Question 1

Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve if the multiplier is greater than 1?

Accepted Answer

A)  It shifts right by $50 billion at each price level. 
B)  It shifts right by more than $50 billion at each price level. 
C)  It shifts right by less than $50 billion at each price level. 
D)  The aggregate demand does not shift; the aggregate supply curve shifts right by $50 billion at each price level. 
A)  It shifts right by $50 billion at each price level. 
B)  It shifts right by more than $50 billion at each price level. 
C)  It shifts right by less than $50 billion at each price level. 
D)  The aggregate demand does not shift; the aggregate supply curve shifts right by $50 billion at each price level.

Question 2

What happens in the domestic economy when there is a decrease in foreign prices, all other things unchanged?

Accepted Answer

A)  Net exports and aggregate demand fall. 
B)  Net exports fall and aggregate demand increases. 
C)  Net exports and aggregate demand increase. 
D)  Net exports rise and aggregate demand falls. 
A)  Net exports and aggregate demand fall. 
B)  Net exports fall and aggregate demand increases. 
C)  Net exports and aggregate demand increase. 
D)  Net exports rise and aggregate demand falls.

Question 3

Use the following to answer questions .
Exhibit: Long-run Equilibrium  
-(Exhibit: Long-run Equilibrium) If the real GDP is $7,000 billion and the implicit price deflator is 1.12, what is the value of nominal GDP?

Accepted Answer

A)  $6,250 billion 
B)  $7,840 billion 
C)  $9,000 billion 
D)  cannot be determined from the information given 
A)  $6,250 billion 
B)  $7,840 billion 
C)  $9,000 billion 
D)  cannot be determined from the information given

Question 4

Use the following to answer questions .
Exhibit: Long-run Equilibrium  
-(Exhibit: Long-run Equilibrium) Changes in aggregate demand from AD1 to either AD2 or AD3

Accepted Answer

A)  will change nominal GDP but will not change real GDP in the long run. 
B)  will change real GDP but will not change nominal GDP in the long run. 
C)  will change the potential level of real GDP. 
D)  will change the price level and real GDP. 
A)  will change nominal GDP but will not change real GDP in the long run. 
B)  will change real GDP but will not change nominal GDP in the long run. 
C)  will change the potential level of real GDP. 
D)  will change the price level and real GDP.

Question 5

Which of the following is false about potential output?

Accepted Answer

A)  It is the level of output an economy can achieve when labor is employed at its natural level. 
B)  It is the long run output level that guarantees price stability. 
C)  It is also called the natural level of real GDP. 
D)  If a country is producing its potential output, then it is producing at a point on its production possibilities frontier. 
A)  It is the level of output an economy can achieve when labor is employed at its natural level. 
B)  It is the long run output level that guarantees price stability. 
C)  It is also called the natural level of real GDP. 
D)  If a country is producing its potential output, then it is producing at a point on its production possibilities frontier.

Question 6

As a recessionary gap is eliminated through an economy's self-correcting adjustments process,

Accepted Answer

A)  the equilibrium price level increases and the equilibrium real output decreases. 
B)  the equilibrium price level decreases and the equilibrium real output increases. 
C)  the equilibrium price level and the equilibrium real output increase. 
D)  the equilibrium price level and the equilibrium real output decrease. 
A)  the equilibrium price level increases and the equilibrium real output decreases. 
B)  the equilibrium price level decreases and the equilibrium real output increases. 
C)  the equilibrium price level and the equilibrium real output increase. 
D)  the equilibrium price level and the equilibrium real output decrease.

Question 7

Taking no action and allowing an economy to adjust by itself is called a nonintervention policy.

Accepted Answer

A) True 
 B)False

Question 8

What is the meaning of "sticky" wages? Provide and explain three reasons why wages may be sticky.

Accepted Answer

"Sticky" wages refer to the phenomenon w

Question 9

Which of the following is an explanation for price stickiness?
I. There are adjustment costs associated with changing prices such as the cost of printing new price lists.
II. Worker unions may forbid firms from raising prices for fear that workers may be laid off if demand for output falls.
III. Firms may have explicit long-term contracts to sell their products to other firms at specified prices.

Accepted Answer

A)  I only 
B)  I and II only 
C)  I and III only 
D)  I, II, and III 
A)  I only 
B)  I and II only 
C)  I and III only 
D)  I, II, and III

Question 10

Inflationary and recessionary gaps are always eliminated automatically through changes in aggregate demand.

Accepted Answer

A) True 
 B)False

Question 11

Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1  
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 1) Suppose the economy is initially at A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. Which of the following is false about the economy after it adjusts to its new long-run equilibrium?

Accepted Answer

A)  Nominal wages increase. 
B)  The price level rises to Pd. 
C)  Firms employ more workers than in the short-run equilibrium. 
D)  There is some frictional and structural unemployment. 
A)  Nominal wages increase. 
B)  The price level rises to Pd. 
C)  Firms employ more workers than in the short-run equilibrium. 
D)  There is some frictional and structural unemployment.

Question 12

How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?

Accepted Answer

A)  It will have no effect on our aggregate demand. 
B)  U.S. aggregate demand will increase. 
C)  U.S. aggregate demand will decrease. 
D)  It depends on whether the U.S. offers financial aid to these countries. 
A)  It will have no effect on our aggregate demand. 
B)  U.S. aggregate demand will increase. 
C)  U.S. aggregate demand will decrease. 
D)  It depends on whether the U.S. offers financial aid to these countries.

Question 13

In the long run, an increase in aggregate demand, all other things unchanged, will cause the price level to

Accepted Answer

A)  increase and potential output to increase. 
B)  decrease and potential output to decrease. 
C)  increase and potential output to remain stable. 
D)  decrease and potential output to remain stable. 
A)  increase and potential output to increase. 
B)  decrease and potential output to decrease. 
C)  increase and potential output to remain stable. 
D)  decrease and potential output to remain stable.

Question 14

Use the following to answer questions .
Exhibit: The Aggregate Demand/Aggregate Supply Model 2  
-(Exhibit: The Aggregate Demand/Aggregate Supply Model 2) For the economy represented in the figure,

Accepted Answer

A)  the real wage rate is higher than full-employment real wage. 
B)  the real wage rate is lower than full-employment real wage. 
C)  the nominal wage rate is higher than full-employment nominal wage. 
D)  the nominal wage rate is lower than full-employment nominal wage. 
A)  the real wage rate is higher than full-employment real wage. 
B)  the real wage rate is lower than full-employment real wage. 
C)  the nominal wage rate is higher than full-employment nominal wage. 
D)  the nominal wage rate is lower than full-employment nominal wage.

Question 15

Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2  
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) Suppose the economy is initially in short-run equilibrium at K. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any?

Accepted Answer

A)  Both policies would return real GDP to its potential at a price level of Pj. 
B)  Both policies would return real GDP to its potential at a price level of Ph. 
C)  A stabilization policy would return real GDP to its potential at a price level of Pj while a nonintervention policy would return real GDP to its potential at a price level of Ph. 
D)  A stabilization policy would return real GDP to its potential at a price level of Ph while a nonintervention policy would return real GDP to its potential at a price level of Pj. 
A)  Both policies would return real GDP to its potential at a price level of Pj. 
B)  Both policies would return real GDP to its potential at a price level of Ph. 
C)  A stabilization policy would return real GDP to its potential at a price level of Pj while a nonintervention policy would return real GDP to its potential at a price level of Ph. 
D)  A stabilization policy would return real GDP to its potential at a price level of Ph while a nonintervention policy would return real GDP to its potential at a price level of Pj.

Question 16

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

Accepted Answer

A)  The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease. 
B)  The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. 
C)  The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. 
D)  The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases. 
A)  The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease. 
B)  The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. 
C)  The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. 
D)  The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases.

Question 17

All other things unchanged, an increase in government spending will

Accepted Answer

A)  shift the aggregate demand curve to the right. 
B)  shift the aggregate demand curve to the left. 
C)  make the aggregate demand curve flatter. 
D)  make the aggregate demand curve steeper. 
A)  shift the aggregate demand curve to the right. 
B)  shift the aggregate demand curve to the left. 
C)  make the aggregate demand curve flatter. 
D)  make the aggregate demand curve steeper.

Question 18

The short-run aggregate supply shows the amount of real GDP that will be

Accepted Answer

A)  made available at various price levels. 
B)  purchased at various price levels. 
C)  purchased at various national income levels. 
D)  made available at various national income levels. 
A)  made available at various price levels. 
B)  purchased at various price levels. 
C)  purchased at various national income levels. 
D)  made available at various national income levels.

Question 19

Use the following to answer questions .
Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2  
-(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) At output level YK,

Accepted Answer

A)  potential output is less than actual output. 
B)  there is a surplus of real GDP. 
C)  the unemployment rate exceeds the natural rate of unemployment. 
D)  over time aggregate demand will rise to restore long-run equilibrium. 
A)  potential output is less than actual output. 
B)  there is a surplus of real GDP. 
C)  the unemployment rate exceeds the natural rate of unemployment. 
D)  over time aggregate demand will rise to restore long-run equilibrium.

Question 20

A decrease in aggregate demand, all other things unchanged, in the long run will generate

Accepted Answer

A)  an increase in potential output and no change in the price level. 
B)  a decrease in potential output and no change in the price level. 
C)  no change in potential output and an increase in the price level. 
D)  no change in potential output and a decrease in the price level. 
A)  an increase in potential output and no change in the price level. 
B)  a decrease in potential output and no change in the price level. 
C)  no change in potential output and an increase in the price level. 
D)  no change in potential output and a decrease in the price level.

Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve if the multiplier is greater than 1?

What happens in the domestic economy when there is a decrease in foreign prices, all other things unchanged?

Use the following to answer questions . Exhibit: Long-run Equilibrium -(Exhibit: Long-run Equilibrium) If the real GDP is $7,000 billion and the implicit price deflator is 1.12, what is the value of nominal GDP?

Use the following to answer questions . Exhibit: Long-run Equilibrium -(Exhibit: Long-run Equilibrium) Changes in aggregate demand from AD₁ to either AD₂ or AD₃

Which of the following is false about potential output?

As a recessionary gap is eliminated through an economy's self-correcting adjustments process,

Taking no action and allowing an economy to adjust by itself is called a nonintervention policy.

What is the meaning of "sticky" wages? Provide and explain three reasons why wages may be sticky.

Inflationary and recessionary gaps are always eliminated automatically through changes in aggregate demand.

How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?

In the long run, an increase in aggregate demand, all other things unchanged, will cause the price level to

Use the following to answer questions . Exhibit: The Aggregate Demand/Aggregate Supply Model 2 -(Exhibit: The Aggregate Demand/Aggregate Supply Model 2) For the economy represented in the figure,

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

All other things unchanged, an increase in government spending will

The short-run aggregate supply shows the amount of real GDP that will be

Use the following to answer questions . Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2 -(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) At output level Y_K,

A decrease in aggregate demand, all other things unchanged, in the long run will generate

Economics: the Study of Choice

Demand and Supply

Applications of Supply and Demand

Macroeconomics: the Big Picture

Measuring Total Output and Income

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Filters

Exam 7: Aggregate Demand and Aggregate Supply

Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve if the multiplier is greater than 1?

What happens in the domestic economy when there is a decrease in foreign prices, all other things unchanged?

Use the following to answer questions . Exhibit: Long-run Equilibrium -(Exhibit: Long-run Equilibrium) If the real GDP is $7,000 billion and the implicit price deflator is 1.12, what is the value of nominal GDP?

Use the following to answer questions . Exhibit: Long-run Equilibrium -(Exhibit: Long-run Equilibrium) Changes in aggregate demand from AD1 to either AD2 or AD3

Which of the following is false about potential output?

As a recessionary gap is eliminated through an economy's self-correcting adjustments process,

Taking no action and allowing an economy to adjust by itself is called a nonintervention policy.

What is the meaning of "sticky" wages? Provide and explain three reasons why wages may be sticky.

Inflationary and recessionary gaps are always eliminated automatically through changes in aggregate demand.

How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?

In the long run, an increase in aggregate demand, all other things unchanged, will cause the price level to

Use the following to answer questions . Exhibit: The Aggregate Demand/Aggregate Supply Model 2 -(Exhibit: The Aggregate Demand/Aggregate Supply Model 2) For the economy represented in the figure,

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the federal government lowers the capital gains tax to stimulate investment.

All other things unchanged, an increase in government spending will

The short-run aggregate supply shows the amount of real GDP that will be

Use the following to answer questions . Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2 -(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) At output level YK,

A decrease in aggregate demand, all other things unchanged, in the long run will generate

Economics: the Study of Choice

Demand and Supply

Applications of Supply and Demand

Macroeconomics: the Big Picture

Measuring Total Output and Income

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Filters

Use the following to answer questions . Exhibit: Long-run Equilibrium -(Exhibit: Long-run Equilibrium) Changes in aggregate demand from AD₁ to either AD₂ or AD₃

Use the following to answer questions . Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2 -(Exhibit: Using the Aggregate Demand/Aggregate Supply Model 2) At output level Y_K,