Question 1

If output is above its natural rate, then according to sticky-wage theory
A) workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve right.
B) workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
C) workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve right.
D) workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve left.

Accepted Answer

According to sticky-wage theory, wages are slow to adjust to changes in economic conditions. If output is above its natural rate, there is an excess demand for goods and services, which leads to an increase in prices. As prices increase, workers and firms will strike bargains for higher wages, but because wages are sticky, they don't immediately adjust. As a result, firms will face higher costs and will reduce their output. This decrease in output corresponds to a leftward shift in the short-run aggregate supply curve. Therefore, the correct answer is B.

Question 2

Which of the following alone can explain the change in the price level and output during World War II?
A) aggregate demand shifted right
B) aggregate demand shifted left
C) aggregate supply shifted right
D) aggregate supply shifted left

Accepted Answer

The answer of Which of the following alone can explain...

Question 3

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
A) aggregate supply to the right.
B) aggregate supply to the left.
C) aggregate demand to the right.
D) aggregate demand to the left.

Accepted Answer

If policymakers want to offset the effects on output of an economic contraction caused by a shift in aggregate supply, they should use policy to shift aggregate demand to the right. This would increase demand and help to counteract the negative effects of the initial shock to aggregate supply.

Question 4

In the short-run an increase in the costs of production makes
A) output and prices rise.
B) output rise and prices fall.
C) output fall and prices rise.
D) output and prices fall.

Accepted Answer

An increase in the costs of production leads to a decrease in supply, which leads to a decrease in output. With lower output, demand may outstrip supply, thus pushing up prices. Therefore, output falls (due to higher costs) and prices rise.

Question 5

Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression?
A) aggregate demand shifted right
B) aggregate demand shifted left
C) aggregate supply shifted right
D) aggregate supply shifted left

Accepted Answer

The answer of Which of the following by itself is...

Question 6

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting
A) aggregate supply right.
B) aggregate supply left.
C) aggregate demand right.
D) aggregate demand left.

Accepted Answer

If policymakers can respond quickly and effectively to a contraction caused by a shift in aggregate demand, they can counteract the initial shift by increasing aggregate demand through policy tools such as fiscal or monetary policy. This would shift the aggregate demand curve to the right, which would lead to an increase in output and a decrease in unemployment. Shifting the aggregate supply curve left would not be an effective response to a contraction caused by a shift in aggregate demand, as it would only exacerbate the contraction by reducing output and increasing unemployment.

Question 7

Which of the following has been suggested as a cause of the Great Depression?
A) a decline in the money supply
B) a decrease in stock prices
C) the collapse of the banking system
D) All of the above are correct.

Accepted Answer

The Great Depression was caused by a combination of factors, including a decline in the money supply, a decrease in stock prices, and the collapse of the banking system. All of these factors contributed to the economic crisis that ushered in a decade of widespread unemployment, poverty, and economic hardship.

Question 8

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?
A) It would have to have shifted left by less than aggregate supply shifted
B) It would have to have to shifted left by more than aggregate supply shifted.
C) It would have to have shifted right by less than aggregate supply shifted
D) It would have to have to shifted right by more than aggregate supply shifted.

Accepted Answer

If the long-run aggregate supply (LRAS) curve shifted right during World War II, it means that the economy's potential output increased. In order for price and output to have changed in the direction they did, aggregate demand (AD) would also have to have shifted. However, we know that the LRAS curve shifted right, meaning that the shift in AD must have been less than the shift in LRAS. If AD had shifted left by more than LRAS shifted right, then we would have seen a decrease in output and prices, which is not what happened during World War II. Therefore, option A is the best choice.

Question 9

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
A) as people revise their price-level expectations upward, firms and workers strike bargains for higher nominal wages.
B) as people revise their price-level expectations upward, firms and workers strike bargains for lower nominal wages.
C) as people revise their price-level expectations downward, firms and workers strike bargains for higher nominal wages.
D) as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages.

Accepted Answer

When the government decreases its expenditures, it decreases the aggregate demand in the economy, causing a negative output gap and deflationary pressure. This leads to a decrease in price-level expectations, causing firms and workers to strike bargains for lower nominal wages. Lower nominal wages lead to lower production costs, which leads to an increase in aggregate supply, and eventually, the economy moves back to long-run equilibrium.

Question 10

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand?
A) It would have to have shifted left by less than aggregate supply.
B) It would have to have shifted left by more than aggregate supply.
C) It would have to have shifted right by less than aggregate supply.
D) It would have to have shifted right by more than aggregate supply.

Accepted Answer

If long-run aggregate supply shifted left during the Great Depression, then output would have decreased and the price level would have decreased or remained stable. To be consistent with this, aggregate demand would have had to shift left by more than aggregate supply, which would result in a decrease in output and a decrease in the price level. Therefore, the correct answer is B.

Question 11

In the early 1930s in the United States, there was a
A) large increase in output. In the early 1940s there was also a large increase in output.
B) large increase in output. In the early 1940s there was a large decrease in output.
C) large decrease in output. In the early 1940s there was a large increase in output.
D) large decrease in output. In the early 1940s there was also a large decrease in output.

Accepted Answer

The early 1930s in the United States marked the beginning of the Great Depression, which saw a large decrease in output. However, in the early 1940s, the United States entered World War II which led to a large increase in output due to the production of war materials and increased government spending.

Question 12

In the first few years of the Great Depression, unemployment rose to about
A) 10 percent, and prices rose about 14 percent.
B) 15 percent, and prices rose about 22 percent.
C) 20 percent, and prices fell about 14 percent.
D) 25 percent, and prices fell about 22 percent.

Accepted Answer

In the first few years of the Great Depression, unemployment rose to about 25 percent, and prices fell about 22 percent.

Question 13

During World War II,
A) government purchases of goods and services increased fivefold.
B) the economy's production increased about 25 percent.
C) unemployment fell to about 5%.
D) All of the above are correct.

Accepted Answer

The answer of During World War II,
A) government purchases of...

Question 14

A decrease in the availability of an important major resource such as oil shifts
A) aggregate supply right.
B) aggregate supply left.
C) aggregate demand right.
D) aggregate demand left.

Accepted Answer

A decrease in the availability of an important major resource such as oil would result in a decrease in the production capacity of firms, leading to a leftward shift in the aggregate supply curve. This shift would lead to an increase in prices and a decrease in output, which would decrease the equilibrium level of real GDP and increase the equilibrium level of the price level.

Question 15

During World War II, the economy's production increased about
A) 25 percent and prices rose about 5 percent.
B) 50 percent and prices rose about 10 percent.
C) 75 percent and prices rose about 15 percent.
D) 100 percent and prices rose about 20 percent.

Accepted Answer

The answer of During World War II, the economy's production...

Question 16

The economic boom of the early 1940s resulted mostly from
A) increased government expenditures.
B) falling prices of oil and other natural resources.
C) an increase in the growth rate of the money supply.
D) rapid developments in transportation, electronics, and communication.

Accepted Answer

The economic boom of the early 1940s was largely due to increased government expenditures during World War II. The government invested heavily in the military, including the development of new technologies and infrastructure, leading to a surge in employment and economic activity.

Question 17

Which of the following shifts short-run aggregate supply left?
A) an increase in price expectations
B) an increase in the actual price level
C) a decrease in the money supply
D) a decrease in the price of oil

Accepted Answer

The answer of Which of the following shifts short-run aggregate...

Question 18

Which of the following did not happen during the onset of the Great Depression?
A) The money supply fell as households took money out of bank deposits.
B) The Fed conducted expansionary monetary policy.
C) Stock prices fell about 90 percent.
D) Disruption of the banking system made it difficult for some firms to obtain funds for investment.

Accepted Answer

The Fed actually conducted contractionary monetary policy during the onset of the Great Depression, contributing to the decrease in the money supply and exacerbating the economic downturn.

Question 19

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
A) rise. This rise in price expectations shifts the short-run aggregate supply curve to the right.
B) rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
C) fall. This fall in price expectations shifts the short-run aggregate supply curve to the right.
D) fall. This fall in price expectations shifts the short-run aggregate supply curve to the left.

Accepted Answer

When the government increases its expenditures, it increases aggregate demand in the short-run. This can cause an increase in price expectations by households and firms, as they expect prices to rise in response to the increase in demand. As a result, the short-run aggregate supply curve shifts to the left. This leads to higher prices and output in the short run, but in the long run, wages and other costs will also rise, causing the short-run aggregate supply curve to shift back to its original position. At this point, output will return to its previous long-run level, but prices will be permanently higher.

Question 20

When production costs rise,
A) the short-run aggregate supply curve shifts to the right.
B) the short-run aggregate supply curve shifts to the left.
C) the aggregate demand curve shifts to the right.
D) the aggregate demand curve shifts to the left.

Accepted Answer

When production costs rise, the short-run aggregate supply curve shifts to the left because it becomes more expensive for firms to produce goods and services, leading to a decrease in aggregate supply. As a result, prices for goods and services increase, leading to inflation.

Quiz 15: Aggregate Demand and Aggregate Supply

If output is above its natural rate, then according to sticky-wage theory

Which of the following alone can explain the change in the price level and output during World War II?

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

In the short-run an increase in the costs of production makes

Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression?

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

Which of the following has been suggested as a cause of the Great Depression?

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand?

In the early 1930s in the United States, there was a

In the first few years of the Great Depression, unemployment rose to about

During World War II,

A decrease in the availability of an important major resource such as oil shifts

During World War II, the economy's production increased about

The economic boom of the early 1940s resulted mostly from

Which of the following shifts short-run aggregate supply left?

Which of the following did not happen during the onset of the Great Depression?

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

When production costs rise,