Problem 2
Suppose that AD and AS intersect at an output level that is higher than the full-employment output level. After the economy adjusts back to equilibrium in the long run, the price level will be ____ . a. Higher than it is now. b. Lower than it is now. c. The same as it is now.
Problem 3
Suppose that an economy begins in long-run equilibrium before the price level and real GDP both decline simultaneously. If those changes were caused by only one curve shifting, then those changes are best explained as the result of: a. The AD curve shifting right. b. The AS curve shifting right. c. The AD curve shifting left. d. The AS curve shifting left.
Problem 4
Identify the two descriptions below as being the result of either cost-push inflation or demand-pull inflation. a. Real GDP is below the full-employment level and prices have risen recently. b. Real GDP is above the full-employment level and prices have risen recently.
Problem 5
Use graphical analysis to show how each of the following would affect the economy first in the short run and then in the long run. Assume that the United States is initially operating at its full-employment level of output, that prices and wages are eventually flexible both upward and downward, and that there is no counteracting fiscal or monetary policy. a. Because of a war abroad, the oil supply to the United States is disrupted, sending oil prices rocketing upward. b. Construction spending on new homes rises dramatically, greatly increasing total U.S. investment spending. c. Economic recession occurs abroad, significantly reducing foreign purchases of U.S. exports.
Problem 7
Assume there is a particular short-run aggregate supply curve for an economy and the curve is relevant for several years. Use the AD-AS analysis to show graphically why higher rates of inflation over this period would be associated with lower rates of unemployment, and vice versa. What is this inverse relationship called?
Problem 8
Aggregate supply shocks can cause _____ rates of inflation that are accompanied by _____ rates of unemployment. a. Higher; higher. b. Higher; lower. c. Lower; higher. d. Lower; lower.
Problem 9
Suppose that firms are expecting 6 percent inflation while workers are expecting 9 percent inflation. How much of a pay raise will workers demand if their goal is to maintain the purchasing power of their incomes? a. 3 percent. b. 6 percent. c. 9 percent. d. 12 percent.
Problem 10
Suppose that firms were expecting inflation to be 3 percent, but then it actually turned out to be 7 percent. Other things equal, firm profits will be: a. Smaller than expected. b. Larger than expected.
