Question 1

The government increases the level of government expenditure.If there is no change in the aggregate supply curve,then aggregate demand will ________,real GDP will ________,and the price level will ________.
A)decrease;increase;increase
B)increase;increase;increase
C)remain the same;increase;increase
D)increase;remain the same;increase
E)decrease;remain the same;decrease

Accepted Answer

An increase in government expenditure raises aggregate demand, leading to higher real GDP and a higher price level if aggregate supply remains unchanged.

Question 2

A crisis in the Middle East drastically raises the price of petroleum.If the aggregate demand curve does NOT shift,then aggregate supply will ________,real GDP will ________,and the price level will ________.
A)decrease;decrease;increase
B)increase;remain the same;increase
C)decrease;remain the same;decrease
D)remain the same;increase;increase
E)increase;increase;increase

Accepted Answer

An increase in petroleum prices raises production costs, causing the aggregate supply to decrease. This leads to a decrease in real GDP and an increase in the price level, assuming aggregate demand remains unchanged.

Question 3

At the beginning of 2017,a country is at full-employment.During 2017,oil-producing countries decrease oil production leading to much higher oil prices.The higher oil prices can
A)decrease aggregate demand and lead to a stagflation.
B)decrease aggregate supply and lead to a stagflation.
C)decrease aggregate demand and lead to a higher price level.
D)increase aggregate supply and lead to an expansion.
E)increase aggregate demand and lead to an expansion.

Accepted Answer

The decrease in oil production and the resulting higher oil prices will increase the costs of production for firms, leading to a decrease in aggregate supply. This will cause a decrease in real output (GDP) and an increase in the price level (inflation). This is known as stagflation, where the economy experiences stagnant growth and high inflation. Therefore, option B is the correct answer.

Question 4

Stagflation is defined as a period when real GDP ________ and the price level ________.
A)decreases;increases
B)increases;decreases
C)is constant;rises rapidly
D)decreases;decreases
E)increases;increases

Accepted Answer

Stagflation is characterized by a combination of stagnant economic growth (i.e. a decrease in real GDP) and rising prices (i.e. an increase in the price level). Therefore, option A is the best choice.

Question 5

If the AD curve shifts rightward while the AS curve and potential GDP don't change,then
A)there will be no change in real GDP,so the economy is at the peak of the cycle.
B)there will be no change in real GDP,so the economy is at the trough of the cycle.
C)the economy will move from a peak into a recession.
D)the expansion phase of the business cycle occurs.
E)real GDP does not change.

Accepted Answer

If the AD curve shifts rightward while the AS curve and potential GDP don't change, there will be an increase in demand for goods and services. This will cause firms to increase production, leading to an expansion in real GDP. Therefore, the economy will move into the expansion phase of the business cycle.

Question 6

A deep recession hits the world economy,and real GDP in the rest of the world decreases.In Australia,
A)aggregate supply and aggregate demand both increase,and the price level rises.
B)aggregate supply and aggregate demand both decrease,and the price level rises.
C)aggregate demand decreases while aggregate supply does not change,and the price level falls.
D)aggregate supply decreases while aggregate demand does not change,and the price level rises.
E)aggregate supply increases and aggregate demand decreases,so the effect on the price level is uncertain.

Accepted Answer

When a deep recession hits the world economy, there is a decrease in real GDP in the rest of the world, which in turn reduces demand for Australian exports. This results in a decrease in aggregate demand in Australia. However, since the recession affects the world economy, there is also likely to be a decrease in demand for Australia's imports, which would counteract the decrease in aggregate demand to some extent. At the same time, there is likely to be excess capacity in the Australian economy due to the recession, which would keep aggregate supply from decreasing. Thus, the combination of a decrease in aggregate demand and no change in aggregate supply would result in a fall in price level in Australia.

Question 7

If oil prices increase then,in the short run,real GDP will ________ and the price level will ________.
A)not change;rise
B)increase;fall
C)decrease;rise
D)decrease;fall
E)increase;rise

Accepted Answer

An increase in oil prices raises production costs, leading to a decrease in real GDP and an increase in the price level due to higher inflation.

Question 8

When cost-push inflation starts,real GDP ________ and the price level ________.
A)decreases;rises
B)increases;falls
C)does not change;does not change
D)does not change;falls
E)decreases;falls

Accepted Answer

When cost-push inflation starts, it is caused by a decrease in aggregate supply due to an increase in production costs. This leads to a decrease in real GDP as firms produce less, and a rise in the price level due to decreased supply and increased production costs.

Question 9

A combination of recession and inflation is called
A)a business cycle.
B)stagflation.
C)a depression.
D)a recession.
E)an expansion.

Accepted Answer

Stagflation is the only term that refers to a combination of recession and inflation. A business cycle refers to the fluctuation of economic activity over time, which includes periods of expansion and contraction. Depression and recession refer to prolonged periods of economic decline. An expansion refers to a period of economic growth.

Question 10

If the AD curve shifts rightward,then
A)both the price level and real GDP will increase.
B)potential GDP increases.
C)the price level will increase,but no change will occur in real GDP.
D)both the price level and real GDP will decrease.
E)the price level will not change,but real GDP will increase.

Accepted Answer

When the AD curve shifts rightward, it means that there is an increase in aggregate demand. This results in both an increase in price level and real GDP, as firms increase their output in response to the higher demand.

Question 11

By itself,an increase in the price of oil shifts the
A)aggregate demand curve leftward and does not shift the aggregate supply curve.
B)aggregate demand curve rightward and does not shift the aggregate supply curve.
C)aggregate supply curve rightward and does not shift the aggregate demand curve.
D)aggregate supply curve leftward and does not shift the aggregate demand curve.
E)aggregate demand curve rightward and shifts the potential GDP line rightward.

Accepted Answer

An increase in the price of oil typically raises production costs for many goods and services, leading to a decrease in the quantity of goods and services supplied at any given price level. This scenario is represented by a leftward shift of the aggregate supply curve, without directly affecting the initial position of the aggregate demand curve.

Question 12

In the short-run,an increase in the price of raw materials will ________ the price level and ________ real GDP.
A)raise;increase
B)lower;increase
C)raise;decrease
D)raise;not change
E)lower;decrease

Accepted Answer

An increase in the price of raw materials will increase production costs for firms, which will lead to a decrease in supply. Given that demand remains constant, the decrease in supply will cause an increase in the price level (inflation) and a decrease in real GDP. Therefore, the correct answer is C, raise; decrease.

Question 13

Suppose that the money prices of raw materials increase so that short-run aggregate supply decreases.If the Reserve Bank does NOT respond,the higher money price of raw materials will i.repeatedly shift the aggregate demand curve rightward and raise the price level.
Ii)shift the aggregate demand curve rightward and the aggregate supply curve leftward,raising prices.
Iii)result initially in lower employment and a higher price level.
A)iii only
B)i and iii
C)i and ii
D)ii and iii
E)i only

Accepted Answer

When the short-run aggregate supply decreases due to higher raw material prices, it initially results in lower employment and a higher price level, as production costs increase and output decreases. The aggregate demand curve does not shift rightward repeatedly without further external factors.

Question 14

The global economy enters a recession,thereby decreasing the level of Australian exports.If the aggregate supply curve does NOT shift,then aggregate demand will ________,real GDP will ________,and the price level will ________.
A)increase;remain the same;increase
B)remain the same;increase;increase
C)decrease;decrease;decrease
D)decrease;increase;increase
E)increase;increase;remain the same

Accepted Answer

With a global recession and decreased level of Australian exports, aggregate demand will decrease, causing real GDP to also decrease. As a result, the price level will also decrease. This can be shown by movement along the unchanged aggregate supply curve, resulting in a lower equilibrium output and price level.

Question 15

When cost-push inflation starts,real GDP ________ and the unemployment rate ________.
A)increases;falls
B)does not change;does not change
C)does not change;falls
D)decreases;falls
E)decreases;rises

Accepted Answer

Cost-push inflation occurs when there is an increase in production costs, such as wages or raw materials. This causes a decrease in aggregate supply, leading to a decrease in real GDP and an increase in prices. As a result, the unemployment rate rises due to lower levels of output and higher production costs. Therefore, the correct answer is E, as real GDP decreases and the unemployment rate rises.

Question 16

The Reserve Bank responds to an increase in unemployment caused by a decrease in the AS curve by lowering interest rates.This will i.shift the aggregate demand curve rightward and raise the price level.
Ii)shift the aggregate demand curve rightward and the aggregate supply curve leftward,raising prices.
Iii)result in lower employment and a higher price level.
A)i and ii
B)ii and iii
C)iii only
D)i only
E)i and iii

Accepted Answer

When the Reserve Bank responds to an increase in unemployment caused by a decrease in the AS curve by lowering interest rates, this will shift the aggregate demand curve rightward (i) and raise the price level (i). There will not be a shift in the aggregate supply curve, so option ii is not correct. Also, lower employment is not a direct result of this action, so option iii is not correct either. Therefore, the best choice is D, i only.

Quiz 11: Aggregate Supply and Aggregate Demand

The government increases the level of government expenditure.If there is no change in the aggregate supply curve,then aggregate demand will ,real GDP will ,and the price level will .

A crisis in the Middle East drastically raises the price of petroleum.If the aggregate demand curve does NOT shift,then aggregate supply will ,real GDP will ,and the price level will .

At the beginning of 2017,a country is at full-employment.During 2017,oil-producing countries decrease oil production leading to much higher oil prices.The higher oil prices can

Stagflation is defined as a period when real GDP and the price level .

If the AD curve shifts rightward while the AS curve and potential GDP don't change,then

A deep recession hits the world economy,and real GDP in the rest of the world decreases.In Australia,

If oil prices increase then,in the short run,real GDP will and the price level will .

When cost-push inflation starts,real GDP and the price level .

A combination of recession and inflation is called

If the AD curve shifts rightward,then

By itself,an increase in the price of oil shifts the

In the short-run,an increase in the price of raw materials will the price level and real GDP.

The global economy enters a recession,thereby decreasing the level of Australian exports.If the aggregate supply curve does NOT shift,then aggregate demand will ,real GDP will ,and the price level will .

When cost-push inflation starts,real GDP and the unemployment rate .