Question

Consider an economy operating at full employment. Suppose the growth rate of labor productivity remains constant, but there is a decrease in aggregate demand (AD).

1) The decrease in aggregate demand will result in

2) an expansion and a decrease in the price level.

3) an expansion and an increase in the price level.

4) a recession and an increase in the price level.

a recession and a decrease in the price level.

Deviations from full employment that are the result of variations in the growth rate in potential GDP are called

1) business cycles.

2) cyclical unemployment.

3) real business cycles.

4) supply-side economics.

Answer 1

1. Option D.

• Due to the decrease in the aggregate demand when the growth rate of labour productivity remains constant, the aggregate demand curve shifts left.
• The leftward movement of the aggregate demand curve causes the equilibrium quantity and the equilibrium price to fall.
• The fall in the production level in the economy leads to recession.

2. Option A.

• Deviations from full employment that are the result of variations in the growth rate in potential GDP are called business cycles.
• The economists usually use the deviation of real GDP from potential GDP as a estimate to measure the size of the fluctuations or deviations in a business cycle.