Question 1

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

Accepted Answer

The business cycle refers to the fluctuation of economic activity over time. It is caused by changes in aggregate demand and aggregate supply, which do not always change at the same rate. This results in periods of expansion, contraction, and recession in the economy.

Question 2

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

Accepted Answer

Fluctuations in aggregate demand and aggregate supply affect the level of output in the economy, causing real GDP to fluctuate. When aggregate demand is high, firms may increase production and hire more workers, leading to an increase in real GDP. Similarly, when aggregate supply increases due to factors such as technology advancements or increased availability of resources, real GDP may increase as well. On the other hand, when aggregate demand or aggregate supply decreases, real GDP may decrease as firms produce less and hire fewer workers. Therefore, fluctuations in aggregate demand and aggregate supply play a significant role in explaining changes in real GDP.

Question 3

-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 
-The table above shows Purpleland's economy aggregate...

Question 4

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

Accepted Answer

During an above-full-employment equilibrium, the economy is producing output beyond its potential level, which means that actual GDP is greater than potential GDP.

Question 5

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 the economy is operating at its potential GDP, which means that all available resources in the economy are being used efficiently. When this occurs, the money wage rate has adjusted so that employment is at the level where real GDP equals potential GDP. Therefore, choice A is correct.

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.

Question 7

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 caused by changes in volatile expectations of future sales and profits are the main source of economic fluctuations. This is because changes in expectations can lead to changes in planned investment and consumption spending, which in turn can affect overall economic activity.

Question 8

-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 
-The table above shows Yellowland's economy aggregate...

Quiz 10: Aggregate Supply and Aggregate Demand