Deck 20: Unemployment and Inflation

Question 1

The aggregate demand curve is defined as the

A) net national product.
B) sum of wages, rent, interest, and profits.
C) real GDP purchased at different possible price levels.
D) total dollar value of household expectations.

Answer 1

Aggregate demand curve indicates the amount of goods purchased at different prices levels by all the users in the economy such as government, house hold etc., during a particular time period.
Therefore the correct answer is (c) real GDP purchased at different possible price levels.

Question 2

Explain why the aggregate demand curve is downward sloping. How does your explanation differ from the reasons behind the downward-sloping demand curve for an individual product?

Answer 2

Aggregate demand curve indicates the amount of goods purchased at different prices levels. The reason for downward sloping curve of aggregate demand is due to three effects. They are
1. Real balances effect
2. Interest rate effect
3. Net exports effect
Real balances effect is the increase in the purchasing power due to the decrease in the price level. Due to increasing purchase power there would be increase in the demand for goods and services increases Aggregate demand.
Interest rate effect is due to the decline in the interest rate, there would be an increase in the demand for money increasing the aggregate demand.
Net exports effect is when the price level decreases, the demand for domestic goods increases increasing the aggregate demand.

Question 3

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which, in turn, reduces consumption and investment spending. This effect is called the

A) real balances effect.
B) interest-rate effect.
C) net exports effect.
D) substitution effect.

Answer 3

Aggregate demand curve indicates the amount of goods purchased at different prices levels. The reason for downward sloping curve of aggregate demand is due to three effects. They are
1. Real balances effect
2. Interest rate effect
3. Net exports effect
Interest rate effect is due to the decline in the interest rate, there would be an increase in the demand for money increasing the aggregate demand. As this is the case of price level stimulating the increase in demand for money, the answer is (b) interest rate effect.

Question 4

Explain the theory of the classical economists that flexible prices and wages ensure that the ecjopomy operates at full employment.

Question 5

The real balances effect occurs because a higher price level reduces the real value of people's

A) financial assets.
B) wages.
C) unpaid debt.
D) physical investments.

Question 6

In which direction would each of the following changes in conditions cause the aggregate demand curve to shift? Explain your answers.

A) Consumers expect an economic downturn.
B) A new U.S. president is elected, and the profit expectations of business executives rise.
C) The federal government increases spending for highways, bridges, and other infrastructure.
D) The United States increases exports of wheat and other crops to Russia, Ukraine, and other former Soviet republics.

Question 7

The net exports effect is the inverse relationship between net exports and the _______ of an economy.

A) real GDP
B) GDP deflator
C) price level
D) consumption spending

Question 8

Identify the three ranges of the aggregate supply curve. Explain the impact of an increase in the aggregate demand curve in each segment.

Question 9

Which of the following will shift the aggregate demand curve to the left?

A) An increase in exports
B) An increase in investment
C) An increase in government spending
D) A decrease in government spending

Question 10

Consider this statement: "Equilibrium GDP is the same as full employment". Do you agree or disagree? Explain.

Question 11

Which of the following will not shift the aggregate demand curve to the left?

A) Consumers become more optimistic about the future.
B) Government spending decreases.
C) Business optimism decreases.
D) Consumers become pessimistic about the future.

Question 12

Assume the aggregate demand and aggregate supply curves intersect at a price level of 100. Explain the effect of a shift in the price level to 120 and to 50.

Question 13

The popular theory prior to the Great Depression that the economy will automatically adjust to achieve full employment is

A) supply-side economics.
B) Keynesian economics.
C) classical economics.
D) mercantilism.

Question 14

Question 15

Classical economists believed that the

A) price system was stable.
B) goal of full employment was impossible.
C) price system automatically adjusts the economy to full employment in the long run.
D) government should attempt to restore full employment.

Question 16

Assume an economy operates in the intermediate range of its aggregate supply curve. State the direction of shift for the aggregate demand or aggregate supply curve for each of the following changes in conditions. What is the effect on the price level? On real GDP? On employment?

A) The price of crude oil rises significantly.
B) Spending on national defense doubles.
C) The costs of imported goods increase.
D) An improvement in technology raises labor productivity.

Question 17

Which of the following is not a range on the eclectic or general view of the aggregate supply curve?

A) Classical range
B) Keynesian range
C) Intermediate range
D) Monetary range

Question 18

What shifts in aggregate supply or aggregate demand would cause each of the following conditions for an economy?

A) The price level rises, and real GDP rises.
B) The price level falls, and real GDP rises.
C) The price level falls, and real GDP falls.
D) The price level rises, and real GDP falls.
E) The price level falls, and real GDP remains the same.
F) The price level remains the same, and real GDP rises.

Question 19

Macroeconomic equilibrium occurs when

A) aggregate supply exceeds aggregate demand.
B) the economy is at full employment.
C) aggregate demand equals aggregate supply.
D) aggregate demand equals the average price level.

Question 20

Explain cost-push inflation verbally and graphically, using aggregate demand and aggregate supply analysis. Assess the impact on the price level, real GDP, and employment.

Question 21

Along the classical or vertical range of the aggregate supply curve, a decrease in the aggregate demand curve will decrease

A) both the price level and real GDP.
B) only real GDP.
C) only the price level.
D) neither real GDP nor the price level.

Question 22

Explain demand-pull inflation graphically using aggregate demand and supply analysis. Assess the impact on the price level, real GDP, and employment.

Question 23

Other factors held constant, a decrease in resource prices will shift the aggregate

A) demand curve leftward.
B) demand curve rightward.
C) supply curve leftward.
D) supply curve rightward.

Question 24

Assuming a fixed aggregate demand curve, a leftward shift in the aggregate supply curve causes a (an)

A) increase in the price level and a decrease in real GDP.
B) increase in the price level and an increase in real GDP.
C) decrease in the price level and a decrease in real GDP.
D) decrease in the price level and an increase in real GDP.

Question 25

An increase in the price level caused by a rightward shift of the aggregate demand curve is called

A) cost-push inflation.
B) supply shock inflation.
C) demand shock inflation.
D) demand-pull inflation.

Question 26

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then

A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Question 27

An assumption for the short run aggregate supply curve is that it is a period of time in which

A) knowledge is complete.
B) wages are fixed.
C) wages are constant for under one year.
D) prices firms charge for products are fixed.

Question 28

The economy of Tuckerland has the following

a. Graph the aggregate demand curve and the short-run aggregate supply curve.
b. What are short-run equilibrium real GDP and the price level?
c. If Tuckerland's potential real GDP is $12 trillion, plot the long-run aggregate supply curve ( LRAS ) in the graph.

Question 29

The long-run aggregate supply curve is based on the assumption that

A) both the price level and nominal incomes are fixed.
B) prices are flexible after one year.
C) both the price level and nominal incomes change by the same percentage.
D) potential GDP is undetermined.

Question 30

Using the graph from question 1 and assuming long-run equilibrium at $12 trillion, explain the impact of a 10 percent increase in worker's income.

Question 31

Graphically, long-run macro equilibrium occurs at the

A) midpoint of the aggregate demand curve.
B) intersection of the aggregate demand and long-run aggregate supply curves regardless of the short-run aggregate supply curve.
C) midpoint of the long-run aggregate supply curve.
D) intersection of the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves.

Question 32

Use the graph drawn in question 1 and assume the initial equilibrium is E 1. Next, assume aggregate demand increases by $4 trillion. Draw the effect on short-run equilibrium.

Question 33

An increase in nominal incomes of workers results in the

A) aggregate demand curve shifting to the left.
B) long run aggregate supply curve shifting to the right.
C) short-run aggregate supply curve shifting to the left.
D) short-run aggregate supply curve shifting to the right.

Question 34

Based on the assumptions of question 3, explain verbally the impact of an increase of $4 trillion in aggregate demand on short-run equilibrium.

Question 35

An increase in aggregate demand in _______ the long run will result in full-employment real GDP and ________ in the price level.

A) no change; an increase
B) an increase; no change
C) a decrease; no change
D) no change; a decrease

Question 36

The economy shown in Exhibit A-7 is initially in equilibrium at point E 1 , and the aggregate demand curve decreases from AD 1 to AD 2 Explain the long-run adjustment process.

Question 37

In Exhibit A-8, the intersection of AD 1 with SRAS indicates

A) short-run equilibrium.
B) long-run equilibrium.
C) that the economy is not operating at full employment.
D) that prices and wages are inflexible.

Question 38

In the first quarter of 2001, real GDP was $9.88 trillion, and the price level measured by the GDP chain price index was 101. Real GDP was approximately equal to potential GDP. In the third quarter, aggregate demand decreased to $9.83 trillion, and the price level rose to 103. Draw a graph of this recession.

Question 39

In Exhibit A-8, the intersection of AD 2 with SRAS indicates

A) short-run equilibrium.
B) long-run equilibrium.
C) that the economy is operating at full employment.
D) that prices and wages are inflexible.

Question 40

In Exhibit A-8, the self-correcting AD-AS model argument is that competition

A) from unemployed workers causes an increase in nominal wages and a rightward shift in SRAS.
B) from unemployed workers causes a rightward shift in LRAS.
C) among firms for workers increases nominal wages, and this causes a leftward shift in SRAS.
D) among consumers causes an increase in the CPI and a rightward shift in SRAS.

Question 41

In Exhibit A-8, the self-correcting AD AS model theory is that in the long run the economy will

A) remain where SRAS intersects AD 1.
B) shift to the intersection of AD 2 and SRAS.
C) shift to the intersection of AD 2 and LRAS.
D) shift to the intersection of AD 2 and a new leftward-shifted SRAS.

Question 42

In Exhibit A-8, the self-correcting AD - AS model predicts that the long-run result of the decrease from AD 1 to AD 2 will be a (an)

A) higher price level and higher unemployment rate.
B) lower price level and higher unemployment rate.
C) unchanged price level and full employment.
D) lower price level and full employment.

Question 43

Which of the following is most likely to cause a leftward shift in the long-run aggregate supply curve?

A) An increase in labor
B) An increase in capital
C) An advance in technology
D) Destruction of resources

Question 44

As shown in Exhibit A-9, and assuming the aggregate demand curve shifts from AD 1 to AD 2 the full-employment level of real GDP is

A) $12 billion.
B) $8 billion.
C) $150 billion.
D) unable to be determined.

Question 45

Given the shift of the aggregate demand curve from AD, to AD in Exhibit A-9, the real GDP and price level (CPI) in long-run equilibrium will be,

A) $8 billion and 150.
B) $12 billion and 200.
C) $8 billion and 250.
D) $8 billion and 200.

Question 46

Beginning from long-run equilibrium at point in Exhibit A-9, the aggregate demand curve shifts to AD 2. The real GDP and price level (CPI) in short-run equilibrium will be

A) $12 billion and 200.
B) $8 billion and 250.
C) $8 billion and 150.
D) $12 billion an$ 250.

Question 47

Beginning from short-run equilibrium at point E 2 in Exhibit A-9, the economy's movement to a new position of long run equilibrium would best be described as

A) a movement along the AD 2 curve with a shift in the SRAS, curve.
B) a movement along the SRAS, curve with a shift in the AD 2 curve.
C) a shift in the LRAS curve to an intersection at E 1.
D) no shift of any kind.