Aggregate Supply Quiz Questions

The aggregate supply curve shows the total supply of goods and services in an economy. It represents the relationship between the overall price level and the quantity of output that firms are willing and able to supply. As the price level increases, firms are incentivized to produce more goods and services, leading to an upward sloping aggregate supply curve. Conversely, as the price level decreases, firms may reduce their production, resulting in a downward sloping aggregate supply curve. The aggregate supply curve is an important tool for understanding the dynamics of the economy and analyzing factors that affect the overall supply of goods and services.

When businesses' taxes are reduced, they will have more incentive to produce efficiently. This is because lower taxes mean they can keep a larger portion of their profits, providing a financial incentive to maximize their productivity and efficiency. With reduced taxes, businesses have more resources available to invest in new technologies, improve operations, and expand their production capabilities. This increased incentive to produce efficiently can lead to higher productivity, lower costs, and ultimately, greater profitability for the businesses.

The correct answer is "Upward" because the short-run aggregate supply curve shows the relationship between the price level and the quantity of real GDP supplied in the short run. As the price level increases, firms are willing to supply more output due to higher profits, resulting in an upward sloping curve. Conversely, as the price level decreases, firms reduce their output due to lower profits, causing the curve to slope upwards. This relationship is based on the assumption that input prices remain constant in the short run.

An improvement in the quality of the factors of production or an increase in the quantity of the factors of production will cause the LRAS (Long-Run Aggregate Supply) curve to shift to the right. This means that the economy's potential output will increase, as there are either better inputs or more inputs available for production. This can result in higher levels of real GDP and lower levels of unemployment in the long run.

Supply side policies aim to increase the potential output of the economy by either increasing the quantity of factors of production or improving their quality. By increasing the quantity of factors of production, such as labor and capital, the economy can produce more goods and services. Additionally, improving the quality of factors of production, through investments in education and technology, can also enhance productivity and output. Therefore, the correct answer is to increase the potential output of the economy by increasing the quantity of factors of production and/or improving their quality.

The slope of the long-run aggregate supply curve is vertical because in the long run, the economy's output is determined by the available resources and technology, not by the price level. This means that changes in the price level do not affect the level of output in the long run, resulting in a vertical slope.

The correct answer is "Increase their costs of production, and reducing aggregate supply." When governments place regulations on business operations, it often leads to increased costs for businesses. This can be due to compliance costs, such as implementing new safety measures or environmental standards, or increased administrative costs. These increased costs of production can then lead to a decrease in aggregate supply, as businesses may have to reduce their output or increase prices to offset the higher costs.

Privately owned profit-maximizing firms are likely to be much more efficient and productive than government-run firms. This is because private firms have a profit motive, which incentivizes them to operate efficiently and maximize their productivity in order to generate higher profits. They have the flexibility to make quick decisions and adapt to market demands, without being constrained by bureaucratic processes and political considerations that often slow down government-run firms. Additionally, private firms are subject to competition, which further drives them to improve efficiency and productivity in order to stay competitive in the market.

When taxes are reduced, individuals have more disposable income. This can lead to increased motivation for labor to work harder and become more productive. With the expectation of keeping more of their earnings, individuals are incentivized to put in more effort and strive for higher productivity. Therefore, there will be a greater incentive for labor to work harder and become more productive when taxes are reduced.

The Keynesian Long-Run Aggregate Supply (LRAS) curve has three phases. These phases represent different levels of output and employment in the economy. The first phase is the horizontal portion of the curve, indicating a recessionary gap with high unemployment and low output. The second phase is the upward sloping portion, indicating a range of output levels where increases in aggregate demand result in higher prices but not significant increases in output or employment. The third phase is the vertical portion, indicating full employment and maximum output where increases in aggregate demand only lead to higher prices and not higher output.

A reduction in trade union power will decrease the ability of unions to negotiate high wages, which in turn lowers the costs of production for firms. This decrease in costs allows firms to increase their potential output.

In the last phase of the Keynesian LRAS curve, it is impossible to increase output. This is because the Keynesian LRAS curve represents the long-run aggregate supply, which is the level of output that can be sustained in the long run. In the last phase, the economy is already operating at its full potential and any attempt to increase output beyond this level would lead to inflationary pressures. Therefore, increasing output is not possible in this phase.

The total amount of goods and services in an economy. This means that aggregate supply represents the overall level of production and output in an economy, including both goods and services. It is an important concept in macroeconomics as it helps to understand the overall performance of an economy and its ability to meet the demand for goods and services.