Chapter 18 Determination of Output and Price

▍ Macroeconomic equilibrium

1. When the aggregate demand curve intersects the short run aggregate supply curve, the corresponding
output level is equal to __________.
(1) potential output level
(2) total quantity of output demanded in the short run
(3) total quantity of output supplied in the short run
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

2. If an economy is at the short run equilibrium,

A. its output equals the full-employment output.
B. its output is greater than the full-employment output.
C. its output is smaller than the full-employment output.
D. its output can be greater than, smaller than or equal to the full-employment output.

3. Which of the following descriptions about macroeconomic equilibrium is INCORRECT?

A. When an economy is at the short run macroeconomic equilibrium, the total quantity of output
supplied is equal to the full-employment output level.
B. When an economy is at the long run macroeconomic equilibrium, the total quantity of output
demanded is equal to the total quantity of output supplied.
C. Short run macroeconomic equilibrium is found where the short run aggregate supply curve
intersects the aggregate demand curve.
D. Long run macroeconomic equilibrium is found where the long run aggregate supply curve
intersects the aggregate demand curve.

▍ Deviations of short run equilibrium from long run equilibrium

4. Which of the following statements about inflationary gaps and deflationary gaps is CORRECT?
A. Inflationary gaps and deflationary gaps can exist in both the short run and the long run.
B. When the total quantity of output demanded is equal to the total quantity of output supplied,
inflationary gap and deflationary gap do not exist.
C. The existence of an inflationary gap implies that the economy experiences inflation.
D. A deflationary gap implies that the economy has an excess supply of labour.

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5. There will be an inflationary gap if

A. the full-employment output level is higher than the output level.
B. the output level is higher than the full-employment output level.
C. the quantity of output demanded is higher than the quantity of output supplied in the short run.
D. the quantity of output demanded is lower than the quantity of output supplied in the short run.

6. __________ will widen an inflationary gap.

(1) An increase in the desire to save
(2) A decrease in the sales tax rate
(3) An increase in the basic allowance of the salaries tax
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

7. Refer to the diagram below. The economy is initially at point E.

Price level LRAS

SRAS

AD

Output
0 Y0

Which of the following statements are CORRECT?

(1) There is an inflationary gap.
(2) There is an excess demand for labour.
(3) The short run equilibrium output level is lower than the full-employment output level.
(4) In the long run, output level is larger than Y0.
A. (1) and (2) only
B. (1) and (3) only
C. (2) and (4) only
D. (3) and (4) only

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8. Suppose an economy is now at the long run equilibrium. Which of the following will result in a short
run equilibrium output level lower than the full-employment output level?
A. an increase in the general price level
B. an increase in foreign demand for domestic exports
C. an increase in labour cost
D. a decrease in the expected price level

▍ Changes in the equilibrium output and price levels

9. Refer to the following diagram. The economy is initially at E0.

Price level
LRAS1 LRAS0

SRAS1

SRAS0
E1
E0
AD0

AD1

Output
0

Suppose there are labour strikes. Which of the following is/are CORRECT?
(1) In the short run, the output level will decrease.
(2) In the short run, the price level will decrease.
(3) The long run equilibrium will be at E1.
A. (1) only
B. (1) and (3) only
C. (2) and (3) only
D. (1), (2) and (3)

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10. Refer to the following diagram. The economy is initially at E.

Price level
LRAS

SRAS0
E
P0 SRAS1
P1
P2 AD0

AD1

Output
0 Y0 Y1

Suppose there is a decrease in the price of raw materials. In the long run, the price level will be
___________ while the output level will be ____________.
A. P0 … Y0
B. P1 … Y0
C. P1 … Y1
D. P2 … Y1

11. Refer to the following diagram. Point E is the initial equilibrium.

Price level
LRAS1 LRAS2

F SRAS1
H
SRAS2
E
G AD2

AD1

Output
0

Suppose there is an increase in people’s desire to consume. The short run equilibrium and long run
equilibrium will be at ________ and ________ respectively.
A. point H … point F
B. point G … point H
C. point H … point E
D. Point F … point H

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12. Refer to the following diagram. Point E is the initial equilibrium.

Price level
LRAS
SRAS3

T SRAS1

E SRAS2
U V
W
AD2
AD1
AD3
Output
0
Suppose the government increases its spending and at the same time there is a decrease in oil price.
The short run equilibrium will be at point ______.
A. T
B. U
C. V
D. W

13. Suppose the economy is initially at the long run equilibrium. Which of the following will result in an
increase in the price level and a decrease in real GDP?
A. an increase in aggregate demand and a decrease in short run aggregate supply
B. an decrease in aggregate demand and an increase in short run aggregate supply
C. an increase in both short run aggregate supply and long run aggregate supply
D. a decrease in both short run aggregate supply and long run aggregate supply

14. Which of the following will result in the short run output level being higher than the full-employment
output level?
A. an increase in the tax rebate on the salaries tax
B. the government abolishing all subsidies to producers
C. an increase in the interest rate
D. a decrease in the price level

15. Which of the following will lead to an increase in the real output of an economy in the short run?
A. an appreciation of domestic currency and an abolishment of sales tax
B. a decrease in oil price and a fall in people’s willingness to consume
C. a decrease in interest rate and a decrease in oil price
D. an increase in business confidence and an increase in the minimum wage rate

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16. An increase in social welfare benefit will lead to

(1) an increase in aggregate demand.
(2) an increase in long run aggregate supply.
(3) an increase in potential output level.
(4) an increase in the general price level.
A. (1) and (4) only
B. (2) and (3) only
C. (1), (3) and (4) only
D. (2), (3) and (4) only

17. An increase in potential output level with a higher long run price level can be caused by
A. an increase in aggregate demand and short run aggregate supply.
B. an increase in short run aggregate supply and long run aggregate supply .
C. an increase in aggregate demand and long run aggregate supply.
D. None of the above.

18. Suppose an economy is initially at long run equilibrium. Under the market adjustment mechanism
from the short run equilibrium to the long run equilibrium,
A. a change in aggregate demand has no effect on the price and output levels in the long run.
B. a change in short run aggregate supply has no effect on the price and output levels in the long
run.
C. a change in long run aggregate supply has no effect on the price and output levels in the long
run.
D. a simultaneous change in aggregate demand and short run aggregate supply has no effect on the
price and output levels in the long run.

19. An increase in the number of statutory public holidays may lead to __________ in labour supply and
__________ in full-employment output level.
A. an increase … an increase
B. an increase … a decrease
C. a decrease … an increase
D. a decrease … a decrease

1. Explain the difference between the following concepts:

(a) short run macroeconomic equilibrium; long run macroeconomic equilibrium (2 marks)
(b) below full-employment equilibrium; above full-employment equilibrium (2 marks)

2. (a) What is an inflationary gap? Explain with the aid of a diagram. (4 marks)
(b) Explain why inflationary gaps do not exist in the long run. (2 marks)

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3. Suppose there is a deflationary gap in an economy. Suggest ONE policy that can narrow the
deflationary gap without raising the price level. Explain your answer with the aid of a diagram.
(6 marks)

4. The diagram below shows the aggregate demand (AD) curve, the short run aggregate supply (SRAS)
curve and the long run aggregate supply (LRAS) curve of an economy. Point E is the initial short run
equilibrium of the economy.

Price level
LRAS0
SRAS0

AD0

Aggregate output
0 Yf

With the aid of the above diagram, explain why a reduction in the interest rate helps the economy
restore to its long run equilibrium. (5 marks)

5. With the aid of separate diagrams, explain the effect of the following events on price and output
levels in the short run.
(a) People are optimistic about their job prospects. (5 marks)
(b) Tariffs on various imported goods decrease. (5 marks)

6. With the aid of a diagram, explain the effects of advancement in production technology on the price
and output levels in the short run. (5 marks)

7. Study the following news excerpt.

Country A’s authorities are going to relax immigration

requirements for immigrants from Country C and
Country D. Investment requirements will decrease from
$10,000,000 to $5,000,000.

With the aid of a diagram, explain the long run effect of the above event to Country A’s price level
and real output. (7 marks)

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HKDSE Economics Exam Kit [Chapter 18 Determination of Output and Price]

8. Refer to the following news excerpt.

On September 2019, the world’s largest oil processing

facility in Saudi Arabia was attacked by drones, causing a
huge fire at a processor which is crucial to the energy
supply around the globe.

Suppose an economy initially operates at the long run equilibrium. With the aid of a diagram, explain
how the above incident will affect the price and output levels of the economy
(a) in the short run. (5 marks)
(b) in the long run, with reference to the mechanism of moving from a short run equilibrium to a
long run equilibrium. (5 marks)

9. An economy wants to reduce its reliance on imported goods. It plans to provide production subsidy
to local producers as well as to impose a quota on imported goods. With the aid of a diagram, explain
why the price level of the economy may increase in the short run. (8 marks)

10. In economy A, there is a problem of labour shortage and inflationary gap. An economist suggests that
raising the minimum wage rate can relieve the problems. Evaluate, with the aid of diagrams, the
suggestion of the economist
(a) by studying demand and supply of labour of economy A; (5 marks)
(b) using the AS-AD model. (5 marks)

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