Chapter 12

All of the following will increase the economy's potential output EXCEPT

a decrease in the aggregate price level

When an economy experiences stagflation, it is usually caused by a:

a negative supply shock.

Suppose the economy is operating in long-run equilibrium. If a positive demand shock hits the economy, we would expect:

a short-run increase in real GDP and price level, and a long-run decrease in real GDP and an increase in price level

An increase in government spending on health care is likely to shift the:

aggregate demand curve to the right.

Raising taxes shifts the

aggregate demand curve; left

(Figure: Inflationary and Recessionary Gaps) In Panel (a), the intersection of SRAS with AD indicates:

an economy experiencing a recessionary gap.

Which of the following would likely cause the short-run aggregate supply curve to shift to the left?

an increase in the price of imported oil

If the economy is currently in a recessionary gap, real GDP will be ________ potential output.

below

An aggregate output level lower than potential output means

high unemployment.

Nominal wages are "sticky" because:

in the short run these payments are slow to rise when there are labor shortages and slow to fall even when there is significant level of unemployment.

Stagflation is a combination of

increasing unemployment and increasing inflation

In the long run, the aggregate price level has:

no effect on the quantity of aggregate output

The short-run aggregate supply curve may shift to the right if:

productivity increases.

Because the aggregate price level has no effect on aggregate output in the long run, the long-run aggregate supply curve is:

vertical

The long-run aggregate supply curve is:

vertical