a) In the AD-AS model, stagflation does not persist, because the
working of the self-correcting mechanism of the economy _____ the
level of output and _____ the price level until the economy
eventually returns to a long-run equilibrium state, where actual
output _____ potential output.

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Question: A) In the AD-AS model, stagflation does not persist, because the working of the self-correcting m…
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decreases; decreases; falls short of
increases; decreases; equals
decreases; increases; exceeds
decreases; increases; equals
increases; decreases; exceeds
b) The LRAS curve is drawn as a vertical line at potential output
(Y*) to indicate that

Y* is independent of the price level and that actual output Y
> Y* in the long run
Y* equals actual output (Y) in the long run
Y* is independent of the price level and that actual output Y =
Y* in the long run
Y* is independent of the price level
Y* is independent of the price level and that actual output Y
< Y* in the long run
c) Stagflation arises in the context of the AD-AS model when some
external factor causes

the LRAS curve to shift to the right
the AD curve to shift leftwards
the SRAS curve to shift downwards
the SRAS curve to shift upwards
the AD curve to shift rightwards
d) If the SRAS curve is positively sloped, then a decrease in the
demand for Canadian-made goods in Europe will lead to _____ in the
price level, in the short run.

either an increase or a decrease
no change
an increase
a decrease
an initial increase, and then a decrease
e) Which of the following will shift the aggregate demand curve to
the right?

Consumers become pessimistic about the future
A new technology is developed that will increase profits
Income taxes are raised
Foreign economies fall into recession, reducing their demand
for domestic exports
The government reduces purchases to balance the budget
f) Suppose a stock market crash decreases the stock of household
wealth and therefore causes autonomous consumption to fall. Which
of the following is the likely result?

A leftward shift the AD curve
There will be no movement of the AD curve
A movement down the AD curve
A movement up the AD curve
A rightward of the shift the AD curve
g) An economy is characterized by the AD equation P = 200 ? 0.02Y,
SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence
of any change in policy or exogenous shocks, this economy will
achieve a long-run price level of

100
110
120
90
105
h) The AD-AS model depicts a self-correcting economy. This means
that the price level in the model adjusts automatically in response
to a(n) _____ gap, so as to eliminate the _____ gap in the long
run, without requiring any help from government policies.

recessionary; recessionary
recessionary; expansionary
expansionary; expansionary
output; output
expansionary; recessionary
i) The aggregate demand curve shows

the amount of planned aggregate expenditure (and output) at the
current price level
the amount of planned aggregate expenditure (and output) at an
average price level
the amount of planned aggregate expenditure (and output) at a
constant price level
the amount of planned aggregate expenditure (and output) at
various price levels
the amount of planned aggregate expenditure (and output) at
last year’s price level
j) Consider an economy initially at long-run equilibrium with
output (Y) equal to potential output (Y*). If the SRAS is
positively sloped, then a shift to the right of the AD curve will
lead to _____ in the price level, in the short run. In the long
run, the SRAS curve will shift to the _____ and the equilibrium
will be at __________.

an increase; left; Y = Y*
a decrease; right; Y > Y*
an increase; right; Y = Y*
a decrease; left; Y > Y*
no change; left; Y = Y*

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