Question

Which of the following indexes is reflecting more clearly price level and inflation trend:

A)  The Core Inflation Rate, or Personal Consumption Expenditure (PCE) price index excluding food & energy

B) GDP deflator which is average of the current prices of all goods & services in GDP expressed as percentage of base year prices

C) Consumer Price Index (CPI) - a measure of the average of prices paid by urban consumers for a fixed market basket of consumer goods and services

D) Real income, which is the purchasing power of nominal income measured by quantity of goods and services nominal income will buy

The changes in Aggregate Supply (AS shifters) resulted from:

A)  Changes in consumer spending, business investment, government expenditures and net export

B) Changes in input prices, productivity, nominal wages and legal-institutional environment

C) Changes in prices of goods and services produced

D)  Business failure, temporary shotdowns and changes in output rate

. The effects of a negative demand shock are:

A) The Aggregate Demand curve shifts leftward with a reduction in price level and in the output that is below the potential GDP and is called recessionary gap

B)  Aggregate demand curve shifts rightward with higher prices and bigger output above the potential GDP called inflationary gap

C) Decrease in Aggregate Supply, higher prices and and lower output which generates stagflation (negative supply shock)

D) Increase in Aggregate Supply with lower prices and bigger output, called positive supply shock

To restore the macroeconomic equilibrium with full-employment the supply side theories emphasized:

A)  The control of money and interest rates as mechanisms for shifting Aggregate demand

B) The role of government spending and taxes

C) The importance to control both Aggregate Demand and Aggregate Supply by shifting both curves

D) The importance to shift Aggregate Supply by changing costs of resources, government taxes and regulation

Answer 1

Q1) The answer is (c)  Consumer Price Index (CPI) - a measure of the average of prices paid by urban consumers for a fixed market basket of consumer goods and services

The CPI is the most commonly used measure to gauge in inflation in most of the countries presented as it measures the prices of a regularly used fixed basket of goods over the years.

All other options are incorrect as they are not reflecting the inflation trend as clearly as the CPI does.

Q2) The answer is (b) Changes in input prices, productivity, nominal wages and legal-institutional environment as all of these changes leads to a change in supply at the existing price.

(a) is false as these are demand shfters

(c) is false as it causes a movement along the supply curve, not shift

(d) is false as it is an impact of change in supply

Q3) The answer is (A)  The Aggregate Demand curve shifts leftward with a reduction in price level and in the output that is below the potential GDP and is called recessionary gap as this is precisely the meaning of the negative demand shock.

(b) is wrong as aggregate demand will shift tot he right

(c) and (d) are wrong as demand shocks will not shift the AS curve

Q4) The answer is (d) The importance to shift Aggregate Supply by changing costs of resources, government taxes and regulation as this helps in increasing potential output, in line with the supply side theory

All other options are wrong as they are not policy choices of the supply side theory