3.5-3.6 Aggregate Equilibrium

What does the price level on the y-axis of the aggregate supply and demand model represent?

• The interest rate

• The unemployment rate

• The total number of goods in the economy

• The price level as measured by the CPI or the GDP deflator

Answer explanation

The price level on the y-axis of the aggregate supply and demand model represents the price level as measured by the CPI or the GDP deflator.

What does real GDP on the x-axis represent?

• The total population of the country

• GDP that has been adjusted for inflation, also known as national income

• The price level of exports

• The total financial assets of the economy

Answer explanation

Real GDP on the x-axis represents GDP that has been adjusted for inflation, also known as national income.

What is the shape of the aggregate demand curve?

• Upward sloping

• Downward sloping

• Horizontal

• Vertical

Answer explanation

The correct shape of the aggregate demand curve is downward sloping, indicating an inverse relationship between price levels and real GDP demanded.

Why is the short run aggregate supply curve upward sloping?

• Because wages and other resource prices are sticky in the short run

• Due to constant prices of resources

• Due to government intervention

• Because of perfect competition in the market

Answer explanation

The short run aggregate supply curve is upward sloping because wages and other resource prices are sticky in the short run, leading to a positive relationship between price level and output.

What does the vertical long run aggregate supply curve represent?

• The inflation rate

• The maximum sustainable level of output

• The total demand in the economy

• The level of unemployment

Answer explanation

The vertical long run aggregate supply curve represents the maximum sustainable level of output.

What causes a shift to the right in the aggregate demand curve?

• Decrease in net exports

• Decrease in consumer confidence

• Increase in taxes

• Increase in consumer spending, gross investment, government purchases, or net exports

Answer explanation

A shift to the right in the aggregate demand curve is caused by an increase in consumer spending, gross investment, government purchases, or net exports.

What is the result of a positive aggregate demand shock?

• Decrease in real GDP and employment

• Increase in unemployment

• Increase in real output, national income, and employment

• Decrease in the price level

Answer explanation

A positive aggregate demand shock leads to an increase in real output, national income, and employment.

What type of inflation is caused by a rightward shift of the aggregate demand curve?

• Hyperinflation

• Cost-push inflation

• Deflation

• Demand-pull inflation

Answer explanation

A rightward shift of the aggregate demand curve leads to an increase in demand, causing demand-pull inflation.

What happens to the price level when there is a leftward shift of the short run aggregate supply curve?

• It increases

• It decreases

• It becomes indeterminate

• It remains constant

Answer explanation

When there is a leftward shift of the short run aggregate supply curve, the price level increases due to a decrease in aggregate supply.

What is stagflation?

• A period of rapid economic growth

• A period of deflation and high unemployment

• A period of high inflation and high unemployment

• A period of stable prices and full employment

Answer explanation

Stagflation is a period of high inflation and high unemployment, not rapid economic growth, deflation and high unemployment, or stable prices and full employment.