Question 1

Suppose the central bank implements expansionary monetary policy where the money supply increases. Which of the following will tend to occur in the long run as a result of this monetary policy action?
A) Output and the price level will both increase.
B) Output will increase with no change in the price level.
C) an increase in the price level and no change in output
D) no change in either the price level or output

Accepted Answer

According to the quantity theory of money, in the long run, an increase in the money supply leads to a proportional increase in the price level, while the output remains constant. Therefore, option C is the best choice. Options A and B are incorrect because output cannot increase in the long run unless there is a corresponding increase in resources or productivity. Option D is incorrect because the increase in the money supply will eventually lead to an increase in the price level.

Question 2

The shape of the aggregate demand curve does NOT tell us anything about how the total dollar value of spending will ultimately be divided between output and prices. For this we need
A) information about the standard of living in the country.
B) information that only the Consumers' Price Index can provide.
C) an aggregate supply curve.
D) to know how far from the origin the aggregate demand curve is.

Accepted Answer

The aggregate supply curve helps us understand how changes in aggregate demand will impact both prices and output, therefore giving us information about how the total dollar value of spending will be divided between output and prices. The other choices are not relevant to this issue or do not provide the needed information.

Question 3

An increase in the amount of physical capital will cause
A) an increase in both aggregate demand and real GDP, but have no effect on the price level.
B) aggregate demand and aggregate supply to increase by the same amounts, causing real GDP to increase and the price level to remain constant.
C) an increase in both aggregate supply and real GDP, but have no effect on the price level.
D) an increase in both aggregate supply and real GDP and a reduction in the price level.

Accepted Answer

An increase in the amount of physical capital increases aggregate supply because more goods and services can be produced with more capital. This increase in aggregate supply leads to an increase in real GDP as more goods and services are available. Additionally, the increase in supply, with demand remaining constant, puts downward pressure on prices, leading to a reduction in the price level.

Question 4

Supply-side inflation is caused by
A) a decrease in aggregate supply and no change in aggregate demand.
B) a decrease in aggregate demand and no change in aggregate supply.
C) an increase in aggregate supply and no change in aggregate demand.
D) an increase in aggregate demand and no change in aggregate supply.

Accepted Answer

Supply-side inflation is caused by a decrease in aggregate supply and no change in aggregate demand, meaning that there is less output available for purchase at the same price level. This causes producers to raise prices in order to maintain their profit margins.

Question 5

How is economic growth graphically depicted?
A) The aggregate demand curve shifts to the left.
B) Aggregate demand shifts to the right.
C) Short-run aggregate supply shifts left.
D) The long-run aggregate supply curve shifts right.

Accepted Answer

Economic growth is graphically depicted by a rightward shift of the long-run aggregate supply curve, indicating an increase in the productive capacity of the economy.

Question 6

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve
A) there will be no price level change.
B) there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves.
C) total planned real expenditures will exceed actual real GDP, and the price level will increase.
D) total planned real expenditure will be lower than actual real GDP, and the price level will increase.

Accepted Answer

When the price level is below the level at which the aggregate demand curve crosses the long-run aggregate supply curve, it indicates that the demand for goods and services is higher than what is being produced at current prices, leading to an increase in the price level as the economy moves towards equilibrium. This scenario is described by option C, where total planned real expenditures exceed actual real GDP, prompting an increase in the price level to balance demand with supply.

Question 7

Suppose total planned expenditures equal $50 trillion when the value of the price level is 100. If the price level drops to 90, total planned real expenditures will equal
A) $50 billion.
B) less than $50 trillion.
C) more than $50 trillion.
D) None of the above: Cannot be determined without additional information.

Accepted Answer

When the price level drops, the value of money increases, allowing consumers and businesses to purchase more with the same amount of money. This typically leads to an increase in total planned real expenditures.

Question 8

Which of the following will result in secular deflation?
A) a one-time rightward shift of the aggregate demand curve
B) continuous rightward shifts of the aggregate demand curve
C) a one-time rightward shift of the long-run aggregate supply curve
D) continuous rightward shifts of the long-run aggregate supply curve

Accepted Answer

Continuous rightward shifts of the long-run aggregate supply curve will result in secular deflation. This is because as the economy grows and becomes more efficient, the cost of production decreases, which leads to a decrease in prices.

Question 9

A persistently declining price level resulting from economic growth and unchanged aggregate demand is called
A) demand-side deflation.
B) supply-side deflation.
C) ozian deflation.
D) secular deflation.

Accepted Answer

Secular deflation is a long-term and persistent decline in the general price level of goods and services in the economy. This type of deflation can occur due to technological advancements, increased productivity, and overall economic growth, which result in a decrease in production costs and prices. Unlike demand-side deflation, which is caused by a decrease in aggregate demand, secular deflation is a supply-side phenomenon.

Question 10

What is the real-balance effect of an increase in the price level?

Accepted Answer

The answer of What is the real-balance effect of an...

Question 11

The U. S. has experienced inflation every year since 1959 due to
A) a sustained decrease in aggregate demand.
B) a sustained increase in aggregate demand accompanied by an even larger decrease in LRAS.
C) a sustained decrease in aggregate supply.
D) a sustained increase in aggregate supply accompanied by an even larger increase in aggregate demand.

Accepted Answer

Inflation typically occurs when there is a sustained increase in aggregate demand that outpaces the increase in aggregate supply. This scenario leads to higher prices as demand for goods and services exceeds the available supply.

Question 12

Economic growth will be associated with a constant price level when
A) the increase in aggregate demand exactly equals the increase in long-run aggregate supply.
B) the increase in aggregate demand is more than the increase in long-run aggregate supply.
C) the increase in aggregate demand is less than the increase in long-run aggregate supply.
D) the increase in aggregate demand is accompanied by a reduction in short-run aggregate supply.

Accepted Answer

When the increase in aggregate demand exactly equals the increase in long-run aggregate supply, there is no excess demand or supply in the economy, and prices will stay constant. This is known as the long-run equilibrium level of GDP. If either aggregate demand or supply increases by more than the other, there will be either inflationary or deflationary pressure on prices, leading to a change in the overall price level. The reduction of short-run aggregate supply (option D) would also result in higher prices and inflation.

Question 13

If the economy grows steadily over several years and at the same time maintains the aggregate demand curve in its present position, then the economy will experience which of the following?
A) inflation
B) a stable price level
C) secular deflation
D) The price level cannot be determined without more information.

Accepted Answer

If the economy grows steadily, increasing its productive capacity, but aggregate demand remains unchanged, the increased supply of goods and services will lead to a decrease in the general price level, resulting in secular deflation.

Question 14

If you have $10,000 and the Gross Domestic Product (GDP) deflator increases from 100 to 110, then
A) the $10,000 will buy 10 percent less of the goods and services produced by society.
B) the $10,000 will buy 10 percent more of the goods and services produced by society.
C) the value of the $10,000 increases.
D) you will be able to buy fewer goods, but the real value of those goods will increase.

Accepted Answer

An increase in the GDP deflator means that prices for goods and services have increased. Therefore, the value of $10,000 will decrease and will be able to buy 10 percent less of the goods and services produced by society.

Question 15

What are the three forces that cause the aggregate demand curve to slope down? Explain.

Accepted Answer

The answer of What are the three forces that cause...

Question 16

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve
A) there will be no price level change.
B) there will be pressures that will lead to a shift of either the aggregate demand or the long run aggregate supply curves.
C) actual real GDP would be less than total planned real expenditures, and the price level will rise.
D) actual real GDP would exceed total planned real expenditures, and the price level will fall.

Accepted Answer

When the price level is below the equilibrium where aggregate demand intersects long-run aggregate supply, actual real GDP is less than planned expenditures, leading to upward pressure on prices as demand exceeds supply.

Question 17

Over the last twenty years, real GDP in the U.S. economy has increased and there has been inflation. This indicates that
A) aggregate demand has increased while aggregate supply has been constant.
B) aggregate demand has been constant while aggregate supply has increased.
C) aggregate demand has increased more than aggregate supply.
D) aggregate demand has increased less than aggregate supply.

Accepted Answer

The increase in real GDP indicates that there has been an increase in aggregate supply. However, the presence of inflation suggests that the increase in aggregate demand has exceeded the increase in aggregate supply, ultimately leading to a rise in prices. Therefore, the best choice is C, which states that aggregate demand has increased more than aggregate supply.

Question 18

What causes the aggregate demand curve to shift?

Accepted Answer

The answer of What causes the aggregate demand curve to...

Question 19

Secular deflation occurs when
A) there is no economic growth and aggregate demand falls.
B) aggregate demand increases at the same time there is no economic growth.
C) aggregate demand remains unchanged while economic growth increases long-run aggregate supply.
D) both aggregate demand and aggregate supply are shifting left.

Accepted Answer

Secular deflation occurs when the economy's long-run aggregate supply increases due to economic growth, while aggregate demand remains unchanged. This leads to a decrease in the general price level over time as the supply of goods and services increases relative to demand.

Question 20

To find an economy's long-run equilibrium price level, locate the point where ________ and ________ cross and look to the left.
A) demand; supply
B) aggregate demand; short-run aggregate supply
C) aggregate demand; price level
D) long-run aggregate supply; aggregate demand

Accepted Answer

The long-run equilibrium price level is the point where the long-run aggregate supply curve intersects with the aggregate demand curve. This is because in the long run, the economy is able to adjust all factors of production and the economy is operating at its potential output, which is reflected in the long-run aggregate supply curve. The short-run aggregate supply curve is able to shift due to changes in input prices, technology, and expectations, and as a result, it does not represent the long-run equilibrium. The price level is not a curve, but a point on the vertical axis, so it cannot intersect with another curve. Therefore, the correct option is D, long-run aggregate supply and aggregate demand.

Quiz 10: Real GDP and the Price Level in the Long Run

Suppose the central bank implements expansionary monetary policy where the money supply increases. Which of the following will tend to occur in the long run as a result of this monetary policy action?

The shape of the aggregate demand curve does NOT tell us anything about how the total dollar value of spending will ultimately be divided between output and prices. For this we need

An increase in the amount of physical capital will cause

Supply-side inflation is caused by

How is economic growth graphically depicted?

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve

Suppose total planned expenditures equal $50 trillion when the value of the price level is 100. If the price level drops to 90, total planned real expenditures will equal

Which of the following will result in secular deflation?

A persistently declining price level resulting from economic growth and unchanged aggregate demand is called

What is the real-balance effect of an increase in the price level?

The U. S. has experienced inflation every year since 1959 due to

Economic growth will be associated with a constant price level when

If the economy grows steadily over several years and at the same time maintains the aggregate demand curve in its present position, then the economy will experience which of the following?

If you have $10,000 and the Gross Domestic Product (GDP) deflator increases from 100 to 110, then

What are the three forces that cause the aggregate demand curve to slope down? Explain.

When the price level is below the level at which the aggregate demand curve crosses the long run aggregate supply curve

Over the last twenty years, real GDP in the U.S. economy has increased and there has been inflation. This indicates that

What causes the aggregate demand curve to shift?

Secular deflation occurs when

To find an economy's long-run equilibrium price level, locate the point where and cross and look to the left.