Question 1

An economic policy maker would rank a _____ shock as the LEAST preferred type.

Accepted Answer

A negative supply shock, such as an increase in oil prices, can lead to both inflation and decreased economic growth. It can also lead to reduced employment opportunities and income for workers in the affected industries. As a result, economic policy makers would prefer to avoid negative supply shocks if possible.

Question 2

If the economy is in a recessionary gap, actual output will be _____ potential output.

Accepted Answer

In a recessionary gap, the economy is operating below potential (full employment) output. Therefore, actual output will be below potential output.

Question 3

Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which factor MOST likely caused these changes?

Accepted Answer

A decrease in short-run aggregate supply would lead to higher prices due to the reduced supply of goods and services, while also potentially causing a decrease in real GDP as the economy is unable to produce as much. This scenario aligns with the described conditions of rising prices and falling real GDP.

Question 4

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _____ in real GDP and _____ the price level.

Accepted Answer

In the short run, a positive demand shock leads to an increase in both real GDP and the price level. However, in the long run, the economy adjusts back to its potential output, meaning real GDP returns to its original level (thus, no long-term increase or decrease), but the price level remains higher due to the inflationary effects of the demand shock. Choice A correctly captures this dynamic by indicating a return to the original level of real GDP (interpreted as "decrease" from the short-run elevated level) and an increase in the price level.

Question 5

Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore _____%.

Accepted Answer

Output Gap = (Potential GDP - Current GDP) / Potential GDP

Output Gap = (10,000 - 9,000) / 10,000

Output Gap = 0.1 or 10% (rounded to the nearest whole number)

Therefore, the best choice is C, which is a 10% output gap.

Question 6

An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

Accepted Answer

An increase in aggregate demand will result in an increase in the demand for goods and services, leading to an increase in real GDP in the short run. As a result of increased demand for goods and services, firms may increase prices to match the higher demand, leading to an increase in the price level. Therefore, an increase in aggregate demand will generate an increase in real GDP and an increase in the price level in the short run.

Question 7

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _____ and potential output to _____.

Accepted Answer

In the long run, a decrease in aggregate demand will lead to a lower price level as suppliers reduce prices to stimulate demand. Potential output, however, remains stable because it is determined by factors like technology, capital, and labor, which are not affected by short-term fluctuations in demand.

Question 8

An increase in investment spending leads to _____ in the price level and _____ in real GDP in the short run.

Accepted Answer

An increase in investment spending will lead to an increase in aggregate demand, which will lead to an increase in both the price level and real GDP in the short run. Therefore, option D is the correct answer.

Question 9

An economic policy maker would rank a _____ shock as the MOST preferred type.

Accepted Answer

A positive supply shock leads to an increase in the availability of goods and services in the economy, which leads to lower prices and increased economic growth. This is typically preferred by policy makers as it leads to higher employment rates, increased output, and increased consumer spending.

Question 10

If membership in labor unions falls, production costs will:

Accepted Answer

A decrease in labor union membership often leads to lower wages and benefits, which can reduce production costs. This reduction in production costs can cause the short-run aggregate supply (SRAS) to shift to the right, leading to an increase in equilibrium GDP and a decrease in the aggregate price level.

Question 11

A decrease in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

Accepted Answer

A decrease in aggregate demand leads to a decrease in real GDP as businesses produce less in response to lower demand. It also leads to a decrease in the price level (deflation) as businesses lower prices in an attempt to attract more customers.

Question 12

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

Accepted Answer

In the short run, equilibrium price level and equilibrium level of total output are determined by the intersection of SRAS and aggregate demand. This is because aggregate demand shows the relationship between the price level and the quantity demanded of all goods and services in an economy, while SRAS shows the relationship between the price level and the quantity of output that firms are willing and able to supply. The intersection of these two curves determines the equilibrium price level and the equilibrium level of total output in the short run.

Question 13

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.

Accepted Answer

In the long run, an increase in aggregate demand primarily affects the price level, causing it to rise, while potential output (the economy's capacity to produce goods and services) remains stable, as it is determined by factors like technology, capital, and labor, rather than by demand.

Question 14

Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are both rising. This is probably the effect of a(n) _____ in aggregate _____.

Accepted Answer

When both the equilibrium aggregate price level and the equilibrium level of real GDP are rising, it means that there is an increase in aggregate demand, which shifts the aggregate demand curve to the right. This results in an increase in both the price level and real GDP.

Question 15

Suppose that the U.S. government doubles its spending on health care. The _____ curve shifts _____, output _____, and prices _____.

Accepted Answer

Doubling the spending on health care would increase aggregate demand, causing the AD curve to shift right. Output would increase as a result, but the increased demand could also lead to higher prices. Since option D is the only one that has the AD curve shifting right, it is the correct choice.

Question 16

An improvement in the business outlook of firms is a type of positive _____ shock and therefore shifts the _____ curve to the _____.

Accepted Answer

An improvement in the business outlook of firms is a positive demand shock, which increases overall demand in the economy, shifting the aggregate demand curve to the right.

Question 17

Use the following to answer question 167:
Figure: Macroeconomics Equilibrium 
-(Figure: Macroeconomics Equilibrium) Refer to Figure: Macroeconomic Equilibrium. Curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____.

Accepted Answer

The answer of Use the following to answer question 167:
Figure:...

Question 18

Unexpectedly rising commodity prices lead to a _____ shock.

Accepted Answer

Rising commodity prices indicate a decrease in supply, as there is now less of the commodity available at the previous price. Therefore, this would be a negative supply shock.

Question 19

The intersection of an economy's aggregate demand and long-run aggregate supply curves:

Accepted Answer

The intersection of the economy's aggregate demand and long-run aggregate supply curves occur at the economy's potential output in long-run equilibrium. This is because the long-run aggregate supply curve represents the economy's potential output, which is the level of output that can be produced when all resources are fully employed. Therefore, the intersection of the two curves represents the point at which the economy is producing at its potential output level, which is the sustainable level of output in the long run.

Question 20

Stagflation is usually caused by a _____ shock.

Accepted Answer

Stagflation is a situation where there is simultaneously high inflation and high unemployment. This is typically caused by a negative supply shock, such as a natural disaster, an increase in oil prices, or a reduction in productivity. A negative supply shock reduces the supply of goods and services, leading to higher prices, but it also reduces the demand for labor, leading to higher unemployment. This combination of high inflation and high unemployment is what defines stagflation.

Quiz 12: Aggregate Demand and Aggregate Supply

An economic policy maker would rank a _____ shock as the LEAST preferred type.

If the economy is in a recessionary gap, actual output will be _____ potential output.

Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which factor MOST likely caused these changes?

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _ in real GDP and _ the price level.

Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore _____%.

An increase in aggregate demand will generate _ in real GDP and _ in the price level in the short run.

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _ and potential output to _.

An increase in investment spending leads to _ in the price level and _ in real GDP in the short run.

An economic policy maker would rank a _____ shock as the MOST preferred type.

If membership in labor unions falls, production costs will:

A decrease in aggregate demand will generate _ in real GDP and _ in the price level in the short run.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _ and potential output to _.

Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are both rising. This is probably the effect of a(n) _ in aggregate _.

Suppose that the U.S. government doubles its spending on health care. The ___ curve shifts _, output _, and prices ___.

An improvement in the business outlook of firms is a type of positive ___ shock and therefore shifts the _ curve to the ___.

Use the following to answer question 167: Figure: Macroeconomics Equilibrium -(Figure: Macroeconomics Equilibrium) Refer to Figure: Macroeconomic Equilibrium. Curve 1 refers to ___, curve 2 refers to _, and curve 3 refers to ___.

Unexpectedly rising commodity prices lead to a _____ shock.

The intersection of an economy's aggregate demand and long-run aggregate supply curves:

Stagflation is usually caused by a _____ shock.

Quiz 12: Aggregate Demand and Aggregate Supply

An economic policy maker would rank a _____ shock as the LEAST preferred type.

If the economy is in a recessionary gap, actual output will be _____ potential output.

Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which factor MOST likely caused these changes?

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _____ in real GDP and _____ the price level.

Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output gap is therefore _____%.

An increase in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _____ and potential output to _____.

An increase in investment spending leads to _____ in the price level and _____ in real GDP in the short run.

An economic policy maker would rank a _____ shock as the MOST preferred type.

If membership in labor unions falls, production costs will:

A decrease in aggregate demand will generate _____ in real GDP and _____ in the price level in the short run.

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of:

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _____ and potential output to _____.

Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are both rising. This is probably the effect of a(n) _____ in aggregate _____.

Suppose that the U.S. government doubles its spending on health care. The _____ curve shifts _____, output _____, and prices _____.

An improvement in the business outlook of firms is a type of positive _____ shock and therefore shifts the _____ curve to the _____.

Use the following to answer question 167: Figure: Macroeconomics Equilibrium -(Figure: Macroeconomics Equilibrium) Refer to Figure: Macroeconomic Equilibrium. Curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____.

Unexpectedly rising commodity prices lead to a _____ shock.

The intersection of an economy's aggregate demand and long-run aggregate supply curves:

Stagflation is usually caused by a _____ shock.

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and a long-run _ in real GDP and _ the price level.

An increase in aggregate demand will generate _ in real GDP and _ in the price level in the short run.

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _ and potential output to _.

An increase in investment spending leads to _ in the price level and _ in real GDP in the short run.

A decrease in aggregate demand will generate _ in real GDP and _ in the price level in the short run.

In the long run, as the economy self-corrects, an increase in aggregate demand will cause the price level to _ and potential output to _.

Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are both rising. This is probably the effect of a(n) _ in aggregate _.

Suppose that the U.S. government doubles its spending on health care. The ___ curve shifts _, output _, and prices ___.

An improvement in the business outlook of firms is a type of positive ___ shock and therefore shifts the _ curve to the ___.

Use the following to answer question 167: Figure: Macroeconomics Equilibrium -(Figure: Macroeconomics Equilibrium) Refer to Figure: Macroeconomic Equilibrium. Curve 1 refers to ___, curve 2 refers to _, and curve 3 refers to ___.