Deck 13: Aggregate Demand, Aggregate Supply, and Business Cycles

Question 1

Shifts in ______ can push the economy out of long-run equilibrium.

A)the AD curve only
B)the AS curve only
C)either the AD curve or the AS curve
D)the PAE line only

Answer 1

either the AD curve or the AS curve

Question 2

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.

A)planned consumption and investment; government spending
B)planned consumption and investment; net exports
C)net exports; planned consumption and investment
D)net exports; government spending

Answer 2

planned consumption and investment; net exports

Question 3

A negative demand shock will shift the ______ curve to the ______.

A)AD; left
B)AD; right
C)AS; left
D)AS; right

Answer 3

AD; left

Question 4

A positive demand shock will shift the ______ curve to the ______.

A)AD; left
B)AD; right
C)AS; left
D)AS; right

Question 5

The economy is in short-run equilibrium:

A)when the AD and AS curves intersect at potential output Y*.
B)when the AD and AS curves intersect at a level of real GDP that is above or below Y*.
C)when the AD and AS curves become vertical.
D)at the peak of the business cycle.

Question 6

A sudden increase in household wealth is an example of a ______ demand shock, which shifts the AD curve to the ______.

A)negative; left
B)positive; left
C)negative; right
D)positive; right

Question 7

The AD curve ______ because, holding all else constant, an increase in ______ causes C, I^{P and NX to fall.}

A)slopes downward; real GDP
B)slopes downward; the inflation rate
C)slopes upward; real GDP
D)is horizontal; the inflation rate

Question 8

The aggregate demand curve shows the relationship between planned spending and the:

A)nominal interest rate.
B)real interest rate.
C)unemployment rate.
D)inflation rate.

Question 9

The aggregate demand curve shifts when there are changes in:

A)the inflation rate.
B)planned spending that are not caused by changes in output or the inflation rate.
C)planned spending that are caused only by changes in output or the inflation rate.
D)real GDP.

Question 10

When the interest rate in the U.S.falls, U.S.financial assets:

A)become more attractive to foreign buyers.
B)become less attractive to both foreign and domestic buyers.
C)become more attractive to both foreign and domestic buyers.
D)become less attractive to domestic buyers and more attractive to foreign buyers.

Question 11

Changes in planned spending not caused by changes in output or the inflation rate will shift the:

A)aggregate supply curve.
B)Keynesian cross.
C)potential output line.
D)aggregate demand curve.

Question 12

When the inflation rate decreases, PAE ______, which in turn causes Y to ______ because of ______.

A)rises; rise; the income-expenditure multiplier
B)rises; fall; the income-expenditure multiplier
C)falls; rise; the wealth effect
D)falls; fall; the wealth effect

Question 13

If the interest rate in the U.S.rises, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will rise.

A)more; demand for
B)more; supply of
C)less; demand for
D)less; supply of

Question 14

If the interest rate in the U.S.falls, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will fall.

A)more; demand for
B)more; supply of
C)less; demand for
D)less; supply of

Question 15

Changes in planned spending that shift the aggregate demand curve are those:

A)caused by changes in output.
B)caused by changes in the inflation rate.
C)caused by changes in output and changes in the real interest rate.
D)not caused by changes in output or changes in the inflation rate.

Question 16

Shifts in ______ can return the economy to long-run equilibrium.

A)the AD curve only
B)the AS curve only
C)either the AD curve or the AS curve
D)the PAE line only

Question 17

A demand shock is a change in planned spending that is:

A)caused by changes in output.
B)caused by changes in the inflation rate.
C)caused by changes in output and changes in the real interest rate.
D)not caused by changes in output or changes in the inflation rate.

Question 18

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______.

A)falls; fall; the income-expenditure multiplier
B)falls; rise; the income-expenditure multiplier
C)rises; rise; the wealth effect
D)rises; fall; the wealth effect

Question 19

The AD curve slopes downward because an increase in ______ causes ______ to fall, which in turn causes real GDP to fall.

A)the inflation rate; planned spending
B)planned spending; the inflation rate
C)real GDP; planned spending
D)real GDP; the unemployment rate

Question 20

When the interest rate in the U.S.rises, U.S.financial assets:

A)become less attractive to foreign buyers.
B)become more attractive to both foreign and domestic buyers.
C)become less attractive to both foreign and domestic buyers.
D)become less attractive to domestic buyers and more attractive to foreign buyers.

Question 21

Due to menu costs, many firms in the economy will increase their output:

A)only after they raise the price at which they are willing to sell their output.
B)before raising the price at which they are willing to sell their output.
C)instead of raising the price at which they sell their output.
D)or raise the price at which they sell their output, but never both.

Question 22

Firms that face menu costs react to a sustained increase in demand by:

A)increasing output and then raising the price of their output.
B)charging higher prices, without necessarily increasing the amount of output they are willing to sell.
C)charging lower prices, while simultaneously increasing the amount of output they are willing to sell.
D)increasing output and then reducing the price of their output.

Question 23

A low rate of expected inflation tends to lead to a ___ rate of actual inflation and a high rate of expected inflation tends to lead to a ____ rate of actual inflation.

A)high; high
B)high; low
C)low; low
D)low; high

Question 24

For a given inflation rate, if a stock market crash makes consumers less willing to spend, then the ______ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Question 25

The AD curve can be shifted by:

A)both fiscal and monetary policy.
B)neither fiscal nor monetary policy.
C)fiscal policy only.
D)monetary policy only.

Question 26

Firms suddenly becoming pessimistic about future business prospects is an example of a ______ demand shock, which would shift the AD curve to the ______.

A)negative; left
B)positive; left
C)negative; right
D)positive; right

Question 27

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the ______ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Question 28

Inflation inertia is the result of the behavior of ____ and the existence of ______.

A)the central bank; automatic stabilizers
B)real and nominal interest rates; an output gap
C)autonomous aggregate demand; the Fed's policy reaction function
D)inflation expectations; long-term wage and price contracts

Question 29

For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase spending on new capital, then the ______ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Question 30

When actual output equals potential output there is ____ output gap and the rate of inflation will tend to ____.

A)an expansionary; increase
B)an expansionary; decrease
C)no; remain the same
D)a recessionary; increase

Question 31

The AS curve slopes upward because:

A)firms generally sell their products at preset prices.
B)relaxing the assumptions of the Keynesian model allows us to develop a more realistic model where firms no longer care about prices.
C)many firms raise their prices when aggregate demand has increased.
D)inflation is higher in goods-producing industries than service-producing industries.

Question 32

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

A)large; high
B)large; low
C)small; low
D)small; high

Question 33

The aggregate supply curve shows the relationship between the amount of output firms want to produce and the ______.

A)nominal interest rate
B)real interest rate
C)unemployment rate
D)inflation rate

Question 34

For a given inflation rate, if a resolution of international disputes leads to a cutback in government military spending, then the ______ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Question 35

For a given inflation rate, if a rise in the stock market makes consumers more willing to spend, then the ______ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Question 36

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

A)the inflation gap
B)inflation expectations.
C)inflation inertia.
D)potential inflation.

Question 37

For a given inflation rate, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ______ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Question 38

Inflation inertia is the tendency for inflation to:

A)equal zero.
B)change relatively slowly from year to year.
C)decrease when the Fed increases interest rates.
D)increase when the Fed decreases interest rates.

Question 39

An increase in the aggregate demand for goods and services will result in an increase in the amount of output firms are willing to produce, and this increase in output is accompanied by:

A)a decrease in the inflation rate.
B)an increase in the inflation rate.
C)a decrease in nominal GDP
D)an increase in potential GDP.

Question 40

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

A)large; high
B)large; low
C)small; low
D)small; high

Question 41

The aggregate supply curve will shift rightward in response to:

A)an increase in the expected rate of inflation.
B)a decrease in the expected rate of inflation.
C)an increase in potential GDP.
D)a decrease in potential GDP.

Question 42

Changes in the expected rate of inflation will:

A)not shift the AS curve.
B)shift the AS curve leftward or rightward.
C)cause the AS curve to become vertical.
D)cause the AS curve to become downward-sloping.

Question 43

Technological improvements:

A)decrease aggregate demand.
B)increase aggregate demand.
C)decrease aggregate supply.
D)increase aggregate supply.

Question 44

An increase in aggregate supply is usually shown by a ______ shift of the AS curve.

A)inverse
B)upward
C)leftward
D)rightward

Question 45

The AS curve slopes upward because:

A)all firms will increase their prices in response to an increase in aggregate demand, but some will increase their output and others will decrease their output.
B)all firms will increase their prices, but not their output in response to an increase in aggregate demand.
C)some firms will increase their prices and their output in response to an increase in aggregate demand.
D)all firms will increase their prices and their output in response to an increase in aggregate demanD.

Question 46

When actual output is less than potential output, there is ____ output gap and the rate of inflation will tend to ____.

A)an expansionary; increase
B)an expansionary; decrease
C)a recessionary; decrease
D)a recessionary; increase

Question 47

Starting from potential output, if firms become more optimistic about the future and decide to increase their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 48

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) _____ gap and inflation will _____.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 49

As the number or quality of available resources improves, ______ shifts to the _____.

A)aggregate demand; left
B)aggregate demand; right
C)aggregate supply; left
D)aggregate supply; right

Question 50

A large increase in oil prices is an example of:

A)a positive inflation shock.
B)a negative inflation shock.
C)inflation inertia.
D)excessive aggregate spending.

Question 51

When actual output exceeds potential output there is ____ output gap and the rate of inflation will tend to ____.

A)an expansionary; increase
B)an expansionary; decrease
C)no; remain the same
D)a recessionary; increase

Question 52

As the available technology improves, ______ shifts to the _____.

A)aggregate demand; left
B)aggregate demand; right
C)aggregate supply; left
D)aggregate supply; right

Question 53

As the quality of available resources becomes worse:

A)aggregate demand falls.
B)aggregate demand rises.
C)aggregate supply falls.
D)aggregate supply rises.

Question 54

An inflation shock is:

A)the level of inflation consistent with output in a recessionary gap.
B)the level of inflation consistent with output in an expansionary gap.
C)a sudden change in the normal behavior of inflation, unrelated to the nation's output gap.
D)a change in the inflation rate generated by excessive aggregate spending.

Question 55

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 56

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will generate a(n) _____ gap and inflation will _____.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 57

A leftward shift of the AS curve indicates:

A)a decrease in aggregate supply.
B)an increase in aggregate supply.
C)a decrease in potential GDP.
D)an increase in potential GDP.

Question 58

A large decrease in oil prices is an example of:

A)a positive inflation shock.
B)a negative inflation shock.
C)inflation inertia.
D)excessive aggregate spending.

Question 59

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap, is called:

A)short-run equilibrium.
B)long-run equilibrium.
C)an inflation shock.
D)inflation inertia.

Question 60

If households and firms expect higher rates of inflation, the ______ curve will shift _____.

A)AD; rightward
B)AS; rightward
C)AS; leftward
D)AD; until it becomes vertical

Question 61

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:

A)a positive demand shock.
B)a negative inflation shock.
C)a decrease in taxes.
D)an increase in the money supply.

Question 62

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

A)a negative demand shock.
B)a positive inflation shock.
C)an increase in taxes.
D)a decrease in the money supply.

Question 63

When using the AD-AS model to understand business cycles, the question, "what are the fundamental causes of business cycles?" can be thought of as the question:

A)"what factors move the economy away from long-run equilibrium?"
B)"what factors move aggregate demand and aggregate supply in different directions?"
C)"what factors increase or decrease potential GDP?"
D)"what factors increase or decrease the expected rate of inflation?"

Question 64

Graphically, long-run equilibrium occurs at the intersection of the aggregate demand curve and:

A)the aggregate supply curve and potential output.
B)the planned aggregate expenditure line.
C)the aggregate supply curve.
D)potential output.

Question 65

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the ______ curve to the right and generate ______.

A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Question 66

Refer to the figure below.The economy pictured in the figure has a(n) ______ gap with a short-run equilibrium indicated by point ___.

A)recessionary; A
B)recessionary; B
C)recessionary; C
D)expansionary; A

Question 67

When actual output equals potential output, there is ______ output gap and the inflation rate will ____.

A)an expansionary; exceed the expected rate of inflation
B)an expansionary; be lower than the expected rate of inflation
C)no; be equal to the expected rate of inflation
D)a recessionary; exceed the expected rate of inflation

Question 68

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will shift the ______ curve to the left and generate ______.

A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Question 69

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

A)a negative demand shock.
B)a negative inflation shock.
C)a decrease in government spending.
D)a decrease in the inflation rate.

Question 70

When actual output is less than potential output, there is ______ output gap and the inflation rate will ____.

A)an expansionary; exceed the expected rate of inflation
B)an expansionary; be lower than the expected rate of inflation
C)a recessionary; be lower than the expected rate of inflation
D)a recessionary; exceed the expected rate of inflation

Question 71

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ______ equilibrium.

A)long-run
B)recessionary
C)expansionary
D)short-run

Question 72

Graphically, short-run equilibrium occurs at the intersection of the aggregate demand curve and:

A)the aggregate supply curve and potential output.
B)the planned aggregate expenditure line.
C)the aggregate supply curve.
D)potential output.

Question 73

An example of a negative inflation shock is:

A)an increase in interest rates.
B)an increase in government purchases.
C)a significant rise in oil prices.
D)a tax increase.

Question 74

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will shift the ______ curve to the right and generate ______.

A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Question 75

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

A)higher; higher
B)higher; lower
C)lower; higher
D)lower; lower

Question 76

Starting from potential output, if firms become less optimistic and decide to decrease their investment in new capital, then this will shift the ______ curve to the left and generate ______.

A)aggregate demand; a recessionary output gap
B)aggregate supply; a recessionary output gap
C)aggregate demand; an expansionary output gap
D)aggregate supply; an expansionary output gap

Question 77

When the economy is in short-run equilibrium, there will be ______ output gap.

A)no
B)only a recessionary
C)either a recessionary or an expansionary
D)only an expansionary

Question 78

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:

A)a positive demand shock.
B)a positive inflation shock.
C)an increase in government spending.
D)an increase in the inflation rate.

Question 79

When actual output exceeds potential output, there is ______ output gap and the inflation rate will ____.

A)an expansionary; exceed the expected rate of inflation
B)an expansionary; be lower than the expected rate of inflation
C)no; be equal to the expected rate of inflation
D)a recessionary; exceed the expected rate of inflation

Question 80

Starting from long-run equilibrium, a negative inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

A)higher; higher
B)higher; lower
C)higher; potential
D)lower; lower