1. Assume the economy is in a recession. Using aggregate demand (AD) and aggrega
ID: 1177406 • Letter: 1
Question
1. Assume the economy is in a recession. Using aggregate demand (AD) and aggregate supply (AS), the economic situation of a recession can be shown as:
A. Macroeconomic equilibrium is achieved where the AD curve intersects the AS curve to the right of potential output %u2013 as a result there is an increase in the inflation rate.
B. The economy is not in an equilibrium where AD = AS.
C. Macroeconomic equilibrium is achieved where the AD curve intersects the AS curve at potential output - as a result there no output gap between actual and potential output.
D. Macroeconomic equilibrium is achieved where the AD curve intersects the AS curve to the left of potential output %u2013 as a result there is an output gap between actual and potential output.
2. Assume the economy is in a recession and that the annual GDP growth rate is equal to 1%. As a result:
A. Aggregate supply will grow equal to supply side growth and aggregate demand growth will be positive but grow at a slower rate. Therefore the output gap will increase.
B. Aggregate supply will grow equal to supply side growth and aggregate demand will decrease. Therefore the output gap will increase.
C. Aggregate supply will grow equal to supply side growth and aggregate demand will keep pace. Therefore the output gap will remain constant.
D. Aggregate supply will grow equal to supply side growth and aggregate demand will grow at a faster rate. Therefore the output gap will shrink.
3. Assume the economy is in a recession and that the annual GDP growth rate is equal to 4%. As a result:
A. Aggregate supply will grow equal to supply side growth and aggregate demand will decrease. Therefore the output gap will increase.
B. Aggregate supply will grow equal to supply side growth and aggregate demand will keep pace. Therefore the output gap will remain constant.
C. Aggregate supply will grow equal to supply side growth and aggregate demand will grow at a faster rate. Therefore the output gap will shrink.
D. Aggregate supply will grow equal to supply side growth and aggregate demand growth will be positive but grow at a slower rate. Therefore the output gap will increase.
Explanation / Answer
1. Assume the economy is in a recession. Using aggregate demand (AD) and aggregate supply (AS), the economic situation of a recession can be shown as:
A. Macroeconomic equilibrium is achieved where the AD curve intersects the AS curve to the right of potential output – as a result there is an increase in the inflation rate.
B. The economy is not in an equilibrium where AD = AS.
C. Macroeconomic equilibrium is achieved where the AD curve intersects the AS curve at potential output - as a result there no output gap between actual and potential output.
D. Macroeconomic equilibrium is achieved where the AD curve intersects the AS curve to the left of potential output – as a result there is an output gap between actual and potential output.
2. Assume the economy is in a recession and that the annual GDP growth rate is equal to 1%. As a result:
A. Aggregate supply will grow equal to supply side growth and aggregate demand growth will be positive but grow at a slower rate. Therefore the output gap will increase.
B. Aggregate supply will grow equal to supply side growth and aggregate demand will decrease. Therefore the output gap will increase.
C. Aggregate supply will grow equal to supply side growth and aggregate demand will keep pace. Therefore the output gap will remain constant.
D. Aggregate supply will grow equal to supply side growth and aggregate demand will grow at a faster rate. Therefore the output gap will shrink.
3. Assume the economy is in a recession and that the annual GDP growth rate is equal to 4%. As a result:
A. Aggregate supply will grow equal to supply side growth and aggregate demand will decrease. Therefore the output gap will increase.
B. Aggregate supply will grow equal to supply side growth and aggregate demand will keep pace. Therefore the output gap will remain constant.
C. Aggregate supply will grow equal to supply side growth and aggregate demand will grow at a faster rate. Therefore the output gap will shrink.
D. Aggregate supply will grow equal to supply side growth and aggregate demand growth will be positive but grow at a slower rate. Therefore the output gap will increase.
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