Q: Which equation best represents the relationship between real GDP ($$Y$$), potential GDP ($$Y^*$$), and the output gap?

$$\text{Output Gap} = Y - Y^*$$

Question 1

Which of the following best describes a recessionary gap in the context of the aggregate demand and aggregate supply model?

Accepted Answer

It is the gap where real GDP is less than potential GDP, indicating underutilization of resources.

Question 2

Suppose the economy is experiencing an inflationary gap. Which policy action would most directly help close this gap?

Accepted Answer

Decrease government spending or increase taxes to reduce aggregate demand.

Question 3

If the short-run aggregate supply (SRAS) curve shifts to the left due to a sudden increase in oil prices, what is the most likely immediate macroeconomic outcome?

Accepted Answer

Stagflation, characterized by rising prices and falling output.

Question 4

Which equation best represents the relationship between real GDP ($$Y$$), potential GDP ($$Y^*$$), and the output gap?

Accepted Answer

$$	ext{Output Gap} = Y - Y^*$$

Question 5

A government decides to use expansionary fiscal policy during a recessionary gap. Which of the following actions is most consistent with this policy?

Accepted Answer

Increasing government purchases or transfer payments.

Question 6

In the long run, after a supply shock that shifts SRAS to the left, what mechanism helps restore equilibrium?

Accepted Answer

Workers accept lower wages, firms decrease prices, and SRAS shifts back to the right.

Question 7

Which of the following is NOT a tool of monetary policy used to address macroeconomic gaps?

Accepted Answer

Changing government purchases.

Question 8

If firms and workers expect higher future prices after an increase in aggregate demand, what is the likely effect on the SRAS curve?

Accepted Answer

SRAS shifts to the left, raising prices.

Question 9

Which of the following best describes the 'no intervention' policy response to a macroeconomic gap?

Accepted Answer

The government takes no action and allows the economy to adjust naturally over time.

Question 10

Suppose the economy is in a recessionary gap. Which of the following would shift the aggregate demand curve to the right?

Accepted Answer

An increase in government purchases.

Question 11

Which of the following scenarios would most likely result in an inflationary gap?

Accepted Answer

A rapid increase in consumer spending due to rising incomes.

Question 12

If the government implements contractionary fiscal policy, what is the expected effect on real GDP and the price level?

Accepted Answer

Real GDP decreases and the price level falls.

Question 13

Which of the following is a direct effect of a positive supply shock (SRAS shifts right) in the short run?

Accepted Answer

Lower prices and higher output.

Question 14

Consider the equation for aggregate demand: $$AD = C + I + G + (X - M). If $$the government increases $$G ($$government purchases), what is the expected effect on aggregate demand?

Accepted Answer

Aggregate demand increases.

Question 15

After a supply shock, why might it take several years for the economy to return to full employment without policy intervention?

Accepted Answer

Because expectations and contracts adjust slowly, delaying the SRAS shift back to the right.

Question 16

Which of the following would shift the long-run aggregate supply (LRAS) curve to the right?

Accepted Answer

An increase in productive technology.

Question 17

If the central bank wants to use monetary policy to close a recessionary gap, which action should it take?

Accepted Answer

Decrease interest rates to stimulate investment and consumption.

Question 18

Which of the following best explains why an increase in aggregate demand can lead to higher wages in the short run?

Accepted Answer

Higher demand for goods reduces unemployment, increasing competition for workers and raising wages.

Question 19

Suppose the economy is at long-run equilibrium. If aggregate demand suddenly increases, what is the sequence of events that restores long-run equilibrium?

Accepted Answer

AD shifts right, output rises above potential, SRAS shifts left as wages and prices rise, restoring equilibrium at a higher price level.

Macroeconomic Equilibrium: Recessionary and Inflationary Gaps (Chapter 13 Study Notes)

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