Question

Question 1

Which of the following functions is unaffected by the price level?

1. Aggregate Demand
2. Short-Run Aggregate Supply
3. Long-Run Aggregate Supply
4. None of the above

Question 2

Below is a list of various changes in the economy. All else held constant, please match each change with the corresponding effect in the Aggregate Demand/Supply framework.

i. A decline in the Short-run aggregate supply        a. An increase in the quantity of economic resources.

ii. A rise in the Long-run Aggregate Supply            b. A rise in consumer confidence.

iii. A decline in the Aggregate Demand                   c. A rise in the input costs.

iv. A rise in the Aggregate Demand                        d. An economic recession in the economies of our trading partner nations

Question 3

A demand driven recession causes the price level to decrease.

1. True
2. False

Question 4

Which of the following will cause the AD to decrease?

1. A rise in consumer confidence
2. A rise in business confidence
3. A decline in government spending
4. An increase in exports

Question 5

If we assume that the supply of oil gets interrupted and as a result the price of oil doubles, what would that do in the short-run?

1. The short-run aggregate supply function will decrease, causing the economy to experience a reduction in the level of output and a rise in the price level.
2. The aggregate demand will decrease, causing the economy to experience a rise in the price level and a decline in the level of output.
3. The long-run aggregate supply will increase, causing the price level to decrease and the output level to increase.
4. The aggregate demand will increase, causing the price level to increase and the output level to decrease.

Answer 1

Question 1

Price level Aggregate Demand and short-run aggregate supply as an increase in the price decrease the aggregate demand and increase the aggregate supply of goods and services.

However, the long-run supply curve is vertical and does not depend upon the price level. So, option c. is correct

Question 2

i. A decline in the short run aggregate supply is due to rise in the input costs. Increase in input cost increases the cost of production and restricts the supply of output in the economy. So, i. is matched with c.

ii. a rise in the LR aggregate supply curve will shift the curve to the right. As a result, the real GDP will increase and will lead to increase in the quantity of economic resources. So, ii is matched with a.

iii. a decline in the aggregate leads to a leftward shift in the AD curve. Both price and output level decreases and the economy will experience a recession. So, iii is matched with d.

iv. A rise in consumer confidence boosts the aggregate demand and investment level in the economy. So, iv. is matched with b.

Question 3

TRUE

A demand-driven recession causes the Aggregate Demand curve to shift left. Compared to the original long run equilibrium, now the economy is trapped into a recessionary gap with lower price and lower real GDP.

Question 4

a. A rise in consumer confidence increases the Aggregate Demand. So, this option is incorrect

b. A rise in business confidence will induce the investor to invest more money into the economy. This will result in higher aggregate demand. So, this option is also incorrect

c. AD = C + I + G + (X - M)

where C = consumption

I = investment

G = Government spending

X-M = Exports - Imports = Net Exports

A decline in government spending will decrease G and therefore cause AD to decreases. So, option c is correct

d.

An increase in exports will increase X and therefore increase AD. So, this option is incorrect

Question 5

The restricted supply of oil will shift the AS curve to the left. As a result, the price level in the economy will increase and the output level will fall. So, option 1. is correct.

The restricted supply will not affect AD curve and the LRAS curve. So, option 2,3,4 are incorrect

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