A: The aggregate supply curve will shift rightward in response to: 1: an increas

Question

A: The aggregate supply curve will shift rightward in response to:

1: an increase in the expected rate of inflation.

2: a decrease in the expected rate of inflation.

3: an increase in potential GDP.

4: a decrease in potential GDP.

B: Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) _____ gap and inflation will _____.

1: recessionary; increase

2: recessionary; decrease

3: expansionary; decrease

4: expansionary; increase

C: Refer to the figure below. Suppose the economy is in a short-run equilibrium at output Y1 and inflation rate 2. The economy is currently experiencing ______, and the correct monetary policy response to this situation, to return the economy to potential GDP, is to ______.

1: a recessionary gap; raise taxes

2: an expansionary gap; cut taxes

3: a recessionary gap; increase the money supply

4: an expansionary gap; decrease the money supply

D: If the interest rate in the U.S. rises, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will rise.

1: more; demand for

2: more; supply of

3: less; demand for

4: less; supply of

E: An increase in aggregate supply is usually shown by a ______ shift of the AS curve.

1: inverse

2: upward

3: leftward

4: rightward

F: Technological improvements:

1: decrease aggregate demand.

2: increase aggregate demand.

3: decrease aggregate supply.

4: increase aggregate supply.

G: Refer to the figure below. Suppose the economy is in a short-run equilibrium at output Y3 and inflation rate 2. The economy is currently experiencing ______, and the correct fiscal policy response to this situation, to return the economy to potential GDP, is to ______.

1: a recessionary gap; increase government spending

2: an expansionary gap; decrease government spending

3: a recessionary gap; increase taxes

4: an expansionary gap; decrease taxes

H: The AS curve slopes upward because:

1: firms generally sell their products at preset prices.

2: relaxing the assumptions of the Keynesian model allows us to develop a more realistic model where firms no longer care about prices.

3: many firms raise their prices when aggregate demand has increased.

4: inflation is higher in goods-producing industries than service-producing industries.

Explanation / Answer

(A) (3)

Increase in potential GDP increases aggregate output, shifting the long run AS curve rightward.

(B) (4)

Higher consumer confidence will increase consumption demand and aggregate demand, shifting AD rightward and increasing both price level and real GDP, creating inflationary/expansionary gap.

(C) (3)

Since Y1 (Real GDP) < Y2 (Potential GDP), there is recessionary gap which can be closed by raising aggregate demand with an increase in money supply.

(D) (1)

Higher interest rate in US gives higher returns to investors, who invest more in US and so, demand for dollar rises.

(E) (4)

(F) (4)

Technological improvements lower production cost, so firms increase output and aggregate supply rises.

NOTE: As per Chegg answering guidelines, first 6 questions are answered.

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