Question 1

When all prices rise together,there is no change in the overall quantity of goods and services supplied.

Accepted Answer

When all prices rise together, the overall quantity of goods and services supplied remains the same as it is not influenced by price changes.

Question 2

Because not all prices adjust instantly to changing conditions,an unexpected fall in the price level leaves some firms with higher-than-desired prices,and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Accepted Answer

This is due to the phenomenon of sticky prices, where some prices take time to adjust to changing market conditions. As a result, firms with higher-than-desired prices may see a decrease in demand for their goods or services, leading them to reduce production.

Question 3

Economists mostly agree that the Great Depression was the result of a very large adverse supply shock.

Accepted Answer

The majority of economists actually believe that the Great Depression was caused by a combination of factors, including an initial financial crisis that led to a reduction in investment and consumer spending, followed by a decrease in aggregate demand and ultimately a contraction in economic output.

Question 4

All explanations for the upward slope of the short-run aggregate-supply curve suppose that output supplied increases when the price level increases more than expected.

Accepted Answer

This is the basic premise of the upward slope of the short-run aggregate-supply curve, which is often explained by the sticky-wage or sticky-price model, where input prices and wages are slow to adjust to changes in the price level. As a result, an unexpected increase in the price level leads to a higher profit margin for firms, which leads to more output supplied in the short run.

Question 5

The long-run trend in real GDP is upward.How is this possible given business cycles? What explains the upward trend?

Accepted Answer

The answer of The long-run trend in real GDP is...

Question 6

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Accepted Answer

This is one of the central ideas of Keynesian economics, as outlined in his book "The General Theory of Employment, Interest and Money." Keynes believed that during times of recession or depression, demand for goods and services falls, leading to decreased productivity and high levels of unemployment. To combat this, he advocated for government intervention in the form of increased spending and/or lower taxes, which would put more money in consumers' pockets and encourage them to spend, thus increasing aggregate demand and stimulating economic activity.

Question 7

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP can be caused by changes in both aggregate demand and aggregate supply. For example, a positive supply shock such as a decrease in the price of oil can increase aggregate supply and lead to an increase in real GDP, while a negative demand shock such as a decrease in consumer confidence can decrease aggregate demand and lead to a decrease in real GDP.

Question 8

Pessimism about the future leads to falling prices and rising unemployment.

Accepted Answer

If people believe that the future is bleak and there will be little growth or opportunity, they will be less likely to invest, spend, or create jobs. This can lead to a decrease in economic activity and ultimately a downward spiral of falling prices and rising unemployment.

Question 9

Make a list of expenditures whose sum equals GDP.

Accepted Answer

The answer of Make a list of expenditures whose sum...

Question 10

Increased output and prices in Canada in the early 1940s was mostly the result of increased government expenditures.

Accepted Answer

This is true. During World War II, the Canadian government increased their spending on military production and infrastructure, which led to increased output and prices in the economy as a whole.

Question 11

Discuss what economists believe is different about the long and short run.

Accepted Answer

The answer of Discuss what economists believe is different about...

Question 12

We could explain continued increases in both output and the price level by supposing that only long-run aggregate supply shifted right over time.

Accepted Answer

This statement is incorrect. Increases in both output and the price level can also be explained by shifts in aggregate demand, which may be driven by changes in consumer spending, government policy, or global economic conditions.

Question 13

Stagflation would result from the aggregate-supply curve shifting left.

Accepted Answer

Stagflation occurs when there is a decrease in aggregate supply (due to factors such as an increase in input costs or a decrease in productivity) combined with a decrease in aggregate demand (usually caused by tight monetary policy). This leads to a situation where both inflation and unemployment are high, which is represented by a leftward shift in the aggregate-supply curve.

Question 14

Explain how an increase in the price level changes interest rates.How does this change in interest rates lead to changes in investment and net exports?

Accepted Answer

The answer of Explain how an increase in the price...

Question 15

An unexpected increase in the price level does not shift the aggregate-supply curve,but an expected increase in the price level shifts the aggregate-supply curve to the left.

Accepted Answer

An unexpected increase in the price level affects the short-run aggregate supply because producers might temporarily increase production due to higher prices, but it doesn't shift the curve itself. An expected increase in the price level can lead to a leftward shift in the aggregate-supply curve as producers anticipate higher costs and might reduce the quantity supplied at every price level.

Question 16

During World War II,output increased by a larger percentage than government expenditures.

Accepted Answer

During World War II, government expenditures increased by a larger percentage than output, as massive government spending on the war effort significantly outpaced the increase in overall economic output.

Question 17

What variables besides real GDP tend to decline during recessions? Given the definition of real GDP,argue that declines in these variables are to be expected.

Accepted Answer

The answer of What variables besides real GDP tend to...

Question 18

In response to a decrease in output,the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply.

Accepted Answer

If the decrease in output is caused by a decrease in aggregate supply, the economy will experience both a decrease in output and an increase in prices, resulting in a new equilibrium with higher prices and lower output. Only if the decrease in output is caused by a decrease in aggregate demand will the economy return to its original level of prices and output.

Question 19

Increased uncertainty and pessimism about the future of the economy decreases investment spending,shifting aggregate demand to the left.

Accepted Answer

This is because when investors are uncertain and pessimistic about the future of the economy, they are less likely to invest in new projects or expand existing ones, which reduces the overall demand for goods and services and shifts the aggregate demand curve to the left.

Question 20

If the government increased the money supply in response to a decrease in aggregate supply,unemployment would return towards its natural rate,but prices would rise even more.

Accepted Answer

Increasing the money supply in response to a decrease in aggregate supply is a form of demand-side policy known as monetary policy. This can increase aggregate demand and help to return unemployment towards its natural rate. However, if the increase in aggregate demand exceeds the economy's capacity to produce, it can lead to inflation and a further rise in prices.

Quiz 14: Aggregate Demand and Aggregate Supply