Chapter 5 aggregate demand and aggregate supply

Chapter 33 Aggregate Demand and Aggregate Supply Sec00 Aggregate Demand and Aggregate Supply Introduction MULTIPLE CHOICE 1 Most economists use the aggregate demand and aggregate supply model primaril[.]

Chapter 33

Aggregate Demand and Aggregate Supply

Sec00-Aggregate Demand and Aggregate Supply-Introduction

MULTIPLE CHOICE

1 Most economists use the aggregate demand and aggregate supply model primarily to analyze

a short-run fluctuations in the economy

b the effects of macroeconomic policy on the prices of individual goods

c the long-run effects of international trade policies

d productivity and economic growth

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Sec01- Aggregate Demand and Aggregate Supply-Three Key Facts About

Economic Fluctuations

MULTIPLE CHOICE

2 Which of the following is correct?

a Short run fluctuations in economic activity happen only in developing countries

b During economic contractions most firms experience rising sales

c Recessions come at regular intervals and are easy to predict

d When real GDP falls, the rate of unemployment rises

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4 Which of the following is most commonly used to monitor short-run changes in economic activity?

a the inflation rate

b real GDP

c aggregate demand

d aggregate supply

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9 Which of the following is correct?

a Economic fluctuations are easily predicted by competent economists

b Recessions have never occurred very close together

c Other measures of spending, income, and production do not fluctuate closely with real GDP

d None of the above is correct

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11 During recessions which type of spending falls?

a consumption and investment

b investment but not consumption

c consumption but not investment

d neither consumption nor investment

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15 Which of the following typically rises during a recession?

16 Real GDP

a is the current dollar value of all goods produced by the citizens of an economy within a given time

b measures economic activity and income

c is used primarily to measure long-run changes rather than short-run fluctuations

d All of the above are correct

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18 As recessions begin, production

a and unemployment both rise

b rises and unemployment falls

c falls and unemployment rises

d and unemployment both fall

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Sec02-Aggregate Demand and Supply-Explaining Short-Run Economic

Fluctuations

MULTIPLE CHOICE

1 The classical dichotomy refers to the separation of

a variables that move with the business cycle and variables that do not

b changes in money and changes in government expenditures

c decisions made by the public and decisions made by the government

d real and nominal variables

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3 According to classical macroeconomic theory, changes in the money supply affect

a real GDP and the price level

b real GDP but not the price level

c the price level, but not real GDP

d neither the price level nor real GDP

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8 Most economists believe that classical macroeconomic theory is a good description of the economy

a in neither the short nor long run

b in the short run and in the long run

c in the short run, but not in the long run

d in the long run, but not in the short run

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13 In order to understand how the economy works in the short run, we need to

a study the classical model

b study a model in which real and nominal variables interact

c understand that “money is a veil.”

d understand that money is neutral in the short run

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18 The aggregate demand and aggregate supply graph has

a the price level on the horizontal axis The price level can be measured by the GDP deflator

b the price level on the horizontal axis The price level can be measured by real GDP

c the price level on the vertical axis The price level can be measured by the GDP deflator

d the price level on the vertical axis The price level can be measured by GDP

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21 The aggregate-demand curve shows the

a quantity of labor and other inputs that firms want to buy at each price level

b quantity of labor and other inputs that firms want to buy at each inflation rate

c quantity of domestically produced goods and services that households want to buy at each price level

d quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level

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22 The model of aggregate demand and aggregate supply explains the relationship between

a the price and quantity of a particular good

b unemployment and output

c wages and employment

d real GDP and the price level

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28 The model of aggregate demand and aggregate supply

a is different from the model of supply and demand for a particular market, in that we cannot focus

on the substitution of resources between markets to explain aggregate relationships

b is different from the model of supply and demand for a particular market, in that we have to

separate real and nominal variables in the aggregate model

c is a straightforward extension of the model of supply and demand for a particular market, in which substitution of resources between markets is highlighted

d is a straightforward extension of the model of supply and demand for a particular market, in which the interaction between real and nominal variables is highlighted

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Sec03-Aggregate Demand and Aggregate Supply-The Aggregate Demand Curve

MULTIPLE CHOICE

4 When the price level falls the quantity of

a consumption goods demanded rises, while the quantity of net exports demanded falls

b consumption goods demanded and the quantity of net exports demanded both rise

c consumption goods demanded and the quantity of net exports demanded both fall

d consumption goods demanded falls, while the quantity of net exports demand rises

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9 Which of the following effects helps to explain the downward slope of the aggregate-demand curve?

a the exchange-rate effect

b the wealth effect

c the interest-rate effect

d All of the above are correct

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13 For the US, the aggregate quantity of goods and services demanded changes as the price level rises because

a real wealth falls, interest rates rise, and the dollar appreciates

b real wealth falls, interest rates rise, and the dollar depreciates

c real wealth rises, interest rates fall, and the dollar appreciates

d real wealth rises, interest rates fall, and the dollar depreciates

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20 In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households

a increases and as a result consumption spending increases This effect contributes to the downward slope of the aggregate-demand curve

b decreases and as a result consumption spending increases This effect contributes to the upward slope of the aggregate-supply curve

c increases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases This effect contributes to the downward slope of the

aggregate-demand curve

d decreases and as a result households increase their money holdings; in turn, interest rates increase and investment spending decreases This effect contributes to the upward slope of the aggregate-supply curve

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21 As the price level rises

a people will want to buy more bonds, so the interest rate rises

b people will want to buy fewer bonds, so the interest rate falls

c people will want to buy more bonds, so the interest rate falls

d people will want to buy fewer bonds, so the interest rate rises

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26 Other things the same, an increase in the price level induces people to hold

a less money, so they lend less, and the interest rate rises

b less money, so they lend more, and the interest rate falls

c more money, so they lend more, and the interest rate falls

d more money, so they lend less, and the interest rate rises

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31 Other things the same, when the price level falls, interest rates

a rise, which means consumers will want to spend more on homebuilding

b rise, which means consumers will want to spend less on homebuilding

c fall, which means consumers will want to spend more on homebuilding

d fall, which means consumers will want to spend less on homebuilding

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32 When interest rates fall

a firms want to borrow more for new plants and equipment and households want to borrow more for homebuilding

b firms want to borrow more for new plants and equipment and households want to borrow less for homebuilding

c firms want to borrow less for new plants and equipment and households want to borrow more for homebuilding

d firms want to borrow less for new plants and equipment and households want to borrow less for homebuilding

37 For the US, in the context of the aggregate-demand curve, the interest-rate effect refers to the idea that, when the price level increases,

a the real value of money decreases; in turn, the real value of the dollar increases in foreign exchangemarkets, which decreases net exports

b the real value of money decreases; in turn, interest rates increase, which decreases net exports

c households increase their holdings of money; in turn, interest rates decrease, which reduces

spending on investment goods

d households increase their holdings of money; in turn, interest rates increase, which reduces

spending on investment goods

40 Other things the same, if the price level falls, people

a increase foreign bond purchases, so the supply of dollars in the market for foreign-currency

50 In the US, other things the same, a decrease in the price level causes the interest rate to

a increase, the dollar to appreciate, and net exports to increase

b increase, the dollar to depreciate, and net exports to decrease

c decrease, the dollar to depreciate, and net exports to increase

d decrease, the dollar to appreciate, and net exports to decrease

57 Other things the same as the price level rises,

a the dollar depreciates

b the interest rate falls

c people feel less wealthy

d All of the above are correct

64 In the US, other things the same, a decrease in the price level causes real wealth to

a fall, interest rates to fall, and the dollar to appreciate

b fall, interest rates to rise, and the dollar to depreciate

c rise, interest rates to rise, and the dollar to appreciate

d rise, interest rates to fall, and the dollar to depreciate

68 Suppose a stock market crash makes people feel poorer This decrease in wealth would induce people to desire

a decreased consumption, which shifts aggregate supply left

b decreased consumption, which shifts aggregate demand left

c increased consumption, which shifts aggregate supply right

d increased consumption, which shifts aggregate demand right

73 When taxes increase, consumption

a increases, so aggregate demand shifts right

b increases, so aggregate supply shifts right

c decreases, so aggregate demand shifts left

d decreases, so aggregate supply shifts left

77 Imagine that businesses in general believe that the economy is likely to head into recession and so they reduce capital purchases Their reaction would initially shift

a aggregate demand right

b aggregate demand left

c aggregate supply right

d aggregate supply left

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82 When the money supply increases

a interest rates fall and so aggregate demand shifts right

b interest rates fall and so aggregate demand shifts left

c interest rates rise and so aggregate demand shifts right

d interest rates rise and so aggregate demand shifts left

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89 Which of the following shifts aggregate demand to the right?

a Congress reduces purchases of new weapons systems

b The Fed buys bonds in the open market

c The price level falls

d Net exports fall

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94 Which of the following both shift aggregate demand right?

a net exports rise for some reason other than a price change and the money supply rises

b net exports rise for some reason other than a price change and the price level rises

c net exports fall for some reason other than a price change and the money supply rises

d net exports fall for some reason other than a price change and the price level rises

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100 If the dollar appreciates, perhaps because of speculation or government policy, then U.S net exports

a increase which shifts aggregate demand right

b increase which shifts aggregate demand left

c decrease which shifts aggregate demand right

d decrease which shifts aggregate demand left

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105 If speculators gained greater confidence in foreign economies so that they wanted to buy more assets of foreign countries and fewer U.S bonds,

a the dollar would appreciate which would cause aggregate demand to shift right

b the dollar would appreciate which would cause aggregate demand to shift left

c the dollar would depreciate which would cause aggregate demand to shift right

d the dollar would depreciate which would cause aggregate demand to shift left

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Sec04-Aggregate Demand and Aggregate Supply-The Aggregate-Supply Curve

MULTIPLE CHOICE

1 Which of the following is not a determinant of the long-run level of real GDP?

a the price level

b the supply of labor

c available natural resources

d available technology

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2 The long-run aggregate supply curve

a is vertical

b is a graphical representation of the classical dichotomy

c indicates monetary neutrality in the long run

d All of the above are correct

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7 The long-run aggregate supply curve would shift right if immigration from abroad

a increased or Congress made a substantial increase in the minimum wage

b decreased or Congress abolished the minimum wage

c increased or Congress abolished the minimum wage

d decreased or Congress made a substantial increase in the minimum wage

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12 The long-run aggregate supply curve would shift right if the government were to

a increase the minimum-wage

b make unemployment benefits more generous

c raise taxes on investment spending

d None of the above is correct

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17 Which of the following shifts the long-run aggregate supply curve to the right?

a both an increase in the capital stock and technological improvements

b an increase in the capital stock but not technological improvements

c an increase in the capital stock but not technological improvements

d neither an increase in the capital stock nor an technological improvements

22 Other things the same, if the capital stock increases, then in the long run

a both output and prices are higher

b output is higher and prices are lower

c output is lower and prices are higher

d both output and prices are lower

27 Other things the same, continued increases in the money supply lead to

a continued increases in the price level and real GDP

b continued increases in the price level but not continued increases in real GDP

c continued increases in real GDP but not continued increases in the price level

d a one-time permanent increase in both prices and real GDP

32 The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,

a production is more profitable and employment rises

b production is more profitable and employment falls

c production is less profitable and employment rises

d production is less profitable and employment falls

37 Which of the following can explain the upward slope of the short-run aggregate supply curve?

a nominal wages are slow to adjust to changing economic conditions

b as the price level falls, the exchange rate falls

c an increase in the money supply lowers the interest rate

d an increase in the interest rate increases investment spending

42 If there are sticky wages, and the price level is greater than what was expected, then

a the quantity of aggregate goods and services supplied falls, which is shown by a shift of the run aggregate supply curve to the left

short-b the quantity of aggregate goods and services supplied falls, as shown by a movement to the left along the short-run aggregate supply curve

c the quantity of aggregate goods and services supplied rises, as shown by a shift of the short-run aggregate supply curve to the right

d the quantity of aggregate goods and services supplied rises, as shown by a movement to the right along the short-run aggregate supply curve

49 The misperceptions theory of the short-run aggregate supply curve says that if the price level is higher than people expected, then some firms believe that the relative price of what they produce has

a decreased, so they increase production

b decreased, so they decrease production

c increased, so they increase production

d increased, so they decrease production

52 According to the misperceptions theory of the short-run aggregate supply curve, if a firm thought that inflation was going to be 4 percent and actual inflation was 2 percent, then the firm would believe that the relative price of what it produces had

a increased, so it would increase production

b increased, so it would decrease production

c decreased, so it would increase production

d decreased, so it would decrease production

60 If the actual price level is 165, but people had been expecting it to be 160, then

a the quantity of output supplied rises, but only in the short run

b the quantity of output supplied rises in the short run and the long run

c the quantity of output supplied falls, but only in the short run

d the quantity of output supplied falls in the short run and the long run

61 Assuming that a is positive, theories of short-run aggregate supply are expressed mathematically as

a quantity of output supplied = natural rate of output + a(actual price level - expected price level).

b quantity of output supplied = natural rate of output + a(expected price level - actual price level).

c quantity of output supplied = a(actual price level -expected price level) - natural rate of output.

d quantity of output supplied = a(expected price level - actual price level) - natural rate of output.

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