Question 1

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

Accepted Answer

A) True 
 B)False  False

Question 2

To say that nominal prices are sticky means

Accepted Answer

A)  the average price level seldom changes. 
B)  relative prices seldom change. 
C)  it takes at least one year for prices to change to a new equilibrium level. 
D)  it takes time for prices to adjust to equilibrium. 
A)  the average price level seldom changes. 
B)  relative prices seldom change. 
C)  it takes at least one year for prices to change to a new equilibrium level. 
D)  it takes time for prices to adjust to equilibrium. D

Question 3

Suppose an economy is in recession. If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? Create a chart to depict an economy in recession.

Accepted Answer

The graph below depicts an economy in a recession. The short-run aggregate supply curve is AS₁ and the economy is in equilibrium at point A, which is to the left of the long-run aggregate supply curve. If policymakers take no action, the economy will return to the long-run aggregate supply curve over time since the actual price level will be below the price level that people expected. Individuals will eventually correct their expectations about the price level. As they do so, prices and wages will adjust accordingly, shifting the aggregate supply curve to the right to AS₂. The economy's new equilibrium is at point B. The rightward shift in aggregate supply eventually causes output to rise back to the natural rate.

The graph below depicts an economy in a recession. The short-run aggregate supply curve is AS<sub>1</sub> and the economy is in equilibrium at point A, which is to the left of the long-run aggregate supply curve. If policymakers take no action, the economy will return to the long-run aggregate supply curve over time since the actual price level will be below the price level that people expected. Individuals will eventually correct their expectations about the price level. As they do so, prices and wages will adjust accordingly, shifting the aggregate supply curve to the right to AS<sub>2</sub>. The economy's new equilibrium is at point B. The rightward shift in aggregate supply eventually causes output to rise back to the natural rate.

Question 4

According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices

Accepted Answer

A)  increase money holdings, decrease lending, interest rates rise, and investment spending falls. 
B)  increase the value of money holdings and consumer spending increases. 
C)  decrease the value of money holdings and consumer spending decreases. 
D)  reduce money holdings, increase lending, interest rates fall, and investment spending increases. 
A)  increase money holdings, decrease lending, interest rates rise, and investment spending falls. 
B)  increase the value of money holdings and consumer spending increases. 
C)  decrease the value of money holdings and consumer spending decreases. 
D)  reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Question 5

An increase in price expectations shifts the long-run aggregate supply curve to the left.

Accepted Answer

A) True 
 B)False

Question 6

Most economists believe that money neutrality holds

Accepted Answer

A)  in the short run but not the long run. 
B)  in the long run but not the short run. 
C)  in both the short run and the long run. 
D)  in neither the short run nor the long run. 
A)  in the short run but not the long run. 
B)  in the long run but not the short run. 
C)  in both the short run and the long run. 
D)  in neither the short run nor the long run.

Question 7

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Accepted Answer

A) True 
 B)False

Question 8

Make a list of things that would shift the long-run aggregate supply curve to the right.

Accepted Answer

Examples (or variations) include increas

Question 9

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

Accepted Answer

A)  Output rises; prices are unchanged from the initial value. 
B)  Output and the price level are unchanged from their initial values. 
C)  Output falls; prices are unchanged from the initial value. 
D)  Prices fall; output is unchanged from its initial value. 
E)  Prices rise; output is unchanged from its initial value. 
A)  Output rises; prices are unchanged from the initial value. 
B)  Output and the price level are unchanged from their initial values. 
C)  Output falls; prices are unchanged from the initial value. 
D)  Prices fall; output is unchanged from its initial value. 
E)  Prices rise; output is unchanged from its initial value.

Question 10

Policy makers are said to "accommodate" an adverse supply shock if they

Accepted Answer

A)  fail to respond to the adverse supply shock and allow the economy to adjust on its own. 
B)  respond to the adverse supply shock by decreasing aggregate demand, which lowers prices. 
C)  respond to the adverse supply shock by decreasing short-run aggregate supply. 
D)  respond to the adverse supply shock by increasing aggregate demand, which further raises prices. 
A)  fail to respond to the adverse supply shock and allow the economy to adjust on its own. 
B)  respond to the adverse supply shock by decreasing aggregate demand, which lowers prices. 
C)  respond to the adverse supply shock by decreasing short-run aggregate supply. 
D)  respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

Question 11

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

Accepted Answer

When the price level increases, the purc

Question 12

The wealth effect, interest rate effect, and foreign trade effect all explain why the

Accepted Answer

A)  aggregate supply curve is horizontal. 
B)  aggregate supply curve is vertical. 
C)  aggregate supply curve is upward sloping. 
D)  aggregate demand curve is downward sloping. 
A)  aggregate supply curve is horizontal. 
B)  aggregate supply curve is vertical. 
C)  aggregate supply curve is upward sloping. 
D)  aggregate demand curve is downward sloping.

Question 13

Which of the following will cause stagflation?

Accepted Answer

A)  an increase in the money supply (which shifts the economy's aggregate demand curve to the right). 
B)  an increase in oil prices (which shifts the economy's aggregate supply curve to the left). 
C)  a decrease in the money supply (which shifts the economy's aggregate demand curve to the right). 
D)  technical progress (which shifts the economy's aggregate supply curve to the right). 
A)  an increase in the money supply (which shifts the economy's aggregate demand curve to the right). 
B)  an increase in oil prices (which shifts the economy's aggregate supply curve to the left). 
C)  a decrease in the money supply (which shifts the economy's aggregate demand curve to the right). 
D)  technical progress (which shifts the economy's aggregate supply curve to the right).

Question 14

Which of the following would not cause a shift in the long-run aggregate supply curve? An increase in:

Accepted Answer

A)  the available capital 
B)  the available labour 
C)  the available technology 
D)  price expectations 
A)  the available capital 
B)  the available labour 
C)  the available technology 
D)  price expectations

Question 15

The long-run effect of an increase in government spending that shifts the economy's aggregate demand curve to the right is to raise

Accepted Answer

A)  both real output and the price level. 
B)  real output and lower the price level. 
C)  real output and leave the price level unchanged. 
D)  the price level and leave real output unchanged. 
A)  both real output and the price level. 
B)  real output and lower the price level. 
C)  real output and leave the price level unchanged. 
D)  the price level and leave real output unchanged.

Question 16

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

Accepted Answer

A)  nominal variables and real variables. 
B)  nominal variables, but not real variables. 
C)  real variables, but not nominal variables. 
D)  neither nominal nor real variables. 
A)  nominal variables and real variables. 
B)  nominal variables, but not real variables. 
C)  real variables, but not nominal variables. 
D)  neither nominal nor real variables.

Question 17

Which of the following events shifts the short-run aggregate supply curve to the right?

Accepted Answer

A)  a decrease in the money supply 
B)  a drop in oil prices 
C)  an increase in government spending on military equipment 
D)  none of these answers 
E)  an increase in price expectations 
A)  a decrease in the money supply 
B)  a drop in oil prices 
C)  an increase in government spending on military equipment 
D)  none of these answers 
E)  an increase in price expectations

Question 18

Which of the following is not a determinant of long-run aggregate supply?

Accepted Answer

A)  the level of skills in the workforce 
B)  the price level 
C)  technology 
D)  the quantity of capital 
A)  the level of skills in the workforce 
B)  the price level 
C)  technology 
D)  the quantity of capital

Question 19

Suppose the economy is initially in long-run equilibrium. Then suppose there is an increase in military spending due to rising international tensions. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

Accepted Answer

A)  Output falls; prices are unchanged from the initial value. 
B)  Prices fall; output is unchanged from its initial value. 
C)  Output and the price level are unchanged from their initial values. 
D)  Prices rise; output is unchanged from its initial value. 
E)  Output rises; prices are unchanged from the initial value. 
A)  Output falls; prices are unchanged from the initial value. 
B)  Prices fall; output is unchanged from its initial value. 
C)  Output and the price level are unchanged from their initial values. 
D)  Prices rise; output is unchanged from its initial value. 
E)  Output rises; prices are unchanged from the initial value.

Question 20

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

Accepted Answer

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. 
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.

Exam 33: Aggregate Demand and Aggregate Supply

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

To say that nominal prices are sticky means

Suppose an economy is in recession. If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? Create a chart to depict an economy in recession.

According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices

An increase in price expectations shifts the long-run aggregate supply curve to the left.

Most economists believe that money neutrality holds

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Make a list of things that would shift the long-run aggregate supply curve to the right.

Policy makers are said to "accommodate" an adverse supply shock if they

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

The wealth effect, interest rate effect, and foreign trade effect all explain why the

Which of the following will cause stagflation?

Which of the following would not cause a shift in the long-run aggregate supply curve? An increase in:

The long-run effect of an increase in government spending that shifts the economy's aggregate demand curve to the right is to raise

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

Which of the following events shifts the short-run aggregate supply curve to the right?

Which of the following is not a determinant of long-run aggregate supply?

Suppose the economy is initially in long-run equilibrium. Then suppose there is an increase in military spending due to rising international tensions. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

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

What Is Economics

Thinking Like an Economist

The Market Forces of Supply and Demand

Elasticity and Its Applications

Background to Demand: Consumer Choices

Background to Supply: Firms in Competitive Markets

Consumers, Producers and the Efficiency of Markets

Supply, Demand and Government Policies

The Tax System

Public Goods, Common Resources and Merit Goods

Market Failure and Externalities

Information and Behavioural Economics

Firms Production Decisions

Market Structures I: Monopoly

Market Structures Ii: Monopolistic Competition

Market Structures Iii: Oligopoly

The Economics of Factor Markets

Income Inequality and Poverty

Interdependence and the Gains From Trade

Measuring a Nations Well-Being

Measuring the Cost of Living

Production and Growth

Unemployment

Saving, Investment and the Financial System

The Basic Tools of Finance

Issues in Financial Markets

The Monetary System

Money Growth and Inflation

Open-Economy Macroeconomics: Basic Concepts

A Macroeconomic Theory of the Open Economy

Business Cycles

Keynesian Economics and the Is-Lm Analysis

The Influence of Monetary and Fiscal Policy on Aggregate Demand

The Short-Run Trade-Off Between Inflation and Unemployment

Supply-Side Policies

Common Currency Areas and European Monetary Union

The Financial Crisis and Sovereign Debt

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