Chapter 27 quiz

the economy is currently operating at full employment. assuming flexible wages and prices, how would a decline in aggregate demand affect GDP and the price level in the short run, and GDP and the price level in the long run?

?

Suppose the equilibrium aggregate price level is rising and the equilibrium level of real GDP is falling. Which of the following most likely caused these changes?

A decrease in short-run aggregate supply

demand shock

A sudden surprise event that temporarily increases or decreases demand for goods or services

If there is an inflationary gap, which of the following accurately describes the adjustment to long-run equilibrium?

Nominal wages increase, and the short-run aggregate supply curve shifts left until the economy reaches long-run equilibrium

When both aggregate supply and aggregate demand increase, which of the following can be said for certain?

Real GDP rises, but the change in the price level is uncertain.

Which of the following is likely to shift the long-run aggregate supply curve to the right?

Research that improves the productivity of labor and capital. (productivity)

Which of the following best describes a key difference between the short-run and long-run aggregate supply curve?

Short-run aggregate supply is upward sloping as nominal wages do not quickly respond to price level changes.

stagflation

a period of slow economic growth and high unemployment (stagnation) while prices rise (inflation)

A negative demand shock can cause

a recessionary gap

supply shock

an event that suddenly changes the price of a commodity or service.

an inflationary gap could be reduced by what actions?

an increase in the income tax rate

A recessionary gap will be eliminated because there is _______ pressure on wages, causing the _______ .

downward; short-run aggregate supply curve to shift rightward.

the long-run, aggregate supply is vertical at

full employment

potential output

highest level of real GDP that can be sustained over a long term. the level of aggregate output that can be sustained in the long run without inflation

If actual GDP is less than potential output, then the economy is

in a recessionary gap.

If an economy is in short-run equilibrium such that the level of output is greater than the potential output, then this means that

in the long run, nominal wages will rise.

what happens when the graph shifts to the right

inflation

inflationary gap

is the amount by which equilibrium real GDP exceeds the full-employment level of GDP

A recessionary gap can be closed by _______ wages that shift the _______ .

lower; SRAS curve rightward

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

negative supply shock.

A natural disaster that destroys part of a country's infrastructure is a type of _________ and therefore shifts the _________ to the _________.

negative supply shock; short-run aggregate supply curve; left

The intersection of the economy's aggregate demand and long-run aggregate supply curves:

occurs at the economy's potential output

what happens when the graph shifts to the left

recession

suppose that, from 1985-1986, unemployment fell from 7.2 to 7.0 percent and inflation fell from 3.8 to 1.1 percent. An explanation of these changes might be the AS curve shifted to the _____

right

A general decrease in wages will result in the

short-run aggregate supply shifting to the right.

Assume that the economy is in long-run equilibrium. Suppose that the Federal Reserve lowers key interest rates, as a result of this action:

the aggregate demand curve will shift to AD2. (right)

According to the long-run aggregate supply curve, when _________, the quantity of aggregate output supplied _________.

the aggregate price level rises; does not change

In the short run, when the AD curve increases:

the aggregate price level will rise and the aggregate output level will increase.

recessionary gap

the amount by which the equilibrium level of real GDP falls short of potential GDP

The short-run aggregate supply curve shows:

the positive relationship between the aggregate price level and aggregate output supplied

If the short-run aggregate supply curve is horizontal, it is because

there exist many unemployed resources so that output can be increased without increasing wages and prices.

a negative supply shock will shift the Phillips curve __________ resulting in what to rise?

to the right. both inflation and unemployment rise

The short-run aggregate supply curve is _____, and the long-run aggregate supply curve is ______.

upward sloping; vertical