Question 1

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand decreases,we expect the AE function to shift to a
A)higher level and stay there.
B)higher level,but then shift part of the way down to its original position as the price level falls.
C)higher level but then return to its original position as the price level falls.
D)lower level and stay there.
E)lower level,but then return to its original position as the price level falls.

Accepted Answer

The answer of If the economy is in macroeconomic equilibrium...

Question 2

Consider the basic AD/AS macro model.A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level
A)and real GDP are higher than in the initial equilibrium.
B)and real GDP are lower than in the initial equilibrium.
C)is lower and real GDP higher than in the initial equilibrium.
D)is higher and real GDP remained the same as in the initial equilibrium.
E)is higher and real GDP lower than in the initial equilibrium.

Accepted Answer

A rise in an input price, such as the price of oil, would shift the aggregate supply curve to the left, leading to a higher price level and lower real GDP in the new equilibrium. This is because the cost of production increases, causing producers to supply less at any given price level.

Question 3

Consider the following news headline: ʺGovernments plan massive hospital construction programs across the country.ʺ Choose the statement below that best describes the likely macroeconomic effects.
A)the AD curve shifts to the left; the price level falls and real GDP falls
B)the AD curve shifts to the right; the price level rises and real GDP rises
C)the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate
D)the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
E)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises

Accepted Answer

With massive hospital construction programs, government spending will increase, which will increase aggregate demand (AD) as a component of GDP. The increased spending will also create jobs and increase incomes, which will further increase AD. This shift in AD will lead to an increase in both the price level and real GDP. Therefore, choice B is the most accurate description of the likely macroeconomic effects.

Question 4

In the basic AD/AS model,the effect of an aggregate demand shock is divided between a change in output and a change in the price level.How the effect is divided depends on the
A)amount of inflation in the economy.
B)position of the AE curve.
C)size of the simple multiplier.
D)slope of the AD curve.
E)slope of the AS curve.

Accepted Answer

The slope of the AS curve determines how much of the aggregate demand shock will affect the price level versus output. A steeper AS curve will result in higher inflation and lower output, while a flatter AS curve will result in lower inflation and higher output. Therefore, the best choice is E - slope of the AS curve.

Question 5

Which of the following will cause a positive aggregate supply shock?
A)an increase in the price of raw materials
B)a decrease in the price of foreign output
C)an increase in the price of foreign output
D)a decrease in the price of oil
E)a decrease in productivity

Accepted Answer

A decrease in the price of oil would cause a positive aggregate supply shock as it would lead to lower production costs for firms, resulting in a rightward shift of the aggregate supply curve.

Question 6

Consider the following two headlines appearing in the same day: ʺFederal government announces major new infrastructure investmentsʺ and ʺNew technology drives down transport costs.ʺ Choose the statement below that best describes the likely macroeconomic effects.
A)The AS curve shifts to the left; the price level rises and real GDP falls.
B)The AS curve shifts to the right; the price level falls and real GDP rises.
C)The AD curve shifts to the left; the price level falls and real GDP falls.
D)The AD curve shifts to the right; the price level rises and real GDP rises.
E)The AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises.

Accepted Answer

The federal government's major new infrastructure investments are likely to increase aggregate demand (AD) by boosting spending, while new technology driving down transport costs can increase aggregate supply (AS) by making production more efficient. Both shifts to the right in AD and AS curves can lead to an increase in real GDP, but the effect on the price level is indeterminate because it depends on the relative magnitude of the shifts.

Question 7

Suppose firms are currently producing output at a level beyond their normal capacity.In this situation,the AS curve will be relatively ________ and a positive AD shock will result in ________.
A)steep; an increase in the price level with a small increase in real GDP
B)flat; an equal increase in the price level and in real GDP
C)flat; a very small increase in prices but a large increase in real GDP
D)flat; a very small decrease in the price level and a decrease in real GDP
E)steep; a decrease in the price level and a very small decrease in real GDP

Accepted Answer

When firms are producing beyond their normal capacity, the Aggregate Supply (AS) curve becomes steep. In this situation, a positive Aggregate Demand (AD) shock would primarily increase the price level, with only a small increase in real GDP, due to limited capacity for additional output.

Question 8

Consider the basic AD/AS model.A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium,which in comparison to the original equilibrium,has a price level that is
A)higher and a real GDP that is higher.
B)higher and a real GDP that is lower.
C)higher and a real GDP that is the same.
D)lower and a real GDP that is higher.
E)lower and a real GDP that is lower.

Accepted Answer

According to the basic AD/AS model, a rise in input prices like the wage rate shifts the AS curve upward and to the left, resulting in a new macroeconomic equilibrium with a higher price level and lower real GDP. This is because the cost of producing goods and services has increased, leading to a decrease in the aggregate supply. As a result, prices increase (inflation) and output decreases (unemployment).

Question 9

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand increases,we expect the AE function to shift to a
A)higher level and stay there.
B)higher level,but then shift part of the way down to its original position as the price level rises.
C)higher level but then return to its original position as the price level rises.
D)lower level and stay there.
E)lower level,but then return to its original position as the price level rises.

Accepted Answer

When the economy is in macroeconomic equilibrium with a vertical Aggregate Supply (AS) curve, an increase in Aggregate Demand (AD) leads to a higher price level without changing the output level. The Aggregate Expenditure (AE) function initially shifts to a higher level due to increased demand. However, as prices rise, the real value of money decreases, reducing consumption and investment, which eventually brings the AE back to its original position. This adjustment process reflects the economy's return to its initial output level at a higher price, assuming no long-term changes in aggregate supply.

Question 10

Consider the AD/AS model.Suppose there is a decrease in aggregate demand and,simultaneously,an increase in aggregate supply.The result will be a
A)rise in real GDP but price level changes will be indeterminate.
B)rise in real GDP and a rise in the price level.
C)rise in real GDP and a fall in the price level.
D)an indeterminate change in real GDP and a rise in the price level.
E)an indeterminate change in real GDP and a fall in the price level.

Accepted Answer

The answer of Consider the AD/AS model.Suppose there is a...

Question 11

Aggregate demand (AD)shocks have a smaller effect on real GDP and a larger effect on the price level
A)the steeper the AS curve.
B)on the downward-sloping portion of the AS curve.
C)the flatter the AS curve.
D)on the upward-sloping portion of the AS curve.
E)if the AD curve is flatter.

Accepted Answer

The answer of Aggregate demand (AD)shocks have a smaller effect...

Question 12

Consider the following news headline: ʺInformation technology costs for Canadian firms continue to drop.ʺ Choose the statement below that best describes the likely macroeconomic effect.
A)the AD curve shifts to the right; the price level rises and real GDP rises
B)the AD curve shifts to the left; the price level falls and real GDP falls
C)the AS curve shifts to the left; the price level rises and real GDP falls
D)the AS curve shifts to the right; the price level falls and real GDP rises
E)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises

Accepted Answer

The news headline suggests that there is a decrease in IT costs for Canadian firms, which means that their production costs will also decrease. This will cause a shift in the AS curve to the right, resulting in lower prices and higher output. This will lead to an increase in real GDP while the price level falls, making option D the correct choice.

Question 13

Which of the following represents a positive aggregate supply shock?
A)an outbreak of war among oil-exporting countries
B)a general labour strike across the country
C)bad weather which cripples telecommunications for one month
D)improved computer literacy for the typical worker
E)an increase in exports

Accepted Answer

An improvement in computer literacy for the typical worker would increase the efficiency and productivity of workers, which would result in a positive aggregate supply shock.

Question 14

Aggregate supply shocks cause the price level and real GDP to change in
A)the same direction with price changing by more than output.
B)the same direction and by the same amount.
C)opposite directions with price changing by less than output.
D)opposite directions but not necessarily by the same amount.
E)opposite directions but by the same amount.

Accepted Answer

Aggregate supply shocks cause the price level and real GDP to move in opposite directions, but not necessarily in the same proportion. For example, a negative supply shock such as a sudden increase in energy prices can lead to a decrease in real GDP and an increase in the overall price level, but the magnitude of each change may vary depending on the specific circumstances. Thus, the answer is option D, opposite directions but not necessarily by the same amount.

Question 15

Consider the following news headline: ʺThreat of widespread labour unrest leads to generous wage increases in several industries.ʺ Choose the statement below that best describes the likely macroeconomic effects.
A)The AS curve shifts to the left; the price level rises and real GDP falls.
B)The AS curve shifts to the right; the price level falls and real GDP rises.
C)The AD curve shifts to the left; the price level falls and real GDP falls.
D)The AD curve shifts to the right; the price level rises and real GDP rises.
E)The AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP falls.

Accepted Answer

Generous wage increases in several industries would increase production costs, leading to a leftward shift in the Aggregate Supply (AS) curve. This shift would cause the price level to rise and real GDP to fall, as businesses produce less due to higher costs.

Question 16

Consider the following news headline: ʺWorld commodity prices rise sharply.ʺ Choose the statement below that best describes the likely macroeconomic effects in Canada.(Remember that Canada is both a producer and a consumer of commodities.)
A)there is no change in either the AD or the AS curves
B)the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
C)the AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases
D)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases
E)the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate

Accepted Answer

As a producer of commodities, Canada will benefit from the rise in commodity prices as its export earnings increase, shifting the AD curve to the right. On the other hand, as a consumer of commodities, Canada will face higher input costs, shifting the AS curve to the left. The net effect on the price level is uncertain, but real GDP is expected to be indeterminate. Therefore, the correct answer is E.

Question 17

Which of the following would cause a positive aggregate demand shock,but leave the aggregate supply curve unaffected?
A)A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures.
B)A severe drought lasting for six months that destroys agricultural and forestry production.
C)A medical report confirming that improved health for Canadian workers caused fewer lost days of production.
D)An improvement in the computer literacy of workers.
E)A substantial increase in world oil prices.

Accepted Answer

A free trade agreement between Canada and Europe that leads Canadian businesses to increase investment expenditures would increase demand for goods and services, causing a positive aggregate demand shock. However, it would not affect the aggregate supply curve, as there would be no change in the production capacity of the economy.

Question 18

Consider the AD/AS macro model.Suppose there is an increase in aggregate demand and,simultaneously,a decrease in aggregate supply.The result will be a
A)rise in real GDP but price level changes will be indeterminate.
B)rise in real GDP and a rise in the price level.
C)rise in real GDP and a fall in the price level.
D)an indeterminate change in real GDP and a rise in the price level.
E)an indeterminate change in real GDP and a fall in the price level.

Accepted Answer

An increase in aggregate demand would initially lead to a rise in both real GDP and the price level. However, the decrease in aggregate supply would cause an increase in production costs and reduce output. As a result, the change in real GDP is indeterminate, but the price level will still rise due to the increase in aggregate demand. Therefore, the correct answer is an indeterminate change in real GDP and a rise in the price level.

Question 19

Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased.We can conclude that this shock was
A)a positive AD shock.
B)a negative AD shock.
C)a positive AS shock.
D)a negative AS shock.
E)a negative technology shock.

Accepted Answer

A decrease in price level and an increase in real GDP indicates that the shock was caused by an increase in aggregate supply (AS). This could be due to factors such as improved technology, a decrease in input prices, or an increase in productivity. A positive AD shock would lead to both an increase in price level and real GDP, while a negative AD shock would lead to a decrease in both. A negative AS shock would lead to a decrease in real GDP and an increase in price level. A negative technology shock would lead to a decrease in productivity and a decrease in real GDP.

Quiz 23: Output and Prices in the Short Run

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand decreases,we expect the AE function to shift to a

Consider the basic AD/AS macro model.A rise in an input price like the price of oil would be expected to cause a new macroeconomic equilibrium in which the price level

Consider the following news headline: ʺGovernments plan massive hospital construction programs across the country.ʺ Choose the statement below that best describes the likely macroeconomic effects.

In the basic AD/AS model,the effect of an aggregate demand shock is divided between a change in output and a change in the price level.How the effect is divided depends on the

Which of the following will cause a positive aggregate supply shock?

Consider the following two headlines appearing in the same day: ʺFederal government announces major new infrastructure investmentsʺ and ʺNew technology drives down transport costs.ʺ Choose the statement below that best describes the likely macroeconomic effects.

Suppose firms are currently producing output at a level beyond their normal capacity.In this situation,the AS curve will be relatively and a positive AD shock will result in .

Consider the basic AD/AS model.A rise in an input price like the wage rate would be expected to create a new macroeconomic equilibrium,which in comparison to the original equilibrium,has a price level that is

If the economy is in macroeconomic equilibrium with a vertical AS curve,and then aggregate demand increases,we expect the AE function to shift to a

Consider the AD/AS model.Suppose there is a decrease in aggregate demand and,simultaneously,an increase in aggregate supply.The result will be a

Aggregate demand (AD) shocks have a smaller effect on real GDP and a larger effect on the price level

Consider the following news headline: ʺInformation technology costs for Canadian firms continue to drop.ʺ Choose the statement below that best describes the likely macroeconomic effect.

Which of the following represents a positive aggregate supply shock?

Aggregate supply shocks cause the price level and real GDP to change in

Consider the following news headline: ʺThreat of widespread labour unrest leads to generous wage increases in several industries.ʺ Choose the statement below that best describes the likely macroeconomic effects.

Consider the following news headline: ʺWorld commodity prices rise sharply.ʺ Choose the statement below that best describes the likely macroeconomic effects in Canada.(Remember that Canada is both a producer and a consumer of commodities.)

Which of the following would cause a positive aggregate demand shock,but leave the aggregate supply curve unaffected?

Consider the AD/AS macro model.Suppose there is an increase in aggregate demand and,simultaneously,a decrease in aggregate supply.The result will be a

Suppose the economy is hit by a shock and we observe that the price level has decreased whereas real GDP has increased.We can conclude that this shock was