Question 1

In an inflationary gap:
A) aggregate output is above potential output.
B) aggregate output equals potential output.
C) aggregate output is less than potential output.
D) short-run flexibility will bring the economy back to its potential output without any intervention.

Accepted Answer

In an inflationary gap, aggregate output is above potential output, which means that the economy is producing more than its maximum sustainable level. This may lead to an increase in prices in the long run and is an indication of an overheated economy. To bring the economy back to its potential output, some intervention may be necessary, such as reducing government spending or increasing taxes.

Question 2

In the long run,an increase in AD will result in:
A) no change in the aggregate price level.
B) an increase in the aggregate output level.
C) increases in both the aggregate price level and the aggregate output level.
D) an increase in the aggregate price level but no change in the aggregate output level.

Accepted Answer

In the long run, the economy is at full employment, so an increase in aggregate demand (AD) leads to higher prices but not higher output, as output is determined by the economy's potential output.

Question 3

An economy is operating at an output level below potential real GDP.If the government wishes to use fiscal policy to bring the economy back to its potential real GDP,it will:
A) increase the money supply.
B) increase its spending.
C) increase taxation.
D) decrease the money supply.

Accepted Answer

If the economy is operating below potential real GDP, there is a gap between actual output and potential output. To close this gap, the government can use expansionary fiscal policy, which involves increasing government spending and/or decreasing taxes. This will boost aggregate demand and stimulate economic growth, eventually bringing the economy back to its potential output level. Increasing the money supply (A) or decreasing the money supply (D) are actions primarily under the control of the central bank, not the government, and may not be effective in boosting aggregate demand in the short run. Increasing taxation (C) would reduce disposable income and aggregate demand, making it counterproductive for stimulating economic growth.

Question 4

Starting from its potential output,an economy's government increases spending.In the long run,this economy will produce at:
A) an output level above its potential output.
B) its potential output.
C) an output level below its potential output.
D) its potential output level at a lower aggregate price level.

Accepted Answer

In the long run, an economy's output will return to its potential output level regardless of the level of government spending. Therefore, the economy will produce at its potential output level even after the increase in government spending in the long run.

Question 5

In the long run,the aggregate price level falls.This could result from:
A) a leftward shift in AD.
B) a rightward shift in AD.
C) a leftward shift in short-run AS.
D) more spending by consumers.

Accepted Answer

A leftward shift in aggregate demand (AD) indicates a decrease in overall demand for goods and services in the economy, which can lead to a decrease in the aggregate price level in the long run.

Quiz 12: Aggregate Demand and Aggregate Supply

In an inflationary gap:

In the long run,an increase in AD will result in:

An economy is operating at an output level below potential real GDP.If the government wishes to use fiscal policy to bring the economy back to its potential real GDP,it will:

Starting from its potential output,an economy's government increases spending.In the long run,this economy will produce at:

In the long run,the aggregate price level falls.This could result from: