Question 1

Within the AD/AS model, which one of the following adjustments will cause the economy to return to its long-run capacity when output is temporarily greater than the economy's long-run potential?

Accepted Answer

A)  Lower wage rates and resource prices reduce short-run aggregate supply. 
B)  Lower interest rates increase aggregate demand and, thereby, stimulate output. 
C)  Higher wage rates and resource prices reduce short-run aggregate supply. 
D)  A decrease in prices reduces aggregate demand.

Question 2

Other things constant, an increase in resource prices will

Accepted Answer

A)  increase aggregate demand. 
B)  decrease aggregate demand. 
C)  decrease short-run aggregate supply. 
D)  increase short-run aggregate supply.

Question 3

When output is greater than the economy's long-run capacity, which of the following is most likely to occur?

Accepted Answer

A)  a reduction in the general level of prices 
B)  an abnormally high rate of unemployment 
C)  increases in real interest rates and real resource prices 
D)  a reduction in imports

Question 4

Which of the following will most likely result from an unanticipated decrease in aggregate supply due to unfavorable weather conditions in agricultural areas?

Accepted Answer

A)  a decrease in inflation 
B)  a decrease in unemployment 
C)  a decrease in the general level of prices 
D)  an increase in the general level of prices

Question 5

Which of the following will most likely occur in the short run when the long-run equilibrium of an economy is disturbed by an unanticipated decrease in aggregate demand?

Accepted Answer

A)  a decrease in output and a higher price level 
B)  an increase in output and a higher price level 
C)  a decrease in output and a lower price level 
D)  an increase in output while prices remain unchanged

Question 6

Which of the following would be most likely to shift the long-run aggregate supply curve (LRAS) to the right?

Accepted Answer

A)  favorable weather conditions that increased the size of this year's grain harvest 
B)  an increase in resource prices relative to product prices 
C)  an increase in labor productivity as the result of improved computer technology and expansion of the Internet 
D)  an increase in the cost of security as the result of terrorist activities

Question 7

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is true?

Accepted Answer

A)  Aggregate quantity supplied is greater than potential output. 
B)  Aggregate quantity demanded is less than potential output. 
C)  Aggregate quantity demanded is equal to potential output. 
D)  The aggregate demand curve is horizontal at the potential output level.

Question 8

When an economy experiences long-run economic growth, a larger output can be achieved

Accepted Answer

A)  only if there is a reduction in the natural rate of unemployment. 
B)  only if the economy's actual unemployment is less than the natural rate. 
C)  if prices increase. 
D)  even though unemployment remains at its natural rate.

Question 9

Within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output,

Accepted Answer

A)  the natural rate of unemployment will increase. 
B)  long-run aggregate supply will increase. 
C)  lower resource prices and declining interest rates will direct the economy back to full employment. 
D)  higher resource prices and rising interest rates will direct the economy back to full employment.

Question 10

Which of the following would cause prices and real GDP to rise in the short run?

Accepted Answer

A)  Short-run aggregate supply shifts right. 
B)  Short-run aggregate supply shifts left. 
C)  Aggregate demand shifts right. 
D)  Aggregate demand shifts left.

Question 11

Figure 10-18
 
-As shown in Figure 10-18, and assuming the aggregate demand curve shifts from AD₁ to AD₂, the full-employment level of real GDP is

Accepted Answer

A)  $10 billion. 
B)  $4 billion. 
C)  $100 billion. 
D)  unable to be determined.

Question 12

Use the figure below to answer the following question(s).
Figure 10-6
 
-In the short-run equilibrium depicted in Figure 10-6, the economy's output is

Accepted Answer

A)  equal to potential GDP. 
B)  less than potential GDP. 
C)  greater than potential GDP. 
D)  equal to the economy's full-employment output.

Question 13

Which of the following will lead to a decrease in aggregate demand in the United States?

Accepted Answer

A)  a higher price level 
B)  a decrease in the real interest rate 
C)  rapid growth in real income in Japan and Western Europe 
D)  an increase in the exchange rate value of the dollar

Question 14

Which of the following will most likely accompany an unanticipated increase in aggregate demand?

Accepted Answer

A)  an increase in real output 
B)  an increase in unemployment 
C)  a decrease in real GDP 
D)  a decrease in the demand for resources

Question 15

For the following question(s), assume that the economy is in long-run equilibrium in the aggregate demand/aggregate supply model and that some sort of event takes place. In each case, mark the most likely impact of the event on the aggregate demand/aggregate supply diagram given below.
Figure 10-19
 
-Refer to Figure 10-19. There is an increase in the expected rate of inflation.

Accepted Answer

A)  The aggregate demand curve would shift to the right. 
B)  The short-run aggregate supply curve would shift to the left. 
C)  The price level would rise and real GDP would remain the same. 
D)  All of the above are correct.

Question 16

If an unanticipated decrease in aggregate demand results in an output below the economy's long-run capacity, long-run equilibrium will eventually be restored by

Accepted Answer

A)  an increase in the rate of inflation. 
B)  lower resource prices and lower real interest rates. 
C)  higher resource prices and higher real interest rates. 
D)  a decrease in the natural rate of unemployment.

Question 17

Figure 10-18
 
-Beginning in Figure 10-18 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂. The economy's path to a new long-run equilibrium is represented by a movement from

Accepted Answer

A)  E₃ to E₁ to E₂. 
B)  E₁ to E₃ to E₂. 
C)  E₂ to E₁ to E₂. 
D)  E₁ to E₂ to E₃.

Question 18

Within the AD/AS model, if consumers and investors become more optimistic about the future direction of the economy,

Accepted Answer

A)  aggregate demand will decrease. 
B)  aggregate demand will increase. 
C)  long-run aggregate supply will increase. 
D)  long-run aggregate supply will decrease.

Question 19

Explain how each of the following factors would influence aggregate demand in the United States. Be sure to explain which component of aggregate demand would be affected.
a.a stock market crash
b.an increase in the personal income tax rate
c.a decrease in the real interest rate
d.an increase in government purchases
e.a decline in income in Canada

Accepted Answer

The answer of Explain how each of the following factors...

Question 20

If a market economy has a self-correcting mechanism, when output is lower than potential or full-employment output,

Accepted Answer

A)  changes will occur that will automatically guide the economy back to full employment. 
B)  resource prices will increase. 
C)  prolonged unemployment such as was experienced during the Great Depression will occur. 
D)  the economy will fall into a more severe recession.

Exam 10: Dynamic Change, Economic Fluctuations, and the Ad-As Model