Deck 23: Output and Prices in the Short Run

Question 1

Suppose there is an exogenous increase in the domestic price level. Which of the individuals listed below would experience an increase in wealth?

A)a person with cash under the mattress
B)a person with a 25- year home mortgage
C)a person with a government bond that promises to pay the holder $1000, 5 years hence
D)a person with deposits in a bank savings account
E)a person with a corporate bond that promises to repay the face value of the bond in the future

Answer 1

B

Question 2

In a macro model with a constant price level, an increase in government purchases will cause the AE curve to shift

A)upward and the AD curve to shift to the left.
B)downward and a movement to the right along the AD curve.
C)downward and the AD curve to shift to the left.
D)upward and the AD curve to shift to the right.
E)downward and the AD curve to shift to the right.

Answer 2

D

Question 3

The economy's AS curve is often assumed to be relatively flat at low levels of real GDP. The underlying reasoning is that

A)at low levels of GDP, firms are faced with unused capacity and thus can increase output without significantly increasing their costs.
B)profits are normally high in this section of the AS curve, so firms are willing to expand output.
C)the price level is constant.
D)consumer demand for most goods tends to be non- responsive to price when output is low.
E)consumer demand for most goods tends to be very responsive to price when output is low.

Answer 3

A

Question 4

Which of the following will cause a positive aggregate supply shock?

A)a decrease in the price of oil
B)a decrease in productivity
C)a decrease in the price of foreign output
D)an increase in the price of foreign output
E)an increase in the price of raw materials

Question 5

A rightward shift in the economy's AS curve implies that

A)at any given price level, a lower level of output will be supplied.
B)there is a demand shock.
C)there is a decrease in aggregate supply.
D)the same output will be produced, but only at a higher price level.
E)at any given price level, a higher level of output will be supplied.

Question 6

Consider the following news headline: "World commodity prices rise sharply." Choose the statement below that best describes the likely macroeconomic effects in Canada. (Remember that Canada is both a producer and a consumer of commodities.)

A)the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
B)there is no change in either the AD or the AS curves
C)the AD and AS curves both shift to the left; the effect on the price level is indeterminate and real GDP decreases
D)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP increases
E)the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate

Question 7

Suppose the economy is hit by a shock and we observe that the price level has and whereas real GDP has increased. We can conclude that this shock was

A)a negative AS shock.
B)a negative technology shock.
C)a positive AS shock.
D)a negative AD shock.
E)a positive AD shock.

Question 8

One reason why the aggregate demand (AD)curve slopes downward is that

A)increases in the price level cause consumers to substitute foreign goods for domestic goods.
B)when the price level falls firms must compete more when output increases.
C)increased production results in lower production costs.
D)when the price level falls consumers increase their saving rate.
E)aggregate expenditure increases as the price level rises.

Question 9

Other things being equal, as the price level falls exogenously, the aggregate expenditure (AE)function shifts

A)down and the economy will move downward along the AD curve.
B)upward and the economy moves downward along the AD curve.
C)to the left, as does the AD curve.
D)down and the economy will move upward along the AD curve.
E)upward and the economy moves upward along the AD curve.

Question 10

Consider the basic AD/AS model. A rise in an input price like unit labour costs would be expected to create a new macroeconomic equilibrium, which in comparison to the original equilibrium, has a price level that is

A)higher and a real GDP that is lower.
B)lower and a real GDP that is lower.
C)lower and a real GDP that is higher.
D)higher and a real GDP that is the same.
E)higher and a real GDP that is higher.

Question 11

In the short run, the aggregate supply curve has a positive slope because, as the price level rises, producers can

A)produce the same output, but at higher prices.
B)accumulate inventories.
C)produce less in response to falling profits.
D)be compensated for the extra costs incurred to produce more output.
E)experience rising factor prices.

Question 12

When the price level varies, the multiplier is _ the simple multiplier.

A)not comparable to
B)equal to
C)definitionally the same as
D)smaller than
E)larger than

Question 13

Consider the basic AD/AS model in the short run. When there is a change in autonomous desired expenditure, the simple multiplier is equal to the

A)ratio of the vertical shift of the AD curve to the change in autonomous expenditure.
B)product of the horizontal shift of the AD curve times the change in autonomous expenditure.
C)product of the vertical movement along the AD curve times the change in autonomous expenditure.
D)ratio of the vertical movement along the AD curve to the change in autonomous expenditure.
E)ratio of the horizontal shift of the AD curve to the change in autonomous expenditure.

Question 14

The AD curve relates the price level to

A)equilibrium savings and wealth.
B)desired consumption.
C)equilibrium nominal GDP if output is demand determined.
D)equilibrium real GDP if output is demand determined.
E)desired aggregate expenditure.

Question 15

Consider a simple macro model with a given price level and demand- determined output. An exogenous change in the domestic price level changes equilibrium real GDP

A)in the same direction.
B)by a lesser amount in either direction.
C)by the same amount in the same direction.
D)in the opposite direction.
E)by the same amount in the opposite direction.

Question 16

One reason why the aggregate demand (AD)curve slopes downward is that

A)increased production results in lower production costs.
B)when the price level falls consumers increase their saving rate.
C)aggregate expenditure increases as the price level rises.
D)decreases in the price level cause increases in private- sector wealth which lead to increases in desired consumption.
E)when the price level falls firms must compete more when output increases.

Question 17

If the AS curve is vertical and there is a decrease in aggregate demand, the result is

A)a decrease in the price level with no change in real GDP.
B)an equal decrease in national income.
C)an increase in the price level.
D)no change in either price level or real GDP.
E)an increase in national income.

Question 18

Which of the following would likely cause an upward parallel shift in the AE curve and a rightward shift in the AD curve?

A)a decrease in the price level
B)a reduction in government purchases
C)an increase in the price level
D)an increase in the MPC
E)an increase in the business confidence of firms

Question 19

Aggregate demand (AD)shocks have a smaller effect on real GDP and a larger effect on the price level,

A)on the upward- sloping portion of the AS curve.
B)on the downward- sloping portion of the AS curve.
C)the steeper the AS curve.
D)if the AD curve is flatter.
E)the flatter the AS curve.

Question 20

Consider the relationship between the AE curve and the AD curve. A fall in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income

A)causes a shift of the AE curve but no movement of the AD curve.
B)shifts the AD curve to the right.
C)causes a movement along the AE curve.
D)causes a movement along the AD curve.
E)shifts the AD curve to the left.

Question 21

Consider the basic AD/AS model. Suppose that a rising percentage of high- school graduates are illiterate, resulting in a decrease in average labour productivity. This change will

A)shift the AD curve to the right.
B)shift the AS curve to the right.
C)shift the AS curve to the left.
D)shift the AD curve to the left.
E)cause a movement to the right along the AS curve.

Question 22

Aggregate demand shocks have a large effect on real GDP and a small effect on the price level

A)on the downward- sloping portion of the AS curve.
B)the steeper the AS curve.
C)if the AD curve is steep.
D)when the AS curve is vertical.
E)the flatter the AS curve.

Question 23

The aggregate supply curve relates the price level to the quantity of output that firms would like to produce and sell, given the assumption that

A)all firms are price setters.
B)technology and the prices of all factors of production do not remain constant.
C)technology and the prices of all factors of production remain constant.
D)unit costs remain constant.
E)all firms are price takers.

Question 24

In the basic AD/AS model, the effect of an aggregate demand shock is divided between a change in output and a change in the price level. How the effect is divided depends on the

A)position of the AE curve.
B)size of the simple multiplier.
C)slope of the AS curve.
D)slope of the AD curve.
E)amount of inflation in the economy.

Question 25

The economy's AS curve will shift upward in the short run if there is:

A)an improvement in technology.
B)a decrease in labour productivity.
C)a decrease in the wage rate.
D)a decrease in the price level.
E)a decrease in the cost of capital.

Question 26

Consider the basic AD/AS model. If their unit costs rise as output increases, price- taking firms will be prepared to produce only if .

A)their current output; prices increase
B)more; prices decrease
C)less; prices increase
D)more; prices increase
E)more; the economy is in equilibrium

Question 27

Other things being equal, a rise in the domestic price level

A)raises the real burden of repaying a fixed money value debt.
B)causes a decrease in real saving.
C)makes domestic goods more attractive to foreigners.
D)makes foreign goods less attractive to domestic residents.
E)lowers the real value of all assets denominated in money units.

Question 28

If firms' unit costs remained constant as firms increased their output levels, this would lead to a

A)vertical AD curve.
B)horizontal AS curve.
C)vertical AS curve.
D)horizontal AD curve.
E)horizontal AE curve.

Question 29

Other things being equal, unit wage costs will tend to fall if

A)the government increases payroll taxes.
B)wage increases are less than productivity increases.
C)wage and price controls are in effect.
D)wages fall.
E)there is a fall in the price of oil.

Question 30

Consider the nature of macroeconomic equilibrium. If, at a particular price level, aggregate output demanded is less than that supplied by producers, then

A)the aggregate demand curve will shift to the right, re- establishing an equilibrium.
B)the price level will decline toward its equilibrium value.
C)the aggregate supply curve will shift to the left, re- establishing an equilibrium.
D)the aggregate supply curve will shift to the right, re- establishing an equilibrium.
E)the price level will rise toward its equilibrium value.

Question 31

Other things being equal, an exogenous rise in the domestic price level will

A)cause net exports to rise.
B)decrease desired real expenditure because it will affect the real value of wealth.
C)have no effect on the level of desired real expenditure.
D)increase the level of desired real expenditure.
E)decrease desired real expenditure only if it is accompanied by a change in the current income of households.

Question 32

Consider the relationship between the AE curve and the AD curve. A rise in the amount of desired consumption, investment, government purchases, or net exports at any given level of national income

A)causes a shift of the AE curve but no movement of the AD curve.
B)shifts the AD curve to the left.
C)shifts the AD curve to the right.
D)causes a movement along the AE curve.
E)causes a movement along the AD curve.

Question 33

Other things being equal, when the price level rises, the real value of money holdings ; when the domestic price level falls, the real value of money holdings _.

A)rises; falls
B)is not affected; rises
C)falls; rises
D)falls; is not affected
E)is not affected; falls

Question 34

All points on an economy's AD curve

A)show the direct relationship between the price level and net exports.
B)relate a particular price level to the total demand for output at that price level.
C)correspond to a particular point on industry demand curves for a particular product.
D)show the direct relationship between the price level and the demand for consumer goods.
E)show only changes in relative prices and quantities.

Question 35

The concept of "demand- determined output" requires _ to remain constant as output increases.

A)government purchases
B)technology of production
C)firms' unit costs
D)the ratio of price setters to price takers
E)labour productivity

Question 36

The aggregate supply curve tends to be relatively steep when GDP is above potential output because firms are operating above and _ _ are rising rapidly.

A)capacity; unit costs
B)equilibrium output; average costs
C)profit- maximizing output; total costs
D)equilibrium output; unit costs
E)equilibrium output; total costs

Question 37

Consider the AD/AS model. Suppose there is a decrease in aggregate demand and, simultaneously, an increase in aggregate supply. The result will be a

A)rise in real GDP but price level changes will be indeterminate.
B)an indeterminate change in real GDP and a fall in the price level.
C)an indeterminate change in real GDP and a rise in the price level.
D)rise in real GDP and a fall in the price level.
E)rise in real GDP and a rise in the price level.

Question 38

Over the horizontal range of the economy's AS curve (assuming such a range exists), a rightward shift of the AD curve will result in

A)a decrease in both real GDP and prices.
B)an increase in both real GDP and prices.
C)an increase in real GDP and no change in prices.
D)a decrease in real GDP but no change in prices.
E)an increase in prices and no change in real GDP.

Question 39

Consider the basic AD/AS model. Real GDP is demand determined along the

A)vertical portion of the AS curve.
B)horizontal portion of the AS curve.
C)upward- sloping portion of the AS curve.
D)downward- sloping portion of the AS curve.
E)none of the above -- real GDP cannot be demand determined.

Question 40

A decrease in aggregate supply in the short run is

A)interpreted to mean that less total output will be supplied at any given price level.
B)caused by a decrease in the price level.
C)reflected in a shift to the right in the AS curve.
D)caused by an increase in the price level.
E)reflected in a movement to the left along the AS curve.

Question 41

Consider the basic AD/AS model. If there is a decrease in the cost of non- labour inputs to production, the result will be to

A)shift the AS curve to the left.
B)shift the AS curve to the right.
C)shift the AD curve to the right.
D)shift the AD curve to the left.
E)cause a movement to the left along the AS curve.

Question 42

When wage rates rise faster than the increase in labour productivity, the

A)AS curve shifts downward.
B)AD curve shifts left.
C)output gap increases.
D)AS curve shifts upward.
E)output gap falls.

Question 43

Consider two economies, each with a marginal propensity to consume of 0.8 and a net tax rate of 0.2. One economy is closed to international trade; the second is open to international trade with a marginal propensity to import of 0.3. Suppose there is an increase in autonomous spending of $5 billion in each of these economies. Which of the following statements is true?

A)The AD curve shifts to the right by more in the closed economy than in the open economy.
B)The simple multiplier is larger in the open economy than in the closed economy.
C)The AD curve shifts to the right by more in the open economy than in the closed economy.
D)The AD curve shifts to the right by the same amount in both economies.
E)The AD curve shifts to the left by the same amount in both economies.

Question 44

Other things being equal, a rise in the price level will imply _ in wealth for the bondholder but in the wealth of the issuer of the bond.

A)an increase; an increase
B)a decline; no change
C)a decline; an increase
D)an increase; a decline
E)a decline; a decline

Question 45

Other things being equal, unit wage costs will tend to increase if

A)there is a rise in the price of oil.
B)wage and price controls are in effect.
C)wage increases exceed productivity increases.
D)the government reduces payroll taxes.
E)wages rise.

Question 46

Other things being equal, the AS curve will shift downward if there is:

A)a decrease in labour productivity.
B)a decrease in the price level.
C)a decrease in the cost of capital inputs.
D)an increase in the wage rate.
E)an increase in the price level.

Question 47

technology.

A)2 and 3
B)3 only
C)1 only
D)2 only
E)1 and 3

Question 48

If the economy's AS curve is vertical, the multiplier in the AD/AS model is

A)negative.
B)smaller than the simple multiplier.
C)infinitely large.
D)zero.
E)equal to the simple multiplier.

Question 49

The "first asymmetry" in the behaviour of aggregate supply refers to the

A)increase in input prices as output is decreased.
B)increasing slope of the AS curve as output rises.
C)increase in input prices as output is increased.
D)decreasing slope of the AS curve as output rises.
E)decreasing unit costs of production as output is increased.

Question 50

A rise in the amount of desired investment expenditure at each level of national income

A)shifts the AD curve to the right.
B)causes a movement along the AD curve.
C)causes a shift of the AE curve but no movement of the AD curve.
D)causes a movement along the AE curve.
E)shifts the AD curve to the left.

Question 51

A leftward shift of the aggregate demand (AD)curve could result from a fall in

A)autonomous government purchases.
B)induced imports.
C)the price level.
D)autonomous desired saving.
E)the net tax rate.

Question 52

Consider the AD/AS model. An increase in government purchases will have no impact on equilibrium real GDP if

A)the AS curve slopes upward.
B)the simple multiplier is very small.
C)the AS curve is vertical.
D)the marginal propensity to spend is very small.
E)the AS curve is horizontal.

Question 53

If the economy is in macroeconomic equilibrium with a vertical AS curve, and then aggregate demand increases, we expect the AE function to shift to a

A)higher level but then return to its original position as the price level rises.
B)lower level, but then return to its original position as the price level rises.
C)lower level and stay there.
D)higher level and stay there.
E)higher level, but then shift part of the way down to its original position as the price level rises.

Question 54

If the economy's AS curve is very steep and there is a negative aggregate demand shock, the result will be

A)an increase in both the price level and national income.
B)a decrease in the price level and an increase in national income.
C)a decrease in the price level with almost no change in national income.
D)no change in either price level or output.
E)an increase in the price level and a decrease in national income.

Question 55

When the economy's AS curve is positively sloped, the multiplier in the AD/AS model is

A)larger than the simple multiplier.
B)constant.
C)smaller than the simple multiplier.
D)equal to one.
E)equal to the simple multiplier.

Question 56

Consider the following news headline: "Governments plan massive hospital construction programs across the country." Choose the statement below that best describes the likely macroeconomic effects.

A)the AD and AS curves both shift to the right; the effect on the price level is indeterminate and real GDP rises
B)the AD curve shifts to the left and the AS curve shifts to the right; the price level falls and the effect on real GDP is indeterminate
C)the AD curve shifts to the right; the price level rises and real GDP rises
D)the AD curve shifts to the right and the AS curve shifts to the left; the price level rises and the effect on real GDP is indeterminate
E)the AD curve shifts to the left; the price level falls and real GDP falls

Question 57

The economy's aggregate supply (AS)curve is assumed to slope upward because

A)inputs become less expensive at higher levels of output.
B)firms' unit costs fall as output increases.
C)inputs become more expensive at higher levels of output.
D)aggregate demand increases at higher levels of national income.
E)firms' unit costs rise as output increases.

Question 58

Consider the AD/AS model. Suppose there is an increase in autonomous desired consumption at a given price level. The result is

A)the AE curve shifts upward and the AD curve shifts to the right.
B)the AE curve shifts downward and the AD curve shifts to the right.
C)no change in either the AE or the AD curve.
D)the AE curve shifts upward and the AD curve shifts to the left.
E)the AE curve shifts downward and the AD curve shifts to the left.

Question 59

In building a macro model with an AS curve, it is assumed that producers will

A)decrease their prices without changing output.
B)produce as much as possible at the existing price level.
C)increase prices without changing their output.
D)decrease their prices when they expand output.
E)produce more output only if prices rise.

Question 60

Over the horizontal range of the economy's AS curve (assuming such a range exists), a leftward shift of the AD curve will result in

A)a decrease in both real GDP and prices.
B)an increase in prices and no change in real GDP.
C)a decrease in real GDP but no change in prices.
D)an increase in real GDP and no change in prices.
E)an increase in both real GDP and prices.

Question 61

A rightward shift in the aggregate demand (AD)curve could result from a rise in

A)desired investment.
B)the net tax rate.
C)desired saving.
D)induced imports.
E)the price level.

Question 62

A leftward shift of the aggregate demand (AD)curve could result from a rise in

A)government purchases.
B)government transfer payments to households.
C)the net tax rate.
D)desired exports.
E)desired investment.

Question 63

Aggregate supply refers to the

A)effects of increases in input prices on output.
B)total output firms wish to produce at each price level.
C)economy's potential output at each possible labour force.
D)decisions of firms to decrease inputs in order to produce outputs.
E)supply of labour inputs in the economy.

Question 64

The economy's aggregate supply (AS)curve shows the relationship between the

A)price level and the marginal propensity to consume (MPC).
B)price level and the total output that firms wish to produce and sell, as technology and input prices vary.
C)equilibrium real GDP and marginal cost.
D)equilibrium real GDP and desired consumption.
E)price level and the total output that firms wish to produce and sell, with technology and input prices held constant.

Question 65

In a macro model with a constant price level, an increase in autonomous desired consumption will cause the AE curve to shift

A)upward and the AD curve to shift to the left.
B)upward and a movement to the right along the AD curve.
C)downward and the AD curve to shift to the left.
D)upward and the AD curve to shift to the right.
E)downward and the AD curve to shift to the right.

Question 66

An exogenous fall in the domestic price level causes an increase in wealth and

A)a rise in desired consumption.
B)a downward shift of the net export function.
C)a fall in government purchases.
D)a fall in desired investment.
E)a downward shift in the AE curve.

Question 67

A positive supply shock could be caused by

A)an increase in exports.
B)bad weather which cripples telecommunications for one month.
C)an outbreak of war among oil- exporting countries.
D)improved computer literacy for the typical worker.
E)a general labour strike across the country.

Question 68

Consider a simple macro model with demand- determined output. An exogenous increase in the domestic price level will

A)pivot the net export function and the AE curve upward.
B)shift the net export function downward and the AE curve upward.
C)shift both the net export function and the AE curve upward.
D)shift the net export function upward and the AE curve downward.
E)shift both the net export function and the AE curve downward.

Question 69

The aggregate supply curve is usually assumed to get progressively steeper at relatively higher levels of output because

A)of increasing factor prices.
B)of rising competition among price setters.
C)of diminishing marginal productivity of the factors of production.
D)of increasing productivity of the factors of production.
E)of excess capacity at higher levels of output.

Question 70

Which of the following would cause a positive aggregate demand shock, but leave the aggregate supply curve unaffected?

A)A medical report confirming that improved health for Canadian workers caused fewer lost days of production.
B)A substantial increase in world oil prices.
C)A severe drought lasting for six months that destroys agricultural and forestry production.
D)An improvement in the computer literacy of workers.
E)A free trade agreement between Canada and the United States that leads Canadian businesses to increase investment expenditures.

Question 71

The economy's aggregate supply (AS)curve shows the relationship between the price level and the total

A)wealth accumulated by households, with national income given.
B)investment that firms wish to make, as input prices vary.
C)output that firms wish to produce and sell, as input prices vary.
D)output that firms wish to produce and sell, with input prices given.
E)investment that firms wish to make, with input prices given.

Question 72

A movement along the economy's AS curve could be caused by a change in

A)the cost of capital.
B)labour productivity.
C)technology.
D)the price level, caused in turn by an AD shock.
E)the wage rate.

Question 73

If the economy's AS curve is upward sloping, a positive aggregate demand shock will result in

A)an increase in output but not prices.
B)a decrease in output and an increase in prices.
C)an increase in both output and prices.
D)a decrease in both output and prices.
E)an increase in prices but not output.

Question 74

Consider the basic AD/AS model with an upward- sloping AS curve. A positive aggregate demand shock will cause

A)the equilibrium point to move rightward along the AS curve.
B)the unemployment rate to remain constant.
C)a movement along the AD curve to the right.
D)a shift to the right in the AS curve.
E)a decrease in the price level.

Question 75

Other things being equal, when the domestic price level rises exogenously,

A)imports of foreign goods fall.
B)Canadian goods become more expensive relative to foreign goods.
C)the aggregate expenditure function shifts upward.
D)the net export function shifts upward.
E)the desired investment function shifts upward.

Question 76

Suppose firms are currently producing output at a level beyond their normal capacity. In this situation, the AS curve will be relatively and a positive AD shock will result in .

A)steep; a decrease in the price level and a very small decrease in real GDP.
B)flat; a very small increase in prices but a large increase in real GDP.
C)steep; an increase in the price level with a small increase in real GDP.
D)flat; an equal increase in the price level and in real GDP.
E)flat; a very small decrease in the price level and a decrease in real GDP.

Question 77

Suppose firms are currently producing beyond their normal capacity. A change in AD leads to a relatively

A)large change in price level and a small change in real GDP.
B)large change in price level and a large change in real GDP.
C)no change in both price and output.
D)small change in price level and a large change in real GDP.
E)small change in price level and a small change in real GDP.

Question 78

Which of the following will cause a negative aggregate demand shock?

A)an increase in the price of raw materials
B)a decrease in the domestic price level
C)an increase in tax rates
D)an increase in government expenditures
E)an increase in the domestic price level

Question 79

The AD curve shows the relationship between

A)AS and AE.
B)the price level and desired consumption.
C)real national income and AE.
D)AS and real national income.
E)the price level and the equilibrium level of demand- determined national income.

Question 80

Other things being equal, an exogenous increase in the price level causes the aggregate wealth of holders and issuers of private- sector bonds to

A)rise in nominal terms, but fall in real terms.
B)not change since the changes in the wealth of bondholders and bond issuers offset each other.
C)decrease.
D)either increase or decrease depending on other factors.
E)increase.