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Questions and Answers
What primarily causes the short run supply curve to slope upward?
What primarily causes the short run supply curve to slope upward?
How does a spike in energy prices affect output in the short run?
How does a spike in energy prices affect output in the short run?
What explains the upward slope of the short-run aggregate supply curve?
What explains the upward slope of the short-run aggregate supply curve?
What does the concept of entrepreneurship ability include?
What does the concept of entrepreneurship ability include?
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Which of the following is NOT considered a component of labor?
Which of the following is NOT considered a component of labor?
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Why is the long run aggregate supply curve vertical?
Why is the long run aggregate supply curve vertical?
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Which factor will most likely cause the aggregate demand curve to shift to the left?
Which factor will most likely cause the aggregate demand curve to shift to the left?
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What does physical capital primarily include?
What does physical capital primarily include?
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Economic growth is primarily measured by?
Economic growth is primarily measured by?
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In the short run, the aggregate supply curve is described as ___ because input prices are __.
In the short run, the aggregate supply curve is described as ___ because input prices are __.
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What is the most likely outcome in the long run if the economy is at full employment and experiences a booming market?
What is the most likely outcome in the long run if the economy is at full employment and experiences a booming market?
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Which condition explains why prices are not fully flexible in the short run?
Which condition explains why prices are not fully flexible in the short run?
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Which of the following statements is true regarding the aggregate demand curve?
Which of the following statements is true regarding the aggregate demand curve?
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Which of the following is NOT an example of human capital investment?
Which of the following is NOT an example of human capital investment?
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What effect does a decrease in firms' market power have on aggregate supply?
What effect does a decrease in firms' market power have on aggregate supply?
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In developing countries, what is often a limiting factor for growth?
In developing countries, what is often a limiting factor for growth?
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Which option is considered an example of infrastructure?
Which option is considered an example of infrastructure?
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What characterizes the Long-Run Aggregate Supply (LRAS) curve?
What characterizes the Long-Run Aggregate Supply (LRAS) curve?
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An increase in taxes primarily shifts the aggregate demand curve to which direction and how does it affect output?
An increase in taxes primarily shifts the aggregate demand curve to which direction and how does it affect output?
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What is the expected result of increasing the natural rate of unemployment on output and inflation in the long run?
What is the expected result of increasing the natural rate of unemployment on output and inflation in the long run?
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When the economy operates at its maximum sustainable output, this is referred to as what?
When the economy operates at its maximum sustainable output, this is referred to as what?
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What effect does a falling aggregate price level have on a country's exports and output demanded?
What effect does a falling aggregate price level have on a country's exports and output demanded?
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Which of these factors is NOT a determinant of short-run aggregate supply?
Which of these factors is NOT a determinant of short-run aggregate supply?
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If a country has a low capital-to-labor ratio, what is generally true about its labor productivity and wages?
If a country has a low capital-to-labor ratio, what is generally true about its labor productivity and wages?
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Which scenario best exemplifies short-run economic growth?
Which scenario best exemplifies short-run economic growth?
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What could lead to a decrease in the price level and an increase in employment?
What could lead to a decrease in the price level and an increase in employment?
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What occurs when business expectations improve?
What occurs when business expectations improve?
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Economic growth can be represented graphically as a:
Economic growth can be represented graphically as a:
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Which one of the following is a result of higher output levels demanded?
Which one of the following is a result of higher output levels demanded?
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Which state is an example of increasing the capital-to-labor ratio?
Which state is an example of increasing the capital-to-labor ratio?
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If a country's currency appreciates, what will happen to its aggregate demand?
If a country's currency appreciates, what will happen to its aggregate demand?
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In the scenario where consumers spend more than usual when the economy is at full employment, what will happen to prices in the short run?
In the scenario where consumers spend more than usual when the economy is at full employment, what will happen to prices in the short run?
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What impact does an increase in capital with a concurrent decrease in labor have on output?
What impact does an increase in capital with a concurrent decrease in labor have on output?
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What is the likely outcome in the long run after an initial increase in consumer spending?
What is the likely outcome in the long run after an initial increase in consumer spending?
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Which solution is appropriate for addressing simultaneous inflation and unemployment?
Which solution is appropriate for addressing simultaneous inflation and unemployment?
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If the economy experiences a shift in aggregate demand due to increased consumer spending, what is the initial effect on output?
If the economy experiences a shift in aggregate demand due to increased consumer spending, what is the initial effect on output?
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Which of the following is NOT an investment in human capital?
Which of the following is NOT an investment in human capital?
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Study Notes
Capital-to-Labor Ratio
- When the capital-to-labor ratio increases, a construction crew is given more backhoes.
- The capital-to-labor ratio is a measure of the amount of capital per worker in an economy.
GDP and Output Growth
- GDP is the total value of all goods and services produced in an economy.
- GDP is a measure of output.
- GDP growth can be calculated by multiplying the growth rates of output and labor.
- For example, a 10% growth in output and a 10% growth in labor would result in a 100% growth in GDP.
Currency Appreciation and Aggregate Demand/Supply
- If a country's currency appreciates, exports become more expensive, and imports become cheaper.
- This will lead to a decrease in aggregate demand (AD) as exports fall and imports rise.
- Aggregate supply (SRAS) will rise due to cheaper imported goods.
Inflation & Unemployment
- Simultaneous inflation and unemployment can be addressed by implementing policies that shift the short-run aggregate supply curve to the right.
- Shifiting the aggregate demand curve left or right will only address inflation or unemployment on its own.
- Increasing output through shifts in SRAS will lower costs of goods and create more jobs.
Short-Run vs. Long-Run Effects of Increased Spending
- Increased consumer spending in the short run will increase prices and output.
- In the long run, prices will rise further and output will return to its potential level as resource constraints and price adjustments occur.
Human Capital
- Investment in human capital refers to activities that improve the skills, knowledge, and abilities of individuals.
- Examples include apprenticeships, universal education policies, and on-the-job training.
- Acquiring obsolete skills is not an example of investment in human capital.
Aggregate Supply
- A decrease in firms' market power, leading to more competition, can increase aggregate supply.
- This is because firms may lower prices and increase output to stay competitive.
Developing Countries
- Developing countries tend to have limited capital and resources.
Infrastructure
- Infrastructure refers to the fundamental facilities and systems serving a country, city or other area, including public services, transport networks, communication systems, and power supply.
- An example of infrastructure is an elementary school.
- Examples of capital or natural resources, NOT infrastructure, are a computer manufacturing plant, coal mine, or drained swamp.
Long-Run Aggregate Supply (LRAS)
- The LRAS curve is vertical at full employment because the economy’s output is determined by its resources (labor, capital, technology, and natural resources) in the long run.
- The economy operates at its maximum sustainable level of output, regardless of changes in the price level, in the long run.
Taxes and Aggregate Demand
- Increased taxes shift the aggregate demand curve to the left and decrease output demanded.
- Consumers have less disposable income to spend when taxes are higher.
Long-Run Effects of Changing Natural Rate of Unemployment
- Increasing an economy's natural rate of unemployment in the long run will lead to increased inflation.
- This is because the natural rate of unemployment is the lowest sustainable unemployment rate in the long run.
Determinants of Short-Run Aggregate Supply
- Changes in input prices, taxes, business expectations, and inflationary expectations are determinants of short-run aggregate supply.
Capital-to-Labor Ratio and Wages
- A country with a low capital-to-labor ratio tends to have low labor productivity and low wages.
- This is because workers have fewer tools and capital to work with, resulting in lower output per worker.
Short-Run Economic Growth
- A situation associated with short-run economic growth is an increase in employment, which reduces the unemployment rate.
- This is because short-run growth is typically characterized by an increase in economic activity and utilization of existing resources.
Shifting the Aggregate Supply Curve
- A shift to the right of the aggregate supply curve can cause the price level to decrease and employment to increase.
- By producing more goods and services, businesses can lower prices and hire more workers.
Business Expectations & Aggregate Demand
- Improved business expectations will shift the aggregate demand curve to the right.
- This is because businesses will invest more and spend more when they are more optimistic about the future.
Economic Growth and Aggregate Supply
- Economic growth is represented by a shift to the right of the long-run aggregate supply curve.
- This indicates an increase in the economy's potential output.
Short-Run Aggregate Supply Curve
- The short-run aggregate supply curve slopes upward because input prices are not fully flexible in the short run.
- Firms are willing to supply more at higher prices when input costs are relatively fixed.
Price Spikes and Economic Output
- Energy price spikes will decrease output in the short run, but output will return to its long-run equilibrium level in the long run.
Determinants of Short-Run Aggregate Supply
- Many inputs, such as wages and raw materials, are slow to change in the short run.
- This leads to the upward slope of the short-run aggregate supply curve.
Entrepreneurship
- The ability to use physical resources in creative ways to produce goods and services is known as entrepreneurship.
- It combines human productivity with capital production.
Labor
- Labor includes all of the physical and mental talents of people.
- Labor is the time and effort provided by individuals in the production of goods and services.
Determinants of Aggregate Supply
- Productivity is a determinant of aggregate supply.
- Productivity refers to the efficiency with which inputs are converted into outputs.
Falling Price Level and Output Demanded
- A falling aggregate price level will increase demand for a country's exports, which will increase output demanded.
- This is because lower prices make a country's goods and services more attractive to foreign buyers.
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Description
Test your understanding of key economic concepts including the capital-to-labor ratio, GDP growth, currency appreciation, and the interplay between inflation and unemployment. This quiz will challenge your knowledge of how these factors influence the economy and aggregate demand/supply.
