Question

5- If an economy is in short-run equilibrium where the level of real GDP is less than potential output, then, in the long run, one will find:

A-Nominal wages will rise and the SRAS curve will shift left bringing the economy back to its potential real GDP.

B-Nominal wages will rise shifting the AD curve to the right and restoring real GDP to its potential level

C-Nominal wages will fall and the SRAS curve will shift right bringing the economy back to its potential real GDP

D-Nominal wages will fall shifting the AD curve to the left and bringing the economy back to its potential real GDP

6-

Suppose the economy is initially at long run equilibrium when the following event happens. Banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time.

6. Over time, economy adjusts back to long run equilibrium such that wages ______ and SRAS shifts ______

A-Decrease, left

B-Increase, right

C-Decrease, right

D-Increase, left

7-

Which of the following would decrease output in the short run?

A-an increase in stock prices makes people feel wealthier

B-government spending increases

C-firms chose to purchase less capital goods

D- All of the above are correct

Answer 1

5.

C

Due to recessionary gap, unemployment increases and wage rate falls. It makes firms to hire workers at lower wage and cost of production decreases. So, SRAS increases and shifts to the right to achieve long run equilibrium.

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6.

C

Since households and consuming less and firms are investing less, then it creates recessionary scenario. It makes unemployment rate to increase and wage to fall. As a result, cost of production decrease and SRAS increases again to achieve long run equilibrium.

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7.

C

When firms invest less in capital goods, then they make less investment spending. It leads to decrease in output.