Question 1

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock would have ________ output effect in the short run and ________ output effect in the long run.
A)a positive; no
B)a positive; a positive
C)no; a positive
D)no; no
E)not enough information to know

Accepted Answer

In the short run, an expansionary aggregate demand (AD) shock would increase output due to price and wage stickiness. However, in the long run, the economy returns to its natural level of output as prices and wages adjust, meaning there is no long-term effect on output.

Question 2

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.  FIGURE 24-3 Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from  to  .The initial effect is
A)a recessionary output gap of 100.
B)a recessionary output gap of 300.
C)a recessionary output gap of 550.
D)an inflationary output gap of 200.
E)an inflationary output gap of 100.

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 3

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an unexpected and sharp reduction in desired business investment expenditure.In the short run,________.In the long run,________.
A)real GDP and the price level both fall; real GDP is at its original level with a lower price level
B)real GDP and the price level both fall; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Accepted Answer

In the short run, a sharp reduction in desired business investment expenditure would lead to a decrease in aggregate demand, causing both real GDP and the price level to fall. In the long run, the economy would adjust back to its potential output (original level of real GDP) but with a lower price level due to the initial decrease in aggregate demand and subsequent adjustments in the economy.

Question 4

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in the Canadian-dollar price of all imported raw materials.In the short run,________.In the long run,________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP and the price level return to their original levels

Accepted Answer

In the short run, the increase in imported raw material prices will increase production costs for firms, leading to a decrease in short-run aggregate supply (SRAS). This will cause a temporary increase in the price level and a decrease in real GDP below its potential level. 
However, in the long run, firms will adjust their production processes and negotiate lower prices for inputs, leading to an increase in SRAS and a return to potential output. The increase in imported raw material prices will also cause an increase in the price level in the long run, but real GDP will return to its original level. Thus, the correct choice is E.

Question 5

Consider the AD/AS model and suppose the economy begins at potential output.The effect of a negative AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
A)rightward; AS
B)rightward; AD
C)leftward; AS
D)leftward; AD
E)leftward; Y*

Accepted Answer

In the long run, the economy tends to return to its potential output level after a negative aggregate supply (AS) shock. This adjustment occurs through a rightward shift in the AS curve, as prices and wages adjust over time, allowing the economy to return to its natural level of output.

Question 6

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.  FIGURE 24-4 Refer to Figure 24-4.The initial effect of the positive AS shock shown in the diagram results in
A)a recessionary output gap of 250.
B)a recessionary output gap of 450.
C)an inflationary output gap of 200.
D)an inflationary output gap of 300.
E)an inflationary output gap of 550.

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 7

Consider the basic AD/AS macro model in long-run equilibrium.A negative AS shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output ________.
A)decrease; decrease; decrease further; will decrease further
B)decrease; decrease; decrease further; will be restored to potential output
C)increase; decrease; decrease; will be restored to potential output
D)increase; decrease; increase further; will be restored to potential output
E)increase; increase; increase further; will be restored to potential output

Accepted Answer

A negative AS shock increases the price level and decreases output in the short run. In the long run, the price level decreases as the economy adjusts, and output returns to potential output.

Question 8

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,________.In the long run,________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP and the price level return to their original levels
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Accepted Answer

A decrease in the Canadian price of all imported raw materials would result in a decrease in the costs of production for firms that use such materials. This would lead to an increase in short-run aggregate supply (SRAS) and a rightward shift of the SRAS curve. In the short run, this would result in a decrease in the price level and an increase in real GDP. However, in the long run, prices and wages will adjust, causing the SRAS to shift back to its original position, but with a higher price level. Thus, in the long run, real GDP returns to its original equilibrium level, but with a lower price level than before.

Question 9

In the basic AD/AS macro model,which of the following events would cause stagflation?
A)a large decrease in wages
B)a large increase in business confidence
C)a large increase in the net tax rate
D)a large increase in the price of raw materials
E)a large increase in labour productivity

Accepted Answer

Stagflation is a situation where there is both inflation and economic stagnation. In the AD/AS model, this can occur due to a supply shock that increases input costs for businesses, such as a large increase in the price of raw materials. This shifts the short-run aggregate supply (SRAS) curve to the left, leading to higher prices and lower output, resulting in both inflation and economic stagnation. A decrease in wages (A) or an increase in labor productivity (E) would shift the SRAS curve to the right, leading to lower prices and higher output, which would not cause stagflation. An increase in business confidence (B) would shift the AD curve to the right, which would increase output and potentially cause inflation, but not necessarily economic stagnation. An increase in the net tax rate (C) would also shift the AD curve to the left, but it would have mixed effects on inflation and output, depending on other factors such as the size and composition of government spending.

Question 10

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.  FIGURE 24-3 Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from  to  .At the new short-run equilibrium,the price level is ________ and real GDP is ________.
A)90; 900
B)110; 800
C)60; 1000
D)60; 700
E)90; 1250

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 11

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a ________ shift in ________.
A)rightward; AS
B)rightward; AD
C)leftward; AS
D)leftward; AD
E)leftward; Y*

Accepted Answer

A positive AS shock will increase the output level above potential output in the short run, but the economy will adjust to the new long-run equilibrium level of output at potential output. This implies a leftward shift in the AS curve, as the higher price level stimulated by the shock will not be sustainable in the long run.

Question 12

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.  FIGURE 24-3 Refer to Figure 24-3.After the negative aggregate demand shock shown in the diagram (from  to  ),which of the following describes the adjustment process that would return the economy to its long-run equilibrium?
A)Wages would eventually fall,causing the AD curve to shift to the right,returning to the original equilibrium at point A.
B)Wages would eventually fall,causing the AS curve to shift slowly to the right,reaching a new equilibrium at point E.
C)Wages would increase,causing the AS curve to shift to the right,reaching a new equilibrium at point E.
D)Wages would increase,causing the AD curve to shift to the right,returning to the original equilibrium at point A.
E)Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.

Accepted Answer

After a negative aggregate demand shock, as shown in the diagram, output and prices both decrease. Wages are slow to adjust downward, causing the AS curve to shift left. As a result, the economy moves to a short-run equilibrium at point B, with lower output and prices. Over time, wages adjust downward, causing the AS curve to shift slowly to the right, eventually reaching a new equilibrium at point E. Point E represents the long-run equilibrium with a lower price level but output equal to potential output. Therefore, choice B is the most appropriate response.

Question 13

Consider the basic AD/AS macro model in long-run equilibrium.A permanent expansionary AD shock has ________ price-level effect in the short run and ________ price-level effect in the long run.
A)a positive; no
B)a negative; no
C)a positive; an even larger
D)a positive; a smaller
E)a negative; a positive

Accepted Answer

A permanent expansionary AD (Aggregate Demand) shock increases the price level in the short run due to the upward slope of the AS (Aggregate Supply) curve in the short run. In the long run, as the economy adjusts and the AS curve shifts, the price level effect is even larger because the economy moves to a new long-run equilibrium at a higher price level, reflecting the increased demand throughout the economy.

Question 14

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.  FIGURE 24-3 Refer to Figure 24-3.Which of the following events could have shifted the AD curve from  to  ?
A)an increase in net exports
B)an increase in government purchases
C)an increase in desired investment
D)an increase in autonomous household saving
E)an increase in autonomous consumption

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 15

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will ________ the price level and ________ output in the short run.In the long run,the price level will ________ and output will ________.
A)decrease; decrease; decrease further; decrease further
B)decrease; decrease; decrease further; be restored to potential output
C)increase; increase; increase further; increase further
D)increase; decrease; increase further; be restored to potential output
E)increase; increase; increase further; be restored to potential output

Accepted Answer

In the short run, an expansionary aggregate demand (AD) shock increases both the price level and output. In the long run, the price level continues to increase as the economy adjusts, but output is restored to its potential level as the economy self-corrects.

Question 16

In the basic AD/AS macro model,which of the following events could cause a negative AS shock?
A)a large decrease in wages
B)a large increase in business confidence
C)a large decrease in the net tax rate
D)a widespread outbreak of a serious infectious disease
E)a large increase in labour productivity

Accepted Answer

A widespread outbreak of a serious infectious disease can cause a negative AS (aggregate supply) shock as it leads to disruptions in production and supply chains. It can result in a decrease in the availability of inputs such as labor and materials, leading to higher costs of production and decreased output, which can shift the AS curve to the left.

Question 17

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A.  FIGURE 24-3 Refer to Figure 24-3.Following the negative AD shock shown in the diagram (from  to  ),the adjustment process will take the economy to a long-run equilibrium where the price level is ________ and real GDP is ________.
A)110; 1000
B)60; 1000
C)90; 900
D)110; 800
E)90; 1250

Accepted Answer

The answer of The diagram below shows an AD/AS model...

Question 18

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in world demand for Canada's goods.In the short run,________.In the long run,________.
A)real GDP and the price level both fall; real GDP is below its original level with a lower price level
B)real GDP and the price level both rise; real GDP is above its original level with a higher price level
C)real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D)real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E)real GDP falls and the price level rises; real GDP is below its original level with a higher price level

Accepted Answer

In the short run, an increase in world demand for Canada's goods would lead to an increase in real GDP and the price level due to higher demand for Canadian products. In the long run, the economy would adjust, and real GDP would return to its potential output (original level), but the price level would remain higher due to the initial demand increase.

Question 19

What is meant by the term "stagflation"?
A)the combination of falling real GDP and a rising price level
B)a persistent inflationary gap
C)a persistent recessionary gap
D)the sluggish downward wage adjustment in response to a recessionary gap
E)the combination of inflation and rising real GDP

Accepted Answer

Stagflation is a condition where there is a combination of high inflation and stagnant economic growth, usually measured by real GDP. It is characterized by a rising price level and falling output, which is the opposite of what is expected in a typical business cycle. This can occur when there is a supply shock, such as a sudden increase in oil prices, that causes both inflation and a decrease in real output.

Question 20

Consider an economy with a relatively steep AS curve.If the AD curve shifts to the left,then the price level will ________ and national output will ________.
A)increase slightly; significantly increase
B)increase slightly; significantly decrease
C)increase sharply; increase slightly
D)fall sharply; will not change.
E)fall sharply; decrease slightly.

Accepted Answer

A steep AS curve means that the economy is operating close to its potential output, so a shift in AD to the left will lead to a sharp fall in both price level and national output. Therefore, option E is the best choice.

Quiz 24: From the Short Run to the Long Run: the Adjustment of Factor Prices

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock would have output effect in the short run and output effect in the long run.

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-3 Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from to .The initial effect is

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an unexpected and sharp reduction in desired business investment expenditure.In the short run,.In the long run,.

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in the Canadian-dollar price of all imported raw materials.In the short run,.In the long run,.

Consider the AD/AS model and suppose the economy begins at potential output.The effect of a negative AS shock on real GDP will be reversed in the long run with a shift in .

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-4 Refer to Figure 24-4.The initial effect of the positive AS shock shown in the diagram results in

Consider the basic AD/AS macro model in long-run equilibrium.A negative AS shock will the price level and output in the short run.In the long run,the price level will and output .

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is a decrease in the Canadian price of all imported raw materials.In the short run,.In the long run,.

In the basic AD/AS macro model,which of the following events would cause stagflation?

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-3 Refer to Figure 24-3.A negative shock to the economy shifts the AD curve from to .At the new short-run equilibrium,the price level is and real GDP is .

Consider the AD/AS model,and suppose that the economy begins at potential output.The effect of a positive AS shock on real GDP will be reversed in the long run with a shift in .

Consider the basic AD/AS macro model in long-run equilibrium.A permanent expansionary AD shock has price-level effect in the short run and price-level effect in the long run.

The diagram below shows an AD/AS model for a hypothetical economy.The economy begins in long-run equilibrium at point A. FIGURE 24-3 Refer to Figure 24-3.Which of the following events could have shifted the AD curve from to ?

Consider the basic AD/AS macro model in long-run equilibrium.An expansionary AD shock will the price level and output in the short run.In the long run,the price level will and output will .

In the basic AD/AS macro model,which of the following events could cause a negative AS shock?

Suppose Canada's economy is in a long-run equilibrium with real GDP equal to potential output.Now suppose there is an increase in world demand for Canada's goods.In the short run,.In the long run,.

What is meant by the term "stagflation"?

Consider an economy with a relatively steep AS curve.If the AD curve shifts to the left,then the price level will and national output will .