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Marks: 1
Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?Choose one answer.

	a. Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed.
	b. Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS₁ closing the gap at H.
	c. In response to rising prices, firms will increase production moving along SRAS₂ until long- run equilibrium is restored at J and the gap is closed.
	d. Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS₂ until long-run equilibrium is restored at J and the gap is closed.

Question 2Marks: 1
Table 7-1 shows the aggregate demand and short-run aggregate supply curves for an economy. The potential level of output is $7.6 trillion.
If policymakers choose to close the gap by using stabilization policy, they should useChoose one answer.

	a. contractionary fiscal or monetary policies.
	b. expansionary fiscal or monetary policies.
	c. a combination of contractionary fiscal and expansionary monetary policies.
	d. a combination of expansionary fiscal and contractionary monetary policies.

Question 3Marks: 1A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is theChoose one answer.

	a. aggregate demand curve.
	b. average price level.
	c. circular flow model.
	d. GDP curve.

Question 4Marks: 1
Which of the following statements is true?Choose one answer.

	a. The economy depicted in the figure experiences a recessionary gap = Y_p–Y₁.
	b. The economy depicted in the figure experiences a recessionary gap = Y_p–Y₂.
	c. The economy depicted in the figure experiences a recessionary gap = Y₂–Y₁.
	d. The economy depicted in the figure is in long-run equilibrium but not in short-run equilibrium.

Question 5Marks: 1
For the economy represented in the figure,Choose one answer.

	a. the real wage rate is higher than full-employment real wage.
	b. the real wage rate is lower than full-employment real wage.
	c. the nominal wage rate is higher than full-employment nominal wage.

Question 6Marks: 1What is the difference between a change in aggregate demand and a change in aggregate quantity of real GDP demanded?Choose one answer.

	a. A change in aggregate demand is represented by a movement along the aggregate demand curve in response to a price change while a change in aggregate quantity of real GDP demanded is represented by a shift of the aggregate supply curve in response to a change in a component of aggregate demand.
	b. A change in aggregate demand is represented by a shift of the aggregate demand curve in response to a change in the actual price level while a change in aggregate quantity of real GDP demanded is represented by a movement along the aggregate demand curve in response to a change in the expected price level.
	c. A change in aggregate demand is represented by a shift of the aggregate demand curve in response to a change in a component of aggregate demand while a change in aggregate quantity of real GDP demanded is represented by a movement along the aggregate demand curve in response to a change in the price level.
	d. There is no difference between the two terms.

Question 7Marks: 1Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.Choose one answer.

	a. The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.
	b. The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase.
	c. The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases.
	d. The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.

Question 8Marks: 1Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and a decrease in real GDP in the short run?Choose one answer.

	a. a decrease in health insurance premiums paid by firms raises the cost of employing labor
	b. an increase in government transfer payments
	c. an increase in the cost of a key input such as oil
	d. a sharp fall in stock market prices

Question 9Marks: 1Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?Choose one answer.

	a. To fund the government spending, more money must be printed. The resulting increase in money supply lowers interest rates which in turn stimulates consumption and investment spending.
	b. The initial change in spending will cause an increase in real GDP and it also becomes income to someone else. As a result, the government’s tax revenue increases which in turn allows the government to further increase its spending.
	c. The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.
	d. The initial change in government spending creates a supply of jobs and stimulates production of domestically produced goods and services. The resulting increases in wages and investment demand leads to increased real GDP.

Question 10Marks: 1A change in the price level, all other things unchanged, causesChoose one answer.

	a. a movement along the aggregate demand curve.
	b. a shift of the aggregate demand curve.
	c. both a movement along the aggregate demand curve and a shift in the curve.
	d. no change in the value of assets held in the form of money.

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