Q: Which of the following equations correctly represents the output gap?

$$\text{Output Gap} = \text{Real GDP} - \text{Potential GDP}$$

Question 1

Which of the following best explains why the long-run aggregate supply (LAS) curve is vertical?

Accepted Answer

Because in the long run, output is determined by potential GDP, which is independent of the price level.

Question 2

Suppose the economy is initially at full employment. If there is a sudden increase in the price of oil, which of the following is most likely to occur in the short run?

Accepted Answer

The short-run aggregate supply (SAS) curve shifts to the left, decreasing output and increasing prices.

Question 3

Which of the following factors would shift both the long-run aggregate supply (LAS) and the short-run aggregate supply (SAS) curves to the right?

Accepted Answer

An increase in the quantity of capital.

Question 4

Why is the short-run aggregate supply (SAS) curve upward-sloping?

Accepted Answer

Because as the price level rises, firms are willing to produce more due to sticky wages and input prices.

Question 5

Which of the following would cause a movement along the aggregate demand (AD) curve, rather than a shift of the curve?

Accepted Answer

A change in the price level.

Question 6

If the economy is experiencing an inflationary gap, which of the following is true?

Accepted Answer

Real GDP is greater than potential GDP.

Question 7

Suppose aggregate demand increases due to a rise in consumer confidence. In the short run, what is the likely effect on output and the price level?

Accepted Answer

Both output and the price level increase.

Question 8

Which of the following best describes stagflation?

Accepted Answer

A period of rising inflation and rising unemployment.

Question 9

According to the classical macroeconomic school of thought, what is the effect of an increase in aggregate demand in the long run?

Accepted Answer

It increases the price level but leaves output unchanged.

Question 10

Which of the following equations correctly represents the output gap?

Accepted Answer

$$	ext{Output Gap} = 	ext{Real GDP} - 	ext{Potential GDP}$$

Question 11

Which of the following would shift only the short-run aggregate supply (SAS) curve, but not the long-run aggregate supply (LAS) curve?

Accepted Answer

A temporary increase in the money wage rate.

Question 12

Which of the following is NOT one of the four main factors that determine aggregate demand (AD)?

Accepted Answer

The price of oil.

Question 13

If the economy is in a below full-employment equilibrium, which of the following is most likely true?

Accepted Answer

There is a recessionary gap.

Question 14

A Keynesian macroeconomist would most likely argue that:

Accepted Answer

Aggregate demand can have a lasting effect on output and employment.

Question 15

Which of the following scenarios best illustrates a shift to the right in the aggregate demand (AD) curve?

Accepted Answer

An increase in government spending.

Question 16

Suppose the economy is at long-run equilibrium. If aggregate demand suddenly falls, what is the immediate short-run effect?

Accepted Answer

The price level falls and output falls below potential GDP.

Question 17

Which of the following best describes the monetarist view of the effects of aggregate demand and aggregate supply?

Accepted Answer

Aggregate demand affects only prices in the long run, but can affect output in the short run.

Question 18

If the money wage rate increases, what is the likely effect on the short-run aggregate supply (SAS) curve?

Accepted Answer

The SAS curve shifts to the left.

Question 19

Which of the following is a reason why the aggregate demand (AD) curve is downward-sloping?

Accepted Answer

As the price level rises, the real value of money balances falls, reducing consumption and investment.

Question 20

A multi-step problem: Suppose the economy is initially at full employment. There is a negative supply shock (such as a natural disaster) that reduces potential GDP. At the same time, the central bank increases the money supply. What is the likely effect on the price level and real GDP in the short run?

Accepted Answer

The price level rises and real GDP falls.

Ch. 10: Aggregate Supply and Aggregate Demand: Core Concepts and Applications

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