Chapter 24.2 Flashcards
Consider the AD/AS macro model. A permanent demand shock that causes equilibrium output to rise above potential output will
A) allow a stable expansion of real income over time.
B) always reverse itself.
C) be negated in the long run, through the economy’s adjustment process.
D) result in a price level lower than that preceding the demand shock.
E) set off an endless cycle of price rises and increases in unemployment.
C
Consider an AD/AS model in long-run equilibrium. An output gap, caused by a leftward shift of the AD curve, will be eliminated if
A) wages rise quickly.
B) the AS curve shifts upward.
C) wages and other factor prices fall sufficiently.
D) real national income decreases.
E) prices rise quickly.
C
Consider an economy with a relatively steep AS curve. If there is a shift to the right in the AD curve, there will be a \_\_\_\_\_\_\_\_ in the price level and \_\_\_\_\_\_\_\_ in national output. A) small increase; a large increase B) small increase; a large decrease C) large increase; a small increase D) large increase; a small decrease E) large increase; no change
C
Consider an economy with a relatively steep AS curve. If the AD curve shifts to the left, then the price level will ________ and national output will ________.
A) increase slightly; significantly increase
B) increase slightly; significantly decrease
C) increase sharply; increase slightly
D) fall sharply; will not change.
E) fall sharply; decrease slightly.
E
Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in world demand for Canada’s goods. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level
C
Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an unexpected and sharp reduction in desired business investment expenditure. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is at its original level with a lower price level
B) real GDP and the price level both fall; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level
A
Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock will ________ the price level and ________ output in the short run. In the long run, the price level will ________ and output will ________.
A) decrease; decrease; decrease further; decrease further
B) decrease; decrease; decrease further; be restored to potential output
C) increase; increase; increase further; increase further
D) increase; decrease; increase further; be restored to potential output
E) increase; increase; increase further; be restored to potential output
E
Consider the basic AD/AS macro model in long-run equilibrium. An expansionary AD shock would have \_\_\_\_\_\_\_\_ output effect in the short run and \_\_\_\_\_\_\_\_ output effect in the long run. A) a positive; no B) a positive; a positive C) no; a positive D) no; no E) not enough information to know
A
Consider the basic AD/AS macro model in long-run equilibrium. A permanent expansionary AD shock has \_\_\_\_\_\_\_\_ price-level effect in the short run and \_\_\_\_\_\_\_\_ price-level effect in the long run. A) a positive; no B) a negative; no C) a positive; an even larger D) a positive; a smaller E) a negative; a positive
C
Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is an increase in the Canadian-dollar price of all imported raw materials. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP returns to its original level with a lower price level
E) real GDP falls and the price level rises; real GDP and the price level return to their original levels
E
Suppose Canada’s economy is in a long-run equilibrium with real GDP equal to potential output. Now suppose there is a decrease in the Canadian price of all imported raw materials. In the short run, ________. In the long run, ________.
A) real GDP and the price level both fall; real GDP is below its original level with a lower price level
B) real GDP and the price level both rise; real GDP is above its original level with a higher price level
C) real GDP and the price level both rise; real GDP returns to its original level with a higher price level
D) real GDP rises and the price level falls; real GDP and the price level return to their original levels
E) real GDP falls and the price level rises; real GDP is below its original level with a higher price level
D
Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . The initial effect is A) a recessionary output gap of 100. B) a recessionary output gap of 300. C) a recessionary output gap of 550. D) an inflationary output gap of 200. E) an inflationary output gap of 100.
A
Refer to Figure 24-3. A negative shock to the economy shifts the AD curve from to . At the new short-run equilibrium, the price level is \_\_\_\_\_\_\_\_ and real GDP is \_\_\_\_\_\_\_\_. A) 90; 900 B) 110; 800 C) 60; 1000 D) 60; 700 E) 90; 1250
A
Refer to Figure 24-3. Which of the following events could have shifted the AD curve from to ?
A) an increase in net exports
B) an increase in government purchases
C) an increase in desired investment
D) an increase in autonomous household saving
E) an increase in autonomous consumption
D
Refer to Figure 24-3. After the negative aggregate demand shock shown in the diagram (from to ), which of the following describes the adjustment process that would return the economy to its long-run equilibrium?
A) Wages would eventually fall, causing the AD curve to shift to the right, returning to the original equilibrium at point A.
B) Wages would eventually fall, causing the AS curve to shift slowly to the right, reaching a new equilibrium at point E.
C) Wages would increase, causing the AS curve to shift to the right, reaching a new equilibrium at point E.
D) Wages would increase, causing the AD curve to shift to the right, returning to the original equilibrium at point A.
E) Potential output would decrease from 1000 to 900 and a new long-run equilibrium would be established at point D.
B
Refer to Figure 24-3. Following the negative AD shock shown in the diagram (from to ), the adjustment process will take the economy to a long-run equilibrium where the price level is \_\_\_\_\_\_\_\_ and real GDP is \_\_\_\_\_\_\_\_. A) 110; 1000 B) 60; 1000 C) 90; 900 D) 110; 800 E) 90; 1250
B
Consider the AD/AS model, and suppose that the economy begins at potential output. The effect of a positive AS shock on real GDP will be reversed in the long run with a \_\_\_\_\_\_\_\_ shift in \_\_\_\_\_\_\_\_. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y*
C
Consider the AD/AS model and suppose the economy begins at potential output. The effect of a negative AS shock on real GDP will be reversed in the long run with a \_\_\_\_\_\_\_\_ shift in \_\_\_\_\_\_\_\_. A) rightward; AS B) rightward; AD C) leftward; AS D) leftward; AD E) leftward; Y*
A