Question

12. According to the AD/AS model, which of the following statements is (are) correct?
(x) Changes in the money supply will not shift the long-run aggregate supply curve because the availability of resources does not change as the money supply changes if monetary neutrality is present.
(y) The verticality of the long-run aggregate supply curve suggests that in the long run, the economy will always return to the level of output that occurs when the rate of unemployment is at its natural level.
(z) An increase in the availability of resources would cause the long-run aggregate supply curve to shift to the right. As a result of that supply curve shift, the price level will fall and real output will increase if aggregate demand is unchanged.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only
13. According to the AD/AS model, which of the following statements is (are) correct?
(x) The sticky-wage theory of the short-run aggregate supply curve says that wages tend to be sticky because of contracts, social norms, and notions of fairness.
(y) The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected production is more profitable and employment rises.
(z) Sticky nominal wages can result in higher profits for firms when the price is lower than expected because the real wage falls when output prices fall.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) only

15. According to the AD/AS model, which of the following statements is (are) correct?
(x) Ceteris paribus, a decrease in the price of a major input would cause production costs to fall and the short-run aggregate supply curve would shift to the left.
(y) An increase in demand would cause movement along the SRAS since the increased demand would cause the price level to rise.
(z) When production costs rise for the economy as a whole, the short-run aggregate supply curve shifts to the left.
A. (x), (y) and (z)
B. (x) and (y) only
C. (x) and (z) only
D. (y) and (z) only
E. (z) on

Answer 1

12. (x) Change in money supply will not shift the long run aggregate suppy curve because the availability of resources does not change as money supply changes if money neutrality is present.

This statement is correct.

According to the theory of money neutrality, money is 'neutral' and does not affect any real variables.

Suppose money supply increases which leads to a rise in the aggregate demand. As such, the price level rises which leads to a decline in the real wage rate (W/P), keeping money wage rate (W) constant. At this declined real wage rate, labor demand exceeds labor supply. Now, according to the Classical theory, this will cause the money wage rate to rise in equal proportion to the rise in price level such that the real wage rate is restored to the original equilibrium level with original equilibrium level of employment and output.

(y) The verticality of the long run aggregate supply curve suggests that in the long run, the economy will always return to the level of output that occurs when the rate of employment is at its natural level.

This statement is correct.

The vertical long run aggregate supply curve depicts that output level is not affected by the change in price level. This works on the assumption of flexible money wage rate such that with any change in price level, the money wage rate adjusts to maintain the real wage rate, employment , and output at the natural level.  

(z) An increase in the availability of resources would cause the long run aggregate supply curve to shift to the right. As a result of that supply curve shift, the price will fall and real output will increase if aggregate demand is unchanged.

This statement is correct.

With the rightward shift of the long run aggregate supply curve due to increase in the availability of resources, keeping aggregate demand unchanged, the price level will fall whereas the real output will rise.

Hence, the correct option is A.