Aggregate Demand and Aggregate Supply ❮ 123- Equilibrium real GDP is far below full employ
ment, and the government lowers household
taxes. Which is the likely result?
(A) Unemployment falls with little inflation.
(B) Unemployment rises with little inflation.
(C) Unemployment falls with rampant inflation.
(D) Unemployment rises with rampant inflation.
(E) No change occurs in unemployment or
inflation. - What is the difference between the shortrun
Phillips curve (SRPC) and the longrun Phillips
curve (LRPC)?
(A) The SRPC is downward sloping and the
LRPC is horizontal.
(B) The SRPC is upward sloping and the LRPC
is downward sloping.
(C) The SRPC is vertical and the LRPC is hori
zontal.
(D) The SRPC is downward sloping and the
LRPC is vertical.
(E) The SRPC is downward sloping and the
LRPC is upward sloping.
6. The effect of the spending multiplier is lessened if
(A) the price level is constant with an increase in
aggregate demand.
(B) the price level falls with an increase in aggre
gate supply.
(C) the price level is constant with an increase in
longrun aggregate supply.
(D) the price level falls with an increase in both
aggregate demand and aggregate supply.
(E) the price level rises with an increase in aggre
gate demand.
❯ Answers and Explanations
- C—An increase in consumption spending increases
the AD curve, or shifts it to the right. Along the
SRAS curve, we see increasing real GDP, a rising
aggregate price level, and a lower unemployment
rate. - A—All resources are employed at full employ
ment in the long run, so firms cannot respond
to an increase in the price level by increasing
production. Thus, any increase in prices cannot
increase production in the long run, and so AS
is assumed to be vertical. Any shortrun discrep
ancy in GDP, above or below, full employment
adjusts back to GDPf in the long run.
3. B—Stagflation is an increase in the price level
and an increase in unemployment. This is most
often the result of falling SRAS and a constant
AD. Choice D is incorrect because a simultane
ous decrease in AD puts downward pressure on
the price level, which offsets the upward pressure
from falling SRAS.
4. A—A deep recession describes macroeconomic
equilibrium in the horizontal section of SRAS.
Here, rising AD increases real GDP, and lowers
unemployment, with little inflation.
5. D—The shortrun Phillips curve shows an inverse
relationship between inflation rates and unem
ployment rates but the longrun Phillips curve is
vertical at the natural rate of unemployment.
6. E—The full spending multiplier effect of an
increase in AD is felt only if there is no rise in the
price.