APM 3.3-3.6_Aggregate Supply & AD-AS Shifts & Equilibrium

SHORT-RUN AGGREGATE SUPPLY (SRAS)
What causes the SRAS curve to slope upward?

• • Decreasing interest rates

• • Sticky wages and prices

• • Increasing taxes

• • Decreasing productivity

Answer explanation

• What causes the SRAS curve to slope upward?

  • a) Incorrect: Decreasing interest rates impact investment, not SRAS slope.

  • b) Correct: Sticky wages and prices mean input costs don’t change immediately with price levels, leading to higher profits and more production when prices rise.

  • c) Incorrect: Increasing taxes would shift the SRAS curve, not affect its slope.

  • d) Incorrect: Decreasing productivity would reduce output, but not cause the SRAS curve to slope upward.

Short-Run Aggregate Supply (SRAS)

If price levels decrease in the short run, what is the most likely outcome?

• • An increase in unemployment

• • An increase in production

• • A decrease in production

• • A rise in wages

Answer explanation

If price levels decrease in the short run, what is the most likely outcome?

• a) Incorrect: Unemployment might rise, but the question focuses on production.

• b) Incorrect: A decrease in price levels leads to less profitability, reducing production, not increasing it.

• c) Correct: Lower price levels reduce profit margins, causing a decrease in production.

• d) Incorrect: Wages are sticky in the short run, so they do not rise immediately when price levels fall.

Short-Run Aggregate Supply (SRAS)
Why does SRAS shift upward when price levels increase?

• • Wages rise immediately

• • Wages rise immediately

• • Firms produce more because input prices stay the same

• • Real GDP falls as price levels rise

Answer explanation

Why does SRAS shift upward when price levels increase?

• a) Incorrect: Wages do not rise immediately in the short run due to sticky prices.

• b) Correct: Firms produce more as input costs remain constant, leading to increased production at higher price levels.

• c) Incorrect: Real GDP does not fall with price level increases in the short run.

• d) Incorrect: More workers may be hired with increased production, but it is not the reason SRAS slopes upward.

SRAS Shifters

Which of the following would cause the SRAS curve to shift to the right?

• • An increase in energy prices

• • A decrease in corporate taxes

• • A decrease in worker productivity

• • An increase in business regulations

Answer explanation

• Which of the following would cause the SRAS curve to shift to the right?

  • a) Incorrect: Higher energy prices increase production costs, shifting SRAS to the left.

  • b) Correct: A decrease in corporate taxes reduces business costs, increasing profitability and shifting SRAS to the right.

  • c) Incorrect: Decreased productivity shifts SRAS to the left as businesses can produce fewer goods.

  • d) Incorrect: More regulations increase production costs, shifting SRAS to the left.

SRAS Shifters

What happens to SRAS when inflation expectations rise?

• • It shifts to the left

• • It shifts to the right

• • It moves along the curve

• • It remains unchanged

Answer explanation

What happens to SRAS when inflation expectations rise?

• a) Correct: Higher inflation expectations cause workers to demand higher wages, which raises input costs and shifts SRAS to the left.

• b) Incorrect: Rising inflation expectations lead to higher production costs, not increased supply.

• c) Incorrect: Changes in inflation expectations shift the curve, not cause movement along it.

• d) Incorrect: Higher inflation expectations do affect SRAS by increasing costs.

SRAS Shifters

Which factor would most likely cause the SRAS curve to shift left?

• • Decreased productivity

• • Lower taxes on businesses

• • Fewer government regulations

• • Decreased inflation expectations

Answer explanation

Which factor would most likely cause the SRAS curve to shift left?

• a) Correct: Decreased productivity means less output for the same input, reducing overall supply and shifting SRAS left.

• b) Incorrect: Lower taxes on businesses reduce production costs and shift SRAS right.

• c) Incorrect: Fewer regulations reduce costs, shifting SRAS to the right.

• d) Incorrect: Decreased inflation expectations reduce cost pressures, shifting SRAS to the right.

SRAS Shifters
How would a decrease in business regulations affect SRAS?

• • Shift SRAS to the left

• Shift SRAS to the right

• No effect on SRAS

• • Movement along the curve

Answer explanation

How would a decrease in business regulations affect SRAS?

• a) Incorrect: Fewer regulations reduce costs, leading to increased production, not decreased production.

• b) Correct: Reduced regulations lower costs for businesses, making production more profitable and shifting SRAS to the right.

• c) Incorrect: Changes in regulations shift SRAS, not leave it unchanged.

• d) Incorrect: Regulation changes shift the SRAS curve rather than causing movement along it.

Long-Run Aggregate Supply (LRAS)

Why is the LRAS curve vertical?

• • Real GDP increases with the price level in the long run.

• • Wages and input prices are sticky.

• • Wages and input prices are flexible.

• • Real GDP is influenced by inflation.

Answer explanation

Why is the LRAS curve vertical?

• a) Incorrect: In the long run, real GDP is independent of price levels.

• b) Incorrect: Sticky wages apply to the short run, not the long run.

• c) Correct: Wages and input prices fully adjust in the long run, so changes in price levels do not affect output.

• d) Incorrect: Real GDP is constant in the long run regardless of inflation.

Long-Run Aggregate Supply (LRAS)
At full employment, what kind of unemployment exists in the long run?

• • No unemployment

• • Only cyclical unemployment

• • Frictional and structural unemployment

• • Both cyclical and frictional unemployment

Answer explanation

At full employment, what kind of unemployment exists in the long run?

• a) Incorrect: Full employment includes natural levels of unemployment, so zero unemployment is not possible.

• b) Incorrect: Cyclical unemployment is absent at full employment.

• c) Correct: Full employment includes frictional and structural unemployment but not cyclical unemployment.

• d) Incorrect: Cyclical unemployment does not exist at full employment.

Long-Run Aggregate Supply (LRAS)
What happens to long-run real GDP when price levels increase?

• • Real GDP increases

• • Real GDP decreases

• • Real GDP stays the same

• • Real GDP fluctuates unpredictably

Answer explanation

What happens to long-run real GDP when price levels increase?

• a) Incorrect: In the long run, real GDP is unaffected by price level changes.

• b) Incorrect: A decrease in real GDP would indicate a recession, but price level changes do not affect long-run output.

• c) Correct: Long-run real GDP stays constant at the full employment level regardless of price changes.

• d) Incorrect: Real GDP does not fluctuate unpredictably in the long run.