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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 that over a 30-year period Buskerville’s price level increased from 72 to 138, while its real GDP rose from \(1.2 trillion to \)2.1 trillion. Did economic growth occur in Buskerville? If so, by what average yearly rate in percentage terms (rounded to one decimal place)? Did Buskerville experience inflation? If so, by what average yearly rate in percentage terms (rounded to one decimal place)? Which shifted rightward faster in Buskerville: its long-run aggregate supply curve (ASLR) or its aggregate demand curve (AD)?

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

What is the Laffer Curve, and how does it relate to supply-side economics? Why is determining the economy’s location on the curve so important in assessing tax policy?

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

Suppose that for years East Confetti’s short-run Phillips Curve was such that each 1 percentage point increase in its unemployment rate was associated with a 2 percentage point decline in its inflation rate. Then, during several recent years, the short-run pattern changed such that its inflation rate rose by 3 percentage points for every 1 percentage point drop in its unemployment rate. Graphically, did East Confetti’s Phillips Curve shift upward or did it shift downward? Explain.
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