1.Which of the following describes the way in which the self-correcting mechanism of the economy resolves the problem of a recessionary gap?

a.The recessionary gap is cured by an increase in government purchases of goods and services, which implies a shift to the right of the AD curve until full employment equilibrium is reestablished.

b. The unemployment associated with a recessionary gap causes wages to fall, increasing Aggregate Supply and thus shifting the AS curve to the right until a full employment equilibrium is reestablished.

c.The unemployment associated with a recessionary gap causes a decrease in Aggregate Supply, shifting the AS curve to the left until full employment equilibrium is restored.

d.Both (a) and (b) are correct.

e. None of the above.

Question 2

1. Which of the following explain why the Aggregate Demand curve is downward sloping?

a. An increase in the price level decreases the purchasing power of money denominated wealth, which in turn causes a decline in on consumption spending.

b. An increase in the price level decreases the purchasing power of money, which means that more money is needed to purchase goods. This causes buyers of investment and durable goods to require bigger loans to finance their purchases. This, in turn, causes an increase in the demand for loanable funds which leads to a higher interest rate. A higher interest rate will reduce the real purchases of investment and durable goods.

c. An increase in the price level makes goods relatively more expensive to foreigners causing them to buy less which means that net exports will decline.

d. All of the above.

e. None of the above.

Question 3.

1. Which of the following explain why the Aggregate Supply curve is upward sloping?

a. As the price level rises consumers are forced to work longer hours to stay ahead of inflation.

b. Demand and therefore sales increase as prices increase.

c. Changes in wages and prices of other resources lag behind changes in product prices.

d. All of the above.

e. None of the above.

Question 4.

1. Which of the following statements about the Long-Run Aggregate Supply (LRAS) are true?

a. The LRAS represents the full-employment level of real GDP.

b. The LRAS represents the level of income and production consistent with resource markets equilibrium.

c. The LRAS represents the potential production of the economy.

d.All of the above.

e. None of the above.