Page 240 - Krugmans Economics for AP Text Book_Neat

Tackle the Test: Multiple-Choice Questions
1. Which of the following causes a negative supply shock? Refer to the graph for questions 4 and 5.
I. a technological advance
II. increasing productivity Aggregate LRAS SRAS
price
III. an increase in oil prices level
a. I only
b. II only E
c. III only P 1
d. I and III only
e. I, II, and III
2. Which of the following causes a positive demand shock?
AD
a. an increase in wealth
Y 1 Real GDP
b. pessimistic consumer expectations
c. a decrease in government spending 4. Which of the following statements is true if this economy is
d. an increase in taxes operating at P 1 and Y 1 ?
e. an increase in the existing stock of capital I. The level of aggregate output equals potential output.
3. During stagflation, what happens to the aggregate price level II. It is in short-run macroeconomic equilibrium.
and real GDP? III. It is in long-run macroeconomic equilibrium.
Aggregate price level Real GDP a. I only
a. decreases increases b. II only
b. decreases decreases c. III only
c. increases increases d. II and III
d. increases decreases e. I and III
e. stays the same stays the same 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.

Tackle the Test: Free-Response Questions

Aggregate LRAS SRAS
price Answer (7 points)
level
1 point: Yes
E 1 point: The economy is in short-run equilibrium because it operates at the
P 1 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
AD equal to potential output
$1,000 1,200 Real GDP 1 point: Inflationary gap
Y 1 1 point: [($1,200 − $1,000)/$1,000] × 100 = 20%
1 point: It will approach zero
1. Refer to the graph above.
a. Is the economy in short-run macroeconomic
2. Draw a correctly labeled aggregate demand and aggregate
equilibrium? Explain.
supply graph illustrating an economy in long-run
b. Is the economy in long-run macroeconomic
macroeconomic equilibrium.
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?

198 section 4 National Income and Price Determination