Question 1

Which of the following best explains why the short-run aggregate supply (AS) curve is upward sloping?

Accepted Answer

Because wages are a large fraction of total costs and wage changes lag behind price changes.

Question 2

Suppose the economy experiences a sudden increase in oil prices. What is the most likely effect on the short-run aggregate supply (AS) curve?

Accepted Answer

The AS curve will shift to the left due to a cost shock.

Question 3

Given the equation for planned aggregate expenditure $$AE = C + I + G$$, what happens to equilibrium output ($$Y) if $$the interest rate ($$r) $$increases, holding all else constant?

Accepted Answer

Equilibrium output ($$Y) $$decreases because planned investment ($$I) $$falls.

Question 4

Which of the following best describes the IS curve in the goods market?

Accepted Answer

It shows a negative relationship between aggregate output ($$Y) $$and the interest rate ($$r).$$

Question 5

If the government increases its spending ($$G) $$while the interest rate ($$r) is $$held constant, what is the effect on the IS curve?

Accepted Answer

The IS curve shifts to the right.

Question 6

The Fed rule is given by $$r = \alpha Y + \beta P + \gamma Z. If $$the price level ($$P) $$increases, what is the likely response according to this rule?

Accepted Answer

The Fed will increase the interest rate ($$r).$$

Question 7

Why does the aggregate demand (AD) curve slope downward?

Accepted Answer

Because a higher price level ($$P) $$leads the Fed to raise the interest rate ($$r$$), which reduces investment ($$I) $$and output ($$Y).$$

Question 8

Which of the following is NOT a reason for a downward-sloping AD curve?

Accepted Answer

An increase in the price level ($$P) $$causes the Fed to lower the interest rate ($$r).$$

Question 9

In the long run, the aggregate supply (AS) curve is:

Accepted Answer

Vertical at the level of potential output ($$\overline{Y}).$$

Question 10

Suppose the economy is operating above potential output ($$Y \u003e \overline{Y}). $$What is likely to happen in the long run?

Accepted Answer

Wages will rise, shifting the short-run AS curve left until output returns to potential ($$\overline{Y}).$$

Question 11

Which of the following best defines potential output (potential GDP)?

Accepted Answer

The level of aggregate output that can be sustained in the long run without inflation.

Question 12

A cost shock, such as a sudden increase in energy prices, will most likely:

Accepted Answer

Shift the short-run AS curve to the left.

Question 13

If the Fed wants to fight high inflation without causing a recession, what challenge does it face?

Accepted Answer

Balancing the dual mandate of maximum employment and stable prices, given policy lags.

Question 14

If planned aggregate expenditure ($$AE) $$exceeds the economy’s full-employment output ($$Y_F$$), what is the likely result?

Accepted Answer

An inflationary gap, causing the price level to rise.

Question 15

Which of the following scenarios would shift the AD curve to the right?

Accepted Answer

An increase in government spending ($$G).$$

Question 16

If the Fed raises the interest rate ($$r) in $$response to an increase in output ($$Y$$), what is the effect on planned investment ($$I) $$and aggregate output ($$Y$$)?

Accepted Answer

Planned investment ($$I) $$falls, leading to a decrease in aggregate output ($$Y).$$

Question 17

Which of the following best describes the real wealth effect?

Accepted Answer

A change in consumption brought about by a change in real wealth due to a change in the price level.

Question 18

If the economy is operating below potential output, what is a likely adjustment in the long run?

Accepted Answer

Wages will fall, shifting the short-run AS curve to the right and increasing output.

Chapter 11: The Determination of Aggregate Output, the Price Level, and the Interest Rate

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