Question 1

What was the main reason for the economic boom of the early 1940s?
A) increased government expenditures
B) falling prices of oil and other natural resources
C) an increase in the immigration of skilled workers
D) rapid developments in transportation, electronics, and communication

Accepted Answer

The increased government expenditures during World War II, particularly on the military and defense industry, provided a huge boost to the economy and created jobs. This led to a surge in production and consumption, and helped to lift the country out of the Great Depression.

Question 2

What could create a decrease in the price level and a reduction in real GDP?
A) an increase in interest rates
B) a war in the Middle East
C) declining immigration
D) tax rebates

Accepted Answer

An increase in interest rates typically leads to a decrease in consumer spending and investment, which can cause both a decrease in the price level and a reduction in real GDP. Higher interest rates make borrowing more expensive, reducing spending and investment.

Question 3

What changes are likely to happen in an economy when production costs rise?
A) Output and prices rise.
B) Output rises and prices fall.
C) Output falls and prices rise.
D) Output and prices fall.

Accepted Answer

When production costs rise, it becomes more expensive for firms to produce goods and services. As a result, firms may decrease the quantity of goods produced, leading to a decrease in output. The decrease in supply may push prices higher in the long run due to less competition in the market. Therefore, output falls and prices rise.

Question 4

How does the aggregate demand and aggregate supply model reflect a rise in wage rates?
A) The short-run aggregate-supply curve shifts to the right.
B) The short-run aggregate-supply curve shifts to the left.
C) The aggregate-demand curve shifts to the right.
D) The aggregate-demand curve shifts to the left.

Accepted Answer

A rise in wage rates will increase production costs and decrease profitability for firms, causing them to supply less at any given price level in the short-run. This means the short-run aggregate-supply curve will shift to the left.

Question 5

What happened in the first few years of the Great Depression?
A) Unemployment rose by about 10 percent, and prices rose about 27 percent.
B) Unemployment rose by about 19 percent, and prices rose about 12 percent.
C) Unemployment rose by about 20 percent, and prices fell about 12 percent.
D) Unemployment rose by about 21 percent, and prices fell about 19 percent.

Accepted Answer

The answer of What happened in the first few years...

Question 6

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the stock market combined with a significant number of skilled workers retiring, what would we expect to happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Accepted Answer

A sharp increase in the stock market can boost consumer and business confidence, leading to increased spending and investment, which can push the price level up. The retirement of a significant number of skilled workers can reduce the economy's productive capacity, affecting real GDP in various ways depending on how demand adjusts, making C the correct choice as it captures the potential for a price level increase while acknowledging the uncertain impact on real GDP.

Question 7

Suppose there is an increase in the availability of an important major resource, such as oil. Which shift would most likely occur?
A) The aggregate supply would shift right.
B) The aggregate supply would shift left.
C) The aggregate demand would shift right.
D) The aggregate demand would shift left.

Accepted Answer

An increase in the availability of an important major resource such as oil would lead to a decrease in the production costs for firms, which would lead to an increase in supply. Therefore, the aggregate supply curve would shift to the right. Choice C and D are not correct because they relate to changes in demand, which is not affected by supply-side changes.

Question 8

Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new sources of oil are discovered in the country, what would we expect will happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Accepted Answer

A tax cut would increase aggregate demand and shift the AD curve to the right, leading to an increase in both real GDP and the price level in the short run. The discovery of new sources of oil would reduce the cost of production, leading to a decrease in the price level. However, it is unclear whether this decrease would be enough to offset the increase in aggregate demand from the tax cut, so the price level may rise, fall, or stay the same in the short run.

Question 9

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Accepted Answer

A sharp increase in the minimum wage will increase the cost of labor for firms, and they may respond by reducing employment and/or increasing prices, leading to a decrease in real GDP. The increase in pessimism about future business conditions may cause firms to reduce investment and production, further reducing real GDP. The overall effect on price level is uncertain as it depends on the magnitude of the increase in minimum wage and the degree of pessimism in the economy.

Question 10

What could create an increase in the price level and a decrease in real GDP in the short run?
A) an increase in the money supply
B) a decrease in taxes
C) an increase in stock prices
D) bad weather in agriculture producing provinces

Accepted Answer

Bad weather in agriculture producing provinces would decrease the supply of agricultural products, causing prices to rise. This would create inflation, which would cause an increase in the price level. However, since the supply of agricultural products has decreased, this would also decrease real GDP as the economy is producing less output.

Question 11

Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, there is a sharp decline in the stock market. What would we expect to happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Accepted Answer

Significant restrictions on the production of electricity will lead to a decrease in aggregate supply, causing a decrease in real GDP. The sharp decline in the stock market will lead to a decrease in investment, further contributing to the decrease in real GDP. The direction of the price level is not clear as it will depend on the magnitude of the decrease in aggregate supply and aggregate demand.

Question 12

Which of the following would cause stagflation?
A) aggregate demand shifts right
B) aggregate demand shifts left
C) aggregate supply shifts right
D) aggregate supply shifts left

Accepted Answer

Stagflation is a situation of stagnant economic growth and high inflation. This can be caused by a decrease in aggregate supply, which means that the economy is producing less while prices increase. Therefore, the correct choice is D.

Question 13

What is the effect of a temporary decrease in the availability of raw materials?
A) Aggregate supply shifts right.
B) Output falls in the short run.
C) Prices fall in the short run.
D) Long-run aggregate supply shifts to the left.

Accepted Answer

With a temporary decrease in the availability of raw materials, output (i.e. production) would fall in the short run as firms would face difficulty in acquiring the necessary inputs to produce goods and services. This would cause a temporary decrease in aggregate supply, as firms would produce less at any given price level. However, in the long run, firms can adjust their input mix and production processes to account for the shortage, so the long-run aggregate supply curve would not shift to the left permanently. Prices may or may not fall depending on the extent to which supply falls relative to demand.

Question 14

Suppose the Canadian economy is in long-run equilibrium. Then suppose the value of the Canadian dollar increases. At the same time, there is an increase in the number of skilled immigrants. What would we expect will happen in the short run?
A) Real GDP will rise, and the price level might rise, fall, or stay the same.
B) Real GDP will fall, and the price level might rise, fall, or stay the same.
C) The price level will rise, and real GDP might rise, fall, or stay the same.
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Accepted Answer

An increase in the value of the Canadian dollar will make Canadian goods relatively more expensive for foreigners, reducing the demand for exports in the short run, leading to a decrease in net exports. As a result, real GDP will fall in the short run. However, an increase in the number of skilled immigrants will increase the potential output of the economy in the long run. In the short run, this increase in the labour force may increase the production capacity of the economy and potentially lead to an increase in output. However, this may not necessarily translate to an increase in real GDP if net exports fall significantly due to the appreciation of the currency. The price level may rise, fall, or stay the same depending on the relative strength of the competing forces of increased supply from increased immigration and reduced demand from decreased net exports. Therefore, choice A is the best answer.

Question 15

What did NOT happen during the onset of the Great Depression?
A) The money supply fell as households took money out of banks.
B) The Bank of Canada decreased the bank rate.
C) The real GDP per person fell about 30 percent.
D) Bankers began holding greater reserves.

Accepted Answer

The Bank of Canada did not exist during the onset of the Great Depression, as it was not established until 1934.

Question 16

Suppose that there has been bad weather resulting in a temporary decrease in the availability of oil and the economy has reached its new short-run equilibrium. What happens as the economy moves from this short-run equilibrium to long-run equilibrium?
A) Prices and output rise.
B) Prices and output fall.
C) Prices rise and output falls.
D) Prices fall and output rises.

Accepted Answer

In the short-run, the decrease in availability of oil will cause a decrease in output and an increase in prices. However, as the economy moves towards long-run equilibrium, firms will adapt to the decreased availability of oil by finding substitutes or more efficient production methods. This will lead to an increase in output and a decrease in prices, resulting in a new long-run equilibrium with a higher price level than before the bad weather event. Therefore, prices fall and output rises as the economy moves from short-run to long-run equilibrium.

Question 17

Suppose there was an economic contraction caused by a shift in aggregate supply. Further, suppose the central bank changes the money supply to offset the effects of that contraction. How would the effects of the change in money supply be reflected in the aggregate demand and aggregate supply model?
A) aggregate supply would shift to the right.
B) Aggregate supply would shift to the left.
C) Aggregate demand would shift to the right.
D) Aggregate demand would shift to the left.

Accepted Answer

When the central bank increases the money supply to counteract an economic contraction caused by a shift in aggregate supply, it lowers interest rates, making borrowing cheaper. This stimulates spending and investment, which shifts the aggregate demand curve to the right.

Question 18

By how much did the real GDP per person increase during World War II?
A) 20 percent
B) 40 percent
C) 60 percent
D) 80 percent

Accepted Answer

During World War II, the real GDP per person in the United States increased by approximately 60 percent. This was due to increased government spending, military production, and a shift towards a wartime economy, which led to a boost in employment and overall economic activity.

Question 19

What happened during World War II?
A) Government purchases of goods and services increased.
B) The real GDP per person decreased by 60 percent.
C) The unemployment rate increased to 15 percent.
D) More resources were devoted to the production of consumer goods.

Accepted Answer

During World War II, the government increased its purchases of goods and services to support the war effort, leading to a significant increase in government spending and a shift towards a more command economy. This increased demand and economic activity helped to pull the United States out of the Great Depression. The real GDP per person actually increased during this time, although this growth was largely due to the increase in government spending and not necessarily indicative of overall economic well-being. The unemployment rate also dropped significantly as the war prompted the mobilization of millions of Americans into military service and the workforce. Finally, resources were diverted away from the production of consumer goods towards military production, leading to shortages of basic goods such as food, clothing, and fuel.

Question 20

In which situation would stagflation exist?
A) when prices and output rise
B) when prices rise and output falls
C) when prices fall and output rises
D) when prices and output fall

Accepted Answer

Stagflation occurs when there is a combination of high inflation and stagnant economic growth. Therefore, prices rise while output (or GDP) falls, as seen in Choice B.

Quiz 14: Aggregate Demand and Aggregate Supply

What was the main reason for the economic boom of the early 1940s?

What could create a decrease in the price level and a reduction in real GDP?

What changes are likely to happen in an economy when production costs rise?

How does the aggregate demand and aggregate supply model reflect a rise in wage rates?

What happened in the first few years of the Great Depression?

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the stock market combined with a significant number of skilled workers retiring, what would we expect to happen in the short run?

Suppose there is an increase in the availability of an important major resource, such as oil. Which shift would most likely occur?

Suppose the economy is in long-run equilibrium. If there is a tax cut at the same time that major new sources of oil are discovered in the country, what would we expect will happen in the short run?

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short run?

What could create an increase in the price level and a decrease in real GDP in the short run?

Suppose the economy is in long-run equilibrium. Concerns about pollution cause the government to significantly restrict the production of electricity. At the same time, there is a sharp decline in the stock market. What would we expect to happen in the short run?

Which of the following would cause stagflation?

What is the effect of a temporary decrease in the availability of raw materials?

Suppose the Canadian economy is in long-run equilibrium. Then suppose the value of the Canadian dollar increases. At the same time, there is an increase in the number of skilled immigrants. What would we expect will happen in the short run?

What did NOT happen during the onset of the Great Depression?

Suppose that there has been bad weather resulting in a temporary decrease in the availability of oil and the economy has reached its new short-run equilibrium. What happens as the economy moves from this short-run equilibrium to long-run equilibrium?

Suppose there was an economic contraction caused by a shift in aggregate supply. Further, suppose the central bank changes the money supply to offset the effects of that contraction. How would the effects of the change in money supply be reflected in the aggregate demand and aggregate supply model?

By how much did the real GDP per person increase during World War II?

What happened during World War II?

In which situation would stagflation exist?