AP Macro Unit 4 Lesson 3 - Spring 2011

An increase in oil prices causes a negative supply shock because it raises the cost of production for businesses, reducing their profitability and ability to supply goods and services. This can lead to higher prices for consumers and a decrease in economic output. Technological advances and increased productivity, on the other hand, generally have a positive impact on the supply side of the economy by improving efficiency and reducing costs.

Positive consumer expectations for the future cause a positive demand shock. When consumers have positive expectations about the future, they are more likely to increase their spending on goods and services. This increase in consumer spending leads to an increase in demand, which can stimulate economic growth and activity. Positive consumer expectations can create a sense of optimism and confidence in the economy, encouraging consumers to make purchases and invest in the future. This, in turn, can have a positive impact on businesses and overall economic performance.

If the economy is operating at P1 and Y1, it means that it is in short-run macroeconomic equilibrium. This is because short-run macroeconomic equilibrium occurs when the aggregate output (Y) is equal to the aggregate demand (AD) at the current price level (P). In this case, the statement II only is true. The other statements, I and III, are not necessarily true as they depend on different conditions and factors.

The correct answer is recession. This can be inferred from the graph, which shows a decline in economic activity. A recession is characterized by a significant decline in economic growth, often accompanied by a decrease in employment, consumer spending, and investment.

Stagflation refers to a situation where there is a combination of high inflation (increase in the aggregate price level) and stagnant economic growth (decrease in real GDP). This means that prices are rising while the economy is not growing, leading to a decrease in real GDP.