Aggregate Supply and Demand Quiz
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Questions and Answers

What condition must be met for long run macroeconomic equilibrium to occur?

  • Real GDP demanded is greater than Real GDP supplied
  • AD curve is below the LAS curve
  • Real GDP demanded equals Real GDP supplied (correct)
  • The price level is increasing indefinitely

    • At what point does long run macroeconomic equilibrium occur on a graph?

  • At the intersection of the AD and SRAS curves
  • At the highest point on the LAS curve
  • At the intersection of the AD and LAS curves (correct)
  • Where the AD curve shifts to the right

    • Which of the following statements is true regarding the LAS curve?

  • It fluctuates based on demand shifts
  • It remains vertical in the long run (correct)
  • It is downward sloping
  • It represents short-term equilibrium

    • Which scenario indicates a deviation from long run macroeconomic equilibrium?

    <p>Real GDP demanded exceeds Real GDP supplied</p> Signup and view all the answers

    What can cause a shift in the Aggregate Demand (AD) curve leading to a new long run equilibrium?

    <p>Changes in consumer confidence</p> Signup and view all the answers

    What is the primary focus of Real GDP when comparing production levels over time?

    <p>It indicates the amount of goods produced without price influence.</p> Signup and view all the answers

    Which factor does NOT directly influence Long Run Aggregate Supply?

    <p>Current market prices of goods.</p> Signup and view all the answers

    How does the quantity of Real GDP supplied typically respond to changes in price level?

    <p>It increases when price levels increase.</p> Signup and view all the answers

    In the long run, what primarily remains unchanged despite fluctuations in the price level?

    <p>Potential GDP.</p> Signup and view all the answers

    What defines the concept of 'potential GDP'?

    <p>The total production capacity under fully employed resources.</p> Signup and view all the answers

    What is NOT a determinant of Aggregate Supply in the long run?

    <p>Import tariffs on goods.</p> Signup and view all the answers

    What happens to the quantity of Real GDP supplied when wages and prices increase at the same rate?

    <p>It remains unchanged at potential GDP.</p> Signup and view all the answers

    Which aspect does Aggregate Demand primarily focus on?

    <p>The total expenditure in an economy at various price levels.</p> Signup and view all the answers

    What is one effect of lowering taxes on the economy?

    <p>It increases aggregate demand.</p> Signup and view all the answers

    How does an increase in government expenditure affect aggregate demand?

    <p>It increases aggregate demand.</p> Signup and view all the answers

    What happens when interest rates are increased?

    <p>Aggregate demand typically decreases.</p> Signup and view all the answers

    What is the result of a fall in the foreign exchange rate for domestic goods?

    <p>Domestic goods become cheaper for foreign buyers.</p> Signup and view all the answers

    How does an increase in foreign incomes affect aggregate demand for a country's exports?

    <p>It usually increases demand for the country's exports.</p> Signup and view all the answers

    What occurs if Real GDP is above Equilibrium GDP?

    <p>Firms will decrease production and lower prices.</p> Signup and view all the answers

    Which of the following is a primary purpose of monetary policy?

    <p>To manage the supply of money and interest rates.</p> Signup and view all the answers

    What is the likely effect of increasing the quantity of money in the economy?

    <p>It increases purchasing power.</p> Signup and view all the answers

    If Canadian goods become cheaper for Americans due to changes in the foreign exchange rate, what is a likely outcome?

    <p>Canadian exports will increase.</p> Signup and view all the answers

    What can be concluded if the intersection of the AD curve and SAS curve represents short-run equilibrium?

    <p>The quantity of Real GDP demanded matches the quantity supplied.</p> Signup and view all the answers

    What typically happens if the government cuts interest rates?

    <p>Aggregate demand and expenditure usually increase.</p> Signup and view all the answers

    What is a potential consequence of too much money in the economy?

    <p>Inflation may occur.</p> Signup and view all the answers

    During a recession, which fiscal policy would most likely be implemented to stimulate the economy?

    <p>Increase government spending.</p> Signup and view all the answers

    How does a higher foreign income impact aggregate demand for domestic goods?

    <p>It increases demand for domestic exports.</p> Signup and view all the answers

    What happens to the quantity of Real GDP supplied when the price level increases, assuming no change in wages or other factors?

    <p>It increases along the aggregate supply curve.</p> Signup and view all the answers

    What does potential GDP represent in an economy?

    <p>The maximum amount of goods and services that can be produced efficiently.</p> Signup and view all the answers

    Which of the following would cause the short-run aggregate supply (SAS) curve to shift leftward?

    <p>An increase in the money wage rate.</p> Signup and view all the answers

    What effect does a decrease in the price level have on the quantity of Real GDP demanded?

    <p>It increases due to higher real wealth.</p> Signup and view all the answers

    What is one reason that can increase aggregate demand?

    <p>A rise in expected future income.</p> Signup and view all the answers

    How do changes in the quantity of capital affect potential GDP?

    <p>They increase potential GDP.</p> Signup and view all the answers

    What does a leftward shift in the short-run aggregate supply curve typically indicate?

    <p>Higher production costs leading to less output.</p> Signup and view all the answers

    Which of the following best describes the wealth effect?

    <p>Decreased prices raise real wealth and consumption.</p> Signup and view all the answers

    Which of the following factors does NOT typically influence aggregate demand?

    <p>Changes in the money wage rate.</p> Signup and view all the answers

    What does the aggregate demand curve illustrate?

    <p>The relationship between the price level and the total quantity of Real GDP demanded.</p> Signup and view all the answers

    Why would an increase in technology typically shift the aggregate supply curve?

    <p>It decreases business costs significantly.</p> Signup and view all the answers

    Under what conditions is Real GDP said to be less than potential GDP?

    <p>The economy is not fully utilizing its resources.</p> Signup and view all the answers

    What typically occurs to the aggregate demand if there is an expectation of future inflation?

    <p>It increases as consumers buy goods now before they get more expensive.</p> Signup and view all the answers

    If money wage rates increase, what is the short-term effect on the short-run aggregate supply curve?

    <p>It shifts leftward, indicating decreased supply.</p> Signup and view all the answers

    Study Notes

    Aggregate Supply and Demand

    • Real GDP is the total output of goods and services using base year prices (e.g., 2012). Nominal GDP, using today's prices, can look larger due to inflation. Real GDP only considers quantity produced.
    • Aggregate real GDP supplied is the total output businesses are willing to produce at different price levels. Higher prices usually lead to increased production.
    • Long Run Aggregate Supply (LRAS) represents the economy's maximum potential output when all resources are fully employed. It is unaffected by price level changes.
    • Factors determining LRAS include labor, technology, and resource quality.
    • Short-Run Aggregate Supply (SRAS) shows the relationship between the price level and the quantity of output supplied when the money wage rate and other factor prices are fixed. SRAS slopes upwards. A price level increase means firms are willing to sell more products because they will earn more money. A price decrease means firms make less output.
    • Potential GDP is the output at full employment on the graph when SAS and LRAS meet. Real GDP is the actual output. If real GDP is lower than potential GDP, the economy is operating below its capacity.

    Changes in Aggregate Supply

    • Changes in aggregate supply result from factors other than price level.
    • Changes in potential GDP shift both LRAS and SRAS. Potential GDP increases with more labor, capital, and/or advanced technology.
    • An increase in the money wage rate shifts the SRAS curve leftward, reducing aggregate supply.

    Aggregate Demand

    • Aggregate demand (AD) curve shows the relationship between price level and the quantity of Real GDP demanded by all sectors of the economy. The AD curve slopes downward.
    • Factors influencing AD include wealth effect, substitution effect, expectations, fiscal policy, monetary policy, and the world economy.
    • The quantity demanded is the sum of consumption, investment, government expenditure, and net exports (exports - imports).

    Why the Aggregate Demand Curve Slopes Downward

    • Wealth effect: A higher price level reduces real wealth and reduces consumption expenditure. A lower price level increases real wealth and increases consumption.
    • Substitution effect: Intertemporal and international substitution effects influence the relationship between price level and quantity demanded.

    Changes in Aggregate Demand

    • Any factor that influences spending decisions (other than the price level) affects aggregate demand.
    • Expectations: Increased expected future income boosts current consumption and demand. Higher expected inflation increases current demand.
    • Fiscal policy: Government spending and taxation affect aggregate demand. Higher government spending or lower taxes increase disposable income which increases consumption, thus increasing AD.
    • Monetary policy: Interest rate adjustments and money supply change consumer and business borrowing costs, influencing aggregate demand through consumption and investment. A lower interest rate increases aggregate demand. A higher money supply increases aggregate demand.
    • The world economy: Foreign exchange rates and foreign incomes impact demand for domestic goods. A weaker currency (fall in exchange rate) will increase aggregate demand, while increased foreign incomes increase consumer spending on domestic products.

    Equilibrium

    • Short-run equilibrium occurs when the quantity of real GDP supplied equals the quantity of real GDP demanded. This is the intersection of the AD and SRAS curves.
    • Long-run equilibrium happens when AD intersects LAS.

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    Description

    Test your understanding of key concepts related to Aggregate Supply and Demand, including Real GDP, Long Run Aggregate Supply (LRAS), and Short-Run Aggregate Supply (SRAS). This quiz will challenge your knowledge of how these factors interact within an economy and their implications for production levels.

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