Question

1. Consider an economy at full employment. If consumers and firms become less optimistic about the future economy then

a) price levels will rise.

b) output will rise.

c) unemployment will rise.

2. A ________ in an AD/AS diagram could explain a decrease in cyclical unemployment.

a) shift in AS to the left

b) shift in AD to the right

c) shift in AS to the right

3. An AD/AS model showing equilibrium in the steep section of the aggregate supply curve suggests

a) the economy is in recession.

b) potential GDP is being exceeded.

c) potential GDP is being met.

Answer 1

1. a) price levels will rise.
(As consumers and firms become less optimistic about the future then the prices in the economy will rise)

2. b) shift in AD to the right
(As AD increases, cyclical unemployment will decline)

3. c) potential GDP is being met.
(Steep section of AS curve shows economy is at full employment so equilibrium in the steep section shows potential GDP is being met.)