AP_Krugman_Textbook

198 section 4 National Income and Price Determination

Tackle the Test: Multiple-Choice Questions

1. Which of the following causes a negative supply shock?
   I. a technological advance
   II. increasing productivity
   III. an increase in oil prices
   a. I only
   b. II only
   c. III only
   d. I and III only
   e. I, II, and III


2. Which of the following causes a positive demand shock?
   a. an increase in wealth
   b. pessimistic consumer expectations
   c. a decrease in government spending
   d. an increase in taxes
   e. an increase in the existing stock of capital


3. During stagflation, what happens to the aggregate price level
   and real GDP?
   Aggregate price level Real GDP
   a. decreases increases
   b. decreases decreases
   c. increases increases
   d. increases decreases
   e. stays the same stays the same

Refer to the graph for questions 4 and 5.

4. Which of the following statements is true if this economy is
   operating at P 1 andY 1?
   I. The level of aggregate output equals potential output.
   II. It is in short-run macroeconomic equilibrium.
   III. It is in long-run macroeconomic equilibrium.
   a. I only
   b. II only
   c. III only
   d. II and III
   e. I and III


5. The economy depicted in the graph is experiencing a(n)
   a. contractionary gap.
   b. recessionary gap.
   c. inflationary gap.
   d. demand gap.
   e. supply gap.

Real GDP

Aggregate

price

level

Y 1

LRAS SRAS

AD

E

P 1

Tackle the Test: Free-Response Questions

1. Refer to the graph above.
   a. Is the economy in short-run macroeconomic
   equilibrium? Explain.
   b. Is the economy in long-run macroeconomic
   equilibrium? Explain.
   c. What type of gap exists in this economy?
   d. Calculate the size of the output gap.
   e. What will happen to the size of the output gap in the
   long run?

Real GDP

Aggregate
price
level

LRAS SRAS

AD

E

P 1

$1,000 1,200

Y 1

Answer (7 points)

1 point:Ye s

1 point:The economy is in short-run equilibrium because it operates at the

point where short-run aggregate supply and aggregate demand intersect.

1 point:No

1 point:Short-run equilibrium occurs at a level of aggregate output that is not

equal to potential output

1 point:Inflationary gap

1 point:[($1,200−$1,000)/$1,000]× 100 =20%

1 point:It will approach zero

2. Draw a correctly labeled aggregate demand and aggregate
   supply graph illustrating an economy in long-run
   macroeconomic equilibrium.