Question 1

At the beginning of the recession of 2007-2009, real GDP in the United States was ________ potential GDP, and in June 2009, real GDP was ________ potential GDP.
A) below; above
B) below; below
C) above; below
D) above; above

Accepted Answer

At the beginning of the recession of 2007-2009, real GDP in the United States was above potential GDP, indicating an overheated economy. By June 2009, the economy had contracted significantly, and real GDP was below potential GDP, reflecting the depth of the recession.

Question 2

As the recession persisted into 2009, the unemployment rate in the United States rose to ________, the highest rate since the recession of 2001-2002 and the second highest since the Great Depression.
A) 5.5 percent
B) 9.3 percent
C) 17.6 percent
D) 25.1 percent

Accepted Answer

The question states that the unemployment rate rose to the highest since the recession of 2001-2002 and the second highest since the Great Depression. The only answer choice that fits this description is B, which is 9.3 percent. Option A is too low for this comparison, and options C and D are much too high for the period in question.

Question 3

Figure 24-4 -Refer to Figure 24-4. In the figure above, LRAS₁ and SRAS₁ denote LRAS and SRAS in year 1, while LRAS₂ and SRAS₂ denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2? A) 8% B) 9.1% C) 10% D) 12%

Accepted Answer

The growth rate in potential GDP is determined by the shift from LRAS₁ to LRAS₂. If the figure shows a 10% increase in the potential GDP from year 1 to year 2, then the correct answer is 10%.

Question 4

Figure 24-4 
-Refer to Figure 24-4. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?
A) 0.3%
B) 1.1%
C) 2.7%
D) 3.7%

Accepted Answer

The actual growth rate in GDP in year 2 is 3.7%, while the potential growth rate in GDP in year 2 is 1%. The difference between the two is 2.7%.

Question 5

Using aggregate demand and aggregate supply, explain what happens in the short run if the Federal Reserve raises interest rates in the economy. Be sure to detail what happens to aggregate demand, the price level, the level of GDP, and unemployment. Assume that the economy is at full employment before the interest rate increase.

Accepted Answer

The answer of Using aggregate demand and aggregate supply, explain...

Question 6

Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run.

Accepted Answer

The answer of Using the aggregate supply and demand model,...

Question 7

Figure 24-4 -Refer to Figure 24-4. In the figure above, AD₁, LRAS₁ and SRAS₁ denote AD, LRAS and SRAS in year 1, while AD₂, LRAS₂ and SRAS₂ denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2? A) 2.5% B) 7.3% C) 8.0% D) 10.0%

Accepted Answer

The actual growth rate in GDP in year 2 is determined by the shift from AD1 to AD2 and the corresponding movement along the SRAS curve, which results in a new equilibrium point. The given options suggest that the correct growth rate is 7.3%.

Question 8

What is the relationship among the AD, SRAS and LRAS curves when the economy is in macroeconomic equilibrium?

Accepted Answer

The answer of What is the relationship among the AD,...

Question 9

Figure 24-4 
-Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2?
A) It will rise.
B) It will fall.
C) It will remain constant.
D) not enough information to answer the question

Accepted Answer

The economy is at point A in year 1, which is below the natural rate of unemployment. This means that there is a shortage of labor, and businesses are competing for workers. As a result, wages will rise, and the unemployment rate will fall.

Question 10

Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level.

Accepted Answer

The answer of Explain how the economy moves back to...

Question 11

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?
A) Potential real GDP increases continuously.
B) The aggregate demand curve shifts to the right during most periods.
C) The short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages.
D) Aggregate demand and potential real GDP decrease continuously.

Accepted Answer

The dynamic model of aggregate demand and aggregate supply assumes that potential real GDP increases continuously and the aggregate demand curve shifts to the right during most periods. It also assumes that the short-run aggregate supply curve shifts to the right except during periods when workers and firms expect higher wages. However, it does not assume that aggregate demand and potential real GDP decrease continuously.

Question 12

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

Accepted Answer

The answer of Starting from long-run equilibrium, use the basic...

Question 13

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.
A) stagflation
B) an automatic destabilizer
C) a housing bubble
D) a supply shock

Accepted Answer

A housing bubble occurs when the prices of houses become detached from their underlying values and are driven up by speculation and expectations of further price increases. This is exactly what happened during the mid-2000s housing market boom, which ultimately led to a devastating crash in 2008.

Question 14

What is a supply shock, and why might a supply shock lead to stagflation?

Accepted Answer

The answer of What is a supply shock, and why...

Question 15

Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock.

Accepted Answer

The answer of Beginning with long-run equilibrium, use the aggregate...

Question 16

Which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?
A) falling oil prices
B) increases in housing prices
C) the financial crisis
D) a decline in government spending

Accepted Answer

The financial crisis, which was triggered by the collapse of the US housing market and the subprime mortgage industry, was a major factor in the decline of aggregate demand in the US and other economies around the world. As banks and other financial institutions struggled with mounting losses and defaults, they became more cautious in their lending and investment activities, leading to a reduction in consumer and business spending.

Question 17

Figure 24-4 
-Refer to Figure 24-4. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?
A) 0.9%
B) 1.8%
C) 2.7%
D) 3.0%

Accepted Answer

The inflation rate is calculated by the percentage change in the price level from year 1 to year 2. If the economy is at point A in year 1, and the price level increases by 1.8% to year 2, then the inflation rate is 1.8%.

Question 18

Figure 24-4 
-Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the price level in year 2?
A) It will rise.
B) It will fall.
C) It will remain constant.
D) not enough information to answer the question

Accepted Answer

The economy is at point A, which is above the LRAS. This means that the economy is operating at a higher price level than the long-run equilibrium price level. In the long run, the economy will move back to the LRAS, which means that the price level will fall.

Question 19

Why are the long-run effects of an increase in aggregate demand on price and output different from the short-run effects?

Accepted Answer

The answer of Why are the long-run effects of an...

Question 20

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth.

Accepted Answer

The answer of Starting from long-run equilibrium, use the basic...

Quiz 24: Aggregate Demand and Aggregate Supply Analysis

At the beginning of the recession of 2007-2009, real GDP in the United States was potential GDP, and in June 2009, real GDP was potential GDP.

As the recession persisted into 2009, the unemployment rate in the United States rose to ________, the highest rate since the recession of 2001-2002 and the second highest since the Great Depression.

Figure 24-4 -Refer to Figure 24-4. In the figure above, LRAS₁ and SRAS₁ denote LRAS and SRAS in year 1, while LRAS₂ and SRAS₂ denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?

Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run.

Figure 24-4 -Refer to Figure 24-4. In the figure above, AD₁, LRAS₁ and SRAS₁ denote AD, LRAS and SRAS in year 1, while AD₂, LRAS₂ and SRAS₂ denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2?

What is the relationship among the AD, SRAS and LRAS curves when the economy is in macroeconomic equilibrium?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2?

Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level.

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.

What is a supply shock, and why might a supply shock lead to stagflation?

Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock.

Which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the price level in year 2?

Why are the long-run effects of an increase in aggregate demand on price and output different from the short-run effects?

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth.

Quiz 24: Aggregate Demand and Aggregate Supply Analysis

At the beginning of the recession of 2007-2009, real GDP in the United States was ________ potential GDP, and in June 2009, real GDP was ________ potential GDP.

As the recession persisted into 2009, the unemployment rate in the United States rose to ________, the highest rate since the recession of 2001-2002 and the second highest since the Great Depression.

Figure 24-4 -Refer to Figure 24-4. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what is the difference between the actual growth rate in GDP in year 2 and the potential growth rate in GDP in year 2?

Using the aggregate supply and demand model, illustrate what happens in the long run when the economy suffers a supply shock. Begin your analysis by assuming the economy has suffered the supply shock in the short run, but has not yet adjusted to it in the long run.

Figure 24-4 -Refer to Figure 24-4. In the figure above, AD1, LRAS1 and SRAS1 denote AD, LRAS and SRAS in year 1, while AD2, LRAS2 and SRAS2 denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2?

What is the relationship among the AD, SRAS and LRAS curves when the economy is in macroeconomic equilibrium?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the unemployment rate in year 2?

Explain how the economy moves back to full employment from recession. Be sure to detail what happens to short-run aggregate supply, unemployment, equilibrium GDP and the price level.

Which of the following is not an assumption made by the dynamic model of aggregate demand and aggregate supply?

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

When people became less concerned with the underlying value of their houses and instead focused on the expectations of the prices of their houses increasing, ________ occurred.

What is a supply shock, and why might a supply shock lead to stagflation?

Beginning with long-run equilibrium, use the aggregate demand and aggregate supply model to illustrate what happens in the short run when the economy suffers a negative supply shock.

Which of the following is one reason for the decline in aggregate demand that led to the recession of 2007-2009?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what is the inflation rate between year 1 and year 2?

Figure 24-4 -Refer to Figure 24-4. Given the economy is at point A in year 1, what will happen to the price level in year 2?

Why are the long-run effects of an increase in aggregate demand on price and output different from the short-run effects?

Starting from long-run equilibrium, use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is an increase in wealth.

At the beginning of the recession of 2007-2009, real GDP in the United States was potential GDP, and in June 2009, real GDP was potential GDP.

Figure 24-4 -Refer to Figure 24-4. In the figure above, LRAS₁ and SRAS₁ denote LRAS and SRAS in year 1, while LRAS₂ and SRAS₂ denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the growth rate in potential GDP in year 2?

Figure 24-4 -Refer to Figure 24-4. In the figure above, AD₁, LRAS₁ and SRAS₁ denote AD, LRAS and SRAS in year 1, while AD₂, LRAS₂ and SRAS₂ denote AD, LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is the actual growth rate in GDP in year 2?