Deck 13: The Aggregate Demandaggregate Supply Model

Question 1

When the price level rises, ________ declines from the wealth effect, ________ declines from the interest rate effect, and ________ decline(s) from the international trade effect.

A) consumption; investment; net exports
B) consumption; consumption; consumption
C) investment; investment; net exports
D) investment; consumption; net exports
E) investment; investment; investment

Answer 1

consumption; investment; net exports

Question 2

Which of the following is true about recessions in the United States?

A) They are more common today than in the past.
B) They are rarer today than in the past.
C) They occur predictably about every two years.
D) They occur predictably about every eight years.
E) They are often caused by changes in government policy.

Answer 2

They are rarer today than in the past.

Question 3

The model used to study business cycles is the ________ model.

A) labor
B) savings
C) growth
D) aggregate demand-aggregate supply
E) interest rate

Answer 3

aggregate demand-aggregate supply

Question 4

The price index used to illustrate the aggregate demand curve is the

A) gross domestic product GDP) deflator.
B) consumer price index.
C) producer price index.
D) nominal price index.
E) real price index.

Question 5

A fall in the price level that causes a change in the real value of wealth results in

A) a downward movement along the aggregate demand curve.
B) an upward movement along the aggregate demand curve.
C) a rightward shift of the demand curve.
D) a leftward shift of the demand curve.
E) no change in the quantity of aggregate demand.

Question 6

Business-cycle theory focuses on time horizons of less than

A) five years.
B) ten years.
C) two years.
D) one year.
E) one month.

Question 7

Consider the wealth effect, interest rate effect, and international trade effect. Of these, the ________effect is the most significant and the ________ effect is the least significant.

A) wealth; international trade
B) wealth; interest rate
C) interest rate; wealth
D) interest rate; international trade
E) international trade; wealth

Question 8

The aggregate demand curve slopes downward because

A) as price rises, consumers substitute cheaper goods for more expensive goods.
B) all demand curves slope downward.
C) a higher price level increases purchasing power.
D) a higher price level increases exports.
E) a higher price level reduces wealth.

Question 9

The aggregate demand curve illustrates the

A) positive relationship between the price level and the quantity demanded of real gross domestic product GDP).
B) positive relationship between the price level and the quantity demanded of nominal gross domestic product GDP).
C) inverse relationship between the price level and the quantity demanded of real gross domestic product GDP).
D) inverse relationship between the price level and the quantity demanded of nominal gross domestic product GDP).
E) positive relationship between the level of spending and the level of real gross domestic product GDP).

Question 10

An increase in the price level that reduces the real value of wealth is likely to ________ consumption and ________ saving.

A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease
E) have no effect on; have no effect on

Question 11

Unemployment rises and real gross domestic product (GDP) growth slows during the ________business cycle.

A) expansion phase of a
B) recession phase of a
C) entire
D) recovery phase of a
E) short-run phase of a

Question 12

How many recessions have there been in the United States since 1982?

A) none
B) one
C) two
D) three
E) four

Question 13

Which of the following would cause an upward movement along the aggregate demand curve?

A) There is an increase in expected income.
B) An increase in the price level increases the value of real wealth.
C) An increase in housing prices increases the value of real wealth.
D) The value of the dollar increases.
E) There is an increase in the expected price level.

Question 14

The aggregate demand curve is best represented by which of the following equations?

A) AD = C + I + G - NX
B) AD = C + I+ G - NX
C) AD = C + I + G
D) AD =C + I
E) AD= C + I - G - NX

Question 15

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

A) aggregate demand AD) curve has a negative slope.
B) aggregate demand AD) curve has a positive slope.
C) aggregate supply AS) curve has a positive slope.
D) aggregate supply AS) curve has a negative slope.
E) price level and real gross domestic product GDP) are unrelated.

Question 16

The value of one's accumulated assets is best defined as

A) money.
B) wealth.
C) income.
D) saving.
E) net worth.

Question 17

Aggregate demand is determined by adding up the spending of

A) domestic consumers who buy goods and services produced in the United States.
B) domestic consumers and firms that buy goods and services produced in the United States.
C) domestic and foreign consumers who buy goods and services produced in the United States.
D) domestic and foreign consumers and firms that buy goods and services produced in the United States.
E) consumers, firms, the government, and foreigners that buy goods and services produced in the United States.

Question 18

Which of the following would cause a downward movement along the aggregate demand curve?

A) A rise in the price level makes U.S. goods relatively more expensive than foreign goods.
B) The value of real wealth rises.
C) There is a decline in the expected price level.
D) A fall in the price level increases savings and lowers interest rates.
E) The value of the dollar decreases.

Question 19

The wealth effect is best described as resulting from an)

A) increase in the price level, reducing the real value of wealth.
B) decrease in the price level, reducing the real value of wealth.
C) increase in wealth due to capital gains.
D) decrease in wealth due to capital gains.
E) increase in disposable income due to a reduction in taxes.

Question 20

The term “________ cycle” is a popular way to describe the recession-expansion pattern followed by
the economy.

A) business
B) output
C) inflation
D) unemployment
E) long-run

Question 21

When a change in the price level leads to a change in saving, this is known as the ________ effect.

A) wealth
B) international trade
C) savings
D) interest rate
E) output

Question 22

An increase in the value of the dollar will

A) have no effect on aggregate demand or supply.
B) decrease aggregate supply.
C) increase aggregate supply.
D) increase aggregate demand.
E) decrease aggregate demand.

Question 23

An increase in the value of the dollar will ________ exports and ________ imports.

A) increase; increase
B) decrease; decrease
C) have no effect on; have no effect on
D) decrease; increase
E) increase; decrease

Question 24

If prices fall, then real wealth ________ and the quantity of aggregate demand ________.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
E) is unaffected; is unaffected

Question 25

A rise in the price level that leads to a change in the interest rate, and therefore to a change in the quantity of aggregate demand, will cause

A) an upward movement along the aggregate demand curve.
B) a downward movement along the aggregate demand curve.
C) a rightward shift of the aggregate demand curve.
D) a leftward shift of the aggregate demand curve.
E) no change in the quantity of aggregate demand.

Question 26

When firms invest less because people are saving less, it is called the ________ effect.

A) wealth
B) international trade
C) interest rate
D) savings
E) investment

Question 27

When median home prices rise, the value of real wealth ________ and aggregate demand ________.

A) increases; is unaffected
B) increases; increases
C) increases; decreases
D) decreases; decreases
E) is unaffected; is unaffected

Question 28

When saving declines, the quantity of investment will ________, and therefore aggregate demand will
________.

A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease
E) remain unchanged; decrease

Question 29

When the price level rises and U.S. goods become relatively more expensive than foreign goods, there will be an)

A) rightward shift of the aggregate demand curve.
B) leftward shift of the aggregate demand curve.
C) upward movement along the aggregate demand curve.
D) downward movement along the aggregate demand curve.
E) downward movement along the aggregate supply curve.

Question 30

When a change in the price level leads to a change in the quantity of net exports demanded, it is called
the ________ effect.

A) international trade
B) export
C) import
D) net export
E) interest rate

Question 31

You read in the paper that there has been a significant increase in the consumer confidence index.Having taken an economics class, you predict that spending in the economy will ________ and aggregate demand will ________.

A) decrease; increase
B) decrease; decrease
C) increase; be unaffected
D) increase; decrease
E) increase; increase

Question 32

Suppose that an increase in the price level reduces the value of real wealth, which then causes a reduction in consumption but no change in saving. In this case, there is

A) both an interest rate effect and a wealth effect.
B) no wealth effect.
C) an interest rate effect but no wealth effect.
D) a wealth effect but no interest rate effect.
E) no wealth effect and no interest rate effect.

Question 33

Shifts in the aggregate demand curve are caused by

A) the wealth effect.
B) the interest rate effect.
C) money illusion.
D) changes in labor productivity.
E) changes in spending.

Question 34

According to the interest rate effect, an increase in the price level leads to ________ in the interest rate, and therefore to ________ in the quantity of aggregate demand.

A) no change; no change
B) a rise; a fall
C) a rise; a rise
D) a fall; a fall
E) a fall; a rise

Question 35

The interest rate effect results from people

A) saving less when the price level rises.
B) consuming more when the price level rises.
C) spending more when the interest rate rises.
D) feeling more wealthy when the price level rises.
E) spending more when the price level falls.

Question 36

When a change in the price level leads to a change in the interest rate and thus a change in the quantity of aggregate demand, it is called the ________ effect.

A) interest rate
B) wealth
C) savings
D) output
E) price

Question 37

When U.S. goods become more expensive relative to foreign goods, exports will ________ and imports will ________.

A) decrease; decrease
B) increase; increase
C) increase; decrease
D) decrease; increase
E) decrease; be unaffected

Question 38

When foreign income rises, U.S. aggregate

A) demand will shift to the right.
B) supply will shift to the right.
C) demand will shift to the left.
D) supply will shift to the left.
E) demand and aggregate supply will be unaffected.

Question 39

If people expect higher incomes in the future, then spending today ________ and aggregate demand________.

A) increases; is unaffected
B) increases; increases
C) increases; decreases
D) decreases; decreases
E) is unaffected; is unaffected

Question 40

Suppose the majority of students who are graduating in May from a large university have found jobs and signed employment contracts by February. Starting in February, these students are likely to ________ spending, and aggregate demand will ________.

A) increase; increase
B) decrease; decrease
C) decrease; increase
D) increase; decrease
E) not change their rate of; not change

Question 41

Aggregate supply describes a relationship between

A) spending and income.
B) output and prices.
C) costs and revenue.
D) spending and output.
E) spending and prices.

Question 42

Shifts in the long-run aggregate supply curve are caused by

A) changes in labor productivity.
B) the wealth effect.
C) supply shocks.
D) changes in spending.
E) the interest rate effect.

Question 43

In the long run, the output of an economy

A) does not grow.
B) grows at a positive rate.
C) depends on aggregate demand.
D) is equal to full-employment output.
E) depends on the price level.

Question 44

The long-run aggregate supply curve is

A) vertical at the level of full-employment output.
B) horizontal at the going-price level.
C) illustrating a positive relationship between price and output.
D) illustrating a negative relationship between price and output.
E) the same as the short-run aggregate supply curve.

Question 45

The long run is best defined as a period of time such that

A) more than one year has passed.
B) more than five years have passed.
C) some prices have adjusted.
D) all prices have adjusted.
E) all firms are maximizing profit.

Question 46

In the long run, a technological advance that improves communication can be expected to ________
labor productivity and ________ unemployment.

A) have no effect on; have no effect on
B) increase; decrease
C) increase; increase
D) increase; have no effect on
E) decrease; increase

Question 47

Which of the following would shift aggregate demand to the left?

A) A study predicts that the recent drought will increase food prices this winter.
B) There is a rise in the median price of houses.
C) A rise in the price level reduces saving and increases interest rates.
D) The value of the dollar increases.
E) The European Union emerges from recession.

Question 48

Which of the following is true about the price level and aggregate supply?

A) The price level influences aggregate supply in both the long run and short run.
B) The price level influences aggregate supply in the long run but not in the short run.
C) The price level influences aggregate supply in the short run but not in the long run.
D) The price level never impacts aggregate supply.
E) There is no clear relationship between the price level and aggregate supply.

Question 49

When decision makers have time to fully adjust to changes in the overall price level, we refer to this as

A) the short run.
B) the long run.
C) short-run equilibrium.
D) a period of time longer than one year.
E) equilibrium.

Question 50

Which of the following would shift aggregate demand to the right?

A) College graduates are having a difficult time finding jobs.
B) There is a decline in consumer confidence.
C) Stock market values increase by 20 percent.
D) A fall in the price level increases the value of real wealth.
E) The value of the dollar increases.

Question 51

Which of the following is true?

A) Long-run aggregate supply is independent of the price level.
B) Short-run aggregate supply is independent of the price level.
C) Long-run aggregate supply is positively related to the price level.
D) Short-run aggregate supply is inversely related to the price level.
E) Long-run aggregate supply is inversely related to the price level.

Question 52

The long-run aggregate supply curve is

A) vertical because full-employment output is independent of the price level.
B) upward sloping because the economy grows over time.
C) horizontal because full-employment output is independent of the price level.
D) upward sloping because as the price level rises, firms will increase output.
E) downward sloping because rising prices reduce real wealth and spending.

Question 53

If large emerging economies continue to grow rapidly, we can expect U.S. aggregate

A) demand to increase.
B) demand to decrease.
C) supply to increase.
D) supply to decrease.
E) demand and supply to be unaffected.

Question 54

Input prices affect the firm’s ________, and output prices affect the firm’s ________.

A) revenue; costs
B) costs; costs
C) costs; revenue
D) revenue; revenue
E) decisions in the short run but not in the long run; decisions in the long run but not in the short run

Question 55

When prices in the economy have not fully adjusted, we say that

A) we are in the short run.
B) we are in the long run.
C) it is a period of time less than one year.
D) it is a period of time less than five years.
E) the market is not in equilibrium.

Question 56

The long-run output of an economy depends on

A) the level of spending.
B) the level of unemployment.
C) the level of inflation.
D) the level of aggregate demand.
E) resources, technology, and institutions.

Question 57

Aggregate demand is about ________ and aggregate supply is about ________.

A) income; spending
B) spending; production
C) production; spending
D) production; income
E) saving; profit

Question 58

You read a study that predicts that rising oil prices projected for this summer are certain to fuel inflation. Having taken an economics class, due to this expected change in prices, you predict that spending today will ________ and aggregate demand today will ________.

A) be unaffected; be unaffected
B) increase; increase
C) decrease; decrease
D) decrease; increase
E) increase; decrease

Question 59

________ would cause a leftward shift of the aggregate demand curve.

A) An increase in real wealth
B) An increase in expected income
C) A decrease in foreign income
D) An increase in the expected price level
E) A decrease in the value of the dollar

Question 60

________ would cause a rightward shift of the aggregate demand curve.

A) A decrease in the expected price level
B) A decrease in foreign income
C) An increase in expected income
D) A decrease in real wealth
E) An increase in the value of the dollar

Question 61

A supply shock is defined as

A) a decrease in full-employment output.
B) a surprise event that changes the firm's production costs.
C) a reduction in aggregate demand that has a negative impact on the firm's revenue.
D) a sudden upward movement along the short-run aggregate supply curve.
E) an attempt by employees to negotiate a wage increase.

Question 62

The slope of the short-run aggregate supply curve can be explained by

A) the fact that all prices are sticky in the short run.
B) sticky input prices and flexible output prices.
C) flexible input prices and sticky output prices.
D) the fact that all prices are flexible in the short run.
E) the fact that all prices except wages are flexible in the short run.

Question 63

Shifts in the short-run aggregate supply curve are caused by

A) supply shocks.
B) menu costs.
C) money illusion.
D) changes in labor productivity.
E) changes in spending.

Question 64

When inflation pushes up prices in the economy, input prices are ________ and revenues ________ in the short run.

A) flexible; remain unchanged
B) sticky; increase
C) sticky; remain unchanged
D) flexible; decrease
E) flexible; increase

Question 65

The relationship between sticky input prices and flexible output prices explains the

A) positive slope of the short-run aggregate supply curve.
B) vertical slope of the long-run aggregate supply curve.
C) negative slope of the short-run aggregate supply curve.
D) negative slope of the aggregate demand curve.
E) positive slope of both the short-run and long-run aggregate supply curves.

Question 66

If the price level rises by 10 percent, then all else being equal, the long-run quantity of aggregate supply will

A) increase by 10 percent.
B) decrease by 10 percent.
C) remain unchanged.
D) increase by more than 10 percent.
E) increase by less than 10 percent.

Question 67

Which of the following would cause an increase in long-run aggregate supply?

A) The price level increases.
B) The price level decreases.
C) Firms and workers expect the price level to fall.
D) Firms and workers expect the price level to rise.
E) The stock of capital increases.

Question 68

When the general price level rises and firms decide not to change their prices in the short run, this can be attributed to

A) menu costs.
B) legally binding contracts.
C) inflexible input prices.
D) money illusion.
E) a decline in revenues.

Question 69

Increases in productivity will

A) cause the price level to rise.
B) impact short-run aggregate supply but not long-run aggregate supply.
C) impact aggregate demand but not aggregate supply.
D) increase long-run aggregate supply.
E) increase the price level and aggregate supply.

Question 70

A supply shock causes a shift in

A) short-run aggregate supply.
B) aggregate demand.
C) aggregate demand and short-run aggregate supply.
D) long-run aggregate supply.
E) short-run and long-run aggregate supply.

Question 71

When an economy experiences economic growth, the

A) long-run aggregate supply curve is unaffected.
B) long-run aggregate supply curve shifts to the right.
C) long-run aggregate supply curve shifts to the left.
D) aggregate demand curve shifts to the left.
E) short-run aggregate supply curve shifts to the left.

Question 72

When an economy has a more stable and well-developed financial system, it is reasonable to expect

A) an upward movement along the long-run aggregate supply curve.
B) a downward movement along the long-run aggregate supply curve.
C) a leftward shift of the long-run aggregate supply curve.
D) a rightward shift of the long-run aggregate supply curve.
E) no change in the long-run aggregate supply curve.

Question 73

If the price level falls by 5 percent, then all else being equal, the long-run aggregate supply curve will

A) remain unchanged.
B) shift to the right to reflect an increase in output of 5 percent.
C) shift to the right to reflect an increase in output of more than 5 percent.
D) shift to the left to reflect a decrease in output of 5 percent.
E) shift to the left to reflect a decrease in output of more than 5 percent.

Question 74

A rightward shift of the long-run aggregate supply curve means there has been

A) a decrease in the cyclical unemployment rate.
B) an increase in the cyclical unemployment rate.
C) an increase in the price level.
D) a decrease in the price level.
E) economic growth.

Question 75

An economy has experienced a rightward shift of its long-run aggregate supply curve and is now producing on that new long-run aggregate supply curve. It is reasonable to expect that

A) the cyclical unemployment rate has fallen.
B) the cyclical unemployment rate has been unaffected.
C) the inflation rate has risen.
D) the price level has risen.
E) productivity has fallen.

Question 76

Input prices are ________ in the short run and ________ in the long run.

A) sticky; sticky
B) flexible; flexible
C) increasing; increasing
D) flexible; sticky
E) sticky; flexible

Question 77

Menu costs help to explain

A) the negative slope of the aggregate demand curve.
B) the negative slope of the aggregate supply curve.
C) the positive slope of the short-run aggregate supply curve.
D) why the long-run aggregate supply curve is vertical.
E) why the long-run aggregate supply curve is horizontal.

Question 78

All else being equal, as the population ages and many people leave the labor force,

A) the unemployment rate will rise.
B) the price level will fall.
C) long-run aggregate supply will fall.
D) long-run aggregate supply will be unaffected.
E) aggregate demand must rise.

Question 79

All else being equal, an increase in ________ would shift the long-run aggregate supply curve to the left.

A) the cyclical unemployment rate
B) the inflation rate
C) economic growth
D) government spending
E) the rate at which capital depreciates

Question 80

New computer technologies can be expected to

A) increase long-run aggregate supply.
B) increase the price level.
C) increase the unemployment rate.
D) decrease aggregate demand.
E) decrease aggregate supply.