Question 1

Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively
A) large change in price level and a large change in real GDP.
B) large change in price level and a small change in real GDP.
C) small change in price level and a large change in real GDP.
D) small change in price level and a small change in real GDP.
E) no change in both price and output.

Accepted Answer

If firms are already producing beyond their normal capacity, they are likely operating at or close to full employment, meaning there is limited room to increase output. As a result, a change in AD will have a larger effect on the price level than on real GDP. This is reflected in choice B, which predicts a large change in the price level but a small change in real GDP.

Question 2

If the economyʹs AS curve is upward sloping, a positive aggregate demand shock will result in
A) an increase in prices but not output.
B) an increase in output but not prices.
C) an increase in both output and prices.
D) a decrease in both output and prices.
E) a decrease in output and an increase in prices.

Accepted Answer

An upward-sloping AS curve indicates that as the price level increases, the quantity of output supplied by firms increases as well. A positive aggregate demand shock will shift the AD curve to the right, resulting in both higher output and higher prices.

Question 3

FIGURE 23-3
-Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy A in its current equilibrium position?
A) Unit costs are rising, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level.
B) Firms are producing well below their capacity and are willing to produce more only if prices rise.
C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase.
D) Firms are producing well below their capacity and are willing to produce more output with no increase in price.
E) Unit costs are rising, but firms are able to produce more output because there is excess capacity in the economy.

Accepted Answer

The answer of  FIGURE 23-3
-Refer to Figure 23-3. Which...

Question 4

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

A rise in an input price like the wage rate would shift the short-run aggregate supply curve (SRAS) leftward, causing a higher price level and lower real GDP compared to the original equilibrium. This is due to the fact that firms face higher production costs and will reduce their output in response, leading to a decrease in real GDP.

Question 5

If the economyʹs AS curve is very steep and there is a negative aggregate demand shock, the result will be
A) an increase in the price level and a decrease in real national income.
B) an increase in both the price level and real national income.
C) a decrease in the price level with almost no change in real national income.
D) a decrease in the price level and an increase in real national income.
E) no change in either price level or output.

Accepted Answer

The answer of If the economyʹs AS curve is very...

Question 6

FIGURE 23-3
-Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy B?
A) Unit costs are rising rapidly, but firms can produce more output by employing standby capacity and overtime labour, for example, with no increase in the price level.
B) Firms are producing well below their capacity and are willing to produce more only if prices rise.
C) Unit costs are rising rapidly as firms are producing beyond their capacity. Firms will produce more only if prices increase.
D) Firms are producing well below their capacity and are willing to produce more output with no increase in price.
E) Firms are not able to produce more output because there is no excess capacity in the economy.

Accepted Answer

The graph shows that the supply curve is flat (horizontal) which suggests that firms are willing to produce more output with no increase in price. This indicates that firms are producing well below their capacity and have excess capacity available to produce more output. Hence, option D is the correct choice.

Question 7

FIGURE 23-3
-Refer to Figure 23-3. Suppose the price level in Economy A is above P0. Which of the following statements describes what would occur?
A) The AD curve would shift to the right until macro equilibrium is reached.
B) Real GDP would be below its equilibrium level which would put downward pressure on the price level until it reaches macro equilibrium at P0.
C) The amount of output supplied by firms is greater than total desired expenditure; excess supply will put downward pressure on the price level until it reaches macro equilibrium at P0.
D) Real GDP would be below its equilibrium level which would put upward pressure on the price level until it reaches macro equilibrium.
E) The AS curve would shift to the left until macro equilibrium is reached.

Accepted Answer

When the price level is above P0, there is excess supply, meaning firms are producing more than what is being demanded. This excess supply puts downward pressure on the price level until it returns to the equilibrium level at P0.

Question 8

Aggregate demand shocks have a large effect on real GDP and a small 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) when the AS curve is vertical.
E) if the AD curve is steep.

Accepted Answer

The answer of Aggregate demand shocks have a large effect...

Question 9

Which of the following will cause a negative aggregate demand shock?
A) an increase in the price of raw materials
B) a decrease in the domestic price level
C) an increase in the domestic price level
D) an increase in government expenditures
E) an increase in tax rates

Accepted Answer

An increase in tax rates will reduce disposable income and decrease consumer spending, causing a negative aggregate demand shock. The other choices could potentially lead to inflation (C) or reduce supply (A) but would not directly cause a negative aggregate demand shock.

Question 10

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 causes the AE function to return to its original position.

Question 11

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 can cause the price level and real GDP to move in opposite directions. For example, a negative supply shock such as an increase in oil prices can decrease aggregate supply, leading to lower output (real GDP) and higher prices. However, the magnitude of the change in price and output may not necessarily be equal or proportional.

Question 12

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...

Question 13

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 leading to increased investment expenditures would increase demand for goods and services, causing a positive aggregate demand shock. However, it would not affect the aggregate supply curve because there would not be a change in the availability of factors of production or technology. The other options would either affect aggregate supply or have no effect on aggregate demand.

Question 14

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 will lower production costs and increase aggregate supply, leading to a positive aggregate supply shock.

Question 15

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.

Question 16

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 17

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 increase in computer literacy for the typical worker would result in an increase in productivity and efficiency, leading to a positive aggregate supply shock.

Question 18

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 AD shock is absorbed by changes in output versus changes in the price level. A steeper AS curve (less elastic) implies a greater impact on the price level and less impact on output, while a flatter AS curve (more elastic) implies a greater impact on output and less impact on the price level.

Question 19

Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will initially cause
A) a decrease in the price level.
B) the equilibrium point to move rightward along the AS curve.
C) a movement along the AD curve to the right.
D) a shift to the right in the AS curve.
E) the unemployment rate to remain constant.

Accepted Answer

A positive aggregate demand shock will shift the AD curve to the right, causing an increase in output and the price level. In the short run, the upward-sloping AS curve will limit the increase in output, causing the equilibrium point to move rightward along the AS curve. Therefore, B is the best choice. A is incorrect because a positive aggregate demand shock will generally cause an increase in the price level due to the short-term output constraint. C is incorrect because a positive aggregate demand shock will shift the AD curve, not cause a movement along it. D is incorrect because the AS curve is already upward-sloping, so a positive aggregate demand shock will not shift it. E is incorrect because the increase in output caused by the aggregate demand shock may temporarily reduce the unemployment rate, at least until wages and prices adjust in the long run.

Question 20

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 relatively steep. In this situation, a positive Aggregate Demand (AD) shock would primarily increase the price level while resulting in only a small increase in real GDP, as firms have less capacity to increase production further.

Quiz 23: Output and Prices in the Short Run

Consider the basic AD/AS model. Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively

If the economyʹs AS curve is upward sloping, a positive aggregate demand shock will result in

FIGURE 23-3 -Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy A in its current equilibrium position?

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 economyʹs AS curve is very steep and there is a negative aggregate demand shock, the result will be

FIGURE 23-3 -Refer to Figure 23-3. Which of the following statements best describes the supply side of Economy B?

FIGURE 23-3 -Refer to Figure 23-3. Suppose the price level in Economy A is above P0. Which of the following statements describes what would occur?

Aggregate demand shocks have a large effect on real GDP and a small effect on the price level

Which of the following will cause a negative aggregate demand shock?

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

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

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

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

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

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

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

Which of the following represents a positive aggregate supply shock?

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

Consider the basic AD/AS model with an upward-sloping AS curve. A positive aggregate demand shock will initially cause

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 .