Question 1

If the nominal wage of workers increases by 10% and the real wage of workers remains unchanged, then the overall price level must have:
A) increased by 10%.
B) decreased by 10%.
C) increased by more than 10%.
D) decreased by less than 10%.

Accepted Answer

If the nominal wage increases by 10% and the real wage remains unchanged, it means that the purchasing power of the wage has not changed. This can only happen if the overall price level also increases by the same percentage, 10%, to offset the nominal wage increase, keeping the real wage constant.

Question 2

If the nominal wage of workers decreases by 5% and the real wage of workers increases by 5%, then the overall price level must have:
A) increased by 5%.
B) decreased by 5%.
C) increased by more than 5%.
D) decreased by more than 5%.

Accepted Answer

For the real wage to increase by 5% while the nominal wage decreases by 5%, the overall price level must have decreased by more than 5%. This is because the real wage is adjusted for inflation and reflects the purchasing power of the nominal wage. A decrease in the price level increases the purchasing power of wages.

Question 3

If the overall price level in the economy is rising and at the same time workers are able to buy more goods and services, then the _____ wage of workers must be _____ the rise in the price level.
A) nominal; falling at faster rate than
B) real; falling at a rate faster than
C) nominal; rising at a rate faster than
D) nominal; rising at the same rate as

Accepted Answer

Nominal wages must be increasing at a rate faster than the rise in the price level for workers to be able to afford more goods and services despite inflation.

Question 4

If the overall price level in the economy increases by 10% and the workers in the economy are able to afford the same amount of goods as before the price change, then which of the following statements is true?
A) The nominal wage of workers has decreased by 10%.
B) The real wage of workers has increased by 10%.
C) The nominal wage of workers has remained constant.
D) The real wage of workers has remained constant.

Accepted Answer

The real wage has remained constant because workers can afford the same amount of goods despite the increase in the overall price level. This implies that any increase in nominal wages has offset the effect of inflation, maintaining the purchasing power of workers.

Question 5

The upward-sloping range of the short-run aggregate supply curve results from the stickiness of which of the following variables?
A) nominal wage
B) real wage
C) nominal interest rate
D) price level

Accepted Answer

The upward slope of the short-run aggregate supply curve is primarily due to the stickiness of nominal wages. In the short run, nominal wages do not adjust immediately to changes in economic conditions, leading to an upward-sloping aggregate supply curve as prices adjust.

Question 6

In the upward-sloping range of the short-run aggregate supply curve, the nominal wage is _____, which implies that the real wage is:
A) flexible; flexible.
B) sticky; flexible.
C) flexible; sticky.
D) sticky; sticky.

Accepted Answer

In the upward-sloping range of the short-run aggregate supply curve, the nominal wage is sticky, which implies that the real wage is flexible.

Question 7

Which of the following variables is measured along the horizontal axis of the short-run aggregate supply curve?
A) nominal wage
B) real wage
C) nominal GDP
D) real GDP

Accepted Answer

The short-run aggregate supply curve is plotted with real GDP on the horizontal axis and the price level on the vertical axis. Real GDP represents the total economic output adjusted for price changes, making it the correct variable for the horizontal axis.

Question 8

Which of the following variables is measured along the vertical axis of the short-run aggregate supply curve?
A) GDP
B) interest rate
C) price level
D) nominal wage

Accepted Answer

The short-run aggregate supply curve (SRAS) plots the relationship between the total quantity of goods and services supplied and the price level. Therefore, the price level is measured along the vertical axis.

Question 9

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply _____ output at _____ price level.
A) more; a higher
B) more; a lower
C) less; a higher
D) more; the same

Accepted Answer

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply more output at a higher price level because higher prices typically increase the profitability of producing additional units, encouraging firms to increase production.

Question 10

When _____ wages are sticky, _____ in the price level leads to a decrease in the profit earned by businesses.
A) real; a decrease
B) nominal; a decrease
C) real; an increase
D) nominal; an increase

Accepted Answer

When nominal wages are sticky, a decrease in the price level means that the cost of labor remains relatively high while the prices at which goods and services are sold decrease. This scenario squeezes profit margins for businesses because their revenues fall while their labor costs do not adjust downward accordingly.

Question 11

When _____ wages are sticky, an increase in the price level leads to _____ in the profit earned by businesses.
A) real; a decrease
B) nominal; a decrease
C) real; an increase
D) nominal; an increase

Accepted Answer

When nominal wages are sticky, they do not adjust immediately to changes in the price level. Therefore, if the price level increases, businesses can sell their products at higher prices while their wage costs remain the same, leading to an increase in profits.

Question 12

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply more output when the overall price level increases because:
A) nominal wages are sticky, so an increase in the price level increases the profit earned by firms.
B) real wages are sticky, so an increase in the price level increases the profits earned by firms.
C) firms can employ better technology at a higher price level and produce more output.
D) more workers are willing to work at a higher price level, so firms can produce more output.

Accepted Answer

In the short run, nominal wages are often sticky due to contracts and other rigidities. When the overall price level increases, firms receive higher prices for their products while their wage costs remain the same, leading to higher profits and an incentive to increase output.

Question 13

If the nominal wage is sticky, then a decrease in the overall price level leads to _____ in the real wage firms have to pay. The firms respond by hiring _____ workers.
A) an increase; more
B) a decrease; more
C) an increase; fewer
D) a decrease; fewer

Accepted Answer

When the nominal wage is sticky and the overall price level decreases, the real wage (nominal wage adjusted for price level) increases. As a result, firms find it more expensive to hire workers and thus hire fewer workers.

Question 14

If the real wage is sticky, then the short-run aggregate supply curve will be:
A) downward sloping.
B) upward sloping.
C) horizontal.
D) vertical.

Accepted Answer

The answer of If the real wage is sticky, then...

Question 15

The short-run aggregate supply curve is perfectly inelastic in the classical range because:
A) large amounts of unused labor and other inputs can be obtained at no additional cost.
B) nominal wages are sticky, so firms can supply additional output at higher price.
C) input and output prices change at the same rate, so there is no incentive to produce extra output.
D) a higher price leads to lower demand, so there is no incentive to produce extra output.

Accepted Answer

In the classical range, it is assumed that prices of inputs (like wages) and outputs adjust simultaneously and proportionately in response to changes in demand or supply. This means that firms have no incentive to change their level of production because their costs and revenues change at the same rate, keeping profit margins constant. Thus, the short-run aggregate supply curve is viewed as perfectly inelastic in this scenario.

Question 16

Which one of the following will decrease aggregate supply, thereby shifting the curve left?
A) Nominal wages decrease as a result of an increased labor supply.
B) The productivity of workers decreases as a result of an epidemic.
C) A new government policy decreases business taxes.
D) The price of oil, which is a major input into most production activities, decreases.

Accepted Answer

A decrease in worker productivity, such as from an epidemic, would reduce the amount of goods and services that can be produced at any given price level, thus shifting the aggregate supply curve to the left.

Question 17

Which one of the following will increase aggregate supply, thereby shifting the curve right?
A) Nominal wages increase as a result of a decreased labor supply.
B) The productivity of workers increases as a result of technological improvements.
C) A new government policy increases business taxes.
D) The price of oil, which is a major input into most production activities, increases.

Accepted Answer

An increase in worker productivity due to technological improvements makes it possible for firms to produce more goods and services at every price level, thus shifting the aggregate supply curve to the right.

Question 18

If an economy is going through a severe recession (or depression), then the short-run aggregate supply curve will likely be:
A) upward sloping.
B) downward sloping.
C) vertical.
D) horizontal.

Accepted Answer

During a severe recession or depression, the short-run aggregate supply curve is typically horizontal or very flat. This reflects that there are many idle resources (e.g., unemployed workers, unused factories), so increases in demand can lead to increases in output without putting upward pressure on prices.

Question 19

The short-run aggregate supply curve is:
A) upward sloping in the classical range.
B) downward sloping in the Keynesian range.
C) vertical in the Keynesian range.
D) vertical in the classical range.

Accepted Answer

In the classical range, the short-run aggregate supply curve is vertical because it is assumed that the economy is at full employment, and output is not affected by changes in the price level.

Question 20

Which one of the following would constitute a negative supply shock?
A) The supply of money in the economy decreases.
B) Discretionary government spending decreases.
C) The price of oil increases as a result of conflict or war.
D) The federal income tax increases.

Accepted Answer

A negative supply shock, such as a significant increase in the price of oil due to conflict or war, directly affects production costs for many industries, leading to decreased supply and potentially higher prices for consumers.

Quiz 14: Aggregate Demand and Aggregate Supply

If the nominal wage of workers increases by 10% and the real wage of workers remains unchanged, then the overall price level must have:

If the nominal wage of workers decreases by 5% and the real wage of workers increases by 5%, then the overall price level must have:

If the overall price level in the economy is rising and at the same time workers are able to buy more goods and services, then the _ wage of workers must be _ the rise in the price level.

If the overall price level in the economy increases by 10% and the workers in the economy are able to afford the same amount of goods as before the price change, then which of the following statements is true?

The upward-sloping range of the short-run aggregate supply curve results from the stickiness of which of the following variables?

In the upward-sloping range of the short-run aggregate supply curve, the nominal wage is _____, which implies that the real wage is:

Which of the following variables is measured along the horizontal axis of the short-run aggregate supply curve?

Which of the following variables is measured along the vertical axis of the short-run aggregate supply curve?

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply _ output at _ price level.

When _ wages are sticky, _ in the price level leads to a decrease in the profit earned by businesses.

When _ wages are sticky, an increase in the price level leads to _ in the profit earned by businesses.

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply more output when the overall price level increases because:

If the nominal wage is sticky, then a decrease in the overall price level leads to _ in the real wage firms have to pay. The firms respond by hiring _ workers.

If the real wage is sticky, then the short-run aggregate supply curve will be:

The short-run aggregate supply curve is perfectly inelastic in the classical range because:

Which one of the following will decrease aggregate supply, thereby shifting the curve left?

Which one of the following will increase aggregate supply, thereby shifting the curve right?

If an economy is going through a severe recession (or depression) , then the short-run aggregate supply curve will likely be:

The short-run aggregate supply curve is:

Which one of the following would constitute a negative supply shock?