Question 1

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 resulted in a global financial crisis and economic downturn, with significant impacts on employment, income, and financial stability. Many economists and analysts consider it to be the worst macroeconomic event since the Great Depression of the 1930s.

Question 2

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation is a combination of stagnant economic growth and high inflation, which can be caused by a variety of factors including supply shocks, external shocks, or excessive government intervention. While a decrease in aggregate demand can contribute to stagnant economic growth, it alone is not enough to cause stagflation.

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

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

When firms are uncertain and pessimistic about the future of the economy, they become less willing to invest in new projects or expand their businesses. This decreases the level of investment spending, which is a component of aggregate demand. As a result, the aggregate-demand curve shifts to the left, reflecting lower overall demand in the economy.

Question 5

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

Accepted Answer

While the classical dichotomy is an important aspect of the model, the primary purpose of the aggregate demand and aggregate supply model is to explain the economy's fluctuations in output and prices in the short run.

Question 6

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 7

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

Accepted Answer

Most economists agree that the Great Depression was caused by a combination of factors that included a stock market crash, a banking crisis, and a decrease in aggregate demand.

Question 8

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 9

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

The upward slope of the short-run aggregate supply curve is based on the idea of sticky wages and prices, which mean that in the short run, output supplied will increase when the actual price level exceeds the expected price level. This is true for all explanations of the upward slope of the short-run aggregate supply curve.

Question 10

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

If the decrease in output is caused by a decrease in aggregate demand, then the economy would experience a decrease in prices and output. However, if the decrease in output is caused by a decrease in short-run aggregate supply, then the economy would experience an increase in prices and a decrease in output, which is known as stagflation. Therefore, the statement is false.

Question 11

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 12

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 were largely due to WWII and the government's spending on war efforts, which stimulated economic growth and led to increased output and prices.

Question 13

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

Accepted Answer

By using monetary and fiscal policy tools, policymakers can adjust the levels of government spending, interest rates, tax rates, and money supply in order to increase or decrease aggregate demand. This can help stabilize the economy and mitigate the severity of economic fluctuations such as recessions and booms.

Question 14

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

Accepted Answer

This statement is true. During World War II, the US government drastically increased its spending on military efforts, which led to a significant increase in output as factories and workers were mobilized to support the war effort.

Question 15

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 wealth and confidence, causing consumers to decrease their spending, which shifted aggregate demand to the left.

Question 16

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

Accepted Answer

Increased optimism about the future leads to increased consumer and business spending, which drives up demand in the economy. This leads to higher prices and can also lead to increased production and hiring, which can lower unemployment in the short run.

Question 17

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 with an increase in aggregate demand, there is an excess demand for goods and services which leads to an increase in prices. This, in turn, causes firms to increase their costs and shift the short-run aggregate-supply curve to the left.

Question 18

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

When aggregate demand shifts right, it leads to an increase in both real output and price level in the short run. However, in the long run, the increase in price level leads to an increase in production costs and reduces the real value of consumer spending, which causes a decrease in aggregate demand. This shift to the left of the aggregate demand curve is known as the long-run aggregate supply curve. It is not caused by an increase in price level expectations, but rather by adjusting to the new equilibrium of real output and price level.

Question 19

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 can be caused by both changes in aggregate demand and changes in aggregate supply, such as changes in technology, natural disasters, or government regulations. Shifts in aggregate supply can affect the economy's potential output, meaning changes in the long-run trend of the economy, whereas shifts in aggregate demand can affect the economy's actual output, meaning changes in short-run expansion or contraction of the economy.

Question 20

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 leads to a decrease in short-run aggregate supply, shifting the curve to the left. This is because higher expected prices mean higher input costs for firms, leading to less output being profitable at any given price level.

Quiz 20: Aggregate Demand and Aggregate Supply