2.4.3 Equilibrium levels of real national output Quiz: Pearson Edexcel Economics A, Unit 2

The 20 questions

1. Equilibrium real national output in the AD/AS model is found where:

   • the long-run AS curve cuts the short-run AS curve
   • aggregate demand equals aggregate supply at the price level
   • aggregate demand exceeds aggregate supply at every price level
   • the price level is at its lowest possible value

2. When aggregate demand exceeds aggregate supply at the current price level, the economy tends to:

   • experience a fall in both output and demand at once, because excess demand leads firms to cut production and households spend less
   • experience pressure on prices and firms expanding output, moving towards a new equilibrium
   • remain in a stable equilibrium with no adjustment pressure, because demand and supply are both fixed at the current price level
   • experience falling stocks of unsold goods and falling prices, because firms are forced to cut prices to clear their shelves

3. A rightward shift of AD, with AS unchanged in the short run, will in the new equilibrium lead to:

   • a lower real national output and a higher price level
   • an unchanged price level and an unchanged real national output
   • a higher real national output and a lower price level
   • a higher real national output and a higher price level

4. A leftward shift of SRAS, with AD unchanged, will in the new equilibrium lead to:

   • a higher real national output and a lower price level
   • a lower real national output and a lower price level
   • a lower real national output and a higher price level
   • a higher real national output and a higher price level

5. Which statement best describes equilibrium in the AD/AS model in the long run?

   • output is at the potential level and the price level has adjusted so AD equals LRAS
   • output is always above potential, because firms expand indefinitely
   • the price level is permanently fixed, so AD and AS never meet
   • output is set by the government and cannot change in response to demand

6. In an AD/AS diagram, a rise in the price level that accompanies an increase in output is best explained by:

   • a shift of the long-run AS curve to the left with AD unchanged
   • a fall in the short-run AS curve with AD unchanged
   • a rightward shift of AD on an upward-sloping short-run AS curve
   • a leftward shift of AD on a vertical long-run AS curve

7. Which of the following would be an accurate description of a change in equilibrium real national output?

   • it is determined by the exchange rate alone in all cases, because the exchange rate sets the level of both aggregate demand and supply
   • it can change because AD or AS shifts, which moves the intersection of the two curves
   • it is always fixed at the level of government spending, since public expenditure sets the output of the economy in every period
   • it changes only when the price level changes, with AD and AS held fixed by policy, so output moves only in response to prices

8. Stagflation is best represented on an AD/AS diagram by:

   • a leftward shift of AD, which lowers both output and prices
   • a rightward shift of LRAS, which lowers prices and raises output, because the economy's productive capacity expands in response
   • a leftward shift of SRAS, which raises the price level while lowering real output
   • a rightward shift of AD, which raises output and lowers prices, so the economy grows while the price level falls in the same period

9. If AD = 1,200 and AS = 1,000 at a given price level, what is the most likely short-run outcome?

   • The price level falls because demand exceeds supply
   • Output falls because firms cannot sell their goods
   • The price level rises and output expands towards equilibrium
   • The economy is in a stable equilibrium at this price level

10. An economy's equilibrium real output is 800 and the potential output is 900. Which statement best describes this?

    • The economy has a positive output gap and is above potential
    • The economy has a fixed price level and no output gap
    • The economy has a negative output gap and spare capacity
    • The economy is at potential output with no output gap

11. Which statement best evaluates the use of AD/AS diagrams to predict the effect of policy?

    • They are simplified tools, so the predicted size of effects depends on assumptions about the slopes and shifts of the curves
    • They are irrelevant because equilibrium output never changes in practice
    • They show only the effect on the exchange rate and never on prices or output, so they are of little use for analysing inflation or growth
    • They provide exact predictions of the effect of any policy with no uncertainty

12. A rise in consumer confidence raises AD. Which combination best describes the short-run equilibrium change?

    • neither output nor the price level changes in the short run
    • output rises and the price level falls, since demand increases
    • output and the price level both rise, provided SRAS is upward sloping
    • output falls and the price level rises, since demand is higher

13. Which best explains why equilibrium real output may not equal potential output?

    • Equilibrium output depends only on the exchange rate and never on demand
    • Potential output is set by the money supply, so it is always met as long as the central bank keeps the stock of money at the correct level
    • Equilibrium output always equals potential output by definition
    • Short-run demand shocks can move the economy away from potential output until prices and wages adjust

14. In the AD/AS model, an equilibrium price level of 105 with real output of 1,050 is combined with a leftward AS shift. Which is the most likely outcome?

    • an unchanged price level and higher real output
    • a higher price level and higher real output
    • a lower price level and higher real output than before the shift
    • a higher price level and lower real output than before the shift

15. Which statement about the relationship between AS and the price level in the short run is most accurate?

    • A higher price level reduces the output that firms are willing to supply in all cases
    • AS depends only on the level of AD and not on prices, so firms supply whatever output households are willing to buy at the current prices
    • The price level has no effect on AS in any time period, since firms' supply decisions depend only on the level of demand in the economy
    • A higher price level encourages firms to supply more in the short run, because some costs are slow to adjust

16. Which of these is most likely to cause the economy to return to potential output in the long run after a positive demand shock?

    • a fall in the price of imported energy that shifts AD to the right, which raises spending and output above potential for a sustained period
    • falling wages that shift LRAS to the right permanently
    • a rise in government spending that keeps output above potential
    • rising wages and input costs that shift SRAS to the left until output returns to potential

17. Which statement best evaluates the view that equilibrium output is fixed in the long run?

    • It is false, because equilibrium output is always set by the central bank through its control of interest rates and the money
    • It is broadly true in classical models, but Keynesian views suggest output can deviate from potential for longer periods
    • It is irrelevant, because only the price level is determined in equilibrium
    • It is always true, because equilibrium output never changes under any circumstances

18. Which of these changes would move equilibrium real output and the price level in opposite directions?

    • a leftward shift of SRAS with AD unchanged
    • a rise in the exchange rate with AD and SRAS unchanged
    • a rightward shift of AD with SRAS unchanged
    • a rightward shift of LRAS with AD unchanged

19. A fall in aggregate demand, with an upward-sloping SRAS, most likely causes which short-run effect?

    • the price level is unchanged while real output rises
    • the price level falls and real output falls
    • the price level rises and real output rises
    • the price level falls and real output rises

20. If planned expenditure exceeds output at the current level of national income, firms are most likely to:

    • raise the rate of saving out of current income
    • reduce investment spending on new capital equipment
    • build up unsold stocks and cut production
    • run down stocks of goods and increase production

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