Question 1

Which of the following best explains why the aggregate supply curve slopes upward in the short run?

Accepted Answer

Because as the price level rises, some input costs are fixed by contract, so profits increase and firms supply more.

Question 2

Suppose the nominal wage rate increases across the economy. What is the most likely effect on the aggregate supply curve?

Accepted Answer

The aggregate supply curve shifts inward (to the left).

Question 3

Which of the following factors would NOT cause the aggregate supply curve to shift?

Accepted Answer

A change in consumer preferences for goods.

Question 4

At the equilibrium point in the aggregate demand and supply model, which condition must be true?

Accepted Answer

Aggregate quantity demanded equals aggregate quantity supplied.

Question 5

If the price level is above equilibrium, what will happen in the market for real GDP?

Accepted Answer

Aggregate supply will exceed aggregate demand, causing prices to fall.

Question 6

Inflation reduces the size of the multiplier in the macroeconomic model because:

Accepted Answer

It erodes the purchasing power of consumer wealth and reduces net exports.

Question 7

Which equation best represents the equilibrium condition in the aggregate demand and supply model?

Accepted Answer

$AD = AS$

Question 8

A recessionary gap is defined as:

Accepted Answer

The amount by which equilibrium real GDP falls short of potential GDP.

Question 9

Which of the following is most likely to occur if the economy is experiencing a persistent recessionary gap?

Accepted Answer

Nominal wages may fall, shifting aggregate supply right.

Question 10

Why might nominal wages and prices not fall easily during a recessionary gap?

Accepted Answer

Because of institutional factors, psychological resistance, and less severe business cycles.

Question 11

Stagflation is best described as:

Accepted Answer

Inflation that occurs while the economy is growing slowly or having a recession.

Question 12

Which real-world event is an example of a negative supply shock leading to stagflation?

Accepted Answer

The OPEC oil embargo of 1973.

Question 13

If both aggregate demand and aggregate supply shift right over time, what is the most likely outcome in the real world?

Accepted Answer

Both the price level and real GDP rise over time.

Question 14

Which of the following would cause the aggregate supply curve to shift outward (to the right)?

Accepted Answer

An improvement in technology and productivity.

Question 15

Suppose aggregate demand increases rapidly while aggregate supply grows slowly. What is the most likely macroeconomic outcome?

Accepted Answer

Slower real GDP growth and higher inflation.

Question 16

Which of the following best describes the self-correcting mechanism in the macroeconomic model?

Accepted Answer

The tendency of the economy to eliminate either a recessionary or inflationary gap through changes in money wages that shift aggregate supply.

Question 17

Which of the following equations represents the effect of a supply shock on real output and price level?

Accepted Answer

$AS_1 \rightarrow AS_2$; Real output decreases, price level increases

Question 18

Which policy is most likely to be used by the government to stabilize the economy after a negative supply shock?

Accepted Answer

Fiscal policy to increase government spending.

Question 19

If the aggregate supply curve is upward sloping, what happens when aggregate demand increases?

Accepted Answer

The price level rises and some of the increase in real demand is eroded.

Question 20

Which of the following is a plausible reason why the self-correcting mechanism may not always work quickly in the real world?

Accepted Answer

Institutional factors and psychological resistance to wage reductions slow the adjustment process.

Chapter 10: Bringing in the Supply Side – Aggregate Supply, Unemployment, and Inflation

Study Guide - Practice Questions