Question 1

When government expenditure rises by $180 million and the initial increase in government expenditure was $60 million, then the multiplier is:

Accepted Answer

The answer of When government expenditure rises by $180 million...

Question 2

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when exports increase due to rising foreign incomes?

Accepted Answer

When exports increase due to rising foreign incomes, it leads to an increase in demand for the country's goods and services. This increased demand boosts economic activity, leading to higher GDP. Additionally, the increased demand can also lead to higher prices, as producers may raise prices in response to the higher demand.

Question 3

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when corporate taxes rise in the economy?

Accepted Answer

When corporate taxes rise, businesses have less after-tax income to invest and spend, leading to a decrease in GDP. Higher taxes can also reduce consumer spending and investment, leading to lower demand and potentially lower prices.

Question 4

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when the government offers businesses a tax incentive if they invest?

Accepted Answer

When the government offers businesses a tax incentive to invest, it encourages more investment. This increased investment boosts economic activity, leading to higher GDP. As demand in the economy increases due to this higher economic activity, prices are likely to increase as well.

Question 5

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when imported inputs become cheaper?

Accepted Answer

When imported inputs become cheaper, the cost of production decreases for firms that rely on those inputs. This results in lower prices for consumers and potentially higher sales due to increased demand. As a result, GDP could increase due to increased production and sales with a lower cost of production.

Question 6

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when productivity increases in the economy?

Accepted Answer

When productivity increases in the economy, there is an increase in the supply of goods and services, leading to a decrease in prices. However, the increase in productivity also results in an increase in output, leading to an increase in GDP. Therefore, prices decrease, and GDP increases.

Question 7

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the government engages in expansionary fiscal policy?

Accepted Answer

The answer of You are an analyst preparing a forecast...

Question 8

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the government engages in contractionary fiscal policy?

Accepted Answer

The answer of You are an analyst preparing a forecast...

Question 9

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the central bank engages in contractionary monetary policy?

Accepted Answer

The answer of You are an analyst preparing a forecast...

Question 10

Which graph correctly depicts the very short-run aggregate supply curve?

Accepted Answer

The answer of Which graph correctly depicts the very short-run...

Question 11

Which graph correctly depicts the long-run aggregate supply curve?

Accepted Answer

The long-run aggregate supply curve is vertical, indicating that in the long-run, the level of output is determined by the economy's potential level of production, which is determined by factors such as technology and resources. Option C correctly depicts a vertical long-run aggregate supply curve. Options A, B, and D all depict upward sloping curves, which is indicative of short-run aggregate supply.

Question 12

Why is the very short-run aggregate supply curve horizontal?

Accepted Answer

The very short-run aggregate supply curve is horizontal because businesses have not yet adjusted their prices in response to changes in demand or other economic shocks. This is because it takes time for firms to adjust their prices in response to changing market conditions.

Question 13

In the long run, the aggregate supply curve is vertical because the:

Accepted Answer

In the long run, prices and wages are flexible, and resource markets adjust to changes in demand and supply. As market prices adjust, firms produce at their potential GDP level, and the aggregate supply curve becomes vertical at potential GDP. Thus, the quantity of output returns to potential GDP as market prices adjust and resource markets return to equilibrium.

Question 14

Which of the following is true?

Accepted Answer

The partial but incomplete adjustment of prices by businesses at different speeds results in an upward-sloping short-run aggregate supply curve. This means that in the short run, changes in demand can lead to changes in prices and output, but only partially due to the incomplete adjustment of prices.

Question 15

Why does the aggregate supply curve change from horizontal to vertical over the course of the very short run to the long run?

Accepted Answer

In the very short run, the aggregate supply curve is horizontal because prices are fixed and firms are willing to supply any amount of goods at those prices. As time passes, prices begin to adjust and firms adjust their production levels accordingly, leading to a recovery of the economy towards potential GDP. This causes the aggregate supply curve to shift from horizontal to upward sloping (eventually becoming vertical in the long run) as potential GDP is reached and the economy returns to full employment. Fiscal and monetary policy may also work to shift aggregate supply, but the primary reason for the shape of the aggregate supply curve is the adjustment of prices and production over time.

Question 16

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the IMMEDIATE impact of a decrease in aggregate demand?

Accepted Answer

In the short run, a decrease in aggregate demand will lead to a decrease in output and an increase in unemployment as businesses cut back on production. Prices may not adjust immediately, leading to a period of deflation. The economy will experience a recession as it adjusts to the new level of demand. In the long run, as prices adjust, the economy will return to its potential output level.

Question 17

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the medium run impact of a decrease in aggregate demand?

Accepted Answer

In the medium run, the decrease in aggregate demand will cause a slow fall in prices as the short-run aggregate supply begins to have a positive slope. The initial decline in output will moderate, but the economy will not yet have returned to its long-run potential.

Question 18

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the LONG-RUN impact of a decrease in aggregate demand?

Accepted Answer

In the long run, all prices adjust to changes in aggregate demand, and the economy returns to its long-run potential output level. This is because firms have enough time to adjust production levels, and wages and other input prices have also adjusted to the new market conditions. Therefore, there is no need for a sharp fall in prices or a recession as output declines initially.

Question 19

Aggregate expenditure is the sum of:

Accepted Answer

Aggregate expenditure is the sum of consumption (household spending), planned investment (business spending), government expenditure (government spending), and net exports (exports minus imports). Therefore, option D is the correct answer since it includes all four components of aggregate expenditure.

Question 20

Consumption refers to the:

Accepted Answer

Consumption specifically refers to the purchases of goods and services by households.

Quiz 33: Aggregate Demand and Aggregate Supply

When government expenditure rises by $180 million and the initial increase in government expenditure was $60 million, then the multiplier is:

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when exports increase due to rising foreign incomes?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when corporate taxes rise in the economy?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when the government offers businesses a tax incentive if they invest?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when imported inputs become cheaper?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. What happens to prices and GDP when productivity increases in the economy?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the government engages in expansionary fiscal policy?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the government engages in contractionary fiscal policy?

You are an analyst preparing a forecast of the effects of macroeconomic changes in the economy. Which graph shows the correct effect on prices and GDP when the central bank engages in contractionary monetary policy?

Which graph correctly depicts the very short-run aggregate supply curve?

Which graph correctly depicts the long-run aggregate supply curve?

Why is the very short-run aggregate supply curve horizontal?

In the long run, the aggregate supply curve is vertical because the:

Which of the following is true?

Why does the aggregate supply curve change from horizontal to vertical over the course of the very short run to the long run?

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the IMMEDIATE impact of a decrease in aggregate demand?

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the medium run impact of a decrease in aggregate demand?

Given your knowledge of how aggregate supply changes from the very short run to the long run, what is the LONG-RUN impact of a decrease in aggregate demand?

Aggregate expenditure is the sum of:

Consumption refers to the: