Question 1

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation results from a combination of high inflation and stagnant economic growth, not from decreases in aggregate demand.

Question 2

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

When aggregate demand shifts right, there is increased demand for goods and services, which can lead to upward pressure on prices. As price level expectations rise, firms may anticipate higher costs of production and adjust their prices accordingly, which can lead to a decrease in short-run aggregate supply. This results in a leftward shift of the short-run aggregate supply 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

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 5

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

If aggregate demand shifts right, it initially causes output and employment to increase, which leads to an increase in prices as the economy moves closer to full capacity. This increase in prices does not necessarily lead to a shift of the aggregate demand curve to the left. The shift to the left only occurs if consumers and firms revise their price level expectations and adjust their spending behaviors accordingly, causing a decrease in aggregate demand.

Question 6

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

Accepted Answer

Policymakers can use fiscal and monetary policy to influence aggregate demand and stabilize the economy during economic fluctuations such as recessions or inflationary periods. By increasing government spending or cutting taxes, fiscal policy can stimulate the economy and boost consumer and business spending. Similarly, monetary policy can be used to influence interest rates and credit availability, which can encourage or discourage borrowing and spending. Together, these policies can mitigate the severity of economic fluctuations and promote more stable economic growth.

Question 7

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 reduced household wealth and led to a decrease in consumption spending, causing a leftward shift in aggregate demand.

Question 8

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 one of the worst macroeconomic events in modern history, causing widespread unemployment and economic instability around the world.

Question 9

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 10

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

Accepted Answer

When people are more optimistic about the future, they are more likely to spend money and invest, which leads to increased economic activity, higher demand for goods and services, and more job opportunities. This, in turn, can lead to rising prices as businesses try to keep up with consumer demand and falling unemployment as companies hire more workers to meet the increased demand.

Question 11

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 real GDP and price level occur in response to changes in aggregate demand and aggregate supply, rather than to demonstrate the classical dichotomy.

Question 12

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 changes in both aggregate demand and aggregate supply. For example, a decrease in aggregate demand can lead to a recession, while a decrease in aggregate supply (e.g. due to a natural disaster or a decrease in productivity) can lead to stagflation.

Question 13

If the central bank increased the money supply in response to a decrease in short-run aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Accepted Answer

Increasing the money supply is a form of monetary policy that can be used to shift the aggregate demand curve to the right, helping to offset the effects of a decrease in short-run aggregate supply. However, this can lead to inflationary pressure as the increase in demand drives up prices. As a result, while unemployment may return towards its natural rate, it may be accompanied by higher prices.

Question 14

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 15

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 about the future of the economy, they tend to hold back on investment spending which can reduce aggregate demand. This shift to the left can cause a decrease in output and employment.

Question 16

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 mostly related to World War II efforts, which led to increased industrial production and demand for goods, as well as higher prices due to inflation.

Question 17

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

Accepted Answer

Economists generally agree that the Great Depression was caused by a combination of factors that shifted both short-run and long-run aggregate demand and supply, including stock market crashes, bank failures, reduction in consumer spending, decrease in investment, and government policies such as the Smoot-Hawley Tariff Act.

Question 18

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

Accepted Answer

This is true. Government spending during World War II increased from $9.5 billion in 1940 to $98.4 billion in 1945 (an almost five-fold increase). Output, as measured by Gross National Product, increased from $94.8 billion in 1940 to $166.3 billion in 1945 (an almost doubled increase).

Question 19

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 output caused by a decrease in aggregate demand would lead to a decrease in prices and a return to the original level of output. However, a decrease in output caused by a decrease in short-run aggregate supply would lead to an increase in prices and a lower level of output. Therefore, the statement is incorrect and the answer is B.

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 would typically cause firms to increase production in the short-run, which would shift the SRAS curve to the right. However, in this case, the question is specifically asking about the "expected" price level, which means that firms have not actually received higher prices yet. If prices are only expected to increase in the future, this would not necessarily cause firms to increase production immediately, so the SRAS curve would not shift. Therefore, an increase in the expected price level would not shift the short-run aggregate supply curve to the right.

Quiz 33: Aggregate Demand and Aggregate Supply