggregate demand and aggregate supply both shift right, we can be sure that the price level is higher in the short run.

Accepted Answer

When both aggregate demand and aggregate supply shift right, the effect on the price level is uncertain without knowing the magnitude of the shifts. If the supply increase is larger than the demand increase, the price level could actually decrease.

Question 4

During World War II government expenditures increased almost five-fold and output almost doubled.

Accepted Answer

This is a true statement. During World War II, government expenditures increased significantly as a result of increased military spending, and the economy experienced a significant boost due to increased production of war-related goods and services.

Question 5

An increase in the expected price level shifts the short-run aggregate supply curve to the right.

Accepted Answer

An increase in the expected price level would cause firms to increase production in the short run, shifting the SRAS curve to the right. This is because higher prices increase the profitability of production, but this increase in production costs would eventually cause the SRAS to shift back to its original position in the long run. Therefore, an increase in expected price level would cause movement along the SRAS curve, but not a shift in its position.

Question 6

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

Accepted Answer

The primary purpose of the aggregate demand and aggregate supply model is to explain how changes in price level affect output and employment in the short run, and how shifts in aggregate demand or aggregate supply affect the equilibrium level of output and price level in the economy. The classical dichotomy is a theoretical concept that suggests that in the long run, changes in the money supply do not affect real variables such as output and employment.

Question 7

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP are caused by both changes in aggregate demand and changes in aggregate supply. For example, a negative supply shock, such as a natural disaster disrupting production, can reduce aggregate supply and cause a recession even if aggregate demand remains unchanged. Similarly, a positive supply shock, such as an increase in productivity, can boost aggregate supply and lead to economic growth even if aggregate demand remains steady.

Question 8

The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run.

Accepted Answer

There are multiple reasons for the upward slope of the short-run aggregate-supply curve, including not only sticky wages but also sticky prices, misperceptions about relative prices, and short-run adjustments in resource utilization.

Question 9

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

Accepted Answer

A decrease in aggregate demand would result in lower prices and output, while a decrease in short-run aggregate supply would result in higher prices and lower output. Thus, the economy would not revert to its original level of prices and output in either scenario.

Question 10

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

Accepted Answer

Economists widely agree that the principal cause of the Great Depression was a decrease in aggregate demand, causing a left shift in the long-run aggregate supply curve. This was caused by a combination of factors such as a decline in consumer spending, a decrease in investment, and restrictions on international trade.

Question 11

If aggregate demand shifts right, then eventually price level expectations rise. This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

Accepted Answer

An increase in price level expectations would cause the short-run aggregate supply curve to shift to the left, not the aggregate demand curve. This would result in a higher price level and a lower level of output.

Question 12

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Accepted Answer

Policymakers, through their use of monetary and fiscal policies, can influence aggregate demand in order to stabilize the economy and lessen the effects of economic fluctuations such as recessions and inflation.

Question 13

The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century.

Accepted Answer

The recession of 2008-2009 was characterized by a severe decline in economic activity and widespread financial distress, making it one of the worst macroeconomic events since the Great Depression of the 1930s.

Question 14

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

Accepted Answer

When consumers and businesses have increased optimism about the future, they are more likely to spend and invest, leading to increased demand and economic growth. This can result in higher prices as businesses have more pricing power, and lower unemployment as firms may need to hire more workers to meet increased demand.

Question 15

All explanations for the upward slope of the short-run aggregate supply curve suppose that the quantity of output supplied increases when the actual price level exceeds the expected price level.

Accepted Answer

This is true because when the actual price level is higher than expected, firms are willing to increase their output in the short-run in order to take advantage of the higher prices and increase their profits. This results in an upward slope of the short-run aggregate supply curve.

Question 16

In the long-run, an increase in aggregate demand increases the price level, but not real GDP.

Accepted Answer

In the long-run, an economy's output is determined by its supply-side factors (such as labor, capital, and technology), not by the level of aggregate demand. Thus, while an increase in aggregate demand can lead to higher prices (inflation), it does not increase the economy's capacity to produce goods and services, leaving real GDP unchanged in the long run.

Question 17

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Accepted Answer

The increased government expenditures during World War II led to increased demand for goods and services, leading to increased output and prices in the United States.

Question 18

If aggregate demand shifts right, then eventually price level expectations rise. The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

Accepted Answer

This is because when aggregate demand shifts right, firms increase production and prices in the short-run, causing an increase in price level expectations. This, in turn, leads to a shift to the left in the short-run aggregate-supply curve as firms face higher input costs and decrease their willingness to supply goods and services at the higher price level.

Question 19

An increase in the actual price level does not shift the short-run aggregate supply curve, but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Accepted Answer

An increase in the actual price level affects the quantity of goods and services supplied in the short run but does not shift the short-run aggregate supply (SRAS) curve itself. However, if producers expect higher prices in the future, they might adjust their production plans, which can shift the SRAS curve to the left as they anticipate higher costs or demand higher prices for their products.

Question 20

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

Accepted Answer

The fall in housing prices led to a decrease in overall wealth and confidence, causing a decrease in consumer spending and a shift in aggregate demand to the left.

Quiz 15: Aggregate Demand and Aggregate Supply