Question

Short-run economic fluctuations occur

		when a shock moves a short-run equilibrium not at potential output
		when potential output increases
		when potential output decreases
		prices have fully adjusted to a shock

A key feature of Keynesian economics is the prices are _______________. Therefore, if the economy goes into recession, without an policy intervention recovery will be ____________.

		sticky, slow
		flexible, fast
		stickly, quick
		flexible, slow

Economic fluctuations that cause lower production, higher unemployment and lower inflation are caused by which of the following

		short-run aggregate supply shifts to the left
		aggregate demand shifts to the right
		aggregate demand shifts to the left
		long-run aggregate supply shifts to the left

Answer 1

Q1) The answer is (a)

Short-run economic fluctuations happen when the equilibrium differs from the potential output equilibrium.

(b) and (c) are wrong as potential output does not change in the short-run

(d) is wrong as if prices fully adjust, there is no fluctuation.

Q2) The answer is (a)

In Keynesian economics, price can not be adjusted quickly and are sticky. Thus, without intervention,n, the recovery will be much slower than expected.

All other options are wrong as prices are no flexible and recovery is not quick.

Q3) The answer is (c)

If the AD shifts to right, it leads to  lower production, higher unemployment and lower inflation

(a) is wrong as inflation rises

(b) is wrong as production increases

(d) is wrong as inflation rises.