Question 1

Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth?

Accepted Answer

An exogenous increase in the domestic price level (inflation) reduces the real value of money. A person with a 25-year home mortgage benefits because the real value of their fixed mortgage payments decreases, effectively reducing the real burden of their debt.

Question 2

In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift

Accepted Answer

An increase in government purchases increases aggregate expenditure (AE), shifting the AE curve upward. This increase in demand also shifts the aggregate demand (AD) curve to the right.

Question 3

The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that

Accepted Answer

At low levels of GDP, firms have excess capacity and can increase production without incurring significant additional costs. This allows them to supply more output at a relatively constant price level, resulting in a relatively flat AS curve.

Question 4

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

Accepted Answer

A decrease in the price of oil will lower production costs for firms, leading to an increase in aggregate supply.

Question 5

A rightward shift in the economy's AS curve implies that

Accepted Answer

A rightward shift in the AS curve indicates an increase in aggregate supply, meaning that at any given price level, a higher level of output will be supplied. This could be due to various factors, such as an increase in productivity, a decrease in input costs, or improvements in technology.

Question 6

Consider the following news headline: "World commodity prices rise sharply." 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.)

Accepted Answer

Since Canada is a producer and consumer of commodities, the rise in world commodity prices will increase the demand for Canadian commodities and cause the AD curve to shift to the right. At the same time, the increase in input costs for Canadian producers will cause the AS curve to shift to the left. The overall effect on the price level is indeterminate, but it is likely to rise. The effect on real GDP is indeterminate because the increase in demand for Canadian commodities could increase production and employment, but the increase in input costs could decrease production and employment.

Question 7

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

Accepted Answer

A decrease in price level and an increase in real GDP is consistent with a positive AS (aggregate supply) shock. This means that there has been an increase in the economy's productive capacity, which allows for more output to be produced at a lower cost. A negative AS shock, on the other hand, would lead to a decrease in output and an increase in prices. A negative technology shock would decrease productivity and shift the AS curve to the left, causing both output and prices to decrease. A negative AD (aggregate demand) shock would lead to a decrease in both output and prices. A positive AD shock would lead to an increase in output and prices.

Question 8

One reason why the aggregate demand (AD)curve slopes downward is that

Accepted Answer

When the domestic price level rises, domestic goods become relatively more expensive compared to foreign goods, leading consumers to substitute foreign goods for domestic goods, which decreases aggregate demand.

Question 9

Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE)function shifts

Accepted Answer

The answer of Other things being equal, as the price...

Question 10

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

Accepted Answer

An increase in unit labour costs would shift the short-run aggregate supply (SRAS) curve upward and leftward, leading to a higher price level and a lower real GDP in the new macroeconomic equilibrium. This is because the increase in input costs would make it more expensive for firms to produce goods and services, leading to a decrease in their willingness to supply them at any given price level. The result is a contractionary effect on the economy, as higher prices lead to lower consumption and investment, causing a decrease in real GDP.

Question 11

In the short run, the aggregate supply curve has a positive slope because, as the price level rises, producers can

Accepted Answer

In the short run, as the price level rises, producers are willing to supply more because they can cover the extra costs incurred to produce additional output, leading to a positive slope in the aggregate supply curve.

Question 12

When the price level varies, the multiplier is _ the simple multiplier.

Accepted Answer

When the price level varies, the value of the simple multiplier becomes smaller. This is because an increase in price level causes a reduction in consumption and investment, which in turn reduces the overall impact of spending on the economy. Thus, the multiplier effect becomes smaller as the price level increases.

Question 13

Consider the basic AD/AS model in the short run. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the

Accepted Answer

The simple multiplier is the ratio of the horizontal shift of the AD curve to the change in autonomous expenditure, reflecting how much output changes in response to a change in autonomous spending.

Question 14

The AD curve relates the price level to

Accepted Answer

The AD (aggregate demand) curve shows the relationship between the price level and the equilibrium level of real GDP, assuming that output is demand-determined. Therefore, option D is the correct answer as it relates the price level to equilibrium real GDP. Options A, B, C, and E do not directly relate to the AD curve.

Question 15

Consider a simple macro model with a given price level and demand- determined output. An exogenous change in the domestic price level changes equilibrium real GDP

Accepted Answer

An exogenous change in the domestic price level will shift the aggregate demand curve. If the change in price level is an increase, the aggregate demand curve will shift leftward and equilibrium real GDP will decrease. If the change in price level is a decrease, the aggregate demand curve will shift rightward and equilibrium real GDP will increase. Therefore, the change in equilibrium real GDP will be in the opposite direction of the exogenous change in the domestic price level.

Question 16

One reason why the aggregate demand (AD)curve slopes downward is that

Accepted Answer

When the price level falls, the purchasing power of existing wealth increases, leading to an increase in the level of wealth. This increase in wealth causes an increase in desired consumption, which in turn drives up the aggregate demand for goods and services. Therefore, as prices fall, the aggregate demand increases, resulting in a downward sloping AD curve.

Question 17

If the AS curve is vertical and there is a decrease in aggregate demand, the result is

Accepted Answer

When the AS curve is vertical, it indicates that the economy is at full capacity, and real GDP is not affected by changes in aggregate demand. A decrease in aggregate demand will lead to a lower price level, but real GDP remains unchanged.

Question 18

Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve?

Accepted Answer

An increase in the business confidence of firms would lead to firms being more willing to invest and expand production, leading to an increase in aggregate demand (AD) as firms would demand more inputs to produce more goods and services. This increase in AD would cause a rightward shift in the AD curve. Additionally, the increase in business confidence would lead to increased consumer confidence, leading to an increase in consumption and investment spending, causing an upward parallel shift in the AE curve.

Question 19

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

Accepted Answer

When the AS curve is steeper, it indicates that output is less responsive to changes in aggregate demand, leading to a larger effect on the price level and a smaller effect on real GDP.

Question 20

Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income

Accepted Answer

A fall in desired consumption, investment, government purchases, or net exports reduces aggregate expenditure at each income level, shifting the AE curve downwards. This decrease in aggregate expenditure leads to a leftward shift in the AD curve, as overall demand in the economy decreases.

Quiz 23: Output and Prices in the Short Run