Question

I have the solutions but want to be sure. Please don't answer if you are not sure.

1.     Aggregate supply increases when ________.

A.    the price level rises

B.    the money wage rate falls

C.    consumption increases

D.    the money price of oil increases

       

2.     When potential GDP increases, _______.

A.    aggregate demand increases

B.    aggregate supply increases

C.    both aggregate demand and aggregate supply increase

D.    the price level rises

       

3.     The quantity of real GDP demanded increases if _______.

A.    the buying power of money increases

B.    the money wage rate rises

C.    the price level falls

D.    the nominal interest rate falls

       

4.     An increase in expected future income increases ________.

A.    consumption expenditure, which increases current aggregate demand

B.    investment, which increases current aggregate supply

C.    the demand for money, which decreases current aggregate demand

D.    future consumption expenditure and has no effect on current aggregate demand

       

5.     Macroeconomic equilibrium occurs when the quantity of real GDP _______ equals the quantity of _______.

A.    demanded; real GDP supplied

B.    demanded; potential GDP

C.    supplied; potential GDP

D.    demanded; real GDP supplied and potential GDP

       

6.     If the economy is at full employment and the Fed increases the quantity of money, _______.

A.    aggregate demand increases, a recessionary gap appears, and the money wage rate starts to rise

B.    aggregate supply increases, the price level starts to fall, and an expansion begins

C.    aggregate demand increases, an inflationary gap appears, and the money wage rate starts to rise

D.    potential GDP and aggregate supply increase together and the price level does not change

Answer 1

(1) (B)

Lower wage rate will reduce wage cost, lowering production cost which will make firms increase production. Aggregate supply will increase.

(2) (B)

Potential GDP increases when long-run aggregate supply curve shifts rightward. The same factors that shift LRAS, will shift SRAS curve too, therefore aggregate supply will increase as well.

(3) (C)

Price level and quantity of real GDP demanded are inversely related. So, when price level rises (falls), quantity of real GDP demanded falls (rises).

(4) (A)

(5) (A)

Equilibrium occurs at intersection of aggregate demand and aggregate supply curves.

(6) (C)