Question 1

$$\begin{array} { | c | c | c | } 
\hline \text { Price level } & \begin{array} { c } 
\text { Real GDP demanded } \
\text { (billions of 2005 } \
\text { dollars) }
\end{array} & \begin{array} { c } 
\text { Real GDP supplied } \
\text { (billions of 2005 } \
\text { dollars) }
\end{array} \
\hline 90 & 450 & 150 \
\hline 100 & 400 & 250 \
\hline 110 & 350 & 350 \
\hline 120 & 300 & 450 \
\hline 130 & 250 & 550 \
\hline
\end{array}$$
-The table above shows Yellowland's economy aggregate demand and supply schedules.Yellowland's potential GDP is $300 billion.
a) Plot the aggregate demand curve,the short-run aggregate supply curve,and the long-run aggregate supply curve.
b) What are the short-run equilibrium real GDP and price level in Yellowland?
c) What is the long-run equilibrium real GDP?
d) Is Yellowland's short-run macroeconomic equilibrium a full-employment equilibrium,below full-employment equilibrium,or above full-employment equilibrium?
What is the recessionary gap (if any)?
What is the inflationary gap (if any)?
e) Suppose aggregate supply decreases by $150 billion.Plot the new aggregate supply curve.How do real GDP and the price level change in the short run?
f) Is Yellowland's new short-run macroeconomic equilibrium a full-employment equilibrium,below full-employment equilibrium,or above full-employment equilibrium?
What is the recessionary gap (if any)?
What is the inflationary gap (if any)?

Accepted Answer

The answer of \[\begin{array} { | c | c |...

Question 2

The level of output at which the short-run aggregate supply curve and the aggregate demand curve intersect is the full employment level of GDP.

Accepted Answer

The level of output at which the short-run aggregate supply curve and the aggregate demand curve intersect determines the equilibrium level of GDP and prices in the economy, but this does not necessarily correspond to the full-employment level of GDP. Full employment refers to the level of employment where there is no cyclical unemployment, and achieving this may not coincide with the short-run equilibrium.

Question 3

The wealth effect points out that consumption decreases when people's real wealth decreases.

Accepted Answer

The wealth effect is a phenomenon that occurs when people's spending habits change based on changes in their perceived wealth. When people feel wealthier, they are more likely to spend money on goods and services, while their consumption decreases when they feel less wealthy.

Question 4

The Keynesian theory of business cycle views volatile expectations of future sales and profits as the main source of economic fluctuations.

Accepted Answer

According to the Keynesian theory, fluctuations in aggregate demand stemming from volatile expectations about future sales and profits are the primary source of business cycle fluctuations. This is because changes in these expectations can lead to changes in the level of investment and consumption, which can cause fluctuations in output and employment.

Question 5

In the short run,a supply shock that shifts the short-run aggregate supply curve leftward raises the price level and increases real GDP.

Accepted Answer

A leftward shift in the short-run aggregate supply curve indicates a decrease in the availability of resources and/or an increase in their costs. This results in a decrease in real GDP and an increase in the price level, not the other way around.

Question 6

A monetarist economist believes that if the economy was left alone,it would rarely operate at full employment.

Accepted Answer

Monetarist economists, following the theories of Milton Friedman, generally believe that the economy is inherently stable and will naturally adjust to operate at or near full employment, provided that the money supply is managed correctly to avoid inflation or deflation.

Question 7

Wealth and substitution effects explain why the aggregate demand curve has a positive slope.

Accepted Answer

The aggregate demand curve has a negative slope, not a positive one, because as the price level decreases, the quantity of goods and services demanded increases due to the wealth effect, interest rate effect, and the substitution effect.

Question 8

If the money wage rate increases,the short-run aggregate supply curve shifts rightward.

Accepted Answer

If the money wage rate increases, it will increase production costs for firms, resulting in a leftward shift of the short-run aggregate supply curve.

Question 9

During an above full-employment equilibrium,actual GDP is greater than potential GDP.

Accepted Answer

During an above full-employment equilibrium, all resources are being used and there is a shortage of labor and capital. This leads to an increase in production and actual GDP exceeding potential GDP.

Question 10

A change in the price level does not shift the aggregate demand curve.

Accepted Answer

The aggregate demand curve represents the total demand for goods and services in an economy at different price levels. A change in the price level causes a movement along the aggregate demand curve, not a shift of the curve. Shifts in the aggregate demand curve are caused by changes in non-price level factors such as consumer confidence, government spending, and investment levels.

Question 11

The business cycle occurs because aggregate demand and aggregate supply change at uneven rates.

Accepted Answer

The business cycle is the natural, fluctuating pattern of economic growth and contraction that occurs over time. This cycle is characterized by changes in aggregate demand and aggregate supply, which can change at uneven rates, leading to periods of economic expansion, peak, contraction, and trough.

Question 12

In the short-run,real GDP can be greater than or less than potential GDP because in the short run the money wage rate is fixed.

Accepted Answer

In the short run, prices and wages may not adjust immediately to changes in supply and demand, leading to a situation where real GDP can be above or below potential GDP. This is known as a business cycle. However, in the long run, the money wage rate is expected to adjust to changes in the economy, bringing real GDP back to potential GDP.

Question 13

Long-run macroeconomic equilibrium is achieved when the money wage rate has adjusted so that employment is such that real GDP equals potential GDP.

Accepted Answer

Long-run macroeconomic equilibrium is achieved when there is no cyclical unemployment and the economy is producing at its potential GDP level. This occurs when the money wage rate has adjusted to the point where there is full employment of resources, and real GDP equals potential GDP.

Question 14

An increase in the quantity of money shifts the aggregate demand curve rightward.

Accepted Answer

When the quantity of money in the economy increases, people have more money to spend, leading to an increase in consumption and investment. This ultimately leads to an increase in aggregate demand, shifting the aggregate demand curve rightward.

Question 15

Fluctuations in aggregate demand and aggregate supply explain why real GDP fluctuates.

Accepted Answer

Fluctuations in aggregate demand and aggregate supply can cause shifts in the economy's output level, which results in changes in real GDP over time. These fluctuations are affected by various factors such as changes in government policies, business investment, and consumer spending patterns.

Question 16

9 Extended Problems
 $$\begin{array} { | c | c | c | } 
\hline \text { Price level } & \begin{array} { c } 
\text { Real GDP } \
\text { demanded } \
\text { (billions of 2005 } \
\text { dollars) }
\end{array} & \begin{array} { c } 
\text { Real GDP } \
\text { supplied (billions } \
\text { of 2005 dollars) }
\end{array} \
\hline 70 & 825 & 375 \
\hline 80 & 750 & 450 \
\hline 90 & 675 & 525 \
\hline 100 & 600 & 600 \
\hline 110 & 525 & 675 \
\hline 120 & 450 & 750 \
\hline 130 & 375 & 825 \
\hline 140 & 300 & 900 \
\hline
\end{array}$$
-The table above shows Purpleland's economy aggregate demand and supply schedules.Purpleland's potential GDP is $675 billion.
a) Plot the aggregate demand curve,the short-run aggregate supply curve,and the long-run aggregate supply curve.
b) What are the short-run equilibrium real GDP and price level in Purpleland?
c) What is the long-run equilibrium real GDP?
d) Is Purpleland's short-run macroeconomic equilibrium a full-employment equilibrium,below full-employment equilibrium,or above full-employment equilibrium?
What is the recessionary gap (if any)?
What is the inflationary gap (if any)?
e) Suppose aggregate demand increases by $150 billion.Plot the new aggregate demand curve.How do real GDP and the price level change in the short run?
f) Is Purpleland's new short-run macroeconomic equilibrium a full-employment equilibrium,below full-employment equilibrium,or above full-employment equilibrium?
What is the recessionary gap (if any)?
What is the inflationary gap (if any)?

Accepted Answer

The answer of 9 Extended Problems
 \[\begin{array} { | c...

Question 17

In the short run,a supply shock that shifts the short-run aggregate supply curve leftward raises the price level and decreases real GDP.

Accepted Answer

A leftward shift in the short-run aggregate supply curve implies that firms face higher input costs or decreased productivity, which leads to higher prices and lower output in the short run.

Question 18

The aggregate demand curve shows total expenditures at different levels of national income.

Accepted Answer

The aggregate demand curve shows the total quantity of all goods and services demanded by the economy at different price levels.

Quiz 10: Aggregate Supply and Aggregate Demand