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What do economists believe is the relationship between the price level (P) and real output (Y)
in the short run and the long run, and how does this answer differ depending on which time
frame is being considered? How are these beliefs reflected visually in the AS-AD model? In
particular, why are the SRAS and LRAS curves upward sloping and vertical, respectively?

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Chika Ilonah
Chika IlonahLv10
28 Sep 2019

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Related questions

What do economists believe is the relationship between the price level and real output in the short and long run, and how does this answer differ depending on which time frame is being considered? How are these beliefs reflected visually in the AS-AD model? why are the SRAS and LRAS curves upward sloping and vertical.

1. Which of the following is likely to happen if the Fed buys Treasury securities from banks?

  interest rate rises; investment falls
  interest rate rises; investment rises
  interest rate falls; investment rises
  interest rate falls; investment falls

2. The main goal of monetary policy is to shift

  AD.
  SRAS.
  LRAS.
  both AD and SRAS.
  both AD and LRAS.

3. Which of the following is true regarding the effects of an expansionary monetary policy?

  Printing more money will affect real GDP only in the short run because all prices do not adjust fully in the short run.
  Printing more money will affect real GDP both in the short and long run because inflation is a natural occurrence of expansionary monetary policy.
  Printing more money will not lower the value of money in the short run because prices are fully flexible in the short run.
  Printing more money will ultimately raise the value of money in the long run because prices are fully flexible in the long run.

4. In which of the following cases are you likely to be adversely affected by unexpected inflation?

  You, the owner of a local restaurant, charge the price of lamb lasagna as per the daily market rate of lamb.
  You purchase Mountain Dew every day from the dormitory vending machine, which keeps its prices fixed for the entire school year.
  You, the owner of an airline company, sign a two-year contract for airline fuel.
  You deposit $10,000 in a bank account for 5 years for a fixed interest rate of 1%.

5. The Phillips curve depicts the relation between

  real GDP and price level.
  price level and inflation rate.
  unemployment rate and inflation rate.
  unemployment rate and real GDP.

6. Which of the following statements is true regarding the shapes of short-run and long-run Phillips curves?

  The short-run Phillips curve is vertical and the long-run Phillips curve is downward sloping.
  The short-run Phillips curve is downward sloping and the long-run Phillips curve is vertical.
  Both the short-run and long-run Phillips curves are downward sloping.
  Both the short-run and long-run Phillips curves are vertical.

7. Suppose the table below lists the actual annual inflation rates for 2010 to 2015. What would be the most likely predictions people make about the inflation rate for 2016 based on adaptive and rational expectations theories, respectively?

Year Actual Inflation rate
2010 0%
2011 0%
2012 3%
2013 3%
2014 6%
2015 6%
   
  6% and 3%
  6% and 9%
  6% and 12%
  9% and 6%
  3% and 6%

8. Which of the following can change relatively quickly in the short-run?

  the price of a latte in a coffee shop
  the salary of a finance professor
  the rent paid for a store

a) In the AD-AS model, stagflation does not persist, because the working of the self-correcting mechanism of the economy _____ the level of output and _____ the price level until the economy eventually returns to a long-run equilibrium state, where actual output _____ potential output.
decreases; decreases; falls short of
increases; decreases; equals
decreases; increases; exceeds
decreases; increases; equals
increases; decreases; exceeds
b) The LRAS curve is drawn as a vertical line at potential output (Y*) to indicate that
Y* is independent of the price level and that actual output Y > Y* in the long run
Y* equals actual output (Y) in the long run
Y* is independent of the price level and that actual output Y = Y* in the long run
Y* is independent of the price level
Y* is independent of the price level and that actual output Y < Y* in the long run
c) Stagflation arises in the context of the AD-AS model when some external factor causes
the LRAS curve to shift to the right
the AD curve to shift leftwards
the SRAS curve to shift downwards
the SRAS curve to shift upwards
the AD curve to shift rightwards
d) If the SRAS curve is positively sloped, then a decrease in the demand for Canadian-made goods in Europe will lead to _____ in the price level, in the short run.
either an increase or a decrease
no change
an increase
a decrease
an initial increase, and then a decrease
e) Which of the following will shift the aggregate demand curve to the right?
Consumers become pessimistic about the future
A new technology is developed that will increase profits
Income taxes are raised
Foreign economies fall into recession, reducing their demand for domestic exports
The government reduces purchases to balance the budget
f) Suppose a stock market crash decreases the stock of household wealth and therefore causes autonomous consumption to fall. Which of the following is the likely result?
A leftward shift the AD curve
There will be no movement of the AD curve
A movement down the AD curve
A movement up the AD curve
A rightward of the shift the AD curve
g) An economy is characterized by the AD equation P = 200 ? 0.02Y, SRAS equation P = 100 and LRAS equation Y* = 5000. In the absence of any change in policy or exogenous shocks, this economy will achieve a long-run price level of
100
110
120
90
105
h) The AD-AS model depicts a self-correcting economy. This means that the price level in the model adjusts automatically in response to a(n) _____ gap, so as to eliminate the _____ gap in the long run, without requiring any help from government policies.
recessionary; recessionary
recessionary; expansionary
expansionary; expansionary
output; output
expansionary; recessionary
i) The aggregate demand curve shows
the amount of planned aggregate expenditure (and output) at the current price level
the amount of planned aggregate expenditure (and output) at an average price level
the amount of planned aggregate expenditure (and output) at a constant price level
the amount of planned aggregate expenditure (and output) at various price levels
the amount of planned aggregate expenditure (and output) at last year's price level
j) Consider an economy initially at long-run equilibrium with output (Y) equal to potential output (Y*). If the SRAS is positively sloped, then a shift to the right of the AD curve will lead to _____ in the price level, in the short run. In the long run, the SRAS curve will shift to the _____ and the equilibrium will be at __________.
an increase; left; Y = Y*
a decrease; right; Y > Y*
an increase; right; Y = Y*
a decrease; left; Y > Y*
no change; left; Y = Y*

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