Question 1

The short-run aggregate supply curve is horizontal at:
A) a level of output determined by aggregate demand.
B) the natural level of output.
C) the level of output at which the economy's resources are fully employed.
D) a fixed price level.

Accepted Answer

The short-run aggregate supply curve is horizontal at a fixed price level, indicating that firms are willing to supply any amount of goods at that price level, assuming other factors like wages and resource costs are constant.

Question 2

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:
A) aggregate demand equals long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.

Accepted Answer

Short-run equilibrium occurs when aggregate demand equals short-run aggregate supply. In the short run, prices are fixed, so changes in aggregate demand lead to changes in output. Long-run equilibrium occurs when aggregate demand equals both short-run and long-run aggregate supply, which allows prices to adjust fully to changes in demand.

Question 3

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:
A) output and employment will increase in the short run.
B) output and employment will decrease in the short run.
C) prices will increase in the short run.
D) prices will decrease in the short run.

Accepted Answer

When the short-run aggregate supply curve is horizontal, it means that the economy is operating at full capacity and any increase in aggregate demand will lead to an increase in output and employment without affecting prices. Therefore, if the Fed increases the money supply, it will shift the aggregate demand curve to the right and result in an increase in output and employment in the short run, while prices remain unchanged.

Question 4

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:
A) aggregate demand is greater than long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.

Accepted Answer

Long-run equilibrium in the aggregate demand-aggregate supply model occurs where aggregate demand equals both short-run and long-run aggregate supply, indicating that the economy is producing at its potential output without any inflationary or deflationary gaps.

Question 5

The natural level of output is:
A) affected by aggregate demand.
B) the level of output at which the unemployment rate is zero.
C) the level of output at which the unemployment rate is at its natural level.
D) permanent and unchangeable.

Accepted Answer

The natural level of output is the level of output at which the unemployment rate is at its natural level, meaning the rate of unemployment that would exist even in a healthy economy without any cyclical fluctuations. It is not affected by aggregate demand and it is not permanent or unchangeable.

Question 6

The long run refers to a period:
A) of decades.
B) during which capital and labor are sometimes not fully employed.
C) during which prices are flexible.
D) during which output deviates from the full-employment level.

Accepted Answer

The long run is a period during which prices are flexible, meaning that they can adjust to changes in supply and demand. In the long run, firms can adjust their output levels and inputs of capital and labor to reach the full-employment level of output.

Question 7

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run.
A) above
B) below
C) equal to
D) either above or below

Accepted Answer

In the short run, if the equilibrium output is below the natural rate of output, firms are operating below their capacity and are likely to increase production. As a result, output increases and the price level decreases as more goods are supplied in the market. In the long run, all input prices adjust to the changes in output and the economy reaches its natural rate of output with lower prices. Therefore, the price level decreases and output increases, only if the short-run equilibrium is below the natural rate of output.

Question 8

The long-run aggregate supply curve is vertical at the level of output:
A) determined by aggregate demand.
B) at which unemployment is at its natural rate.
C) at which the inflation rate is zero.
D) at a predetermined price level.

Accepted Answer

The long-run aggregate supply curve is vertical at the level of output where unemployment is at its natural rate. This means that the economy is producing at its potential and any increase in aggregate demand will only lead to an increase in prices and not output. The long-run aggregate supply curve is not determined by aggregate demand, a predetermined price level, or the inflation rate being zero.

Question 9

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.

Accepted Answer

If the long-run aggregate supply curve (LRAS) is vertical, it means that the economy is operating at its full potential output level and any increase or decrease in aggregate demand (AD) would only lead to a change in prices but not the level of output. This can be explained by the fact that if AD increases, there would be excess demand in the economy leading to a shortage of goods and services, which would drive up prices. On the other hand, if AD decreases, there would be excess supply in the economy leading to a surplus of goods and services, which would drive down prices. However, the level of output would remain constant in both cases as the economy is already producing at its full potential. Hence, changes in AD impact prices but not the level of output if the LRAS curve is vertical.

Question 10

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Accepted Answer

In the transition to the long run, if the short-run equilibrium occurs at a level of output above the natural rate, prices will increase due to higher demand and output will decrease as the economy adjusts back towards the natural rate of output.

Question 11

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:
A) level of output but not prices.
B) prices but not level of output.
C) both prices and level of output.
D) neither prices nor level of output.

Accepted Answer

When the short-run aggregate supply curve is horizontal, it indicates that the economy can produce more goods and services without increasing prices, thus changes in aggregate demand affect the level of output but not prices.

Question 12

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A) is horizontal.
B) is vertical.
C) slopes upward and to the right.
D) slopes downward and to the right.

Accepted Answer

When all prices are stuck at a predetermined level, it means that the price level does not change regardless of changes in real GDP. This scenario is represented by a horizontal short-run aggregate supply curve, indicating that output can change without affecting the price level.

Question 13

The short run refers to a period:
A) of several days.
B) during which prices are sticky and unemployment may occur.
C) during which capital and labor are fully employed.
D) during which there are no fluctuations.

Accepted Answer

The short run is a period in which prices are sticky, meaning they do not adjust instantaneously to changes in supply and demand. This can lead to unemployment as firms may not be able to adjust output in the short run to match changes in demand, leading to a mismatch between the demand for goods and the supply of labor.

Question 14

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.
A) prices; output
B) output; prices
C) output; output
D) prices; prices

Accepted Answer

If the Federal Reserve increases the money supply, it will lead to a decrease in interest rates which will stimulate investment and consumer spending resulting in an increase in output in the short run. However, in the long run, the increase in the money supply will lead to inflation which will result in an increase in prices. Therefore, the correct choice is B since output increases in the short run and prices increase in the long run.

Question 15

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.
A) output decreases and prices are unchanged; rise
B) output decreases and prices are unchanged; fall
C) output and prices both decrease; rise
D) output and prices both decrease; fall

Accepted Answer

When the Fed reduces the money supply, it causes a decrease in aggregate demand in the short run, leading to a decrease in output and no change in prices. However, in the long run, prices will adjust to the decreased aggregate demand, causing them to fall, and output will return to its original level. This is known as the long-run neutrality of money.

Question 16

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output

Accepted Answer

In the short run, with a horizontal aggregate supply curve, changes in the money supply can change output without affecting prices. In the long run, with a vertical aggregate supply curve, changes in the money supply only affect prices, not output.

Question 17

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:
A) both the short run and the long run.
B) in neither the short run nor the long run.
C) in the short run, but not in the long run.
D) in the long run, but not in the short run.

Accepted Answer

Monetary neutrality means that changes in the money supply have no impact on the real economy in the long run. In the short run, changes in the money supply may affect output and prices, but in the long run, prices and wages adjust to fully reflect changes in the money supply, resulting in no real effects. Therefore, monetary neutrality holds only in the long run, not in the short run.

Question 18

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:
A) the labor supply.
B) the supply of capital.
C) the money supply.
D) technology.

Accepted Answer

The vertical long-run aggregate supply curve represents the level of output that the economy is capable of producing in the long run, given its resources and technology. It is independent of the money supply because changes in the money supply only lead to changes in prices and nominal variables, but not in real variables such as output or employment. The natural rate of output, which is the level of output produced when all markets are in equilibrium, is determined by factors such as technology, the supply of labor and capital, and institutions, but not by changes in the money supply.

Question 19

If the short-run aggregate supply curve is horizontal, then the:
A) classical dichotomy is satisfied.
B) money supply cannot affect prices in the short run.
C) money supply cannot affect output in the short run.
D) money supply is irrelevant in the short run.

Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that there is excess capacity in the economy and firms are willing to supply any amount of output at the current price level. In this case, an increase in the money supply will not lead to an increase in prices as there is no upward pressure on prices due to excess supply. This implies that the money supply cannot affect prices in the short run.

Question 20

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will ______ and output will ______.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Accepted Answer

The answer of If a short-run equilibrium occurs at a...

Quiz 10: Introduction to Economic Fluctuations

The short-run aggregate supply curve is horizontal at:

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

The natural level of output is:

The long run refers to a period:

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run.

The long-run aggregate supply curve is vertical at the level of output:

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will and output will .

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

The short run refers to a period:

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then increase(s) in the short run and increase(s) in the long run.

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run , whereas in the long run prices and output returns to its original level.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change in the short run and change in the long run.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

If the short-run aggregate supply curve is horizontal, then the:

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will and output will .