Question 1

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 the cost of information technology is decreasing for Canadian firms. This can be seen as an increase in productivity and efficiency, resulting in a decrease in the cost of production for firms. As a result, the AS (aggregate supply) curve shifts to the right, indicating that firms can produce more output at every price level. This leads to a decrease in the price level (inflation), and an increase in real GDP (economic growth). Hence, the best choice is D.

Question 2

If the economyʹs AS curve is completely horizontal, the multiplier in the AD/AS model is
A) infinitely large.
B) equal to the simple multiplier.
C) smaller than the simple multiplier.
D) is zero.
E) negative.

Accepted Answer

If the economyʹs AS curve is completely horizontal, it means that the output supply is perfectly elastic, meaning that any increase in aggregate demand will lead to an equal increase in output. This situation is similar to the scenario in which the AS curve is a straight line intersecting the horizontal axis. In this case, the multiplier in the AD/AS model will be equal to the simple multiplier because any increase in autonomous spending will lead to a proportional increase in income. Therefore, Choice B is correct.

Question 3

FIGURE 23-5
-Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then how much was the increase in government purchases?
A) 30
B) 40
C) 50
D) 12
E) not enough information to know

Accepted Answer

The answer of  FIGURE 23-5
-Refer to Figure 23-5. Suppose...

Question 4

FIGURE 23-5
-Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then what is the value of the multiplier?
A) 1.2
B) 1.4
C) 4
D) 2.8
E) 3.2

Accepted Answer

The answer of  FIGURE 23-5
-Refer to Figure 23-5. Suppose...

Question 5

Consider the AD/AS model in which the price level varies. In this case, the multiplier is the simple multiplier.
A) larger than
B) smaller than
C) definitionally the same as
D) not comparable to
E) equal to

Accepted Answer

The multiplier in the AD/AS model, where the price level varies, is smaller than the simple multiplier because as prices rise, the real value of money decreases, leading to a lower level of consumption and investment than would be predicted by the simple multiplier, which does not account for changes in the price level.

Question 6

FIGURE 23-5
-Refer to Figure 23-5. Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right, as shown. The simple multiplier is and the multiplier is .
A) 6; 1.2
B) 2.8; 1.2
C) 4; 1.2
D) 4; 2.8
E) 4; 3.2

Accepted Answer

The simple multiplier is calculated as 1/(1-MPC) = 1/(1-0.8) = 5, and the multiplier is calculated as 1/MPS = 1/0.2 = 5. Therefore, the multipliers are both 5, and the increase in government purchases of 50 will lead to an increase in equilibrium output of 5x50= 250. This is represented by the shift of the AD curve to the right by the distance Y = 250 in Figure 23-5.

Question 7

FIGURE 23-4
-Refer to Figure 23-4. Suppose the Canadian economy is initially in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock?
A) an increase in the net tax rate
B) a decrease in firmsʹ desired investment expenditures
C) an increase in factor prices
D) a decrease in labour productivity
E) a decrease in the world price of oil

Accepted Answer

A decrease in the world price of oil would reduce the cost of production, shifting the AS curve to the right. It would also reduce the cost of importing oil, increasing net exports and shifting the AD curve to the right. This leads to a new equilibrium at point B with a higher level of output and lower price level.

Question 8

If the economyʹs AS curve is vertical, the multiplier in the AD/AS model is
A) infinitely large.
B) equal to the simple multiplier.
C) smaller than the simple multiplier.
D) zero.
E) negative.

Accepted Answer

If the economy's AS curve is vertical, it means that the level of output is fixed regardless of changes in the price level. Therefore, changes in aggregate demand would have no effect on output, and the multiplier in the AD/AS model would be zero.

Question 9

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...

Question 10

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

Both headlines suggest positive economic developments: increased infrastructure investments can enhance productivity and efficiency, leading to a rightward shift in the Aggregate Supply (AS) curve. Similarly, new technology reducing transport costs can increase economic efficiency and productivity, also contributing to a rightward shift in the AS curve. Additionally, the infrastructure investments could increase overall demand (shifting the Aggregate Demand (AD) curve to the right) due to increased government spending and potentially higher consumer confidence. The combined effect of these shifts is an increase in real GDP, while the effect on the price level is uncertain because it depends on the relative magnitude of the shifts in the AD and AS curves.

Question 11

FIGURE 23-5
-Refer to Figure 23-5. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then what is the value of the multiplier?
A) 1.2
B) 1.5
C) 4.0
D) 5.0
E) not enough information to know

Accepted Answer

The answer of  FIGURE 23-5
-Refer to Figure 23-5. Suppose...

Question 12

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

The massive hospital construction programs will lead to increased government spending, which will shift the AD curve to the right. This will result in an increase in the price level and an increase in real GDP as the economy experiences a boost in aggregate demand.

Question 13

FIGURE 23-5
-Refer to Figure 23-5. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then how much was the increase in investment?
A) 30
B) 40
C) 50
D) 12
E) not enough information to know

Accepted Answer

Using the simple multiplier formula (change in real GDP/change in autonomous spending), we can determine that the increase in investment was 50. The change in real GDP is shown on the vertical axis of the graph as the distance between the original and new equilibrium points, which is 200 - 150 = 50. Therefore, the change in autonomous spending (which is the increase in investment in this case) is 50/4 = 12.5. Rounded to the nearest whole number, the answer is 50.

Question 14

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 typically lead to higher production costs, which can cause the aggregate supply (AS) curve to shift to the left. This shift results in a higher price level and a decrease in real GDP.

Question 15

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 Canada is both a producer and a consumer of commodities, a rise in world commodity prices would likely have a mixed effect on Canada's economy. The AD curve would shift to the right as the increase in global demand for commodities would increase Canada's exports and boost investment in its commodity-related industries. However, the AS curve would also shift to the left as the higher prices for commodities would increase production costs and reduce the purchasing power of Canadian consumers. The overall effect on the price level is likely to be a rise, while the effect on real GDP is indeterminate due to the opposing shifts in the AD and AS curves.

Question 16

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 the price level along with an increase in real GDP indicates an increase in supply, which implies a positive AS shock.

Question 17

When the economyʹs AS curve is positively sloped, the multiplier in the AD/AS model is
A) constant.
B) equal to one.
C) equal to the simple multiplier.
D) smaller than the simple multiplier.
E) larger than the simple multiplier.

Accepted Answer

When the economy's AS curve is positively sloped, it means that output is primarily influenced by supply-side factors rather than demand-side factors. As a result, any change in aggregate demand will have a smaller effect on output and employment. Therefore, the multiplier in the AD/AS model will be smaller than the simple multiplier, which assumes a flat AS curve and complete responsiveness of output to changes in aggregate demand. The exact value of the multiplier will depend on the slope of the AS curve and the size of the initial shock to aggregate demand.

Question 18

Suppose the government embarks on an infrastructure program, spending $8 billion on the construction of new roads and bridges. What is the size of the multiplier if the AS curve is vertical?
A) 0
B) greater than 1
C) less than 1
D) infinity
E) insufficient information to solve

Accepted Answer

If the AS curve is vertical, then the economy is operating at full capacity and any increase in government spending will only lead to inflation without any increase in output. Therefore, the multiplier is 0.

Question 19

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

The increase in aggregate demand will lead to an increase in both real GDP and the price level, while the simultaneous decrease in aggregate supply will lead to a decrease in real GDP and an increase in the price level. The net effect on real GDP will therefore be indeterminate, but the price level will definitely rise.

Question 20

FIGURE 23-5
-Refer to Figure 23-5. Suppose that an increase in autonomous investment by 40 causes the AD curve to shift to the right, as shown. The simple multiplier is and the multiplier is .
A) 6; 1.2
B) 2.8; 1.2
C) 4; 1.2
D) 5; 1.5
E) 4; 3.2

Accepted Answer

The answer of  FIGURE 23-5
-Refer to Figure 23-5. Suppose...

Quiz 23: Output and Prices in the Short Run

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.

If the economyʹs AS curve is completely horizontal, the multiplier in the AD/AS model is

FIGURE 23-5 -Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then how much was the increase in government purchases?

FIGURE 23-5 -Refer to Figure 23-5. Suppose that an increase in government purchases caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then what is the value of the multiplier?

Consider the AD/AS model in which the price level varies. In this case, the multiplier is the simple multiplier.

FIGURE 23-5 -Refer to Figure 23-5. Suppose that an increase in government purchases by 50 causes the AD curve to shift to the right, as shown. The simple multiplier is and the multiplier is .

FIGURE 23-4 -Refer to Figure 23-4. Suppose the Canadian economy is initially in equilibrium at point A. An unexpected shock then shifts both the AD and the AS curves as shown and results in a new equilibrium represented by point B. Which of the following events could cause such a shock?

If the economyʹs AS curve is vertical, the multiplier in the AD/AS model is

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

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.

FIGURE 23-5 -Refer to Figure 23-5. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 5, then what is the value of the multiplier?

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.

FIGURE 23-5 -Refer to Figure 23-5. Suppose that an increase in autonomous investment caused the AD curve to shift to the right, as shown. If the simple multiplier in this model is 4, then how much was the increase in investment?

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.)

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

When the economyʹs AS curve is positively sloped, the multiplier in the AD/AS model is

Suppose the government embarks on an infrastructure program, spending $8 billion on the construction of new roads and bridges. What is the size of the multiplier if the AS curve is vertical?

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

FIGURE 23-5 -Refer to Figure 23-5. Suppose that an increase in autonomous investment by 40 causes the AD curve to shift to the right, as shown. The simple multiplier is and the multiplier is .