Economics Review Questions and Answers – Week 12

How does an increase in aggregate demand affect the economy?

• An increase in aggregate demand can lead to higher output and employment, but may also cause inflation if the economy is operating near full capacity.

• An increase in aggregate demand always leads to lower prices and reduced employment.

• An increase in aggregate demand causes a decrease in both output and inflation.

• An increase in aggregate demand has no effect on output, employment, or inflation.

What does the formula AD = C + I + G + (X – M) represent?

• It represents the components of aggregate demand: Consumer spending (C), Investment (I), Government spending (G), Exports (X) minus Imports (M).

• It represents the components of aggregate supply: Consumer spending (C), Investment (I), Government spending (G), Exports (X) minus Imports (M).

• It represents the calculation of national income using only government spending and investment.

• It represents the calculation of inflation rate in an economy.

Explain why the aggregate demand curve slopes downwards.

• Because as price levels fall, real incomes increase, interest rates decrease, and exports become more competitive.

• Because as price levels rise, real incomes increase, interest rates decrease, and exports become more competitive.

• Because as price levels fall, real incomes decrease, interest rates increase, and exports become less competitive.

• Because as price levels rise, real incomes decrease, interest rates increase, and exports become more competitive.

What factors can cause the aggregate supply curve to shift?

• Changes in input prices (like wages or raw materials), taxes, and productivity can shift aggregate supply.

• Only changes in consumer preferences can shift aggregate supply.

• Aggregate supply is only affected by government spending.

• Aggregate supply shifts only due to changes in the money supply.

How does potential growth help policymakers?

• It guides fiscal and monetary policy decisions by setting a benchmark for sustainable economic growth.

• It determines the level of government spending required for infrastructure projects.

• It directly controls the inflation rate in the economy.

• It sets the legal framework for international trade agreements.

Identify two ways the government can promote economic growth through investment.

• By investing in infrastructure and education/workforce development.

• By increasing tariffs and reducing imports.

• By cutting funding for public services and welfare programs.

• By limiting access to higher education and job training.

How does supporting research and development lead to economic growth?

• It fosters innovation, leading to new products and industries that boost productivity and output.

• It reduces the need for skilled workers in the economy.

• It discourages competition among businesses.

• It leads to higher taxes and less consumer spending.

Define unemployment and explain why it is a key economic indicator.

• Unemployment is the state of being jobless while actively seeking work. It reflects labor market health and overall economic performance.

• Unemployment is the state of being employed in multiple jobs at once. It measures the number of people with more than one job.

• Unemployment is the process of choosing not to work despite available opportunities. It indicates personal preference for leisure.

• Unemployment is the increase in the number of businesses in an economy. It reflects business growth and expansion.

What is frictional unemployment and what causes it?

• Frictional unemployment occurs when people are between jobs or entering the labor market, often due to voluntary job changes.

• Frictional unemployment is caused by a lack of available jobs in the economy due to recession.

• Frictional unemployment occurs when workers are replaced by machines and technology.

• Frictional unemployment is the result of government-imposed wage controls.

Structural unemployment differs from cyclical unemployment in that:

• Structural unemployment is caused by changes in the economy that make certain skills obsolete, while cyclical unemployment is caused by downturns in the business cycle.

• Structural unemployment occurs only during recessions, while cyclical unemployment occurs at all times.

• Cyclical unemployment is permanent, while structural unemployment is temporary.

• Structural unemployment affects only young workers, while cyclical unemployment affects only older workers.