Question 1

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:
A)level of output but not prices.
B)prices but not level of output.
C)both prices and level of output.
D)neither prices nor level of output.

Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that the economy can produce as much as it wants at a fixed price level. Therefore, any changes in aggregate demand will affect only the level of output and not prices because firms can produce more without needing to increase prices.

Question 2

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:
A)aggregate demand is greater than long-run aggregate supply.
B)aggregate demand equals short-run aggregate supply.
C)aggregate demand equals short-run and long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Accepted Answer

Long-run equilibrium in the aggregate demand-aggregate supply model occurs where aggregate demand equals both short-run and long-run aggregate supply, indicating that the economy is producing at its potential output without any inflationary or deflationary gaps.

Question 3

The relationship between the quantity of goods and services supplied and the price level is called:
A)aggregate demand.
B)aggregate supply.
C)aggregate investment.
D)aggregate production.

Accepted Answer

The relationship between the quantity of goods and services supplied and the price level is known as aggregate supply. Aggregate demand refers to the relationship between the quantity of goods and services demanded and the price level. Aggregate investment and aggregate production are not relevant to the specific relationship between quantity supplied and price level.

Question 4

In the long run, the level of output is determined by the:
A)interaction of supply and demand.
B)money supply and the levels of government spending and taxation.
C)amounts of capital and labour and the available technology.
D)preferences of the public.

Accepted Answer

In the long run, the level of output is determined by the factors of production, such as capital and labor, and the technology available, which influence the economy's productive capacity.

Question 5

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.
A)output; output
B)prices; prices
C)prices; output
D)output; prices

Accepted Answer

In the short run, firms adjust production based on changes in prices, but in the long run, they have the ability to adjust all factors of production, including output levels, leading to a fixed output and variable prices. Therefore, a short-run aggregate supply curve shows fixed prices and a long-run aggregate supply curve shows fixed output levels.

Question 6

The natural level of output is:
A)affected by aggregate demand.
B)the level of output at which the unemployment rate is zero.
C)the level of output at which the unemployment rate is at its natural level.
D)permanent and unchangeable.

Accepted Answer

The natural level of output is the level of output at which the unemployment rate is at its natural level. This is also known as the full employment output. It is not affected by short-term changes in aggregate demand and can vary over time due to changes in factors such as technology, population growth, and education levels. It is not permanent and can be influenced by policy actions aimed at increasing or decreasing aggregate demand. Option A is incorrect because the natural level of output is not affected by short-term changes in aggregate demand. Option B is incorrect because achieving zero unemployment is not always possible and is not a reliable indicator of the natural level of output. Option D is incorrect because the natural level of output can change over time due to various factors.

Question 7

The short run refers to a period:
A)of several days.
B)during which prices are sticky and cyclical unemployment may occur.
C)during which capital and labour are fully employed.
D)during which there are no fluctuations.

Accepted Answer

In the short run, prices are sticky, meaning they do not adjust immediately to changes in economic conditions, which can lead to cyclical unemployment.

Question 8

When the Bank of Canada reduces the money supply, at a given price level the amount of output demanded is _____, and the aggregate demand curve shifts _____.
A)greater; inward
B)greater; outward
C)lower; inward
D)lower; outward

Accepted Answer

When the Bank of Canada reduces the money supply, interest rates typically rise, leading to decreased investment and consumption, which lowers the amount of output demanded. This causes the aggregate demand curve to shift inward.

Question 9

According to the quantity theory of money, when velocity is constant, if output is higher, _____ real balances are required, and for fixed M this means _____ P.
A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Accepted Answer

According to the quantity theory of money, MV = PY. If velocity (V) is constant and output (Y) increases, then for a fixed money supply (M), the price level (P) must decrease to maintain the equation balance, implying higher real balances are required.

Question 10

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:
A)increases.
B)decreases.
C)does not change.
D)may either increase or decrease.

Accepted Answer

The quantity equation is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services purchased. If V and M are fixed and P increases, then Q must decrease to maintain the equality, as the increase in P would require a decrease in Q to keep the product PQ constant.

Question 11

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A)neither prices nor level of output.
B)both prices and level of output.
C)level of output but not prices.
D)prices but not level of output.

Accepted Answer

When the long-run aggregate supply curve is vertical, it indicates that the economy has reached its potential output level, meaning that changes in aggregate demand only affect prices and not the level of output. As wages and other input costs adjust to changes in aggregate demand, any increase in demand will be reflected in higher prices, but not in an increase in output. Similarly, any decrease in demand will be reflected in lower prices, but not in a decrease in output.

Question 12

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A)slopes upward and to the right.
B)slopes downward and to the right.
C)is horizontal.
D)is vertical.

Accepted Answer

The long-term aggregate supply curve is vertical because in the long run, the economy can produce its potential output level at any price level, indicating that changes in the price level do not impact the economy's ability to produce.

Question 13

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:
A)aggregate demand equals long-run aggregate supply.
B)aggregate demand equals short-run aggregate supply.
C)aggregate demand equals short-run and long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Accepted Answer

Short-run equilibrium occurs where aggregate demand intersects with short-run aggregate supply. Long-run aggregate supply is not a factor in determining short-run equilibrium as it represents the potential output level in the long run, which depends on factors such as technology, resources, and institutions.

Question 14

The short-run aggregate supply curve is horizontal at:
A)a level of output determined by aggregate demand.
B)the natural level of output.
C)the level of output at which the economy's resources are fully employed.
D)a fixed price level.

Accepted Answer

The short-run aggregate supply curve is horizontal at a fixed price level, indicating that firms are willing to supply any amount of goods at that price level, assuming other factors like wages and resource costs are constant.

Question 15

Assuming velocity is constant, the aggregate demand curve tells us possible:
A)combinations of M and Y for a given value of P.
B)combinations of M and P for a given value of Y.
C)combinations of P and Y for a given value of M.
D)results if the Bank of Canada reduces the money supply.

Accepted Answer

The aggregate demand curve shows the relationship between the price level (P) and the output (Y) for a given money supply (M), assuming velocity is constant.

Question 16

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:
A)the labour supply.
B)the supply of capital.
C)the money supply.
D)technology.

Accepted Answer

The classical dichotomy suggests that real variables, like the natural rate of output, are not affected by nominal variables, such as the money supply.

Question 17

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A)is horizontal.
B)is vertical.
C)slopes upward and to the right.
D)slopes downward and to the right.

Accepted Answer

When all prices are stuck at a predetermined level, it means that the price level does not change regardless of changes in real GDP. This scenario is represented by a horizontal short-run aggregate supply curve, indicating that output can change without affecting the price level.

Question 18

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run.
A)only prices; only output
B)only output; only prices
C)both prices and output; only prices
D)both prices and output; both prices and output

Accepted Answer

In the short run, with a horizontal aggregate supply curve, changes in the money supply can change output without affecting prices. In the long run, with a vertical aggregate supply curve, changes in the money supply only affect prices, not output.

Question 19

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:
A)downward and to the left.
B)downward and to the right.
C)upward and to the left.
D)upward and to the right.

Accepted Answer

A decrease in the money supply will lead to a decrease in consumption and investment expenditures, leading to a decrease in planned aggregate expenditure (PAE) at any given price level. This will cause a shift of the aggregate demand curve downward and to the left.

Question 20

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _____, generating a _____ quantity of output demanded.
A)higher; greater
B)higher; smaller
C)lower; greater
D)lower; smaller

Accepted Answer

At a lower price level, the real value of money balances increases because each unit of currency buys more goods and services. This increase in real money balances makes consumers and businesses feel wealthier, which tends to increase spending and thus the quantity of output demanded.

Quiz 10: Introduction to Economic Fluctuations

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

The relationship between the quantity of goods and services supplied and the price level is called:

In the long run, the level of output is determined by the:

A short-run aggregate supply curve shows fixed _, and a long-run aggregate supply curve shows fixed _.

The natural level of output is:

The short run refers to a period:

When the Bank of Canada reduces the money supply, at a given price level the amount of output demanded is _, and the aggregate demand curve shifts _.

According to the quantity theory of money, when velocity is constant, if output is higher, _ real balances are required, and for fixed M this means _ P.

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

The short-run aggregate supply curve is horizontal at:

Assuming velocity is constant, the aggregate demand curve tells us possible:

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _ in the short run and change _ in the long run.

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level, real money balances are _, generating a _ quantity of output demanded.