MccEachern Ch 11 Aggregate Supply

If wages are flexible, the long-run aggregate supply curve is vertical.

TRUE

Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices. Which of the following is true?

There will be a movement to the left along the aggregate demand curve.

Given the aggregate demand curve, an adverse supply shock would

cause no change in output or the price level

In the short run, but not in the long run,

cyclical unemployment can exist

The graph in Exhibit 10-7 shows a(n)

decrease in short-run aggregate supply

The potential output of an economy is the level of output produced when the

expected price level equals the actual price level

Compensation is usually negotiated in terms of the nominal wage because wage agreements are based on expected price levels.

expected price levels

If the price level rises by 5 percent and the nominal wage rises 3 percent, the real wage

falls by 2 percent

If the actual price level is less than the expected price level reflected in long-term contracts,

firms will find production less profitable than they had expected and will decrease the quantity of output supplied

Which of the following types of unemployment can exist in an economy that is at its potential output level?

frictional, seasonal, and structural unemployment only

The key resource underlying aggregate supply is

labor

An expansionary gap is closed in the long run by a(n)

leftward shift of the short-run aggregate supply curve

Wage agreements may cause costs to be __________ flexible than prices so that __________ in the price level cause __________ in aggregate quantity supplied.

less; decreases; decreases

A nominal wage is

measured in current dollars rather than in constant dollars

As actual output falls below the potential level, which of the following must be true?

more resources become unemployed

The capital stock increases

only if net investment is positive

Given aggregate demand and aggregate supply schedule #2 in Exhibit 10-1, the equilibrium output level and price level are

output $6.5, price level 120

As an expansionary gap is closed in the long run by firms' actions,

output decreases and the price level increases

Aggregate supply reflects billions of production decisions made by

resource suppliers and firms

Which of the following is not assumed to be constant along a short-run aggregate supply curve?

the actual price level

Given the long-run aggregate supply curve, the aggregate demand curve determines

the price level but not the output level

If nominal wages are sticky in the downward direction,

unemployment may persist for long periods of time

If the actual price level exceeds the expected price level reflected in long-term contracts,

unemployment will decrease firms will find production more profitable than they had expected and will increase the quantity of output supplied

In the long run, the economy will produce at potential output if

wages and prices are sufficiently flexible

Potential output will decrease if

workers choose shorter work schedules in order to enjoy more leisure time

Consider Exhibit 10-12. Aggregate demand is represented by AD0 and the aggregate supply is AS100 since the expected price level is 100. Which of the following describes the current situation for this economy?

an expansionary gap exists

Which of the following would shift the LRAS curve to the right?

an improvement in technology

In the long run, an increase in aggregate demand will cause

an increase in the price level and no change in output

The graph in Exhibit 10-9 shows a(n)

increase in long-run aggregate supply

The graph in Exhibit 10-4 shows a(n)

increase in short-run aggregate supply

Given the aggregate demand curve, an increase in the supply of a productive resource will

increase the price level but leave output unchanged

The short-run aggregate supply curve slopes upward because quantity supplied

increases when the price level increases

A contractionary gap may be closed in the long run by a(n)

rightward shift of the short-run aggregate supply curve

In the short run, there is a positive relationship between

the actual price level and aggregate quantity supplied

Consider Exhibit 10-12. Aggregate demand is represented by AD0 and the aggregate supply is AS100 since the expected price level is 100. Which of the following identifies the the long-run equilibrium?

A

Suppose that the real wage remained unchanged between year 1 and 2 but the nominal wage increased from $20 to $24. What is true about the price level?

It rose by 20 percent.

Which of the following is true of the short-run aggregate supply curve?

It shows the relation between the price level and the quantity of aggregate output firms supply, other things constant.

Which of the following occurs as macroeconomic output expands in the short run?

All of the answers are correct

Which of the following is true about real and nominal wages?

Changes in the nominal wage will be the same as changes in the real wage only if the price level is constant.

Refer to Exhibit 10-11. Which point represents short-run equilibrium?

D

Which of the following is true of a beneficial supply shock?

It could lead to a lower price level.

Aggregate supply is the relationship between aggregate demand and the quantities of aggregate output firms are willing and able to produce, other things constant.

FALSE

Consider Exhibit 10-3. The short-run equilibrium output is Y1.

FALSE

Given aggregate demand and aggregate supply schedule #2 in Exhibit 10-1, the equilibrium output level and price level are $7.0 and 110

FALSE

In the long run, the price level is determined by aggregate supply.

FALSE

In the short run, the price level is determined solely by aggregate supply.

FALSE

Increases in the costs of producing each level of output will cause a rightward shift of the short-run aggregate supply curve.

FALSE

The amount by which actual output falls short of potential output is called an expansionary gap.

FALSE

The graph in Exhibit 10-4, when aggregate supply is AS, the equilibrium output and price level will be Y2 and P2.

FALSE

The shift from AS to AS' in Exhibit 10-4 would occur when the actual price level is higher than expectations.

FALSE

Which of the following would be evidence that a contractionary gap exists?

Help wanted advertising lower than usual, and the consumer price index lower than expected.

Which of the following is generally true of nominal wages?

Sustained and continuous (cyclical) unemployment suggests nominal wages do not fall quickly

Because nominal wages fall slowly, the supply-side adjustments needed to close a contractionary gap may take very long.

TRUE

If the actual price level is higher than the expected price level, the economy will expand in the short run.

TRUE

The expected price level is assumed to be constant along a given short-run aggregate supply curve.

TRUE

The long-run aggregate supply curve is vertical because potential real GDP is determined by resource availabilities and productivities.

TRUE

Wage rates are typically flexible upward but "sticky" downward.

TRUE

Which of the following is true in the long run?

The actual price level and the expected price level are equal. The long-run aggregate supply curve is vertical. The aggregate supply curve is the key determinant of the level of potential output.

If the economy were at its potential output level, which of the following is not true?

The actual unemployment rate would be greater than the natural rate. structural unemployment would be equal to zero The actual price level is greater than the expected price level. Firms' and workers' expectations about the price level are not accurate.

If the economy is simultaneously in long-run and short-run equilibrium, which of the following is not true?

The aggregate demand curve is horizontal at the potential output level.

Suppose that the actual and expected price levels are initially equal, and that the expected price level falls. Which of the following will occur over the long run? (Hint: Recall the actual price level is on the vertical axis.)

The short-run aggregate supply curve will shift to the left

In Exhibit 10-2, a contractionary gap would be represented by the distance

Y1 - Y2

In Exhibit 10-2, an expansionary gap would be represented by the distance

Y2 - Y1

Which of the following would shift the LRAS curve to the left?

a civil war

In Exhibit 10-6, the distance between Y1 and Y2 is called

a contractionary gap

Which of the following supply shocks would shift the aggregate supply curve inward?

a decrease in agricultural output

Which of the following changes best represents the effect on the U.S. of the oil embargo (a shut-off of oil from certain OPEC countries) of the 1970s?

a leftward shift of the aggregate supply curve

The potential level of output can be altered by changes in

a nation's stock of capital

Which of the following would cause the long-run aggregate supply curve to shift rightward?

a technological breakthrough with widespread practical applications that occurs in the microcomputer industry

The long-run aggregate supply curve is represented by

a vertical line

In long-run equilibrium,

actual output must equal potential output

An expansionary gap is equal to

actual short-run output minus potential output

In the short run, real and nominal GDP will both decrease whenever

aggregate demand decreases, but not always when aggregate supply decreases

If nominal wage rates increase by 2 percent per year and the price level increases by 5 percent per year, real wages will

decrease by 3 percent per year

The movement in Exhibit 10-10 could be caused by a(n)

decrease in the size of the labor force

Consider Exhibit 10-3. In this situation, long-run equilibrium would be established by a(n)

decrease of short-run aggregate supply to close the expansionary gap

Stagflation is defined as

decreased output accompanied by a higher price level

The short run is a period of time

during which resource buyers and sellers cannot adjust fully to changes in the price level

Exhibit 10-4 shows that the

economy will experience deflation

Given implicit or explicit resource price agreements, if the actual price level is below the expected price level, the

economy will move leftward along the short-run aggregate supply curve

Beneficial supply shocks include all of the following except one. Which is the exception?

establishment of the Occupational Safety and Health Administration (OSHA)

Between 1994 and 2004, Jack's salary increased from $100,000 to $200,000 per year and the price index increased from 100 to 300 during the same period. Which of the following statements best describes Jack's situation?

his real income decreased and money income increased

As a contractionary gap is closed in the long run,

output increases and the price level decreases

During a recession

output is below potential and unemployment is above the natural rate contractionary gaps may persist if wages are not very flexible

The movement shown in Exhibit 10-9 could be caused by

positive net investment

The aggregate supply curve reflects the relationship between the

price level and the quantity of all goods supplied in the economy

If the expected price level exceeds the actual price level

production becomes less attractive to firms

If the expected price level falls below the actual price level,

production becomes more attractive to firms firms

A rising price level in the short run may create an incentive for firms to increase production because

profits will increase

As actual output rises above the potential level, which of the following must be true?

real GDP rises

If nominal wage rates increase by 5 percent per year and the price level increases by 3 percent per year, which of the following is correct?

real wages increase by 2 percent per year

If the price level rises by 4 percent and the nominal wage rises 6 percent, the real wage

rises by 2 percent

The various output levels produced at different price levels is reflected in the

short-run aggregate supply curve

If the economy is at point M in Exhibit 10-5,

the actual price level is higher than expected with a $200 billion expansionary gap the short-run supply curve will shift to SRS109 and the expansionary gap will be eliminated

In Exhibit 10-3, at income level Y2

the actual unemployment rate equals the natural rate of unemployment

If the actual price level in Exhibit 10-2 exceeds the expected price level, then

the actual unemployment rate is below the natural rate

In Exhibit 10-6, at income level Y1

the actual unemployment rate is greater than the natural rate of unemployment

In constructing the short-run aggregate supply curve, we define the short run as the period in which

the costs of some resources are fixed

Aggregate supply expresses the relationship between

the price level in the economy and the aggregate output firms will produce, other things constant

If the actual price level turns out to be lower than expected,

the unemployment rate will probably rise businesses cut back production