METU
Department of Economics
Econ 210-All Sections
PROBLEM SET 6
Chapter 26
1. Explain the factors that determine the position and slope of the Aggregate Demand (AD)
curve. How do changes in these factors affect equilibrium output and price levels in the short
run?
2.Given the following information for the economy of Econland:
Price Level AD (billions) SRAS (billions) LRAS (billions)
100 150 100 120
120 140 110 130
140 130 120 140
160 120 130 150
a) Draw the AD, SRAS, and LRAS curves for Econland.
b) Determine the short-run equilibrium output and price level.
c) Identify any existing gaps in the short run and calculate their magnitudes.
d) Discuss the adjustments that occur to restore long-run equilibrium, illustrating the
process graphically.
3. Consider an economy experiencing a recessionary gap. Discuss the appropriate fiscal
policy actions the government could take to close the gap. Using AD-AS diagrams, illustrate
the impact of:
a) An increase in government spending.
b) A decrease in personal income taxes.
Analyze the effectiveness of each policy in restoring equilibrium output and price
levels.
4. Draw diagrams for
a) inflationary gap
b) recessionary gap
and explain why any economy experiences inflationary and recessionary gaps? (hint:
over or underuse of resources)
5. Assuming all other factors remain constant, consider the following scenario:
Wages in the economy have increased by 3%.
Productivity has increased by 2%.
a) Using the AD-AS model, analyze the expected impact of these changes on the
economy's equilibrium price level. Illustrate your analysis graphically by shifting the
appropriate curves and explaining the adjustments in output and price level.
b) Discuss the implications of the calculated change in the price level on
macroeconomic stability. Consider factors such as inflationary pressures, output
levels, and the effectiveness of monetary and fiscal policy tools in stabilizing the
economy.
6. Describe the Aggregate Supply (AS) model, outlining its components and the
factors that affect it. In particular, discuss how changes in input prices, technological
advancements, government policies, and expectations impact the short-run and long-
run aggregate supply curves.
MUTIPLE CHOICE QUESTIONS
1. The slope of the short-run aggregate supply (SRAS) curve is primarily influenced by:
A) Changes in input prices.
B) Technological advancements.
C) Consumer confidence.
D) Fiscal policy.
2. In the long run, an increase in government spending is most likely to:
A) Increase potential GDP.
B) Decrease the price level.
C) Decrease aggregate demand.
D) Shift the long-run aggregate supply curve.
3. The concept of "crowding out" refers to:
A) A decrease in private investment due to increased government borrowing.
B) An increase in consumer spending caused by a reduction in taxes.
C) The effect of expansionary fiscal policy on aggregate demand.
D) The impact of technological advancements on productivity growth.
4.Which of the following is true regarding the Aggregate Supply (AS) curve?
A) It is upward-sloping in the short run and vertical in the long run.
B) It is vertical in the short run and upward-sloping in the long run.
C) It is vertical in both the short run and the long run.
D) It is upward-sloping in both the short run and the long run.
5.The concept of "full employment" in macroeconomics refers to:
A) Every individual in the economy having a job.
B) The unemployment rate being zero.
C) The economy operating at its potential output level.
D) All available resources being fully utilized.
6. If the actual unemployment rate in an economy is above the natural rate of unemployment,
this indicates:
A) A recessionary gap.
B) An inflationary gap.
C) Full employment.
D) Stagflation.
7.In the AD-AS model, an increase in government spending would lead to:
A) An increase in both output and price level in the short run.
B) A decrease in both output and price level in the short run.
C) An increase in output and a decrease in the price level in the short run.
D) A decrease in output and an increase in the price level in the short run.
8. A leftward shift of the Aggregate Demand (AD) curve could be caused by:
A) An increase in consumer confidence.
B) A decrease in the money supply.
C) An increase in government spending.
D) A decrease in taxes.
9. What is the multiplier effect in macroeconomics?
A) The process by which government spending directly leads to an increase in
aggregate demand.
B) The phenomenon where an initial change in spending results in a larger final
impact on real GDP.
C) The tendency for changes in investment to be magnified and amplified by
fluctuations in consumer confidence.
D) The concept of monetary policy effectiveness in influencing interest rates and
investment levels.
