Question

8. According to the AD/AS model, which of the following statements is (are) correct?
(x) Suppose a stock market crash makes people feel less wealthy. The decrease in wealth would cause
people to decrease consumption, which shifts the aggregate demand curve to the left.
(y) If the government provides an investment tax credit to firms that purchase new capital, then investment
will increase and the aggregate demand curve shifts to the right.
(z) An increase in the price level causes households to purchase fewer goods. The AD/AS model illustrates
this as a shift of the aggregate demand curve to the left.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (y) only

10. According to the AD/AS model, which of the following statements about the long-run aggregate supply
(LRAS) is (are) correct?
(x) The long-run aggregate supply curve is determined by the availability of labor, capital, natural resources
and technology.
(y) The long-run aggregate supply curve is vertical and is located at the economy’s rate of output that
occurs when the rate of unemployment is at its natural level.
(z) An increase in the price level does not cause the long-run aggregate supply curve to shift and the price
increase does not cause a change in output in the long run.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (z) only

11. According to the AD/AS model, which of the following statements about the LRAS is (are) correct?
(x) An increase in the money supply will cause the long-run aggregate supply curve to shift to the right
because of the presence of monetary neutrality.
(y) A hurricane, flood or other natural disaster that reduces the availability of resources will cause the LRAS
to shift to the left.
(z) An increase in capital equipment or a technological advance that decreases production costs will cause
the LRAS to shift to the right.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

Answer 1

8. E. (y) only

(x) Suppose a stock market crash makes people feel less wealthy. The decrease in wealth would cause
people to decrease consumption, which shifts the aggregate demand curve to the left - FALSE

AD is determined by Consumption, Investment, Government Expenditure and Net exports

Wealth does not influence the increase or decrease in AD

(y) If the government provides an investment tax credit to firms that purchase new capital, then investment will increase and the aggregate demand curve shifts to the right.- TRUE

It will increase the investment part in AD which would lead to rightward shift in the curve.

(z) An increase in the price level causes households to purchase fewer goods. The AD/AS model illustrates
this as a shift of the aggregate demand curve to the left - FALSE

Shift in AD curve influences the price, change in price does not shifts the AD curve

10. A. (x), (y) and (z)

(x) The long-run aggregate supply curve is determined by the availability of labor, capital, natural resources
and technology- TRUE

These factors determine the AS curve and change in any of the factor leads to shift in the AS curve

(y) The long-run aggregate supply curve is vertical and is located at the economy’s rate of output that
occurs when the rate of unemployment is at its natural level- TRUE

When an economy is producing exactly its full employment output, the rate of unemployment is equal to the natural rate of unemployment. The LRAS curve is also vertical at the full-employment level of output because this is the amount that would be produced once prices are fully able to adjust.

(z) An increase in the price level does not cause the long-run aggregate supply curve to shift and the price increase does not cause a change in output in the long run.- TRUE

Change in factors other than price leads to shift in AS curve and through that change, output changes.

11. D. (y) and (z) only

(x) An increase in the money supply will cause the long-run aggregate supply curve to shift to the right
because of the presence of monetary neutrality- FALSE

It seems that in the short run, increases in the money supply lead to increases in output, but in the long run increases in the money supply just cause inflation.

(y) A hurricane, flood or other natural disaster that reduces the availability of resources will cause the LRAS
to shift to the left- TRUE

Decrease in resources will decrease the supply and the supply curve will shift to the left side.

z) An increase in capital equipment or a technological advance that decreases production costs will cause
the LRAS to shift to the right- TRUE

All these factors will increase the supply in the economy leading to rightward shift in the AS curve.