Chapter Eighteen: GDP and the Price level in the Short-Run

Table of Contents

1. Chapter Eighteen: GDP and the Price level in the Short-Run

Chapter Eighteen: GDP and the Price level in the Short-Run

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Question 1 The short-run aggregate supply curve is positively sloped because: a) Input prices rise as output expands. b) With given input prices and a fixed capital stock, firms' marginal costs rise with output. c) Firms are faced with increasing returns to scale. d) Input prices rise when there is an inflationary gap. e) Money wages rise as demand increases. Correct.Incorrect. The answer is b) With given input prices and a fixed capital stock, firms' marginal costs rise with output.Your answer has been saved.

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Question 2 An exogenous rise in exports, X, where SRAS is horizontal would: a) Shift AE upwards, shift AD to the left and lower real GDP by the change in X times the multiplier. b) Shift AE downwards, shift AD to the right, and increase real GDP by the change in X times the multiplier. c) Shift AE upwards, shift AD to the right, and increase real GDP by the change in X times the multiplier. d) Shift AE downwards, shift AD to the left, and decrease real GDP by the change in X times the multiplier. e) Shift AE downwards, shift AD to the left, and increase real GDP by the change in X times the multiplier. Correct.Incorrect. The answer is c) Shift AE upwards, shift AD to the right, and increase real GDP by the change in X times the multiplier.Your answer has been saved.

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Question 3 An exogenous fall in exports, X, where SRAS is horizontal would: a) Shift AE upwards, shift AD to the left and lower real GDP by the change in X times the multiplier. b) Shift AE downwards, shift AD to the right, and increase real GDP by the change in X times the multiplier. c) Shift AE upwards, shift AD to the right, and increase real GDP by the change in X times the multiplier. d) Shift AE downwards, shift AD to the left, and decrease real GDP by the change in X times the multiplier. e) Shift AE downwards, shift AD to the left, and increase real GDP by the change in X times the multiplier. Correct.Incorrect. The answer is d) Shift AE downwards, shift AD to the left, and decrease real GDP by the change in X times the multiplier.Your answer has been saved.

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Question 4 An exogenous fall in investment, I, where SRAS is horizontal would in the short run: a) Shift AE downwards, shift AD to the left, and decrease real GDP by the change in I times the multiplier. b) Shift AE upwards, shift AD to the left and lower real GDP by the change in I times the multiplier. c) Shift AE downwards, shift AD to the right, and lower real GDP by the change in I times the multiplier. d) Shift AE upwards, shift AD to the right, and increase real GDP by the change in I times the multiplier. e) Shift AE downwards, shift SRAS upwards and have no impact on AD or GDP. Correct.Incorrect. The answer is a) Shift AE downwards, shift AD to the left, and decrease real GDP by the change in I times the multiplier.Your answer has been saved.

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Question 5 The short-run aggregate supply curve shifts to the left when: a) There is a recessionary gap. b) Raw material prices rise. c) Raw material prices fall. d) There is an improvement in technology which increases productivity. e) The monetary authorities lower interest rates. Correct.Incorrect.Your answer has been saved.

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Question 6 The aggregate demand curve, AD, is negatively sloped because: a) At higher price levels net exports increase and consumption rises leading to lower GDP. b) At higher price levels net exports fall and consumption rises leading to higher GDP. c) At higher price levels net exports fall and consumption falls leading to lower GDP. d) At lower price levels net exports increase and consumption rises leading to lower GDP. e) At lower price levels net exports fall and consumption falls leading to lower GDP. Correct.Incorrect. The answer is c) At higher price levels net exports fall and consumption falls leading to lower GDP.Your answer has been saved.

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Question 7 Consumption falls when there is an exogenous price level increase because: a) Consumers expect prices to fall later. b) Consumers expect inflation to rise. c) Consumers are better off owing to higher house prices. d) Consumers have lower wealth owing to the lower purchasing power of their nominal savings. e) Consumers' wages will be compensated for the inflation. Correct.Incorrect. The answer is d) Consumers have lower wealth owing to the lower purchasing power of their nominal savings.Your answer has been saved.

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Question 8 Net exports fall when there is an exogenous price level increase because: a) Domestic goods are now cheaper than foreign goods. b) Domestic GDP will rise. c) Imports will fall because domestic incomes have fallen. d) Interest rates will rise. e) Export demand will fall and import demand will rise as domestic prices have risen relative to foreign prices. Correct.Incorrect. The answer is e) Export demand will fall and import demand will rise as domestic prices have risen relative to foreign prices.Your answer has been saved.

9	Question 9 How will an annual 10% rise in prices affect: (a) an agent who has issued a bond worth £100 that needs to be repaid next year; (b) the person who has loaned the £100 to the bond issuer. Hint: re-read 'Changes in private consumption' pp403.

10	Question 10 What is the difference between 'inside assets' and 'outside assets'? To what extent do you think that the distinction is important? Hint: re-read 'Inside assets' and 'Outside assets' pp403-04.

11	Question 11 Why will a rise in prices lead to a downward shift in the net export function? Hint: re-read 'Changes in net exports' pp404.

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Question 12 Draw a diagram that shows the relationship between the Aggregate Spending curve and the Aggregate Demand curve. Hint: re-read 'The aggregate demand curve' pp404-05. Ensure that you have a consistent notation system that makes the link between the two diagrams you draw explicit. If you need an insight into this, consult Figure 18.2 (p405).

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Question 13 Why is it incorrect to assume that the aggregate demand curve has exactly the same properties as a demand curve for baked beans? Hint: the distinction between the two is set out in 'Box 18.1' p406. it is important that you understand fully why the two are different in terms of the assumptions that underpin each of them.

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Question 14 Why are the marginal propensity to consume and the degree to which an aggregate demand curve will shift in response to an increase in government spending linked? Hint: re-read 'The simple multiplier and the AD curve' pp408-09. You may wish to explore this question diagrammatically, using pairs of diagrams akin to those used in Figure 18.4 (p408). Draw scenarios for when the marginal propensity to consume is high and one when the marginal propensity to consume is low.

15	Question 15 What is the difference between the short-run aggregate supply curve and the long-run aggregate supply curve? Hint: re-read 'The aggregate supply curve' p409.

16	Question 16 Under what circumstances will the short-run aggregate supply curve be horizontal? Hint: you may wish to think about the type of economic conditions that gave birth to Keynesian economics. For further insights consult 'Box 18.2' p413.

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Question 17 What is the relationship between the size of the multiplier and the slope of the short-run aggregate supply curve? Hint: re-read 'The multiplier when the price level varies' pp413-14. As with many questions, it is often useful to consolidate your understanding diagrammatically. Figure 18.9 (p414) should provide a useful starting point. You may also wish to think about the implications for the multiplier of an extreme vertical short-run aggregate supply curve, as depicted in Figure 18.11 (p416).

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Question 18 What changes will cause the short-run aggregate supply curve to shift? Assuming a constant aggregate demand curve, what are the implications of the shifts you have identified? Hint: re-read 'Aggregate supply shocks' pp417-18. In this section the impact of oil price increases are considered. You may also wish to focus your attention on factors that might push the short-run aggregate supply curve to the right.