Question

1. What is a key difference between AE and AD/AS models?

A. it's clear where Potential GDP exsists in the AE model, but not in the AD/AS model

B. the multiplier equations only apply within the AD/AS model not the AE model

C. a shift in AD or AS cause the price level in the AD/AS model to change, but changes in the price level within the AE model cause AE to shift

D. the economy will always produce at Potential GDP in the AD/AS model, but not always within the AE model

E. all of the above

2. Which of the following leads to an increase (shift right) in the Aggregate Demand curve?

A. increase in expenditure on capital

B. decrease in the price level

C. increase in expenditure on imports

D. all of the above

3. Which statement about the AD/AS model is MOST accurate:

A. changes in nominal GDP occur within the context of a fixed price level

B. at least some segments of the AD curve have a positive slope

C. the AS curve is flatter at lower levels of GDP and increasingly steeper as the economy approches Potential GDP

D. the AS curve is always vertical at Potential GDP

E. none of thr above are correct

4. Which os the following situations lead to involuntary unemployment in a labor market:

A. when a decrease in the demand for labor is not accompanied by falling wages

B. when a decrease in the demand for labor causes the equilibrium wage to decrease

C. when the price level decreases and firms experience negative profit

D. where there is an increase in the demand for imports

E. all of the above

Answer 1

1.Option C

Aggregate expenditure is defined as the current value of all the finished goods and services in the economy. The aggregate expenditure is thus the sum total of all the expenditures undertaken in the economy by the factors during a given time period.

The AD–AS or aggregate demand–aggregate supply model is a macroeconomic model that explains price level and output through the relationship of aggregate demand and aggregate supply.

2.Option C

AD=C+I+G+X−M

Increasing any of these components shifts the AD curve to the right, leading to a greater real GDP and to upward pressure on the price level. Decreasing any of the components shifts the AD curve to the left, leading to a lower real GDP and a lower price level.at every negative number in M term has a corresponding positive number in the C, I, G, term, and they always cancel out.

3.Option D

A vertical LRAS curve means that the level of aggregate supply (or potential GDP) will determine the real GDP of the economy, regardless of the level of aggregate demand. More precisely, given flexible prices, whatever the position of the AD curve, prices will adjust so that AD = AS at potential GDP.

4.Option E

During a recession, the rate of cyclical or involuntary unemployment is high, due to the decline in consumer demand for goods and services. In other words, there is a decrease in production – therefore, fewer workers are needed, resulting in job layoffs. When international prices are comparatively less than the domestic prices, then it may lead to a rise in imports, implying a cut in the aggregate demand. Involuntary unemployment is a situation where workers are willing to work at the market wage or just below but are prevented by factors beyond their control. These factors could include deficiency of aggregate demand, labour market inflexibilities, implicit wage bargaining and efficiency wage theory..