Question 1

Stagflation occurs when short-run aggregate supply decreases.

Accepted Answer

Stagflation is a situation where there is a combination of high inflation and economic stagnation, which is usually caused by a decrease in short-run aggregate supply.

Question 2

If rapid increases in oil prices caused price levels to increase and real GDP to decrease in the short run,the economy would experience

Accepted Answer

Rapid increases in oil prices would lead to a decrease in aggregate supply, which would cause stagflation - a combination of inflation and unemployment. The increase in oil prices leads to higher production costs, which in turn leads to firms increasing the prices of their goods and services. This leads to inflation. At the same time, the decrease in aggregate supply leads to a decrease in output and employment, which leads to higher unemployment.

Question 3

At a long-run macroeconomic equilibrium,real GDP is always equal to potential GDP.

Accepted Answer

At long-run macroeconomic equilibrium, the economy is operating at full capacity and producing at its potential GDP, hence real GDP is always equal to potential GDP.

Question 4

At a short-run macroeconomic equilibrium,real GDP is always equal to potential GDP.

Accepted Answer

At a short-run macroeconomic equilibrium, real GDP may be above or below potential GDP, depending on the level of aggregate demand.

Question 5

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Accepted Answer

The automatic mechanism lowers the price level in the case of a recession to stimulate demand and raises the price level in the case of an expansion to cool down the economy and prevent overheating.

Question 6

Most economists agree that an automatic mechanism brings the economy back to potential GDP in the long run.In mid-2011,two years after the recession of 2007-2009 had ended,real GDP in the United States

Accepted Answer

The question states that the recession ended in 2009, but two years later (in mid-2011), real GDP had not yet returned to potential GDP. Option A can be eliminated. Option B suggests that real GDP was above potential GDP, which is unlikely in a recessionary period. Option D is too extreme and unsupported. Therefore, the best choice is C, which suggests that real GDP was still below potential GDP, indicating that the economy had not fully recovered from the recession after two years.

Question 7

In the long run,

Accepted Answer

In the long run, the economy will reach its potential level of real GDP, which is determined by the factors of production and technology. This is shown by the vertical position of the LRAS curve, which represents the economy's potential output. Thus, GDP = potential GDP in the long run.

Question 8

Article Summary
According to the International Energy Agency (IEA), increased oil production resulting from U.S. shale oil has invigorated the North American oil industry and has created a global supply shock. The shale oil and gas industry has generated tens of billions of dollars in revenues and hundreds of thousands of new jobs, and could result in the United States changing from being the world's largest oil importer to a net exporter within a few years. An IEA forecast predicts that because of shale oil, the United States will become the world's largest oil producer by 2017, with supply growing by 3.9 million barrels per day from 2012-2018.
Source: Denise Roland, and AFP, "US shale energy creates global oil 'supply shock'," Telegraph, May 14, 2013.

-Refer to the Article Summary.The supply shock mentioned in the article summary may well result in a decrease in the price of oil.After an unexpected decrease in the price of oil,the long-run adjustment ________ the price level and ________ the unemployment rate as they return to their original levels.

Accepted Answer

The answer of Article Summary
According to the International Energy Agency...

Question 9

A rapid increase in the price of oil will tend to

Accepted Answer

A rapid increase in the price of oil will increase the cost of production for firms, causing a decrease in their willingness to supply goods and services in the short run. As a result, short-run aggregate supply will shift to the left. This will cause an increase in prices and a decrease in output, which will likely lead to inflationary pressures in the economy.

Question 10

Ceteris paribus,in the long run,a negative supply shock causes

Accepted Answer

The answer of Ceteris paribus,in the long run,a negative supply...

Question 11

Article Summary
According to the International Energy Agency (IEA), increased oil production resulting from U.S. shale oil has invigorated the North American oil industry and has created a global supply shock. The shale oil and gas industry has generated tens of billions of dollars in revenues and hundreds of thousands of new jobs, and could result in the United States changing from being the world's largest oil importer to a net exporter within a few years. An IEA forecast predicts that because of shale oil, the United States will become the world's largest oil producer by 2017, with supply growing by 3.9 million barrels per day from 2012-2018.
Source: Denise Roland, and AFP, "US shale energy creates global oil 'supply shock'," Telegraph, May 14, 2013.

-Refer to the Article Summary.The supply shock mentioned in the article summary may well result in a decrease in the price of oil.When the price of oil falls unexpectedly,the equilibrium price level ________ and the unemployment rate ________ in the short run.

Accepted Answer

A decrease in oil prices typically leads to a lower equilibrium price level and can stimulate economic activity, reducing unemployment in the short run.

Question 12

A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run.

Accepted Answer

This statement is not necessarily true as it depends on various other factors such as the initial state of the economy, the magnitude and composition of the spending cut, and the response of the central bank and other economic agents. In some cases, a decrease in government spending may lead to a decrease in the price level and a decrease in real GDP in the short run, but may also increase private investment and consumption in the long run, leading to a higher potential GDP and lower prices. Alternatively, a decrease in government spending may result in lower interest rates and more accommodative monetary policy, which can offset the negative impact on GDP and prices. Therefore, the relationship between government spending, price level, and real GDP is complex and subject to various macroeconomic dynamics.

Question 13

Stagflation occurs when inflation ________ and GDP ________.

Accepted Answer

Stagflation is characterized by a situation where there is high inflation and slow economic growth or stagnant GDP. Option B correctly captures this phenomenon by suggesting that inflation rises while GDP falls.

Question 14

Stagflation is often a result of

Accepted Answer

Stagflation occurs when there is a combination of inflation and stagnation in the economy. It is often caused by a negative supply shock, which can increase costs for businesses and reduce the output of goods and services, leading to both inflation and a slowdown in economic growth or even recession. A decrease in aggregate demand might lead to deflation and recession, while an increase in aggregate demand could lead to inflation and economic growth. An increase in aggregate supply could lead to higher economic output and lower prices, reducing the risk of stagflation.

Question 15

What is the relationship among the AD,SRAS and LRAS curves when the economy is in macroeconomic equilibrium?

Accepted Answer

The answer of What is the relationship among the AD,SRAS...

Question 16

Explain how the economy moves back to full employment from recession.Be sure to detail what happens to short-run aggregate supply,unemployment,equilibrium GDP and the price level.

Accepted Answer

The answer of Explain how the economy moves back to...

Question 17

Which of the following is considered a negative supply shock?

Accepted Answer

An unexpected increase in the price of natural gas would be considered a negative supply shock because it would lead to higher production costs for firms, reducing their profitability and potentially causing them to reduce output and employment.

Question 18

________ of unemployment during ________ make it easier for workers to ________ wages.

Accepted Answer

High levels of unemployment during a recession mean there is less competition for jobs, which gives employers the advantage to offer lower wages as workers have fewer alternative job opportunities.

Question 19

Stagflation occurs when aggregate supply and aggregate demand both increase.

Accepted Answer

Stagflation occurs when there is a simultaneous increase in inflation (which is caused by increased aggregate demand) and a decrease in economic growth (which is caused by decreased aggregate supply). So, if both aggregate supply and demand increase, it would not result in stagflation.

Question 20

An increase in government spending will result in an increase in the price level and an increase in real GDP in the long run.

Accepted Answer

In the long run, an increase in government spending is typically thought to affect the composition of output rather than increasing the overall level of real GDP, due to the economy's return to its potential output. Long-term increases in the price level can occur due to demand-pull inflation if the spending is excessive and not offset by taxes or other measures.

Quiz 13: Aggregate Demand and Aggregate Supply Analysis