Question 1

Which of the following does NOT affect potential GDP?
A) The quantity of labour employed
B) The quantity of land and natural resources
C) The quantity of capital and human capital
D) The quantity of money
E) The amount of entrepreneurial talent available

Accepted Answer

Potential GDP is determined by the economy's supply side factors: labor, capital (including human capital), land, natural resources, and technology, not by the amount of money in the economy. Money supply affects nominal variables like inflation but does not directly affect the economy's potential output.

Question 2

-If the money wage rate and the price level both rise by the same proportion, then, in the figure above, the potential GDP line ________, and the aggregate supply curve ________.
A) shifts rightward; does not shift
B) shifts rightward; shifts leftward
C) shifts rightward; shifts rightward
D) does not shift; shifts rightward
E) does not shift; shifts leftward

Accepted Answer

E

Question 3

The aggregate supply curve shows the relationship between
A) the quantity of real GDP supplied and the price level.
B) potential GDP and real GDP.
C) the quantity of real GDP supplied and the interest rate.
D) potential GDP and the aggregate demand curve.
E) potential GDP and the price level.

Accepted Answer

The aggregate supply curve illustrates the relationship between the total quantity of goods and services that firms in an economy are willing to sell at a given overall price level.

Question 4

Which of the following changes aggregate supply and shifts the aggregate supply curve?
i. Change in the price level
ii. Change in potential GDP
iii. Change in the money wage rate
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii and iii

Accepted Answer

Changes in potential GDP and changes in the money wage rate can shift the aggregate supply curve. A change in the price level affects the aggregate demand, not supply.

Question 5

A rise in the price level brings a ________ in the real wage rate that ________ profits which leads to ________ production.
A) fall; increases; increasing
B) rise; reduces; decreasing
C) rise; increases; decreasing
D) rise; reduces; increasing
E) fall; decreases; decreasing

Accepted Answer

A rise in the price level decreases the real wage rate because the purchasing power of wages falls. This increase in profits incentivizes firms to increase production.

Question 6

If the price level falls and the money wage rate does not change, some firms ________ and there is ________.
A) shut down; a leftward shift of the aggregate supply curve
B) shut down; a decrease in potential GDP
C) start up; a rightward shift of the aggregate supply curve
D) shut down; a decrease in the quantity of real GDP supplied
E) start up; an increase in potential GDP

Accepted Answer

When the price level falls and the money wage rate remains unchanged, firms may shut down because their costs remain the same while their revenues decrease, leading to a decrease in the quantity of real GDP supplied.

Question 7

Moving along the AS curve, when the price level increases, the
A) real wage rate rises, and there is a decrease in the quantity of real GDP supplied.
B) nominal wage rate rises, and there is a decrease in the quantity of real GDP supplied.
C) real wage rate falls, and there is an increase in the quantity of real GDP supplied.
D) real wage rate rises, and there is an increase in the quantity of real GDP supplied.
E) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied.

Accepted Answer

When the price level increases, the real wage rate (the wage rate adjusted for inflation) effectively falls because each unit of currency buys less. This makes labor cheaper for firms, encouraging them to produce more, hence increasing the quantity of real GDP supplied.

Question 8

-Based on the figure above, the aggregate supply curve shifts rightward and the potential GDP line does NOT change when
A) both the price level and money wage rate rise by the same proportion.
B) the price level falls.
C) the money wage rate falls.
D) the money wage rate rises.
E) the price level rises.

Accepted Answer

A rightward shift in the aggregate supply curve can occur due to a decrease in the cost of production, such as when the money wage rate falls. This makes production more profitable at every price level, increasing the quantity of goods and services supplied without changing the potential GDP, which is determined by factors like technology and resources, not by changes in the price level or wages.

Question 9

During 2018, a country reports that its price level fell and the money wage rate did not change. These changes led to
A) no change in the real wage rate and an increase in aggregate demand.
B) a lower real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
C) a higher real wage rate, higher profits, and an increase in the quantity of real GDP supplied.
D) a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
E) a lower real wage rate, higher profits, and an increase in the quantity of real GDP supplied.

Accepted Answer

When the price level falls and the money wage rate does not change, the real wage rate (the wage rate adjusted for inflation) increases because workers' wages buy more goods and services than before. This can lead to lower profits for businesses, as their labor costs relative to their selling prices increase. Consequently, businesses may reduce production, leading to a decrease in the quantity of real GDP supplied.

Question 10

If profits are high because the price level rose,
A) potential GDP must be decreasing.
B) it is likely the result of an increase in the real wage rate.
C) business failures rise and the quantity of real GDP supplied increases.
D) new businesses open and the quantity of real GDP supplied increases.
E) the AS curve shifts leftward.

Accepted Answer

When profits are high due to a rise in the price level, it often encourages new businesses to open and existing businesses to expand production, leading to an increase in the quantity of real GDP supplied. This is because higher prices can improve profit margins, making it more attractive for businesses to increase supply.

Question 11

Changes in which of the following do NOT shift the AS curve?
i. The price level
ii. Potential GDP
iii. The money wage rate
A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii and iii

Accepted Answer

Changes in the price level do not shift the Aggregate Supply (AS) curve; they move along it. Changes in potential GDP and the money wage rate can shift the AS curve.

Question 12

If the price of widgets is $2 and the real wage is $20 per hour then the firm must sell 10 widgets to cover the cost of an hour of labour. If the price of widgets rises to $4, how many widgets must the firms sell to cover the cost of an hour of labour?
A) 15
B) 5
C) 12
D) 10
E) 20

Accepted Answer

When the price of widgets rises to $4, the firm only needs to sell $20 / $4 = 5 widgets to cover the cost of an hour of labor, since the real wage remains $20 per hour.

Question 13

The line showing potential GDP is a vertical straight line because
A) economists are unsure about how to determine potential GDP.
B) it represents the minimum level of real GDP in a recession.
C) when nothing else changes, a higher price level has no effect on real GDP.
D) there is only one level of full employment at any point in time.
E) the aggregate supply curve is upward sloping.

Accepted Answer

The answer of The line showing potential GDP is a...

Question 14

Along the aggregate supply curve, the quantity of real GDP supplied increases when the price level rises because
A) the real wage rate rises.
B) the demand for the goods and services increases.
C) the real wage rate and profits both fall.
D) profits decrease.
E) the real wage rate falls.

Accepted Answer

When the price level rises, the real wage rate falls because the purchasing power of wages decreases. This makes labor relatively cheaper for firms, encouraging them to increase production, which leads to an increase in the quantity of real GDP supplied.

Question 15

The aggregate supply curve is a(n) ________ curve because it represents the relationship between price level and the quantity of real GDP supplied, two items that are ________ correlated.
A) downward-sloping; negatively
B) vertical; not
C) upward-sloping; negatively
D) downward-sloping; positively
E) upward-sloping; positively

Accepted Answer

The aggregate supply curve is upward-sloping because it represents the idea that as the price level increases, the quantity of goods and services that producers are willing to supply also increases, indicating a positive correlation between price level and the quantity of real GDP supplied.

Question 16

Which of the following shifts the aggregate supply curve rightward?
i. The money wage rate rises.
ii. Potential GDP increases.
iii. Government expenditure on goods and services increases.
A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii and iii

Accepted Answer

An increase in potential GDP shifts the aggregate supply curve rightward because it indicates an expansion in the economy's capacity to produce goods and services, not influenced by changes in the price level. Increases in the money wage rate or government expenditure affect aggregate demand or the cost of production, not the aggregate supply curve in this context.

Question 17

Over the business cycle, factors such as the quantity of capital, human capital and technology
A) change drastically, fluctuating more than the quantity of labour employed.
B) grow but do not fluctuate as much as the quantity of labour employed.
C) do not grow and are therefore not the source of economic growth.
D) fluctuate about the same amount as the quantity of labour employed.
E) change randomly, sometimes growing, sometimes falling.

Accepted Answer

Factors such as the quantity of capital, human capital, and technology tend to grow over time and do not fluctuate as much as the quantity of labor employed. These factors are more stable and contribute to long-term economic growth, whereas the quantity of labor can change more rapidly in response to economic conditions.

Question 18

If the price level increases from 110.0 to 115.0, the quantity of
A) potential GDP will decrease.
B) potential GDP will increase.
C) real GDP demanded will increase.
D) real GDP supplied will decrease.
E) real GDP supplied will increase.

Accepted Answer

When the price level increases, firms are generally willing to supply more goods and services because they can sell them at higher prices, leading to an increase in real GDP supplied.

Question 19

The real wage rate definitely falls if the money wage rate ________ and the price level ________.
A) remains constant; falls
B) remains constant; rises
C) rises; rises
D) falls; falls
E) rises; falls

Accepted Answer

If the money wage rate remains constant while the price level rises, the real wage rate falls because the purchasing power of the wage decreases.

Question 20

An increase in the price level leads to
A) neither a movement along the aggregate supply curve nor a shift of the aggregate supply curve.
B) a downward movement along the aggregate supply curve.
C) a leftward shift of the aggregate supply curve.
D) a rightward shift of the aggregate supply curve.
E) an upward movement along the aggregate supply curve.

Accepted Answer

An increase in the price level typically results in an upward movement along the aggregate supply curve, as producers are willing to supply more at higher prices.

Quiz 11: Aggregate Supply and Aggregate Demand

Which of the following does NOT affect potential GDP?

-If the money wage rate and the price level both rise by the same proportion, then, in the figure above, the potential GDP line , and the aggregate supply curve .

The aggregate supply curve shows the relationship between

Which of the following changes aggregate supply and shifts the aggregate supply curve? i. Change in the price level ii. Change in potential GDP iii. Change in the money wage rate

A rise in the price level brings a in the real wage rate that profits which leads to production.

If the price level falls and the money wage rate does not change, some firms and there is .

Moving along the AS curve, when the price level increases, the

-Based on the figure above, the aggregate supply curve shifts rightward and the potential GDP line does NOT change when

During 2018, a country reports that its price level fell and the money wage rate did not change. These changes led to

If profits are high because the price level rose,

Changes in which of the following do NOT shift the AS curve? i. The price level ii. Potential GDP iii. The money wage rate

If the price of widgets is $2 and the real wage is $20 per hour then the firm must sell 10 widgets to cover the cost of an hour of labour. If the price of widgets rises to $4, how many widgets must the firms sell to cover the cost of an hour of labour?

The line showing potential GDP is a vertical straight line because

Along the aggregate supply curve, the quantity of real GDP supplied increases when the price level rises because

The aggregate supply curve is a(n) curve because it represents the relationship between price level and the quantity of real GDP supplied, two items that are correlated.

Which of the following shifts the aggregate supply curve rightward? i. The money wage rate rises. ii. Potential GDP increases. iii. Government expenditure on goods and services increases.

Over the business cycle, factors such as the quantity of capital, human capital and technology

If the price level increases from 110.0 to 115.0, the quantity of

The real wage rate definitely falls if the money wage rate and the price level .

An increase in the price level leads to