True or False:
1. Starting with the economy initially at full-employment equilibrium, a sudden increase in oil prices would result in a recessionary gap.
2. Holding AD constant, falling oil prices would lead to lower prices, lower output, and lower rates of unemployment.
3. A fall in AD would reduce real output and the price level and increase unemployment in the short run—a recessionary gap.
4. In a recession, unemployed workers and other input suppliers will bid down wages and prices, and the resulting reduction in production costs shifts the short-run aggregate supply curve to the right.
5. Downward wage stickiness may lead to prolonged periods of recession in response to decreases in aggregate demand by making the economy’s adjustment mechanism slower.
6. If the economy is currently in a recessionary gap, with output less than potential output, the price level is higher than workers anticipated.
7. When aggregate demand increases, workers’ and input suppliers’ purchasing power falls in the short run; but input suppliers’ purchasing power is restored at a higher price level in the long run.
8. The AD/AS model is a precise tool for analyzing the economy.