AD-AS Model Quiz

AD-AS Model and its Short-Run and Medium-Run Behavior

• The AD-AS model assumes that the stock of physical capital is fixed in the short-run.
• In the labor market, as unemployment increases, the real wage decreases according to the wage setting equation.
• In the labor market, as unemployment increases, the real wage is unchanged according to the price setting equation.
• At the natural rate of unemployment, prices and expected prices are equal.
• If prices are greater than expected prices, to restore equilibrium in the labor market, unemployment must increase.
• A shift of the aggregate supply function is caused by a change in expected prices, while a movement along the supply function is caused by a change in income or prices.
• A shift of the aggregate demand function is caused by a change in nominal money supply or taxation, while a movement along the demand function is caused by a change in expected prices.
• The short-run behavior of the AD-AS model assumes that price expectations are fixed.
• The medium-run behavior of the AD-AS model assumes that the natural rate of unemployment is fixed.
• Increasing the money supply by 10% through open market operations does not necessarily affect output, the natural rate of unemployment, or the interest rate in the short-run.
• If the government increases the minimum wage by law when the labor market equilibrium wage is already above the minimum wage, the natural level of aggregate supply would not increase.
• The reserve requirement is a factor that can shift the aggregate demand curve to the left.

AD-AS Model and its Short-Run and Medium-Run Behavior

• The AD-AS model assumes that the stock of physical capital is fixed in the short-run.
• In the labor market, as unemployment increases, the real wage decreases according to the wage setting equation.
• In the labor market, as unemployment increases, the real wage is unchanged according to the price setting equation.
• At the natural rate of unemployment, prices and expected prices are equal.
• If prices are greater than expected prices, to restore equilibrium in the labor market, unemployment must increase.
• A shift of the aggregate supply function is caused by a change in expected prices, while a movement along the supply function is caused by a change in income or prices.
• A shift of the aggregate demand function is caused by a change in nominal money supply or taxation, while a movement along the demand function is caused by a change in expected prices.
• The short-run behavior of the AD-AS model assumes that price expectations are fixed.
• The medium-run behavior of the AD-AS model assumes that the natural rate of unemployment is fixed.
• Increasing the money supply by 10% through open market operations does not necessarily affect output, the natural rate of unemployment, or the interest rate in the short-run.
• If the government increases the minimum wage by law when the labor market equilibrium wage is already above the minimum wage, the natural level of aggregate supply would not increase.
• The reserve requirement is a factor that can shift the aggregate demand curve to the left.