Title: QUIZ: Long-Run Equilibrium Module
Course: FRE Resources > Section: Long-Run Equilibrium Module

Q: The intersection of the short-run aggregate supply, aggregate demand, and long-run aggregate supply represents __________.
- long-run disequilibrium
- long-run equilibrium
- short-run disequilibrium
- short-run equilibrium
A: long-run equilibrium
If right: That's correct!
If wrong: That is incorrect. The intersection of AD, SRAS, and LRAS is where the economy tends to settle in the long run. The LRAS represents the economy’s potential output—an estimate of what an economy could feasibly produce when it fully employs its available economic resources.

Q: Long-run equilibrium means the economy __________.
- is operating at potential output
- is experiencing cyclical unemployment
- has a low and stable rate of inflation
- is in a recession
A: is operating at potential output
If right: That's correct!
If wrong: That is incorrect. The LRAS represents the economy’s potential output, an estimate of what an economy could feasibly produce when it fully employs its available economic resources.

Q: Potential output is best defined as __________.
- an estimate of what an economy could feasibly produce when it fully employs its available economic resources
- the level of output an economy can produce when the unemployment rate is above 8 percent
- the total output an economy is producing when it is in long-run disequilibrium
- the total output an economy is producing when it is in short-run equilibrium
A: an estimate of what an economy could feasibly produce when it fully employs its available economic resources
If right: That's correct!
If wrong: That is incorrect. Potential output is an estimate of what an economy could feasibly produce when it fully employs its available economic resources.

Q: Which of the following would cause an economic shock?

1. Stock market crash
2. Natural disaster
3. Increase in exports
- I only
- II only
- I, II, and III
- I and II only
A: I, II, and III
If right: That's correct!
If wrong: That is incorrect. An economic shock is a sudden, unexpected change in factors such as stock market fluctuations, natural disasters, and demand for exports.

Q: Which of the following correctly identifies components that cause shifts of aggregate demand?
- Changes in the price of inputs, productivity, and consumption
- Changes in government purchases, short-run supply shocks, and investment in stocks and bonds
- Changes in consumption expenditures, investment, government purchases, and net exports
- Changes in the price of inputs, short-run supply shocks, and productivity
A: Changes in consumption expenditures, investment, government purchases, and net exports
If right: That's correct!
If wrong: That is incorrect. Changes in consumption expenditures, investment, government purchases, and net exports are components that cause shifts in aggregate demand.

Q: Which of the following correctly identifies components that cause shifts of aggregate supply?
- Changes in the price of inputs, productivity, and consumption
- Changes in government purchases, short-run supply shocks, and investment in stocks and bonds
- Changes in consumption expenditures, investment, and net exports
- Changes in the price of inputs, short-run supply shocks, and productivity
A: Changes in the price of inputs, short-run supply shocks, and productivity
If right: That's correct!
If wrong: That is incorrect. Changes in the price of inputs, short-run supply shocks, and productivity are all components of aggregate supply.

Q: Which of the following will cause a negative demand shock?
- A rising stock market increases the wealth of consumers.
- The government passes a bill to increase military spending.
- Foreign consumers increase their demand for U.S. goods and services (exports).
- A stock market crash decreases the wealth of businesses.
A: A stock market crash decreases the wealth of businesses.
If right: That's correct!
If wrong: That is incorrect. A stock market crash decreases the wealth of businesses and consumer confidence, which causes a negative demand shock.

Q: Which of the following will cause a positive demand shock?
- A rising stock market increases the wealth of consumers.
- The government passes a bill to decrease military spending.
- Foreign consumers decrease their demand for U.S. goods and services (exports).
- A stock market crash decreases the wealth of businesses.
A: A rising stock market increases the wealth of consumers.
If right: That's correct!
If wrong: That is incorrect. A rising stock market increases the wealth of businesses and consumer confidence, which causes a positive demand shock.

Q: An effect of short-run fluctuations due to a negative demand shock is __________.
- lower price level
- lower unemployment rates
- increase in RDGP
- higher employment rates
A: lower price level
If right: That's correct!
If wrong: That is incorrect. A negative demand shock would result in a lower price level.

Q: An effect of short-run fluctuations due to a positive demand shock is __________.
- higher price level
- higher unemployment rates
- decrease in output
- lower employment rates
A: higher price level
If right: That's correct!
If wrong: That is incorrect. A positive demand shock would result in a higher price level.

Q: Which of the following scenarios best describes a recessionary gap in the AS/AD model?
- The AD curve shifts left, resulting in short-run equilibrium below potential output.
- The SRAS curve shifts right, resulting in short-run equilibrium above potential output.
- The LRAS curve shifts left, resulting in long-run equilibrium below potential output.
- The AD curve shifts right, resulting in short-run equilibrium above potential output.
A: The AD curve shifts left, resulting in short-run equilibrium below potential output.
If right: That's correct!
If wrong: That is incorrect. The leftward shift of the AD curve moves short-run equilibrium away from potential output to below potential output. The gap between potential output and short-run equilibrium, when AD shifts left, represents a recessionary gap.

Q: Which of the following scenarios best describes an inflationary gap in the AS/AD model?
- The AD curve shifts left, resulting in short-run equilibrium below potential output.
- The SRAS curve shifts left, resulting in short-run equilibrium below potential output.
- The AD curve shifts right, resulting in short-run equilibrium above potential output.
- The LRAS curve shifts right, resulting in long-run equilibrium above potential output.
A: The AD curve shifts right, resulting in short-run equilibrium above potential output.
If right: That's correct!
If wrong: That is incorrect. The rightward shift of the AD curve moves short-run equilibrium away from potential output to above potential output. The gap between potential output and short-run equilibrium, when AD shifts right, indicates an inflationary gap.

Q: A __________ is a case in which aggregate demand turns out to be lower than expected, while a __________ is a case in which aggregate demand turns out to be higher than expected.
- negative demand shock; positive demand shock
- positive supply shock; negative supply shock
- positive demand shock; negative demand shock
- excess demand; excess supply
A: negative demand shock; positive demand shock
If right: That's correct!
If wrong: That is incorrect. When aggregate demand unexpectedly decreases, it is the result of a negative demand shock, and when aggregate demand unexpectedly increases, it is the result of a positive demand shock.

Q: Which of the following are the most likely short-run effects of a negative demand shock?

Real Gross Domestic Product (RGDP) | Price Level (PL) | Unemployment Rate
Increase | Decrease | Decrease
Decrease | Decrease | Decrease
Decrease | Decrease | Increase
Increase | Decrease | Increase
- RGDP: Increase, PL: Decrease, Unemployment Rate: Decrease
- RGDP: Decrease, PL: Decrease, Unemployment Rate: Decrease
- RGDP: Decrease, PL: Decrease, Unemployment Rate: Increase
- RGDP: Increase, PL: Decrease, Unemployment Rate: Increase
A: RGDP: Decrease, PL: Decrease, Unemployment Rate: Increase
If right: That's correct!
If wrong: That is incorrect. A negative demand shock will cause RGDP to decrease; since there is decreased aggregate demand, output may decrease. Price levels will also decrease since the decreased aggregate demand will mean fewer goods and services will have to be produced and some resources will be underutilized, which means that unemployment rates would actually increase.

Q: If an economy is operating below potential output as a result of decreased investment spending, the economy is experiencing a(n) __________.
- inflation
- expansion
- positive demand shock
- recession
A: recession
If right: That's correct!
If wrong: That is incorrect. When the short-run equilibrium is below potential output, the output is decreasing. Decreasing output is one indicator that the economy is in a recession.

Q: The self-correcting nature of markets draw the economy back to long-run equilibrium. This is because in the long run, __________.
- prices of inputs are flexible
- prices of goods and services are flexible
- prices of inputs are inflexible
- prices of goods and services are inflexible
A: prices of inputs are flexible
If right: That's correct!
If wrong: That is incorrect. In the long run, input price adjustments may occur; input prices are then “flexible,” such as unemployed workers willing to take lower wages.

Q: Refer to the graph below. At points Y1 and PL1, the economy is experiencing which of the following economic conditions?
- Recession
- Inflation
- Potential output
- Negative demand shock
A: Inflation
If right: That's correct!
If wrong: That is incorrect. When the economy is experiencing short-run equilibrium, the intersection of the SRAS and AD curves is to the right of the LRAS and raises the price level up, thus causing inflation. This is the result of “too much money chasing too few goods.”