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Suppose an economy is in long-run equilibrium. The central bank raises the money supply by 5 percent. what causes the economy to move from its short-run equilibrium to its long-run equilibrium?

1. The government increases taxes to curb aggregate demand.

2. Nominal wages, prices, and perceptions adjust upward to this new price level.

3. The government increases spending to increase aggregate demand.

4. Nominal wages, prices, and perceptions adjust downward to this new price level.

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Darryn D'Souza
Darryn D'SouzaLv10
11 Sep 2020
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Related questions

1. If the price level doubles and the real output doesn't change, then nominal output also doubles.
2. Inflation makes it less difficult to interpret the information conveyed by prices.

3. Laissez-faire economists oppose government intervention in the market process.

4. Active demand management policies are based on the work of JohnMaynard Keynes.

5. In the AS/AD model, as the price level rises, the real value of assets increases, causing consumption to increase. This is one reason why the aggregate demand curve slopes down.

6. The short-run aggregate supply curve is upward sloping in part because increases in aggregate demand cause some firms to increase their price markups.

7. If productivity and wages both raises by 3 percent, then the short-run aggregate supply curve does not shift.

8. The long-run aggregate supply curve is vertical because all prices adjust in the long run.

9. If the economy is not in long-run equilibrium and other things are equal, then prices will eventually adjust to bring the economy to long-run equilibrium.

10. Most economists agree that it is possible for fiscal policy to fine-tune the economy.

1) If actual (equilibrium ) real GDP is less than the full-employment, or natural, level of real GDP, then wages and other input prices are expected to:

a. fall and SRAS to shift to the left until long-run equilibrium is achieved.

b. fall and SRAS to shift to the right until long-run equilibrium is achieved.

c. rise and SRAS to shift to the left until long-run equilibrium is achieved.

d. rise and SRAS to shift to the right until long-run equilibrium is achieved.

2) In a self-regulating economy, inflationary gaps are automatically eliminated in the long run by:

a. decreases in wage rates that cause short-run aggregate supply to shift rightward.

b. decreases in wage rates that cause short-run aggregate supply to shift leftward.

c. increases in wage rates that cause short-run aggregate supply to shift rightward.

d. increases in wage rates that cause short-run aggregate supply to shift leftward.

3) Assume the economy is initially in equilibrium at the full-employment level of real GDP. If businesses and consumers become pessimistic regarding future economic conditions, ceteris paribus, the aggregate demand curve will shift to the ________, causing the level of output to ______.

a. left; fall

b. right; fall

c. left; rise

d. right; rise

4) Economists that advocate a macroeconomic policy of laissez-faire:

a. believe the economy is self-regulating only if the government intervenes to move the economy to equilibrium at natural real GDP.

b. believe the economy is self-regulating and will automatically move to equilibrium at natural real GDP in the long run.

c. also advocate central planning and government control of resources.

d. also advocate active government intervention in the economy.

5) Which of the following summarizes the process for closing a recessionary gap if the economy is self-regulating?

a. Labor shortages put upward pressure on wages, which leads to higher costs of production and a decrease in short-run aggregate supply.

b. Labor shortages put downward pressure on wages, which leads to increases in employment and spending and an increase in aggregate demand.

c. Unemployed resources put upward pressure on the price level, which leads to higher wages, increases in spending, and increases in aggregate demand.

d. Unemployed resources put downward pressure on the price level, which leads to lower costs of production and an increase in short-run aggregate supply.

(6 points) Suppose an economy is initially at its long-run equilibrium and aggregate demand increases. How do price level, real GDP and nominal wage rate change in the short run and in the long run?

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