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Chapter 18: Q3. (page 389)

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.

Short Answer

Expert verified

The correct option is (c): the AD curve shifting left.

Step by step solution

01

The explanation for correct option (c)

In the AD-AS model, the long-run equilibrium is obtained when the short-run aggregate supply curve, aggregate demand curve, and long-run aggregate supply curves intersect.A shift in the aggregate demand curve causes price and GDP levels to change in the same direction. A short-run aggregate supply curve shift causes price and GDP levels to change in the opposite direction.

So, if an economy begins from long-run equilibrium, then the decline in price and output levels can be caused by a leftward shift of the aggregate demand curve.

Hence, the correct option is (c).

02

The explanation for correct options (a), (b), and (d) 

If the aggregate demand curve shifts rightward, there will be a rise in price and output levels.

So, option (a) is incorrect.

If the aggregate supply curve shifts rightward, there will be a rise in output level and a decline in the price level. So, option (b) is incorrect.

If the aggregate supply curve shifts leftward, there will be a fall in output and a price level rise. So, option (d) is incorrect.

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Most popular questions from this chapter

Suppose the full-employment level of real output (Q) for a hypothetical economy is $250 and the price level (P) initially is 100. Use the short-run aggregate supply schedules below to answer the questions that follow:

AS(P100)
AS(P125)
AS(P75)
PQPQPQ
125280125250125310
100250100220100280
752207519075250

What is the level of real output in the short run if the price level unexpectedly rises from 100 to 125 because of an increase in aggregate demand? What happens if the price level unexpectedly falls from 100 to 75 because of a decrease in aggregate demand? Explain each situation, using numbers from the table.

b. What is the level of real output in the long run when the price level rises from 100 to 125? When it falls from 100 to 75? Explain each situation.

c. Illustrate the circumstances described in parts a and b on graph paper, and derive the long-run aggregate supply curve.

Between 1990 and 2009, the U.S. price level rose by about 64 percent while real output increased by about 62 percent. Use the aggregate demand–aggregate supply model to illustrate these outcomes graphically.

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

Aggregate supply shocks can cause _______ inflation rates that are accompanied by _______ unemployment rates.

a. higher; higher

b. higher; lower

c. lower; higher

d. lower; lower

Distinguish between the short run and the long run as they relate to macroeconomics. Why is the distinction important?
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