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A change in the price level produces an immediate shift of the short-run aggregate supply curve.

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When an economy fails to produce at its potential, I. there may be actions that the government or the central bank can take to push the economy toward its potential. II. the unemployment rate is below its natural rate. III. the average price level is likely to rise.


A) I, II, and III
B) I and II only
C) I and III only
D) I only

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Figure 7-5 Figure 7-5 -Refer to Figure 7-5. Which of the following statements is true? A) The economy depicted in the figure experiences an inflationary gap = Y<sub>2 </sub>-Y<sub>p</sub>. B) The economy depicted in the figure experiences an inflationary gap = Y<sub>1 </sub>-Y<sub>p</sub>. C) The economy depicted in the figure experiences an inflationary gap = Y<sub>1</sub>-Y<sub>2</sub>. D) The economy depicted in the figure is in long-run equilibrium but not in short-run equilibrium. -Refer to Figure 7-5. Which of the following statements is true?


A) The economy depicted in the figure experiences an inflationary gap = Y2 -Yp.
B) The economy depicted in the figure experiences an inflationary gap = Y1 -Yp.
C) The economy depicted in the figure experiences an inflationary gap = Y1-Y2.
D) The economy depicted in the figure is in long-run equilibrium but not in short-run equilibrium.

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In the short-run, an output gap occurs because


A) there is insufficient demand for goods and services.
B) there is insufficient supply of goods and services.
C) wages and prices are fully flexible.
D) wages and some prices have not adjusted sufficiently to maintain output at its potential level.

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Wage and price stickiness


A) gives rise to a vertical long-run aggregate supply curve.
B) gives rise to a vertical short-run aggregate supply curve.
C) creates a surplus or a shortage of real GDP.
D) prevents the economy from producing its potential level of real GDP.

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Figure 7-6 Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD<sub>2</sub>. Which of the following is false about the economy after it adjusts to its new long-run equilibrium? A) Nominal wages increase. B) The price level rises to P<sub>d</sub>. C) Firms employ more workers than in the short-run equilibrium. D) There is some frictional and structural unemployment. -Refer to Figure 7-6. Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following is false about the economy after it adjusts to its new long-run equilibrium?


A) Nominal wages increase.
B) The price level rises to Pd.
C) Firms employ more workers than in the short-run equilibrium.
D) There is some frictional and structural unemployment.

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The aggregate demand curve slopes downward I. for the same reasons that an ordinary demand curve does. II. in part because when the price level falls, the real wealth of the public falls, and this induces people to change their consumption. III. because as the price level falls, the net export component of aggregate demand increases.


A) I, II, and III
B) II and III
C) II only
D) III only

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Figure 7-7 Figure 7-7 -Refer to Figure 7-7. A shift from SRAS<sub>1</sub> to SRAS<sub>2</sub> could have been caused by all of the following except A) an increase in the consumer confidence index. B) an increase in payroll tax. C) a rise in health care costs which raises the cost of employing labor. D) terrorist attacks that destroys an economy's infrastructure. -Refer to Figure 7-7. A shift from SRAS1 to SRAS2 could have been caused by all of the following except


A) an increase in the consumer confidence index.
B) an increase in payroll tax.
C) a rise in health care costs which raises the cost of employing labor.
D) terrorist attacks that destroys an economy's infrastructure.

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Figure 7-7 Figure 7-7 -Refer to Figure 7-7. At output level Y<sub>K</sub>, A) the economy is not in equilibrium because it operates with an output gap. B) the economy is in short-run equilibrium and it operates with an inflationary gap. C) the economy is in short-run equilibrium and it operates with a recessionary gap. D) the economy is not in equilibrium because the unemployment rate is below the natural rate of unemployment. -Refer to Figure 7-7. At output level YK,


A) the economy is not in equilibrium because it operates with an output gap.
B) the economy is in short-run equilibrium and it operates with an inflationary gap.
C) the economy is in short-run equilibrium and it operates with a recessionary gap.
D) the economy is not in equilibrium because the unemployment rate is below the natural rate of unemployment.

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Discuss why the short-run aggregate supply curve is upward sloping unlike the long-run aggregate supply curve which is vertical.

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The short-run aggregate supply curve is ...

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A change in the aggregate quantity of goods and services supplied at every price level is called a


A) change in short-run aggregate supply.
B) change in long-run aggregate supply.
C) change in short-run aggregate quantity of output supplied.
D) determinant of short-run aggregate supply.

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Figure 7-3 Figure 7-3 -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. As a result, A) the economy's potential output decreases to Y<sub>3</sub>. B) unemployment is below its natural rate. C) the economy moves to a new long-run equilibrium at point C. D) there is some cyclical unemployment. -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. As a result,


A) the economy's potential output decreases to Y3.
B) unemployment is below its natural rate.
C) the economy moves to a new long-run equilibrium at point C.
D) there is some cyclical unemployment.

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An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.

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True

All of the following are held constant along a short-run aggregate supply curve except


A) factor prices.
B) output prices.
C) nominal wages.
D) capital stock.

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B

A decrease in aggregate demand, all other things unchanged, in the long run will generate


A) an increase in potential output and no change in the price level.
B) a decrease in potential output and no change in the price level.
C) no change in potential output and an increase in the price level.
D) no change in potential output and a decrease in the price level.

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The potential level of real GDP is the level of output a society can achieve when labor is employed at its natural level.

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All of the following statements are true about the short-run aggregate supply curve except


A) it is a graphical representation of the relationship between production and the price level.
B) it is a result of the stickiness or inflexibility of some prices and wages.
C) it is upward-sloping.
D) it is drawn holding price level constant.

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Figure 7-6 Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD<sub>2</sub>. As a result, A) the economy is not in equilibrium because it operates with an output gap. B) the economy is in short-run equilibrium and it operates with an inflationary gap. C) the economy is in short-run equilibrium and it operates with a recessionary gap. D) the economy is not in equilibrium because the unemployment rate is not equal to the natural rate of unemployment. -Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. As a result,


A) the economy is not in equilibrium because it operates with an output gap.
B) the economy is in short-run equilibrium and it operates with an inflationary gap.
C) the economy is in short-run equilibrium and it operates with a recessionary gap.
D) the economy is not in equilibrium because the unemployment rate is not equal to the natural rate of unemployment.

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Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?


A) To fund the government spending, more money must be printed. The resulting increase in money supply lowers interest rates which in turn stimulates consumption and investment spending.
B) The initial change in spending will cause an increase in real GDP and it also becomes income to someone else. As a result, the government's tax revenue increases which in turn allows the government to further increase its spending.
C) The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.
D) The initial change in government spending creates a supply of jobs and stimulates production of domestically produced goods and services. The resulting increases in wages and investment demand leads to increased real GDP.

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All the following explain price stickiness except A) firms choose not to adjust prices until they can assess if changes in sales are temporary or permanent. B) the more firms produce, the lower the average cost of production. Therefore, firms are willing to not raise prices as long as they can sell more. C) firms may be concerned that consumers may be angered by price increases. D) firms may be concerned that their rivals may not match their price increases.

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B

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