Question 1

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?
A)Aggregate quantity supplied is greater than potential output.
B)Aggregate quantity demanded is less than potential output.
C)Aggregate quantity demanded is equal to potential output.
D)The aggregate demand curve is horizontal at the potential output level.

Accepted Answer

If the economy is in both long-run and short-run equilibrium, it means that aggregate quantity demanded is equal to aggregate quantity supplied at the potential output level. Therefore, option C is the correct answer. Option A is incorrect because if aggregate quantity supplied is greater than potential output, the economy would be in a short-run equilibrium but not in a long-run equilibrium. Option B is incorrect because if aggregate quantity demanded is less than potential output, the economy would be in a short-run equilibrium but not in a long-run equilibrium. Option D is incorrect because the horizontal shape of the aggregate demand curve does not necessarily imply both long-run and short-run equilibrium.

Question 2

During the past 50 years, the production possibilities of the United States have expanded, increasing both short-run and long-run aggregate supply. Other things constant, this would lead to
A)an expansion in output and an increase in prices.
B)an expansion in output and a decrease in prices.
C)no change in either output or prices.
D)no change in output and a decrease in prices.

Accepted Answer

An expansion in production possibilities means that the economy can produce more output in the short run and the long run. This will shift both the short-run and long-run aggregate supply curves to the right. This will increase output and lower prices in the short run. In the long run, the increase in production possibilities will lead to increased productivity and potential output, leading to lower prices and higher output. Therefore, B is the correct choice.

Question 3

When economic growth (a gradual shift of LRAS to the right) expands the production possibilities of an economy,
A)a higher rate of real output can be achieved in the short run, but it cannot be sustained in the long run.
B)a larger output can be attained even if unemployment remains at its natural rate.
C)the general level of prices will rise if the money supply is held constant.
D)the equilibrium in the goods and services market will be disrupted.

Accepted Answer

Economic growth leads to a shift in the LRAS curve to the right, which increases the potential output of the economy. This means that a larger output can be attained without necessarily leading to inflation or an increase in prices. Even if unemployment remains at its natural rate, the economy can produce more goods and services. Therefore, choice B is the correct answer.

Question 4

Over the last 60 years, the average annual growth of real GDP in the United States has been approximately
A)1 percent.
B)3 percent.
C)5 percent.
D)9 percent.

Accepted Answer

The average annual growth of real GDP in the United States over the last 60 years has been approximately 3 percent.

Question 5

Which of the following will most likely increase short-run aggregate supply?
A)unfavorable weather conditions in the nation's agricultural areas
B)an increase in income tax rates
C)an increase in the expected inflation rate
D)a reduction in resource prices

Accepted Answer

A reduction in resource prices will lower production costs, allowing firms to produce goods and services at a lower cost, thus increasing short-run aggregate supply. Unfavorable weather conditions in the nation's agricultural areas would decrease the supply of agricultural products and increase their prices, leading to higher production costs for firms in related industries, thereby decreasing short-run aggregate supply. An increase in income tax rates would decrease aggregate demand, leading to a decrease in production and causing short-run aggregate supply to decrease as well. An increase in the expected inflation rate would increase production costs and decrease short-run aggregate supply.

Question 6

A large grain crop resulting from favorable weather conditions would shift which of the following curves?
A)only aggregate demand
B)aggregate demand and short-run aggregate supply
C)only short-run aggregate supply
D)only long-run aggregate supply

Accepted Answer

A large grain crop would increase the supply of goods in the short run, resulting in a rightward shift of the short-run aggregate supply curve. It would not affect either aggregate demand or long-run aggregate supply.

Question 7

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this
A)it is only necessary that long-run aggregate supply shifts right over time.
B)it is only necessary that aggregate demand shifts right over time.
C)both aggregate demand and long-run aggregate supply must be shifting right and aggregate demand must shift farther.
D)None of the above cases would produce rising prices and growing real GDP over time.

Accepted Answer

Both aggregate demand and long-run aggregate supply need to shift right, and aggregate demand needs to shift farther than long-run aggregate supply in order to produce rising prices and growing real GDP over time. This is because a rightward shift in aggregate demand will increase both prices and output in the short run, while a rightward shift in long-run aggregate supply will increase output but lower prices in the long run. Combining the two shifts results in a steady increase in both prices and output over time.

Question 8

An improvement in technology would shift which of the following curve(s)?
A)aggregate demand and short-run aggregate supply
B)only the short-run aggregate supply
C)only the aggregate demand
D)short-run and long-run aggregate supply

Accepted Answer

An improvement in technology would increase the productivity of factors of production, leading to a decrease in the cost of production. This would shift both the short-run and long-run aggregate supply curves to the right, resulting in an increase in output and a decrease in price level. The aggregate demand curve would remain unchanged. Therefore, the option D is the correct answer.

Question 9

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect
A)the price level to rise and real GDP to fall.
B)the price level to fall and real GDP to rise.
C)the price level and real GDP both to stay the same.
D)All of the above are possible.

Accepted Answer

The answer of Suppose the economy is in long-run equilibrium....

Question 10

Which of the following, other things the same, would make the price level decrease and real GDP increase?
A)long-run aggregate supply shifts right
B)long-run aggregate supply shifts left
C)aggregate demand shifts right
D)aggregate demand shifts left

Accepted Answer

If the long-run aggregate supply shifts right, it means that the economy is producing more goods and services with the same amount of resources. This will lead to a decrease in the price level due to increased supply, and an increase in real GDP due to increased output.

Question 11

When an economy experiences long-run economic growth, a larger output can be achieved
A)only if there is a reduction in the natural rate of unemployment.
B)only if the economy's actual unemployment is less than the natural rate.
C)if prices increase.
D)even though unemployment remains at its natural rate.

Accepted Answer

Long-run economic growth is characterized by an increase in a country's productive capacity, which allows for a larger output of goods and services. This increase in productive capacity can be achieved even if unemployment remains at its natural rate, which is the level of unemployment that exists when the economy is in equilibrium and there is no cyclical unemployment. Therefore, option D is the best choice. Option A is incorrect, as a reduction in the natural rate of unemployment is not necessary for long-run economic growth. Option B is also incorrect, as the natural rate of unemployment is not related to the economy's actual unemployment rate in the long run. Option C is incorrect, as an increase in prices does not necessarily indicate long-run economic growth.

Question 12

Which of the following is the best example of a supply shock?
A)an increase in the availability of capital and machinery due to normal changes in business investment
B)a decrease in the productivity of the labor force due to a decline in the average educational level of workers
C)a decline in agricultural output due to a summer drought
D)an increase in output as a result of an expansion in employment

Accepted Answer

A supply shock is an unexpected event that affects the production or supply of goods and services in a particular industry or the overall economy. Among the options, only a decline in agricultural output due to a summer drought represents an unexpected event that affects the production of goods, resulting in a supply shock. The other options represent either normal changes in business investment or expected changes in labor productivity and employment, which do not qualify as supply shocks.

Question 13

Other things constant, an increase in resource prices will
A)increase aggregate demand.
B)decrease aggregate demand.
C)decrease short-run aggregate supply.
D)increase short-run aggregate supply.

Accepted Answer

The answer of Other things constant, an increase in resource...

Question 14

An increase in capital formation that expands long-run aggregate supply will
A)increase output and decrease prices.
B)increase both output and prices.
C)decrease both output and prices.
D)decrease output and increase prices.

Accepted Answer

An increase in capital formation leads to an increase in productivity, which leads to an increase in the economy's potential output, shifting the long-run aggregate supply curve to the right. This results in an increase in output and a decrease in prices. Therefore, choice A is the correct answer.

Question 15

Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices. Which of the following is true?
A)The short-run aggregate supply curve shifts leftward and the long-run supply curve shifts rightward.
B)The short-run aggregate supply curve shifts rightward and there is a movement along the aggregate demand curve.
C)The short-run aggregate supply curve does not shift and the long-run aggregate supply curve shifts rightward.
D)The short-run aggregate supply curve shifts rightward but the long-run aggregate supply curve does not shift.
E)The short-run aggregate supply curve shifts leftward and there is a movement along the aggregate demand curve.

Accepted Answer

A supply shock in the form of higher energy prices causes an increase in production costs for firms, leading to a leftward shift in the short-run aggregate supply curve. In the short run, this leads to a decrease in real output and an increase in the price level. However, in the long run, firms have time to adjust their production processes and make technological advancements that reduce their production costs, leading to a rightward shift in the long-run aggregate supply curve. In the short run, there is a movement along the aggregate demand curve as the higher energy prices reduce consumer purchasing power and decrease the quantity of goods and services demanded.

Question 16

An abnormally large grain crop due to highly favorable weather conditions in the Midwest is an example of
A)a technological improvement that will increase long-run aggregate supply.
B)a supply shock that will increase short-run aggregate supply.
C)an unexpected development that will reduce the natural rate of unemployment.
D)an unexpected development that will lead to excess supply and widespread unemployment.

Accepted Answer

An abnormally large grain crop is an example of a supply shock, which will increase short-run aggregate supply. This is because the supply of grain has increased, which will reduce the price of grain and encourage firms to increase production. However, in the long-run, it is possible that technological improvements may lead to a sustained increase in aggregate supply. This example does not necessarily imply an unexpected development that will reduce the natural rate of unemployment or lead to excess supply and widespread unemployment.

Question 17

Within the AD/AS model, an increase in capital formation that permits the economy to achieve a larger output will
A)increase long-run aggregate supply.
B)increase short-run aggregate supply, but long-run aggregate supply will be unaffected.
C)increase aggregate demand.
D)decrease aggregate demand.

Accepted Answer

An increase in capital formation leads to a higher level of productivity and potential output capacity in the long run. This means that the long-run aggregate supply curve will shift to the right, which allows the economy to produce more goods and services without causing inflationary pressure. There is no immediate effect on short-run aggregate supply or aggregate demand.

Question 18

A supply shock is a surprise occurrence that
A)shifts the long-run aggregate supply curve to the right.
B)either increases or decreases short-run aggregate supply and output.
C)temporarily increases aggregate demand.
D)temporarily reduces aggregate demand.

Accepted Answer

A supply shock can either increase or decrease short-run aggregate supply and output, as it disrupts the normal factors of production and supply chains. It does not shift the long-run aggregate supply curve or affect aggregate demand in the long run. Therefore, option B is the correct choice.

Question 19

If an improvement in the quality of education in the United States increases the productivity of labor, this will
A)increase aggregate demand and decrease aggregate supply.
B)increase short-run aggregate supply and reduce aggregate demand.
C)decrease aggregate demand and increase short-run aggregate supply.
D)increase both long-run and short-run aggregate supply.

Accepted Answer

Improving the quality of education in the United States will lead to an increase in the human capital of the workforce, which will increase the productivity of labor. This will have a positive impact on both the short-run and long-run aggregate supply. In the short run, the increased productivity of labor will lead to lower unit costs of production and therefore lower prices, which will increase short-run aggregate supply. In the long run, the increased human capital will lead to sustained economic growth, which will increase both long-run and short-run aggregate supply.

Question 20

If business decision makers expect that the inflation rate will increase in the near future,
A)long-run aggregate supply will increase.
B)long-run aggregate supply will decrease.
C)short-run aggregate supply will increase.
D)short-run aggregate supply will decrease.

Accepted Answer

If business decision makers expect inflation to increase in the near future, they are likely to increase their prices, causing the short-run aggregate supply to decrease. This is because businesses will face higher costs, including labor and raw materials, and may attempt to pass those costs onto consumers in the form of higher prices. In the long-run, however, the aggregate supply curve may eventually shift depending on how the inflation is managed by the government and other economic factors.

Quiz 10: Dynamic Change, Economic Fluctuations, and the Ad-As Model

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?

During the past 50 years, the production possibilities of the United States have expanded, increasing both short-run and long-run aggregate supply. Other things constant, this would lead to

When economic growth (a gradual shift of LRAS to the right) expands the production possibilities of an economy,

Over the last 60 years, the average annual growth of real GDP in the United States has been approximately

Which of the following will most likely increase short-run aggregate supply?

A large grain crop resulting from favorable weather conditions would shift which of the following curves?

Since the end of World War II, the U.S. has almost always had rising prices and an upward trend in real GDP. To explain this

An improvement in technology would shift which of the following curve(s) ?

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect

Which of the following, other things the same, would make the price level decrease and real GDP increase?

When an economy experiences long-run economic growth, a larger output can be achieved

Which of the following is the best example of a supply shock?

Other things constant, an increase in resource prices will

An increase in capital formation that expands long-run aggregate supply will

Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices. Which of the following is true?

An abnormally large grain crop due to highly favorable weather conditions in the Midwest is an example of

Within the AD/AS model, an increase in capital formation that permits the economy to achieve a larger output will

A supply shock is a surprise occurrence that

If an improvement in the quality of education in the United States increases the productivity of labor, this will

If business decision makers expect that the inflation rate will increase in the near future,