Question 1

Use the figure below to answer the following question(s).
Figure 10-1
 
-At which point in Figure 10-1 is the economy experiencing an economic boom?
A)A
B)B
C)C
D)D

Accepted Answer

The point B in the graph represents a period of high economic growth with low unemployment and high output. This is indicative of an economic boom.

Question 2

When an economy is temporarily operating at an output that is beyond its full-employment rate,
A)excess supply in resource markets will eventually lead to lower resource prices,which will decrease costs and direct the economy toward full employment.
B)excess demand in resource markets will lead to higher resource prices,which will increase costs and direct the economy toward full employment.
C)lower wages and prices will quickly restore full employment.
D)only restrictive fiscal policy will direct the economy back to full employment.

Accepted Answer

When an economy is temporarily operating beyond its full-employment rate, it means that there is excess demand for resources. This excess demand leads to higher resource prices, which increases costs for firms. As a result, firms will eventually reduce output and employment, and the economy will move back towards its full-employment rate. This process is known as the "classical adjustment mechanism". Therefore, answer B is correct. Answers A, C, and D are incorrect because they do not accurately describe the way the economy adjusts to temporary deviations from full employment.

Question 3

Which of the following contributed to the crisis of 2008?
A)a doubling of the price of imported oil during 2007-2008
B)a sharp increase in the price of housing during 2008
C)inclement weather in 2008
D)falling resource prices and a reduction in the cost of production

Accepted Answer

The doubling of the price of imported oil during 2007-2008 contributed to the crisis of 2008 as it resulted in an increase in the cost of production and transportation, which eventually led to a rise in prices of other goods and services. It also impacted the disposable income of households, making it difficult for them to meet their financial obligations.

Question 4

Which of the following would reduce the ability of the self-correcting mechanism to direct an economy out of a recession quickly?
A)a decrease in the real rate of interest
B)resource prices that are inflexible in a downward direction
C)an increase in aggregate demand
D)a low level of savings

Accepted Answer

If resource prices are inflexible in a downward direction, firms will have trouble reducing costs and may have to lay off workers or reduce production, making it more difficult for the economy to recover quickly. The other options would actually help stimulate the economy and lead to a faster recovery.

Question 5

Which of the following contributed to the sharp economic downturn during 2008?
A)rising housing and stock prices
B)falling housing and stock prices
C)rising housing prices but falling stock prices
D)falling housing prices but rising stock prices

Accepted Answer

Falling housing and stock prices contributed to the sharp economic downturn during 2008, as the housing market bubble burst and led to a recession.

Question 6

Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?
A)Prices will decline,bringing actual output into balance with its potential.
B)The natural rate of unemployment will increase and,thereby,restore equilibrium.
C)Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.
D)Lower interest rates will increase the economy's long-run capacity and restore equilibrium.

Accepted Answer

When output exceeds the economy's long-run capacity, there is upward pressure on resource prices and costs. This reduces short-run aggregate supply until output falls back to the economy's long-run capacity. Therefore, answer choice C is the most likely adjustment to occur. Answer choice A is incorrect because prices will generally rise when the economy is producing beyond its long-run capacity due to resource scarcity. Answer choice B is incorrect because an increase in the natural rate of unemployment is not a mechanism for restoring equilibrium in the long run. Answer choice D is incorrect because lower interest rates generally stimulate output in the short run, but they do not increase the economy's long-run capacity.

Question 7

What impact did the change in housing prices during 2002 to 2005 have within the framework of the AD/AS model?
A)Declining housing prices reduced aggregate demand shifting AD leftward.
B)Rising housing prices increased aggregate demand shifting AD rightward.
C)Rising housing prices led to increased construction shifting LRAS leftward.
D)Declining housing prices caused SRAS to shift leftward.

Accepted Answer

Rising housing prices increased wealth and consumer confidence, leading to an increase in consumption and investment, shifting AD rightward.

Question 8

Within the AD/AS model,which one of the following adjustments will cause the economy to return to its long-run capacity when output is temporarily greater than the economy's long-run potential?
A)Lower wage rates and resource prices reduce short-run aggregate supply.
B)Lower interest rates increase aggregate demand and,thereby,stimulate output.
C)Higher wage rates and resource prices reduce short-run aggregate supply.
D)A decrease in prices reduces aggregate demand.

Accepted Answer

If output is temporarily greater than the economy's long-run potential, it means that the economy is operating above its potential GDP, which creates inflationary pressures. The best way to return the economy to its long-run capacity is to reduce short-run aggregate supply. This can be accomplished by increasing wage rates and resource prices, reducing output and lowering prices, eventually returning the economy to its long-run equilibrium level. Therefore, choice C is the correct answer. The other options would either increase aggregate demand, which would further exacerbate inflationary pressures, or would decrease aggregate demand, which may lead to a decrease in output and employment, but would not address the root cause of the problem.

Question 9

If a market economy has a self-correcting mechanism,when output is lower than potential or full-employment output,
A)changes will occur that will automatically guide the economy back to full employment.
B)resource prices will increase.
C)prolonged unemployment such as was experienced during the Great Depression will occur.
D)the economy will fall into a more severe recession.

Accepted Answer

In a market economy, a self-correcting mechanism exists whereby market forces will ultimately guide the economy back to full employment. When output is lower than potential, demand for goods and services is weaker, causing firms to reduce production, lower prices, and cut back on employment. As resources become relatively more abundant and cheaper, producers will adjust by increasing production, leading to an expansion of employment and increased output. Eventually, output will increase to the full-employment level as the economy attains equilibrium. Thus changes will occur that will automatically guide the economy back to full employment.

Question 10

When output is greater than the economy's long-run capacity,which of the following is most likely to occur?
A)a reduction in the general level of prices
B)an abnormally high rate of unemployment
C)increases in real interest rates and real resource prices
D)a reduction in imports

Accepted Answer

The answer of When output is greater than the economy's...

Question 11

If an economy operates at a short-run equilibrium output that exceeds its long-run capacity,which of the following will be most likely to direct the economy toward full employment?
A)Improvements in technology will shift the LRAS curve to the right.
B)Resource prices will increase,causing the SRAS curve to shift to the left.
C)The unemployment rate will increase,causing the economy's aggregate supply curve to shift to the right.
D)Interest rates will decline,shifting the aggregate demand curve to the right.

Accepted Answer

When the economy operates at a short-run equilibrium output that exceeds its long-run capacity, it is in an inflationary gap where output is higher than the potential output. In this case, the prices will increase due to excess demand. By increasing the resource prices, the SRAS curve shifts leftward, which brings the economy to full employment equilibrium where the short-run aggregate supply curve intersects with the long-run aggregate supply curve. The other options do not address the inflationary gap situation directly. A shift in the LRAS curve due to technology improvement will cause the output to increase in the long run, not in the short run. The increase in the unemployment rate, which causes the aggregate supply curve to shift to the right, will lead to a lower price level and output level, but it will not necessarily lead to full employment. The decline in interest rates will increase the aggregate demand, but it may not necessarily bring the economy to full employment if the problem is due to potential output capacity constraints.

Question 12

Which of the following was a contributing factor to the instability of 2002 to 2008?
A)ideal weather from 2002 to 2006,followed by a severe drought in 2007 and 2008
B)falling housing prices leading to an expansion,followed by rising housing prices leading to a sharp economic downturn
C)an increase in housing prices leading to an expansion,followed by a collapse in housing prices and a sharp economic downturn
D)falling stock prices leading to an expansion,followed by rising stock prices leading to a sharp economic downturn

Accepted Answer

The increase in housing prices led to an expansion of the economy, but the collapse of the housing market in 2008 caused a sharp economic downturn. This instability is often referred to as the 2008 global financial crisis. The other answer choices do not accurately reflect the contributing factors to the instability of 2002 to 2008.

Question 13

Use the figure below to answer the following question(s).
Figure 10-1
 
-At which point in Figure 10-1 is the economy at long-run equilibrium?
A)A
B)B
C)C
D)D

Accepted Answer

The answer of Use the figure below to answer the...

Question 14

The economic boom between 2002 and 2006 was primarily a result of
A)a reduction in stock prices along with rising oil prices.
B)a sharp reduction in the real price of resources and wages.
C)an increase in both housing and stock prices.
D)an increase in both resource prices and interest rates.

Accepted Answer

The economic boom between 2002 and 2006 was characterized by an increase in both housing and stock prices. This was largely due to factors such as low interest rates, loose lending standards, and speculative behavior in the housing market. While resource prices may have played a role in the boom, they were not the primary driving force. Similarly, while interest rates may have played a role, they were not uniformly increasing during this period. A reduction in stock prices combined with rising oil prices (A) would not have led to an overall economic boom, and a sharp reduction in the real price of resources and wages (B) would likely have led to deflationary pressures rather than economic growth.

Question 15

Within the AD/AS model,if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output,
A)the natural rate of unemployment will increase.
B)long-run aggregate supply will increase.
C)lower resource prices and declining interest rates will direct the economy back to full employment.
D)higher resource prices and rising interest rates will direct the economy back to full employment.

Accepted Answer

If an unanticipated reduction in aggregate demand results in less than the full-employment rate of output, lower resource prices and declining interest rates will direct the economy back to full employment. This is because with lower aggregate demand, firms will reduce their prices to sell their products and services, leading to lower resource prices, including lower wages. This, in turn, leads to lower production costs and ultimately, firms will increase their production to meet the increased demand for cheaper goods and services. This will lead to an increase in aggregate demand, which will eventually get the economy back to the full-employment rate of output. Additionally, declining interest rates will encourage households and firms to spend more, leading to an increase in aggregate demand.

Question 16

If an unanticipated decrease in aggregate demand results in an output below the economy's long-run capacity,long-run equilibrium will eventually be restored by
A)an increase in the rate of inflation.
B)lower resource prices and lower real interest rates.
C)higher resource prices and higher real interest rates.
D)a decrease in the natural rate of unemployment.

Accepted Answer

A decrease in aggregate demand leads to an excess supply of goods and services, which puts downward pressure on prices. This pressure on prices ultimately leads to lower resource prices and lower real interest rates. Lower resource prices reduce production costs and increase profits, leading firms to increase production. Lower real interest rates encourage borrowing and investment, which also stimulates economic activity. These adjustments in the economy will eventually restore long-run equilibrium. An increase in the rate of inflation (choice A) would actually worsen the situation and move the economy further away from equilibrium. Higher resource prices and higher real interest rates (choice C) would also be unlikely outcomes in response to a decrease in aggregate demand. The natural rate of unemployment (choice D) is determined by factors outside of the business cycle and would not be affected by this short-term shock to aggregate demand.

Question 17

When the output of an economy exceeds the economy's full-employment capacity,
A)aggregate supply will increase until the economy can produce the output at the existing price level.
B)the actual rate of unemployment will be less than the natural rate.
C)wage rates and resource prices will tend to fall.
D)interest rates will decline and help direct the economy back to full employment.

Accepted Answer

The answer of When the output of an economy exceeds...

Question 18

If the economy is operating at an output level beyond its full-employment capacity,which of the following would most likely direct the economy back to long-run equilibrium?
A)improvements in technology
B)a decrease in the real rate of interest
C)an increase in resource prices
D)a decrease in resource prices

Accepted Answer

If the economy is operating beyond its full-employment capacity, it means that there is excess demand for goods and services which can lead to inflationary pressures. An increase in resource prices would lead to an increase in production costs, which would cause firms to decrease their output, eventually leading to a decrease in aggregate demand and a return to long-run equilibrium. A decrease in resource prices, on the other hand, would increase output and further exacerbate the inflationary pressures. Improvements in technology and a decrease in the real rate of interest would not directly address the issue of excess demand in the economy.

Question 19

What impact did the soaring oil prices of 2007 and the first half of 2008 have on the economy?
A)They increased SRAS,causing real output and employment to increase.
B)They reduced SRAS,causing real output and employment to increase.
C)They increased SRAS,causing real output and employment to decline.
D)They reduced SRAS,causing real output and employment to decline.

Accepted Answer

Soaring oil prices reduce SRAS as they increase the cost of production, leading to a decrease in real output and employment. This is because firms face higher costs of production, and they have to reduce their output to maintain profitability. Additionally, higher oil prices lead to an increase in the cost of goods and services, reducing consumers' purchasing power and overall demand for goods and services. This reduction in demand leads to a decrease in real output and employment.

Question 20

During an economic expansion,housing and stock prices generally
A)fall,leading to a reduction in aggregate demand.
B)fall,leading to an increase in aggregate demand.
C)rise,leading to a reduction in aggregate demand.
D)rise,leading to an increase in aggregate demand.

Accepted Answer

During an economic expansion, there is generally an increase in consumer confidence and income, leading to higher demand for housing and stocks. This increase in demand drives up the prices of both, which in turn leads to an increase in aggregate demand as consumers feel wealthier and are more likely to spend.

Quiz 10: Dynamic Change, economic Fluctuations, and the Ad-As Model

Use the figure below to answer the following question(s) . Figure 10-1 -At which point in Figure 10-1 is the economy experiencing an economic boom?

When an economy is temporarily operating at an output that is beyond its full-employment rate,

Which of the following contributed to the crisis of 2008?

Which of the following would reduce the ability of the self-correcting mechanism to direct an economy out of a recession quickly?

Which of the following contributed to the sharp economic downturn during 2008?

Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?

What impact did the change in housing prices during 2002 to 2005 have within the framework of the AD/AS model?

Within the AD/AS model,which one of the following adjustments will cause the economy to return to its long-run capacity when output is temporarily greater than the economy's long-run potential?

If a market economy has a self-correcting mechanism,when output is lower than potential or full-employment output,

When output is greater than the economy's long-run capacity,which of the following is most likely to occur?

If an economy operates at a short-run equilibrium output that exceeds its long-run capacity,which of the following will be most likely to direct the economy toward full employment?

Which of the following was a contributing factor to the instability of 2002 to 2008?

Use the figure below to answer the following question(s) . Figure 10-1 -At which point in Figure 10-1 is the economy at long-run equilibrium?

The economic boom between 2002 and 2006 was primarily a result of

Within the AD/AS model,if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output,

If an unanticipated decrease in aggregate demand results in an output below the economy's long-run capacity,long-run equilibrium will eventually be restored by

When the output of an economy exceeds the economy's full-employment capacity,

If the economy is operating at an output level beyond its full-employment capacity,which of the following would most likely direct the economy back to long-run equilibrium?

What impact did the soaring oil prices of 2007 and the first half of 2008 have on the economy?

During an economic expansion,housing and stock prices generally