Q: Which equation correctly represents the relationship between real GDP, nominal GDP, and the price level (GDP deflator)?

$$\text{Real GDP} = \frac{\text{Nominal GDP}}{\text{GDP Deflator}} \times 100$$

Question 1

Which of the following best explains why the Long-run Aggregate Supply (LRAS) curve is vertical?

Accepted Answer

Because in the long run, all factors of production and input prices can adjust fully, so real output is independent of the price level.

Question 2

Suppose a country experiences an increase in labor force participation and a technological breakthrough. What is the most likely effect on the LRAS curve?

Accepted Answer

The LRAS curve will shift to the right, indicating an increase in potential output.

Question 3

Which of the following is NOT a component of aggregate demand?

Accepted Answer

Transfer payments

Question 4

If the price level rises, which of the following effects will most likely occur according to the real-balance effect?

Accepted Answer

The real value of money balances decreases, leading to reduced spending.

Question 5

Which equation correctly represents the relationship between real GDP, nominal GDP, and the price level (GDP deflator)?

Accepted Answer

$$	ext{Real GDP} = \frac{	ext{Nominal GDP}}{	ext{GDP Deflator}} 	imes 100$$

Question 6

Which of the following would cause a rightward shift in the aggregate demand (AD) curve?

Accepted Answer

An improvement in economic conditions in other countries

Question 7

If the U.S. price level increases relative to other countries, what is the most likely impact on net exports according to the open economy effect?

Accepted Answer

Net exports will decrease because U.S. goods become more expensive for foreign buyers.

Question 8

Which of the following best describes the meaning of long-run equilibrium in the economy?

Accepted Answer

It is the point where the aggregate demand curve crosses the long-run aggregate supply curve, and actual real GDP equals potential real GDP.

Question 9

Which of the following scenarios would most likely result in demand-side inflation?

Accepted Answer

Aggregate demand increases faster than long-run aggregate supply.

Question 10

Suppose the annual growth rate of labor and capital both increase. What is the expected effect on the production possibilities curve (PPC) and the LRAS curve?

Accepted Answer

Both the PPC and LRAS curve will shift outward/rightward.

Question 11

Which of the following is a plausible consequence of secular deflation in a growing economy?

Accepted Answer

A persistent decline in the price level resulting from rightward shifts in the LRAS curve.

Question 12

If the aggregate demand curve shifts rightward at the same pace as the LRAS curve, what is the expected effect on the price level?

Accepted Answer

The price level will remain relatively stable.

Question 13

Which of the following is most likely to cause a leftward shift in the LRAS curve?

Accepted Answer

A reduction in the productivity of labor and capital

Question 14

Which of the following best describes the interest rate effect on aggregate demand?

Accepted Answer

Higher price levels increase interest rates, which reduces borrowing and spending.

Question 15

Suppose the government increases taxes and the amount of money in circulation decreases. What is the expected effect on the aggregate demand curve?

Accepted Answer

The aggregate demand curve will shift to the left.

Question 16

Which of the following is true about the natural rate of unemployment in the context of the LRAS curve?

Accepted Answer

It consists of frictional and structural unemployment present even at full employment.

Question 17

If the price level falls, what is the expected effect on total planned spending on goods and services?

Accepted Answer

Total planned spending will increase.

Question 18

Which of the following is a non-price-level determinant that can shift the aggregate demand curve?

Accepted Answer

A change in the amount of money in circulation

Question 19

Suppose the economy is at long-run equilibrium and the LRAS curve shifts rightward due to economic growth, but aggregate demand remains unchanged. What is the most likely outcome?

Accepted Answer

The price level will fall and real GDP will increase.

Question 20

Which of the following best describes supply-side inflation?

Accepted Answer

Inflation caused by a leftward shift in the long-run aggregate supply curve.

Output Growth, Aggregate Supply, and Aggregate Demand in Macroeconomics

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