Question 1

With flexible wages and prices:

Accepted Answer

With flexible wages and prices, the aggregate supply curve is vertical, indicating that aggregate supply equals potential output regardless of the inflation rate. This reflects the classical view that in the long run, the economy is always at its potential output level, and changes in the price level do not affect the quantity of goods and services supplied.

Question 2

The long-run aggregate supply curve:

Accepted Answer

The long-run aggregate supply curve is vertical because it represents the idea that the total production of an economy (its output) is determined by factors like technology and resources, not by the price level. This implies that in the long run, an economy's potential output is fixed, assuming all resources are fully employed, regardless of changes in the price level or inflation.

Question 3

An increase in the capital stock that increases the amount of capital per worker:

Accepted Answer

An increase in the capital stock per worker makes labor more productive, which increases potential output and shifts the long-run aggregate supply curve to the right, not to the left. It does not inherently raise the inflation rate; inflation is influenced by many factors, including aggregate demand relative to aggregate supply.

Question 4

Potential output is determined by all the following variables except one, which is:

Accepted Answer

Potential output, also known as full employment output, is determined by the economy's supply side factors such as technology, capital, and labor. Aggregate demand, on the other hand, affects the actual output but not the potential output, which is the economy's ability to produce goods and services when it is operating at full capacity.

Question 5

-Refer to Figure 13.1. For a given stock of capital, supply of labour and state of technology, the long run supply curve is:

Accepted Answer

The long run supply curve is vertical at the level of potential output because it reflects the maximum amount of goods and services an economy can produce when it is most efficiently using all its resources (capital, labor, technology). It does not depend on the price level in the long run, indicating that changes in demand will not affect the total output in the long run, only the price level.

Question 6

-Refer to Figure 13.1. The shift in the LAS curve from LAS₀ to LAS₁ could be caused by:

Accepted Answer

The shift in the Long-Run Aggregate Supply (LAS) curve from LAS₀ to LAS₁ indicates an increase in the economy's potential output. This can be caused by factors that enhance the productive capacity of the economy, such as an increase in the stock of capital, an increase in the supply of labor, or improvements in technology. These factors directly affect the economy's ability to produce goods and services, leading to a rightward shift in the LAS curve.

Question 7

In terms of the production function Y = A₀ x F(L,K₀) where A is the state of technology, L the level of Employment and K the stock of capital:

Accepted Answer

B) is correct because an increase in the labor force (L) directly increases the potential output by providing more labor for production, which shifts the Long-Run Aggregate Supply (LAS) curve to the right, indicating an increase in the economy's capacity to produce goods and services.

Question 8

In terms of the production function Y = A₀ x F(L,K₀) where A is the state of technology, L the level of employment and K the stock of capital:

Accepted Answer

The production function Y = A * F(L, K) shows how output Y is determined by the state of technology (A), the level of employment (L), and the stock of capital (K). In the short run, changes in output (AS) can indeed come from changes in the level of employment (L), as capital stock and technology are often considered fixed in the short term. Potential output (Y_P) is the level of output when the economy is at full employment (L_F), indicating that all available labor resources are being used efficiently. Changes in the stock of capital or the state of technology can shift the potential output level by affecting the production capacity of the economy. Therefore, all the statements A, B, and C are correct, making D the correct choice.

Question 9

The level of potential output is treated as a long-run aggregate supply:

Accepted Answer

The level of potential output is treated as a long-run aggregate supply because it represents the economy's capacity to produce goods and services when wages and prices have fully adjusted to their equilibrium values, reflecting the economy's productive capacity without inflationary pressures.

Question 10

A vertical line showing the economy's potential output is called the:

Accepted Answer

The long-run aggregate supply curve (LAS) is vertical because it represents the economy's potential output, which is determined by factors like technology and resources, and is not affected by the price level in the long run.

Question 11

Which of the following statements is false?

Accepted Answer

The real interest rate adjusts the nominal interest rate for the effects of inflation or deflation. In the case of a 2% decrease in nominal interest rate and a 3% deflation rate, the real interest rate actually increases by 1%, not decreases. This is because deflation increases the purchasing power of money, effectively increasing the real interest rate.

Question 12

Assume that AE = 200 + 0.5Y - 10r. Further assume that the central bank sets the interest rate as r = r_o + 1)5(? -1), where r_o is the interest rate where Y = Y_P. If r_o is 2.0, AE function will be:

Accepted Answer

The answer of Assume that AE = 200 + 0.5Y...

Question 13

Consider the following equations: AE = 200 + 0.5Y - 10r R = 2 + 1.5(? -1) [Target ?^* is one] AE=Y Y = 390 - 30? On the basis of the above, select the false statement from the following statements.

Accepted Answer

If ? is greater than target ?^*, the central bank will raise r. As a result, Y will decline.

Question 14

Which of the following will not shift the AD curve?

Accepted Answer

Changes in the inflation rate affect the value of money and purchasing power but do not directly shift the Aggregate Demand (AD) curve. The AD curve shifts due to changes in factors like government spending, interest rates, and autonomous expenditures, which directly affect the total demand for all goods and services in an economy.

Question 15

-Refer to Figure 13.2. In the diagram, the intersection of the AD₀ curve and the LAS curve determines:

Accepted Answer

The answer of 
-Refer to Figure 13.2. In the diagram,...

Question 16

-Refer to Figure 13.2. The AD curve can be shifted from AD₀ to AD₁ by the central bank by:

Accepted Answer

Raising interest rates by the central bank typically reduces aggregate demand, shifting the AD curve to the left, not to the right as from AD0 to AD1.

Question 17

-Refer to Figure 13.2. If an increase in exports shifted the AD curve from AD₀ to AD₂ the equilibrium inflation rate would increase:

Accepted Answer

The equilibrium inflation rate would increase only if the central bank raised its inflation target and adjusted monetary policy to accommodate the increase in aggregate demand due to higher exports.

Question 18

At long-run equilibrium, inflation _______ and actual output equals ______.

Accepted Answer

In the long-run equilibrium, inflation is stable because the economy's output has adjusted to its potential level, meaning the level of production that can be sustained over time without increasing inflation. This reflects the natural rate of unemployment and the economy's capacity.

Question 19

To achieve an inflation target, the central bank forecasts AD then sets a ________________________ to achieve the required __________________.

Accepted Answer

The central bank sets a nominal interest rate to achieve the required real interest rate. The nominal interest rate directly influences borrowing and spending, which in turn affects inflation. However, the real interest rate, which is adjusted for inflation, is the key target that influences economic behavior.

Question 20

-Refer to Figure 13.3. The diagram shows that a benefit of an increase in potential output is to permit higher output without experiencing:

Accepted Answer

An increase in potential output allows the economy to produce more without causing inflation to rise, as it does not put upward pressure on prices by exceeding the productive capacity of the economy.

Quiz 13: Economic Growth

With flexible wages and prices:

The long-run aggregate supply curve:

An increase in the capital stock that increases the amount of capital per worker:

Potential output is determined by all the following variables except one, which is:

-Refer to Figure 13.1. For a given stock of capital, supply of labour and state of technology, the long run supply curve is:

-Refer to Figure 13.1. The shift in the LAS curve from LAS₀ to LAS₁ could be caused by:

In terms of the production function Y = A₀ x F(L,K₀) where A is the state of technology, L the level of Employment and K the stock of capital:

In terms of the production function Y = A₀ x F(L,K₀) where A is the state of technology, L the level of employment and K the stock of capital:

The level of potential output is treated as a long-run aggregate supply:

A vertical line showing the economy's potential output is called the:

Which of the following statements is false?

Assume that AE = 200 + 0.5Y - 10r. Further assume that the central bank sets the interest rate as r = r_o + 1) 5(? -1) , where r_o is the interest rate where Y = Y_P. If r_o is 2.0, AE function will be:

Consider the following equations: AE = 200 + 0.5Y - 10r R = 2 + 1.5(? -1) [Target ?^* is one] AE=Y Y = 390 - 30? On the basis of the above, select the false statement from the following statements.

Which of the following will not shift the AD curve?

-Refer to Figure 13.2. In the diagram, the intersection of the AD₀ curve and the LAS curve determines:

-Refer to Figure 13.2. The AD curve can be shifted from AD₀ to AD₁ by the central bank by:

-Refer to Figure 13.2. If an increase in exports shifted the AD curve from AD₀ to AD₂ the equilibrium inflation rate would increase:

At long-run equilibrium, inflation _ and actual output equals .

To achieve an inflation target, the central bank forecasts AD then sets a ______ to achieve the required .

-Refer to Figure 13.3. The diagram shows that a benefit of an increase in potential output is to permit higher output without experiencing:

Quiz 13: Economic Growth

With flexible wages and prices:

The long-run aggregate supply curve:

An increase in the capital stock that increases the amount of capital per worker:

Potential output is determined by all the following variables except one, which is:

-Refer to Figure 13.1. For a given stock of capital, supply of labour and state of technology, the long run supply curve is:

-Refer to Figure 13.1. The shift in the LAS curve from LAS0 to LAS1 could be caused by:

In terms of the production function Y = A0 x F(L,K0) where A is the state of technology, L the level of Employment and K the stock of capital:

In terms of the production function Y = A0 x F(L,K0) where A is the state of technology, L the level of employment and K the stock of capital:

The level of potential output is treated as a long-run aggregate supply:

A vertical line showing the economy's potential output is called the:

Which of the following statements is false?

Assume that AE = 200 + 0.5Y - 10r. Further assume that the central bank sets the interest rate as r = ro + 1) 5(? -1) , where ro is the interest rate where Y = YP. If ro is 2.0, AE function will be:

Consider the following equations: AE = 200 + 0.5Y - 10r R = 2 + 1.5(? -1) [Target ?* is one] AE=Y Y = 390 - 30? On the basis of the above, select the false statement from the following statements.

Which of the following will not shift the AD curve?

-Refer to Figure 13.2. In the diagram, the intersection of the AD0 curve and the LAS curve determines:

-Refer to Figure 13.2. The AD curve can be shifted from AD0 to AD1 by the central bank by:

-Refer to Figure 13.2. If an increase in exports shifted the AD curve from AD0 to AD2 the equilibrium inflation rate would increase:

At long-run equilibrium, inflation _______ and actual output equals ______.

To achieve an inflation target, the central bank forecasts AD then sets a ________________________ to achieve the required __________________.

-Refer to Figure 13.3. The diagram shows that a benefit of an increase in potential output is to permit higher output without experiencing:

-Refer to Figure 13.1. The shift in the LAS curve from LAS₀ to LAS₁ could be caused by:

In terms of the production function Y = A₀ x F(L,K₀) where A is the state of technology, L the level of Employment and K the stock of capital:

In terms of the production function Y = A₀ x F(L,K₀) where A is the state of technology, L the level of employment and K the stock of capital:

Assume that AE = 200 + 0.5Y - 10r. Further assume that the central bank sets the interest rate as r = r_o + 1) 5(? -1) , where r_o is the interest rate where Y = Y_P. If r_o is 2.0, AE function will be:

Consider the following equations: AE = 200 + 0.5Y - 10r R = 2 + 1.5(? -1) [Target ?^* is one] AE=Y Y = 390 - 30? On the basis of the above, select the false statement from the following statements.

-Refer to Figure 13.2. In the diagram, the intersection of the AD₀ curve and the LAS curve determines:

-Refer to Figure 13.2. The AD curve can be shifted from AD₀ to AD₁ by the central bank by:

-Refer to Figure 13.2. If an increase in exports shifted the AD curve from AD₀ to AD₂ the equilibrium inflation rate would increase:

At long-run equilibrium, inflation _ and actual output equals .

To achieve an inflation target, the central bank forecasts AD then sets a ______ to achieve the required .