Page 231 - Krugmans Economics for AP Text Book_Neat

2. Because changes in the aggregate price level have no effect on 4. A decrease in which of the following will cause the short-run
aggregate output in the long run, the long-run aggregate supply aggregate supply curve to shift to the left?
curve is a. commodity prices
a. vertical. b. the cost of health care insurance premiums paid by
b. horizontal. employers
c. fixed. c. nominal wages
d. negatively sloped. d. productivity
e. positively sloped. e. the use of cost-of-living allowances in labor contracts
3. The horizontal intercept of the long-run aggregate supply 5. That employers are reluctant to decrease nominal wages Section 4 National Income and Price Determination
curve is during economic downturns and raise nominal wages during
a. at the origin. economic expansions leads nominal wages to be described as
b. negative. a. long-run.
c. at potential output. b. unyielding.
d. equal to the vertical intercept. c. flexible.
e. always the same as the horizontal intercept of the short-run d. real.
aggregate supply curve. e. sticky.

Tackle the Test: Free-Response Questions
1. a. Draw a correctly labeled graph illustrating a long-run 2. a. Draw a correctly labeled short-run aggregate supply curve.
aggregate supply curve. b. On your graph from part a, illustrate a decrease in short-run
b On your graph from part a, label potential output. aggregate supply.
c. On your graph from part a, illustrate an increase in long-run c. List three types of changes, including the factor that changes
aggregate supply. and the direction of the change, that could lead to a decrease
d. What could have caused the change you illustrated in part c? in aggregate supply.
List three possible causes.

Answer (8 points)

Aggregate
price LRAS 1 LRAS 2
level

Y P1 Y P2 Real GDP
1 point: Vertical axis labeled “Aggregate price level” (or “Price level”)
1 point: Horizontal axis labeled “Real GDP”
1 point: Vertical curve labeled “LRAS” (or “LRAS 1 ”)
1 point: Potential output labeled Y P (or Y P1 ) on horizontal axis at intercept of
long-run aggregate supply curve
1 point: Long-run aggregate supply curve shifted to the right
1 point: An increase in the quantity of resources (land, labor, capital, or
entrepreneurship)
1 point: An increase in the quality of resources
1 point: Technological progress

module 18 Aggregate Supply: Introduction and Determinants 189