Macroeconomics Chapter on Equilibrium

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Questions and Answers

What shift in aggregate demand would likely result from an increase in the quantity of money in circulation?

Increase in overall spending (correct)

No change in demand

Increase in saving rates

Decrease in overall spending

In the short-run macro equilibrium, which condition must be true?

AD intersects with LRAS

Real GDP demanded equals real GDP supplied (correct)

Real GDP exceeds potential GDP

Money wage rates are flexible

Which factor would likely lead to an increase in potential GDP?

Investment in infrastructure (correct)

Increase in taxation

Decrease in labor productivity

Decrease in the money supply

What is the characteristic difference between short-run and long-run aggregate supply?

Money wage rates are fixed in the short-run but adjust in the long-run Signup and view all the answers

Which of the following actions would typically decrease aggregate demand?

Decreasing foreign incomes Signup and view all the answers

Which of the following actions would likely lead to a decrease in aggregate demand?

Raising income tax rates Signup and view all the answers

What is a likely effect of a decrease in government expenditure on the economy in the short run?

Higher unemployment rates Signup and view all the answers

If the economy is operating below its potential GDP, which of the following fiscal policies would be appropriate?

Increasing government spending Signup and view all the answers

During stagflation, which combination of changes occurs in real GDP and the price level?

Decreases in real GDP while the price level increases Signup and view all the answers

Which factor is most directly related to the long-run aggregate supply curve?

The availability of factor inputs Signup and view all the answers

What effect does a rise in the price level have on the quantity of real GDP demanded?

It decreases the quantity demanded. Signup and view all the answers

Which factor is NOT a reason why the aggregate demand curve slopes downward?

Demand Curve Effect Signup and view all the answers

Which of the following shifts the aggregate demand curve?

Decrease in interest rates Signup and view all the answers

How does an increase in real wealth typically affect aggregate demand?

It increases current consumption. Signup and view all the answers

What is the relationship between interest rates and aggregate demand when the price level rises?

Interest rates rise, thus decreasing aggregate demand. Signup and view all the answers

What occurs when aggregate demand changes?

The aggregate demand curve shifts. Signup and view all the answers

Which of the following factors does NOT contribute to changes in aggregate demand?

Natural disasters Signup and view all the answers

Which of the following actions would typically increase aggregate demand?

Increase in investment spending Signup and view all the answers

Study Notes

Short-Run Macro Equilibrium

Occurs when the quantity of real GDP demanded equals the quantity of real GDP supplied
Intersection of AD and SAS
Money wage rate is fixed

Long-Run Macro Equilibrium

Occurs when real GDP equals potential GDP – i.e., when the economy is on its LRAS curve
Intersection of AD and LRAS
Money wage rate adjusts

Aggregate Demand Curve

AD is described by an aggregate demand schedule and aggregate demand curve
Slopes downward for two reasons:
- Wealth Effect
  - When the price level rises but other things remain the same, real wealth decreases
  - Individuals then  savings and  current consumption   AD
- Substitution Effect
  - When the price level rises and other things remain the same, interest rates rise
  - Individuals then  savings and  current consumption   AD

Changes in Aggregate Demand

Aggregate demand changes when any factor that influences planned expenditure other than the price changes
Factors that cause aggregate demand changes
- Expectations
- Fiscal policy
- Monetary policy
- The world economy
When AD changes, the AD curve shifts

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Description

This quiz focuses on the concepts of short-run and long-run macro equilibrium, exploring the intersection of Aggregate Demand (AD) with Short-Run Aggregate Supply (SAS) and Long-Run Aggregate Supply (LRAS). It also examines the reasons behind the downward slope of the Aggregate Demand curve and what factors influence changes in aggregate demand.