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Chapter 11 Classical and Keynesian Macro Analyses 399
22) According to the above figure, what will the price level be in the new long run equilibrium?
A) 115 B) 110 C) 100 D) Less than 100
23) What is the shape of the modern short run aggregate supply (SRAS) curve? Why?
24) Compare the effects of an increase in aggregate demand when the price level is fixed versus
when it can change.
25) Suppose the economy in the diagram below is in long run equilibrium. If government spending
decreases and causes a movement from point A to point B in the diagram below, what are the
short run effects? Explain fully.
Answer:
11.4 Shifts in the Aggregate Supply Curve
1) Economic growth due to labor force expansion or capital investments will result in
I. A leftward shift of short run aggregate supply.
II. A rightward shift in long run aggregate supply.
A) I only B) II only C) Both I and II D) Neither I nor II
2) Which of the following will cause an increase in aggregate supply?
A) Decreased competition B) An increase in the price level
C) An increase in marginal tax rates D) A decrease in input prices
3) Refer to the above figure. Assume that B is the current long run aggregate supply (LRAS) curve
and that E is the current short run aggregate supply (SRAS) curve. If a new discovery of large
oil fields in Florida led to an increase in the nation s productive capacities, then we could expect
the LRAS curve and the SRAS curve to
A) remain B and E. B) move to A and D.
C) move to C and F. D) move to A and F.
4) Refer to the above figure. Assume that B is the current long run aggregate supply (LRAS) curve
and E is the current short run aggregate supply (SRAS) curve. If a 90 day embargo of oil from
the Middle East to the United States were announced, and if after that 90 day period oil prices
were expected to return to normal pre embargo prices, then you would expect
A) the LRAS and the SRAS to remain at B and E, respectively.
B) the LRAS to remain at B, but the SRAS to shift to D.
C) the LRAS to remain at B, but the SRAS to shift to F.
D) the LRAS to shift to C, and the SRAS to shift to F.
5) Which of the following is NOT an event that causes BOTH the short run aggregate supply
(SRAS) curve and the long run aggregate supply (LRAS) curve to shift?
A) A change in an economy s endowments of the factors of production
B) Technological changes
C) A change in an economy s labor supply
D) A temporary change in the price of a key input
6) Which of the following will NOT shift the short run aggregate supply (SRAS) curve?
A) A change in the wage rate
B) Technological progress
C) A reduction in the price of a raw material
D) A change in the price level
7) All of the following will shift the short run aggregate supply (SRAS) curve EXCEPT
A) a change in the price level.
B) a change in the price of labor.
C) a change in the price of a needed raw material.
D) technological progress.
8) As real GDP per year increases along the short run aggregate supply (SRAS) curve, the SRAS
curve
A)
b
ecomes increasingly steep. B)
b
egins to level out.
C) shifts inward. D) does not change.
9) Both the long run and short run aggregate supply curves will shift when
A) the government increases defense spending.
B) an event occurs which is expected to last only a short period of time.
C) they are both upward sloping.
D) the endowments of the factors of production change.
10) Which of the following would increase aggregate supply?
A) increased training and education B) a reduction in input prices
C) a discovery of new raw materials D) all of the above
11) The discovery of new iron ore fields will cause
A) the long run aggregate supply curve to shift to the right and the short run aggregate
supply curve to shift to the left.
B) the long run aggregate supply curve to shift to the right, but not the short run aggregate
supply.
C) the short run aggregate supply curve to shift to the right, but not the long run aggregate
supply curve.
D)
b
oth the long run and the short run aggregate supply curves to shift to the right.
12) A major hurricane causes production problems in Gulf Coast region of the United States. This
would cause
A) the short run aggregate supply curve to shift to the left, but there would be no effect on
the long run aggregate supply curve.
B) the short run aggregate supply curve to shift to the left, and the long run aggregate
supply curve would shift to the right.
C)
b
oth the short run and the long run aggregate supply curves to shift to the right in equal
amounts.
D)
b
oth the short run and the long run aggregate supply curves to shift to the left, but the
long run aggregate supply curve would shift more than the short run curve.
13) The short run aggregate supply curve would shift and the long run aggregate supply curve
would remain fixed if
A) there was a temporary shock to aggregate demand.
B) there was a temporary shock that influenced the supply side.
C) there was a permanent increase in aggregate demand along with a permanent decrease in
aggregate supply.
D) there was a permanent increase in aggregate demand.
14) The short run aggregate supply curve would shift and the long run aggregate supply curve
would remain fixed if
A) transportation workers went on strike for a month.
B) there was an increase in immigration.
C) the retirement age increased by two years.
D) tough new environmental laws were passed.
15) A reduction in nominal wages will cause which of the following?
A) a movement along the short run aggregate supply curve
B) a shift of both the short run and long run aggregate supply curves
C) a rightward shift in the short run aggregate supply curve
D) a leftward shift in the short run aggregate supply curve to shift to the left
16) A permanent reduction in international trade barriers would
A) decrease long run aggregate supply. B) increase long run aggregate supply.
C) decrease aggregate demand. D) increase aggregate demand.
17) A short lived increase in oil prices caused by destruction of oil producing and oil refining
facilities by a large hurricane will
A) shift the SRAS curve to the right. B) shift the LRAS curve to the right.
C) shift the SRAS curve to the left. D) shift the AD curve to the right.
18) If there is a change in the U.S. endowment of factors of production, then there would be
A) a shift in just LRAS. B) a shift in both LRAS and SRAS.
C) shifts in just SRAS. D) a movement along the SRAS curve.
19) All items below will decrease short run aggregate supply EXCEPT
A) a decrease in the marginal tax rates. B) an increase in the prices of inputs.
C) a decrease in training and education. D) a decrease in labor supply.
20) Which of the following decreases aggregate supply?
A) discoveries of new raw materials B) an increase in competition
C) an increase in training and education D) a decrease in labor supply
21) A temporary embargo on oil from the Middle East going in to the United States would
A) shift both the short run and long run aggregate supply curves to the left.
B) shift only the long run aggregate supply curve to the left.
C) shift the long run aggregate supply curve to the right.
D) shift only the short run aggregate supply curve to the left.
22) A new discovery of large volumes of previously unknown deposits of natural gas in
Pennsylvania would
A) shift the short run and long run aggregate supply curves to the right.
B) shift only the short run aggregate supply curve to the right.
C) shift only the long run aggregate supply curve to the right.
D) not affect either the short run or long run aggregate supply curves.
23) Consider a nation in which most workers are unionized. If all the nation s unions band together
and succeed in boosting wages established by long term labor contracts, then
A) there is a leftward shift in just LRAS.
B) there is a leftward shift in both LRAS and SRAS.
C) there is a rightward shift in just SRAS.
D) there is a rightward movement along the SRAS curve.
24) All of the following will cause the aggregate supply curve to shift to the right EXCEPT
A) discoveries of raw materials.
B) a reduction in input prices.
C) an increase in marginal tax rates.
D) a reduction in international trade barriers.
25) A temporary increase in the price of oil would
A) increase both short run and long run aggregate supply.
B) increase short run aggregate supply and decrease long run aggregate supply.
C) decrease short run aggregate supply and leave long run aggregate supply unchanged.
D) decrease both short run and long run aggregate supply.
1) Refer to the above figure. An increase in aggregate demand between real Gross Domestic
Product (GDP) levels Y0and Y1
A) would most likely result in some inflation.
B) would not increase output since the economy is already working at full capacity.
C) would have no effect on the price level.
D) would cause price levels to fall.
2) Refer to the above figure. An increase in aggregate demand beyond real Gross Domestic
Product (GDP) level Y1would result in
A) higher real GDP but not a higher price level.
B) a lower price level but no change in real GDP.
C) a higher price level but no change in real GDP.
D) a lower price level and an increases in real GDP.
3) The gap that exists when equilibrium real Gross Domestic Product (GDP) is greater than full
employment real Gross Domestic Product (GDP) is called a(n)
A) employment gap. B) inflationary gap.
C) recessionary gap. D) demand gap.
4) Economic growth will NOT result in deflation if aggregate demand shifts
A) outward to the right at the same speed as aggregate supply.
B) inward to the left at the same speed as aggregate supply.
C) outward to the right as aggregate supply shifts inward to the left.
D) inward to the left as aggregate supply shifts outward to the right.
5) An unexpected event that causes the aggregate demand curve to shift inward or outward is an
A) aggregate demand shock. B) aggregate supply shock.
C) aggregate supply increase. D) aggregate supply decrease.
6) If the economy is near full capacity, the effect of a negative aggregate demand shock is to
A) increase the level of aggregate demand.
B) cause the price level to fall.
C) increase the firm s cost of producing at every level of output.
D) increase the level of employment.
7) One possible result of a fall in aggregate demand coupled with a stable short run aggregate
supply is
A) a recession. B) an increase in employment levels.
C) an economic expansion. D) a rise in the stock market.
8) If equilibrium level of real Gross Domestic Product (GDP) is less than the full employment real
Gross Domestic Product (GDP) consistent with the position of the economy s long run
aggregate supply (LRAS) curve, then the difference between full employment real Gross
Domestic Product (GDP) and current equilibrium real Gross Domestic Product (GDP) is
A) an aggregate demand shock. B) an aggregate supply shock.
C) a recessionary gap. D) an inflationary gap.
9) In the above figure, the inflationary gap can correctly be identified as
A) the difference between 125 and 120.
B) the difference between 12.2 trillion and 12 trillion.
C) LRAS minus SRAS.
D) AD1.
10) In the above figure, an increase in aggregate demand has resulted in
A) a decline in the price level. B) economic growth.
C) an inflationary gap. D) a recessionary gap.
11) The reason that it is possible for the economy in the above figure to be at E 2rather than at E1is
that
A) in the long run there is always less than full employment.
B) in the short run the economy can produce more than it can in a long run full adjustment
situation.
C) AD always shifts outward and never shifts inward.
D) the economy must be in a recession.
12) In the above figure, the economy would most likely move from AD1to AD2because of
A) an aggregate supply shock. B) an aggregate demand shock.
C) a recession. D) a depression.
13) A short run equilibrium occurs
A) at the intersection of the long run aggregate supply curve and the aggregate demand
curve.
B) at the intersection of the short run aggregate supply curve and the long run aggregate
supply curve.
C) at the intersection of the short run aggregate supply curve and the aggregate demand
curve.
D) at the real GDP associated with full employment.
14) Assume equilibrium real GDP per year is equal to full employment real GDP. Which of the
following will cause a recessionary gap?
A) an increase in aggregate demand B) a reduction in aggregate demand
C) a discovery of a new raw material D) a temporary reduction in the price of oil
15) In the Keynesian model, an aggregate demand shock
A) will cause the aggregate demand curve to shift, leading to a change in the price level and
real GDP.
B) will cause the aggregate demand curve to shift, leading to a change in the price level but
not real GDP.
C) will cause the aggregate demand curve to shift, leading to a change in real GDP but not the
price level.
D) will not lead to a shift of the aggregate demand curve.
16) The three curves in the above figure are
A) (1) the long run aggregate supply curve, (2) the aggregate demand curve, and (3) the
short run aggregate supply curve.
B) (1) the long run aggregate supply curve, (2) the short run aggregate supply curve, and (3)
the aggregate demand curve.
C) (1) the short run aggregate supply curve, (2) the aggregate demand curve, and (3) the
long run aggregate supply curve.
D) (1) the aggregate supply curve, (2) the short run aggregate demand curve, and (3) the
long run aggregate demand curve.
17) Refer to the above figure. Which point or points represent(s) a short run equilibrium?
A) A only B) B only C) C only D)
b
oth A and B
18) Refer to the above figure. Which point or points represent(s) a long run equilibrium?
A) A only B) B only C) C only D)
b
oth A and B
19) Refer to the above figure. At the initial long run equilibrium, the price level is ________, and at
the new long run equilibrium, the price level will be ________.
A) 20; 45 B) 20; 40 C) 40; 45 D) 20; 20
20) Refer to the above figure. Suppose the original long run equilibrium was at point B. What could
have caused the move to the current equilibrium?
A) Decreases in the price level caused short run aggregate supply to fall.
B) Input prices must have increased, causing long run aggregate supply to increase.
C) Aggregate demand must have decreased.
D) A temporary reduction in production due to bad weather.
21) Suppose the current situation is such that the price level is 120, real GDP is $14 trillion, and
long run aggregate supply is $13.6 trillion. We can conclude that
A) the price level will fall until long run aggregate supply shifts to $14 trillion.
B) the price level will fall and input prices will rise until real GDP pulls long run aggregate
supply up to $14 trillion.
C) input prices will rise until real GDP is $13.6 trillion.
D) aggregate demand will increase until both short run and long run aggregate supply equal
$14 trillion.
22) Holding the level of prices fixed implies that a given increase in aggregate demand
A) will have a smaller effect on real GDP than would be the case if prices were more flexible.
B) will have a larger effect on real GDP than would be the case if prices were more flexible.
C) has the same effect on real GDP as when prices are more flexible.
D) has a smaller effect on nominal GDP than when prices are more flexible.
23) Suppose we observe rising nominal GDP, a rising price level, and constant unemployment as a
result of an increase in aggregate demand. We would conclude that the aggregate supply curve
is
A) upward sloping. B) downward sloping.
C) vertical. D) horizontal.
24) If aggregate demand and nominal GDP increase while the price level is constant, we would
conclude that
A) the economy is already at full employment.
B) the aggregate supply curve is upward sloping.
C) the aggregate supply curve is horizontal.
D) the aggregate demand curve is vertical.
25) If we observe an increase in real GDP and an increase in the price level after an increase in
aggregate demand, we can conclude that
A) the aggregate supply curve is upward sloping.
B) the aggregate supply curve is horizontal.
C) the aggregate supply curve is vertical.
D) the economy is now at full employment.
26) A change in tastes for U.S. produced goods will
A) shift both the aggregate demand curve and the long run aggregate supply curve.
B) shift the aggregate demand curve.
C) shift the short run aggregate supply curve.
D) shift the long run aggregate supply curve.
27) Assume equilibrium real GDP per year is equal to full employment real GDP. If aggregate
demand falls, then
A) the price level will increase in the short run and decrease in the long run.
B) there will be an expansionary gap.
C) there will be a recessionary gap.
D) long run aggregate supply will eventually decrease too.
28) The short run and long run aggregate supply curves remain stable, and a decrease in aggregate
demand occurs. What is the result in the short run?
A) An increase in the price level and real GDP will occur.
B) A period of expansion and a rise in the unemployment rate could occur.
C) A period of recession and a rise in the unemployment rate could occur.
D) The price level will fall but real GDP will remain the same.
29) An inflationary gap occurs when
A) aggregate demand falls, but other things remain constant.
B) short run aggregate supply falls, but other things remain constant.
C) the short run equilibrium level of real GDP is greater than long run aggregate supply.
D) the short run equilibrium level of real GDP is less than long run aggregate supply.
30) The gap that exists when equilibrium real GDP is less than full employment real GDP is
A) the short run aggregate supply curve. B) money illusion.
C) a recessionary gap. D) an inflationary gap.
31) The gap that exists when equilibrium real GDP is greater than the level of real GDP shown by
the position of the long run aggregate supply curve is
A) the short run aggregate supply curve. B) money illusion.
C) a recessionary gap. D) an inflationary gap.
32) Refer to the above figure. Suppose the economy had been at point A and now is at B. What
could have caused the movement to B?
A) Unusually good weather causes the wheat crop to be larger than normal.
B) Government spending increased causing aggregate demand to increase.
C) Winter storms cause factories in the north to be shut down for several weeks.
D) Both the labor force and the population increased.
33) A recessionary gap occurs when
A) aggregate demand falls, but other things remain constant.
B) short run aggregate supply falls, but other things remain constant.
C) the short run equilibrium level of real GDP is greater than the level consistent with the
long run aggregate supply curve.
D) the short run equilibrium level of real GDP is less than the level consistent with the
long run aggregate supply curve.
34) An example of an aggregate supply shock is
A) inflation caused by a surge in demand.
B) the cutoff of oil by the OPEC nations in the early 1970s.
C) the increase in the labor force due to the baby
b
oomer generation reaching working age.
D) the increase in candy sales every February.
35) A recessionary gap is the amount by which
A) total planned real expenditures exceed total planned production in the long run.
B) the short run equilibrium level nominal GDP is above the short run real GDP.
C) the short run equilibrium level nominal GDP is below the short run real GDP.
D) the short run equilibrium level of real GDP is below the full employment level of real
GDP.
36) An inflationary gap is the amount by which
A) total planned production exceeds total planned real expenditures in the long run.
B) the short run equilibrium level of nominal GDP is above the short run level of real GDP.
C) the short run equilibrium level of nominal GDP is below the short run level of real GDP.
D) the short run equilibrium level of real GDP is above the full employment level of real
GDP.
