The determination of level of output and price: Practice Questions

In the AD-AS model, when an economy is at its long-run equilibrium, the intersection of the aggregate demand (AD) curve and the short-run aggregate supply (SRAS) curve __________.

In the AD-AS model, if the households in an economy suddenly increase their marginal propensity to consume, what will be the most likely effect on the equilibrium real output and the price level in the short run?

Suppose an economy is initially in its long-run equilibrium. There is a permanent and significant decrease in the global demand for the economy's exports. Assuming the economy adjusts through its self-correcting mechanism without any government intervention, which of the following will occur in the long run?

Suppose an economy experiences two simultaneous shocks: a significant decrease in government expenditure AND a major technological breakthrough that reduces production costs across the economy. Assuming the economy starts at full employment, what is the unambiguous short-run effect on the equilibrium real output (\(Y\)) and the general price level (\(P\))?

Suppose an economy is initially at its long-run equilibrium. Two events then occur simultaneously:
(i) A government initiative significantly improves the productivity of the labor force through education and training.
(ii) There is a sustained increase in foreign demand for the economy’s exports.
In the long run, which of the following MUST be correct regarding the new equilibrium?

Explain how an increase in government expenditure affects the aggregate demand (AD) curve in an economy.

Suppose there is a significant technological advancement in an economy. Describe its short-run and long-run effects on the equilibrium output and price level within the \( AD \)-\( AS \) framework.

Assume an economy is initially operating at its long-run equilibrium. A sudden, substantial increase in global demand for its exports occurs simultaneously with a significant rise in domestic labour costs due to new government regulations. Analyze the immediate (short-run) impact on the equilibrium price level and real output, and describe the eventual adjustment mechanism to a new long-run equilibrium.

Suppose an economy is operating below its full employment level. The government then decides to launch a massive infrastructure development program, significantly increasing its spending on building new roads and bridges. Explain the short-run effect of this increase in government spending on the equilibrium price level and real output in the economy, referring to the Aggregate Demand-Aggregate Supply (AD-AS) model.

An economy is initially in a long-run equilibrium. Due to unexpected geopolitical tensions, there is a substantial and sustained increase in the global price of crude oil, a key input for many industries.

(a) Explain the short-run effect of this increase in global oil prices on the equilibrium price level and real output in the economy, using the Aggregate Demand-Aggregate Supply (AD-AS) model.

(b) Assuming there is no government intervention, explain the mechanism through which the economy will adjust from the short-run equilibrium described in part (a) back to its long-run equilibrium.