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Chapter 35 - Extending the Analysis of Aggregate Supply

Chapter 35 Extending the Analysis of Aggregate Supply Multiple Choice Questions

1. In terms of aggregate supply, a period in which nominal wages and other resource prices are unresponsive to price-level changes is called the: A. long run. B. short run. C. immediate market period. D. very long run.

2. In terms of aggregate supply, a period in which nominal wages and other resource prices are fully responsive to price-level changes is called the: A. long run. B. short run. C. immediate market period. D. very long run.

3. In the extended analysis of aggregate supply, the short-run aggregate supply curve is: A. vertical and the long-run aggregate supply curve is horizontal. B. horizontal and the long-run aggregate supply curve is vertical. C. upsloping and the long-run aggregate supply curve is vertical. D. horizontal and the long-run aggregate supply curve is upsloping.

4. In terms of aggregate supply, the short run is a period in which: A. the price level is constant. B. employment is constant. C. real output is constant. D. nominal wages and other resource prices are unresponsive to price-level changes.

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Chapter 35 - Extending the Analysis of Aggregate Supply

5. In terms of aggregate supply, the difference between the long run and the short run is that in the long run: A. the price level is variable. B. employment is variable. C. real output is variable. D. nominal wages and other input prices are fully responsive to price-level changes.

6. The long-run aggregate supply curve is vertical: A. because the rate of inflation is steady in the long run. B. because resource prices eventually rise and fall with product prices. C. because product prices tend to increase at a faster rate than resource prices. D. only when the money supply increases at the same rate as real GDP.

7. The short-run aggregate supply curve is upsloping because higher price levels: A. lower interest rates and encourage firms to invest and produce more. B. create incentives to expand output when resource prices are unresponsive to price-level changes. C. encourage importation of foreign goods. D. create an expectation among producers of still higher price levels.

8. Other things equal, a decrease in the price level will: A. shift the aggregate supply curve to the left. B. shift the aggregate demand curve to the left. C. cause a movement up a short-run aggregate supply curve. D. cause a movement down an aggregate supply curve.

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Chapter 35 - Extending the Analysis of Aggregate Supply

Suppose the full employment level of real output (Q) for a hypothetical economy is $500, the price level (P) initially is 100, and that prices and wages are flexible both upward and downward. Use the following short-run aggregate supply schedules to answer the question.

9. Refer to the information above. If the price level unexpectedly increases from 100 to 125, the level of real output in the short run will: A. rise from $500 to $560. B. fall from $500 to $440. C. fall from $560 to $500. D. rise from $440 to $500.

10. Refer to the information above. In the long run, an increase in the price level from 100 to 125 will: A. increase real output from $500 to $560. B. decrease real output from $500 to $440. C. change the aggregate supply schedule from (a) to (c) and result in an equilibrium level of real output of $560. D. change the aggregate supply schedule from (a) to (b) and result in an equilibrium level of real output of $500.

11. Refer to the information above. If the price level unexpectedly declines from 100 to 75, the level of real output in the short run will: A. rise from $500 to $560. B. fall from $500 to $440. C. fall from $560 to $500. D. rise from $440 to $500.

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Chapter 35 - Extending the Analysis of Aggregate Supply

12. Refer to the information above. In the long run, a fall in the price level from 100 to 75 will: A. decrease real output from $500 to $440. B. increase real output from $500 to $620. C. change the aggregate supply schedule from (a) to (c) and produce an equilibrium level of real output of $500. D. change the aggregate supply schedule from (a) to (b) and produce an equilibrium level of real output of $500.

13. Which of the following statements is true? A. The short-run aggregate supply curve is downsloping. B. The short-run aggregate supply curve is vertical. C. The long-run aggregate supply curve is vertical. D. The long-run aggregate supply curve is upsloping.

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Chapter 35 - Extending the Analysis of Aggregate Supply

14. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf In the short run, an increase in the price level from P2 to P3 will: A. change aggregate supply from AS2 to AS3. B. increase real output from Q1 to Q2. C. change aggregate supply from AS 2 to AS1. D. increase real output from Qf to Q2.

15. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf In the long run, an increase in the price level from P2 to P3 will: A. increase real output from Qf to Q2. B. change aggregate supply from AS 2 to AS1. C. decrease real output from Q2 to Q1. D. move the economy from b to d.

16. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf.In terms of this diagram, the long-run aggregate supply curve: A. is AS 2. B. is a vertical line extending from Qf upward through e, b, and d. C. may be either AS1, AS2, or AS3 depending on whether the price level is P1, P2, or P3. D. is a horizontal line extending from P2 rightward through f, b, and g.

17. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the short run, demand-pull inflation could best be shown as: A. a move from b to c on AS 2. B. a move from b to c to d. C. a change of aggregate supply from AS2 to AS3. D. a move from b to d.

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Chapter 35 - Extending the Analysis of Aggregate Supply

18. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the long run, demand-pull inflation could best be shown as: A. a move from b to c on AS 2. B. a move from b to f to d. C. a change of aggregate supply from AS2to AS1. D. a move from b to d.

19. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P2 and that the economy initially is operating at its full-employment level of output Qf. In the short run, cost-push inflation could best be shown as: A. a leftward shift of aggregate supply from AS2 to AS3. B. a move from b to c on AS2. C. a move from b to c to d. D. a move from b to f to d.

20. Other things equal, the short-run aggregate supply curve shifts positions when: A. the price level changes. B. the rate of inflation changes. C. nominal wages and other input prices change. D. aggregate demand changes.

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Chapter 35 - Extending the Analysis of Aggregate Supply

21. Refer to the above diagram relating to short-run and long-run aggregate supply. The A. short-run aggregate supply curve is A. B. short-run aggregate supply curve is B. C. long-run aggregate supply curve is B. D. long-run aggregate supply curve is D.

22. Refer to the above diagram. If the price level rises above P1 because of an increase in aggregate demand, the: A. economy will move up along curve B and output will temporarily increase. B. long-run aggregate supply curve C will shift upward. C. short-run aggregate supply curve B will automatically shift to the right. D. economy's output first will decline, then increase, and finally return to Q1.

23. Refer to the above diagram. The long-run aggregate supply curve is: A. A. B. B. C. C. D. D.

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Chapter 35 - Extending the Analysis of Aggregate Supply

24. Refer to the above diagram and assume the economy is operating at equilibrium point w. In the short run, an increase in the price level from P2 to P3 would move the economy from point w to point: A. v. B. x. C. u. D. z.

25. Refer to the above diagram and assume the economy is operating at equilibrium point w. In the long run, an increase in the price level from P2 to P3 would move the economy from point w to point: A. v. B. x. C. u. D. y.

26. Refer to the above diagram and assume the economy is operating at equilibrium point w. In the short run, a decrease in the price level from P2 to P1 would move the economy from point w to point: A. v. B. x. C. t. D. y.

27. Refer to the above diagram and assume the economy is operating at equilibrium point w. If wages and other resource prices are flexible downward, in the long run a decrease in the price level from P2 to P1 would move the economy from point w to point: A. v. B. x. C. t. D. y.

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Chapter 35 - Extending the Analysis of Aggregate Supply

28. Refer to the above diagram. If drawn, the long-run aggregate supply curve would include points: A. v, w, and u. B. y, w, and u. C. t, w, and z. D. y, w, and x.

29. The level of potential output and location of the long-run aggregate supply curve are determined by: A. Federal Reserve policy. B. the price level. C. the intersection of aggregate demand and short-run aggregate supply. D. the natural rate of unemployment.

30. The natural rate of unemployment: A. can vary over time and defines the location of the long-run aggregate supply curve. B. is constant over time and defines the location of the long-run aggregate supply curve. C. varies over time in response to changes in aggregate demand. D. is inversely related to the price level.

31. In the extended aggregate demand-aggregate supply model: A. long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve. B. the long-run aggregate supply curve is horizontal. C. the price level is the same regardless of the location of the aggregate demand curve. D. long-run equilibrium occurs at the intersection of the aggregate demand curve, the shortrun aggregate supply curve, and the long run aggregate supply.

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Chapter 35 - Extending the Analysis of Aggregate Supply

32. In the extended aggregate demand-aggregate supply model: A. long-run equilibrium occurs wherever the aggregate demand curve intersects the short-run aggregate supply curve. B. the long-run aggregate supply curve is horizontal. C. the level of real output is the same in the long run regardless of the location of the aggregate demand curve. D. the short-run aggregate supply curve is downsloping.

33. Refer to the above diagram. The initial aggregate demand curve is AD 1 and the initial aggregate supply curve is AS1. Demand-pull inflation in the short run is best shown as: A. a shift of the aggregate demand curve from AD1 to AD2. B. a move from d to b to a. C. a move directly from d to a. D. a shift of the aggregate supply curve from AS 1 to AS2.

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Chapter 35 - Extending the Analysis of Aggregate Supply

34. Refer to the above diagram. The initial aggregate demand curve is AD 1 and the initial aggregate supply curve is AS1. In the long run, demand-pull inflation is best shown as: A. a shift of aggregate demand from AD1 to AD2 followed by a shift of aggregate supply from AS1 to AS2. B. a move from d to b to a. C. a shift of aggregate supply from AS1 to AS2 followed by a shift of aggregate demand from AD1 to AD2. D. a move from a to d.

35. Refer to the above diagram. The initial aggregate demand curve is AD 1 and the initial aggregate supply curve is AS1. In the long run, the aggregate supply curve is vertical in the diagram because: A. nominal wages and other input prices are assumed to be fixed. B. real output level Qf is the potential level of output. C. price level increases produce perfectly offsetting changes in nominal wages and other input prices. D. higher than expected rates of actual inflation reduce real output only temporarily.

36. Refer to the above diagram. The initial aggregate demand curve is AD 1 and the initial aggregate supply curve is AS1. Cost-push inflation in the short run is best represented as a: A. leftward shift of the aggregate supply curve from AS 1 to AS2. B. rightward shift of the aggregate demand curve from AD 1 to AD2. C. move from d to b to a. D. move from d directly to a.

37. Refer to the above diagram. The initial aggregate demand curve is AD 1 and the initial aggregate supply curve is AS1. Assuming no change in aggregate demand, the long-run response to a recession caused by cost-push inflation is best depicted as a: A. move from a to d along the long-run aggregate supply curve. B. rightward shift of the aggregate supply curve from AS 2 to AS1. C. move from a to c to d. D. leftward shift of the aggregate supply curve from AS 1 to AS2.

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Chapter 35 - Extending the Analysis of Aggregate Supply

38. Refer to the above diagram. The initial aggregate demand curve is AD 1 and the initial aggregate supply curve is AS1. If government offsets the decline in real output resulting from short-run cost-push inflation by increasing aggregate demand from AD1 to AD2: A. real output will rise above Qf. B. the price level will rise from P1 to P2. C. it is possible that aggregate supply will shift rightward from AS2 because nominal wage demands will rise. D. the price level will rise from P2 to P3.

39. If government uses fiscal policy to restrain cost-push inflation, we can expect: A. the unemployment rate to rise. B. the unemployment rate to fall. C. the aggregate demand curve to shift rightward. D. tax-rate declines and increases in government spending.

40. One policy dilemma posed by cost-push inflation is that: A. an increase in aggregate demand will increase inflation and the unemployment rate simultaneously. B. tax rates can be reduced without lowering tax revenues. C. the reduction of aggregate demand to restrain inflation will cause a further reduction in the real GDP. D. the adjustment of aggregate demand can neither increase real GDP nor reduce inflation.

41. If government uses its stabilization policies to maintain full employment under conditions of cost-push inflation: A. a deflationary spiral is likely to occur. B. an inflationary spiral is likely to occur. C. stagflation is likely to occur. D. the Phillips Curve is likely to shift inward.

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Chapter 35 - Extending the Analysis of Aggregate Supply

42. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the extended AD-AS model: A. demand-pull inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C. B. cost-push inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C. C. recession would involve a leftward shift of curve A, followed by a leftward shift of curve C. D. recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.

43. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the extended AD-AS model: A. demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C. B. cost-push inflation would involve first a leftward shift of curve C, then a rightward shift of curve C. C. recession would involve a leftward shift of curve A followed by a leftward shift of curve C. D. recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.

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Chapter 35 - Extending the Analysis of Aggregate Supply

44. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the extended AD-AS model: A. demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C. B. cost-push inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C. C. recession would involve a leftward shift of curve A, followed by a rightward shift of curve C. D. recession would involve a rightward shift of curve D, followed by leftward shifts of curves A and C.

45. Refer to the above diagram and assume that prices and wages are flexible both upward and downward in the economy. In the extended AD-AS model: A. demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C. B. cost-push inflation would involve a rightward shift of curve A, followed by a leftward shift of curve C. C. recession would involve a leftward shift of curve A, followed by a leftward shift of curves C and D. D. recession could be caused by either a leftward shift of curve A or a leftward shift of curve C.

46. Refer to the above diagram. Assume both upward and downward price and wage flexibility in the economy. In the extended AD-AS model: A. demand-pull inflation would involve a rightward shift of curve A, followed by a rightward shift of curve C. B. cost-push inflation would involve a leftward shift of curve C, followed by an upward shift of curve B. C. recession would involve a leftward shift of curve A. D. a rightward shift of curve D would be equivalent to an outward shift of the nation's production possibilities curve.

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Chapter 35 - Extending the Analysis of Aggregate Supply

47. Refer to the above graphs. Growth of production capacity is shown by: A. the shift from AB to CD only. B. the shift from X to Y only. C. both the shift from AB to CD and the shift from X to Y. D. both the shift from AB to CD and the shift from Y to X.

48. Refer to the above graphs. An increase in an economy's labor productivity would shift curve: A. AB to CD and shift curve Y to X. B. CD to AB and shift curve X to Y. C. AB to CD and shift curve X to Y. D. X to Y while leaving curve AB in place.

49. Refer to the above graphs. An increase in the economy's human capital would shift curve: A. AB to CD and curve Y to X. B. CD to AB and curve X to Y. C. X to Y while leaving curve AB in place. D. AB to CD and curve X to Y.

50. Inflation in the U.S. economy tends to be: A. a finite, one-time event resulting from a shock. B. ongoing, as increases in aggregate demand outpace increases in aggregate supply. C. a finite, one-time event as the Fed actively works to eliminate all inflation. D. ongoing, as aggregate supply is continually shifting to the left.

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Chapter 35 - Extending the Analysis of Aggregate Supply

51. In the absence of unexpected shocks, the economy will tend to experience: A. positive, non-inflationary growth. B. no changes in output or prices. C. positive growth with mild amounts of deflation. D. positive growth with mild amounts of inflation.

52. Refer to the above graphs, where the subscripts on the labels denote years 1 and 2. In year 1 the economy: A. is in long-run equilibrium at output Q1. B. is in short-run equilibrium at output Q1, but not in long-run equilibrium. C. cannot be in long-run equilibrium because output changes in period 2. D. is in a re...