Deck 11: Aggregate Supply and Aggregate Demand

Question 1

Which of the following does NOT affect potential GDP?

A) The quantity of labour employed
B) The quantity of land and natural resources
C) The quantity of capital and human capital
D) The quantity of money
E) The amount of entrepreneurial talent available

Answer 1

The quantity of money

Question 2

If the money wage rate and the price level both rise by the same proportion, then, in the figure above, the potential GDP line ________, and the aggregate supply curve ________.

A) shifts rightward; does not shift
B) shifts rightward; shifts leftward
C) shifts rightward; shifts rightward
D) does not shift; shifts rightward
E) does not shift; shifts leftward

Answer 2

does not shift; shifts leftward

Question 3

The aggregate supply curve shows the relationship between

A) the quantity of real GDP supplied and the price level.
B) potential GDP and real GDP.
C) the quantity of real GDP supplied and the interest rate.
D) potential GDP and the aggregate demand curve.
E) potential GDP and the price level.

Answer 3

the quantity of real GDP supplied and the price level.

Question 4

Which of the following changes aggregate supply and shifts the aggregate supply curve?
i. Change in the price level
ii. Change in potential GDP
iii. Change in the money wage rate

A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii and iii

Question 5

A rise in the price level brings a ________ in the real wage rate that ________ profits which leads to ________ production.

A) fall; increases; increasing
B) rise; reduces; decreasing
C) rise; increases; decreasing
D) rise; reduces; increasing
E) fall; decreases; decreasing

Question 6

If the price level falls and the money wage rate does not change, some firms ________ and there is ________.

A) shut down; a leftward shift of the aggregate supply curve
B) shut down; a decrease in potential GDP
C) start up; a rightward shift of the aggregate supply curve
D) shut down; a decrease in the quantity of real GDP supplied
E) start up; an increase in potential GDP

Question 7

Moving along the AS curve, when the price level increases, the

A) real wage rate rises, and there is a decrease in the quantity of real GDP supplied.
B) nominal wage rate rises, and there is a decrease in the quantity of real GDP supplied.
C) real wage rate falls, and there is an increase in the quantity of real GDP supplied.
D) real wage rate rises, and there is an increase in the quantity of real GDP supplied.
E) nominal wage rate falls, and there is an increase in the quantity of real GDP supplied.

Question 8

Based on the figure above, the aggregate supply curve shifts rightward and the potential GDP line does NOT change when

A) both the price level and money wage rate rise by the same proportion.
B) the price level falls.
C) the money wage rate falls.
D) the money wage rate rises.
E) the price level rises.

Question 9

During 2018, a country reports that its price level fell and the money wage rate did not change. These changes led to

A) no change in the real wage rate and an increase in aggregate demand.
B) a lower real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
C) a higher real wage rate, higher profits, and an increase in the quantity of real GDP supplied.
D) a higher real wage rate, lower profits, and a decrease in the quantity of real GDP supplied.
E) a lower real wage rate, higher profits, and an increase in the quantity of real GDP supplied.

Question 10

If profits are high because the price level rose,

A) potential GDP must be decreasing.
B) it is likely the result of an increase in the real wage rate.
C) business failures rise and the quantity of real GDP supplied increases.
D) new businesses open and the quantity of real GDP supplied increases.
E) the AS curve shifts leftward.

Question 11

Changes in which of the following do NOT shift the AS curve?
i. The price level
ii. Potential GDP
iii. The money wage rate

A) i only
B) ii only
C) iii only
D) i and ii
E) i, ii and iii

Question 12

If the price of widgets is $2 and the real wage is $20 per hour then the firm must sell 10 widgets to cover the cost of an hour of labour. If the price of widgets rises to $4, how many widgets must the firms sell to cover the cost of an hour of labour?

A) 15
B) 5
C) 12
D) 10
E) 20

Question 13

The line showing potential GDP is a vertical straight line because

A) economists are unsure about how to determine potential GDP.
B) it represents the minimum level of real GDP in a recession.
C) when nothing else changes, a higher price level has no effect on real GDP.
D) there is only one level of full employment at any point in time.
E) the aggregate supply curve is upward sloping.

Question 14

Along the aggregate supply curve, the quantity of real GDP supplied increases when the price level rises because

A) the real wage rate rises.
B) the demand for the goods and services increases.
C) the real wage rate and profits both fall.
D) profits decrease.
E) the real wage rate falls.

Question 15

The aggregate supply curve is a(n) ________ curve because it represents the relationship between price level and the quantity of real GDP supplied, two items that are ________ correlated.

A) downward-sloping; negatively
B) vertical; not
C) upward-sloping; negatively
D) downward-sloping; positively
E) upward-sloping; positively

Question 16

Which of the following shifts the aggregate supply curve rightward?
i. The money wage rate rises.
ii. Potential GDP increases.
iii. Government expenditure on goods and services increases.

A) i only
B) ii only
C) iii only
D) ii and iii
E) i, ii and iii

Question 17

Over the business cycle, factors such as the quantity of capital, human capital and technology

A) change drastically, fluctuating more than the quantity of labour employed.
B) grow but do not fluctuate as much as the quantity of labour employed.
C) do not grow and are therefore not the source of economic growth.
D) fluctuate about the same amount as the quantity of labour employed.
E) change randomly, sometimes growing, sometimes falling.

Question 18

If the price level increases from 110.0 to 115.0, the quantity of

A) potential GDP will decrease.
B) potential GDP will increase.
C) real GDP demanded will increase.
D) real GDP supplied will decrease.
E) real GDP supplied will increase.

Question 19

The real wage rate definitely falls if the money wage rate ________ and the price level ________.

A) remains constant; falls
B) remains constant; rises
C) rises; rises
D) falls; falls
E) rises; falls

Question 20

An increase in the price level leads to

A) neither a movement along the aggregate supply curve nor a shift of the aggregate supply curve.
B) a downward movement along the aggregate supply curve.
C) a leftward shift of the aggregate supply curve.
D) a rightward shift of the aggregate supply curve.
E) an upward movement along the aggregate supply curve.

Question 21

An increase in ________ increases potential GDP and ________ aggregate supply.

A) the money wage rate; decreases
B) technology; decreases
C) the money price of oil; decreases
D) technology; increases
E) the money wage rate; increases

Question 22

The change in potential real GDP and aggregate supply shown in the graph above can be a result of

A) a decrease in the money price of oil.
B) an increase in the real wage rate.
C) a fall in the price level.
D) a decrease in the money wage rate.
E) an increase in the quantity of capital.

Question 23

The aggregate demand curve shifts when any of the following factors change EXCEPT

A) foreign income.
B) expectations about the future.
C) the price level.
D) fiscal policy.
E) monetary policy.

Question 24

Which of the following shifts the aggregate supply curve rightward?

A) An increase in real GDP.
B) An increase in potential GDP.
C) An increase in the money wage rate.
D) An increase in the money price of oil.
E) An increase in consumers' incomes.

Question 25

A rise in the price level

A) decreases the quantity of real GDP demanded.
B) decreases aggregate demand.
C) has no effect on aggregate demand or on the quantity of real GDP demanded.
D) increases aggregate demand.
E) increases the quantity of real GDP demanded.

Question 26

Aggregate demand ________ if the expected inflation rate increases because ________.

A) does not change; inflation does not affect the aggregate demand curve
B) decreases; people wait for the exchange rates to change before making purchases
C) increases; people want to make purchases now before the price of goods and services begin to increase
D) increases; people expect to experience increases in the cost of living as the inflation begins
E) decreases; people want to wait for the price of goods and services begin to decrease

Question 27

All of the following shift the aggregate demand curve to the right EXCEPT

A) an increase in taxes.
B) an increase in expected future profit.
C) an expansion of the global economy.
D) an increase in government expenditure.
E) an increase in foreign income.

Question 28

Which of the following produces a movement along the aggregate demand curve and does not shift the aggregate demand curve?

A) A change in expectations about the future
B) A change in monetary policy
C) A change in the price level
D) A change in foreign incomes
E) A change in government expenditures on goods and services

Question 29

When the price level rises and increases the demand for money, the nominal interest rate ________ and the real interest rate ________.

A) rises; rises
B) falls; falls
C) does not change; does not change
D) falls; rises
E) rises; falls

Question 30

A rise in the money wage rate shifts the

A) AS curve rightward.
B) AD curve rightward.
C) AD curve leftward.
D) potential GDP curve rightward.
E) AS curve leftward.

Question 31

A fall in the price level produces a ________ the aggregate demand curve

A) movement upward along
B) rightward shift of
C) movement downward along
D) change in the slope of
E) leftward shift of

Question 32

The change reflected in the above figure might be a result of

A) a fall in the price level.
B) an increase in the quantity of labour.
C) a decrease in the money prices of resources other than labour.
D) a decrease in the quantity of capital.
E) a rise in the money wage rate.

Question 33

Sherri lives in Canada and is considering buying a new sofa. If the price level in Canada falls and the price level in the United States does not change, Canadian manufactured sofas are relatively

A) less expensive, so Sherri will likely purchase a Canadian manufactured sofa.
B) less expensive, so Sherri will likely purchase a U.S. manufactured sofa.
C) more expensive, so Sherri will likely purchase a U.S. manufactured sofa.
D) more expensive, so Sherri will likely purchase a Canadian manufactured sofa.
E) Both answers B and D could be correct depending on whether U.S. manufactured sofas were initially more expensive or less expensive than Canadian sofas.

Question 34

If the price level increases, there is ________ the AD curve and the quantity of real GDP demanded ________.

A) no change in; does not change
B) a movement upward along; increases
C) a movement upward along; decreases
D) a leftward shift in; decreases
E) a movement downward along; increases

Question 35

When the price level increases there is ________ movement along the aggregate demand curve because the buying power of money ________.

A) a downward; increases
B) an upward; decreases
C) an upward; increases
D) a downward; decreases
E) no; does not change

Question 36

A technological advance ________ aggregate supply, shifting the aggregate supply curve ________ and potentially bringing the ________ phase of the business cycle.

A) increases; rightward; expansion
B) increases; leftward; expansion
C) increases; rightward; recession
D) decreases; leftward recession
E) decreases; rightward; expansion

Question 37

A reason why an increase in the price level decreases the quantity of real GDP demanded is that

A) potential GDP decreases.
B) the real interest rate falls.
C) the inflation rate decreases.
D) the buying power of money increases.
E) the price of domestic goods and services increases relative to foreign goods and services.

Question 38

The aggregate supply curve shifts rightward when

A) the money wage rate falls.
B) government purchases increase.
C) potential GDP decreases.
D) the money wage rate rises.
E) income taxes increase.

Question 39

Which of the following shifts the aggregate supply curve leftward?

A) A fall in the money wage rate.
B) A decrease in the price level.
C) An increase in potential GDP.
D) A fall in the real wage rate.
E) A decrease in potential GDP.

Question 40

At a price level of 100, John has savings equal to $20,000. If the price level increases to 130, the buying power of John's savings is approximately

A) $15,400.
B) $12,780.
C) $26,000.
D) $30,000.
E) $20,000.

Question 41

Which of the following shifts the aggregate demand curve rightward?

A) A tax cut
B) A decrease in expected future income
C) A decrease in government expenditures on goods and services
D) A decrease in the price level
E) A decrease in the quantity of money

Question 42

An economy is at a full-employment equilibrium, and then the aggregate demand curve shifts leftward. As a result, the price level ________ and real GDP ________.

A) falls; increases
B) falls; does not change
C) falls; decreases
D) rises; decreases
E) rises; increases

Question 43

In the figure above, the shift in the aggregate demand curve from AD₁ to AD3 could be the result of

A) a decrease in the buying power of money.
B) an increased expectation of a recession that lowers the expected rate of profit from investment.
C) a decrease in the real interest rate.
D) a decrease in the foreign exchange rate.
E) an increase in the price level.

Question 44

According to the AS-AD model,

A) the AS curve is always equal to potential GDP.
B) the equilibrium is where the AS curve crosses the AD curve, but the amount of real GDP at this point is not always equal to potential GDP.
C) a change in the amount of potential GDP is the only factor that shifts both the aggregate supply curve and the aggregate demand curve.
D) the aggregate quantity demanded is typically greater than the aggregate quantity supplied, thereby leading to inflation.
E) the aggregate quantity supplied is typically greater than the aggregate quantity demanded, thereby leading to unemployment.

Question 45

The aggregate demand curve in the figure above shifts rightward if

A) potential GDP increases.
B) government expenditure decreases.
C) the money wage rate falls.
D) taxes are raised.
E) the Reserve Bank lowers the interest rate.

Question 46

In the figure above, the shift in the aggregate demand curve from AD₁ to AD3 could be the result of an increase in

A) the price level.
B) foreign incomes.
C) the foreign exchange rate.
D) expected future income.
E) aggregate supply.

Question 47

In the figure above, as the price level increases, the aggregate demand curve will

A) shift from AD₁ to AD3 and then back to AD₁.
B) not shift, but the aggregate demand curve will change so that it is positively sloped.
C) not shift.
D) shift from AD₁ to AD3.
E) shift from AD₁ to AD₂.

Question 48

When the quantity of real GDP demanded exceeds the quantity of real GDP supplied, firms

A) increase production and prices.
B) decrease production and prices.
C) increase production and lower prices.
D) do not change production because aggregate demand and potential GDP will adjust.
E) decrease production and increase prices.

Question 49

Which of the following decreases aggregate demand and shifts the AD curve leftward?

A) A tax cut
B) An increase in government expenditures on goods and services
C) A decrease in potential GDP
D) The Reserve Bank increasing the interest rate
E) An increase in the quantity of money

Question 50

The aggregate demand curve in the figure above shifts rightward if

A) taxes are raised.
B) potential GDP increases.
C) government expenditure increases.
D) the money wage rate falls.
E) the Reserve Bank raises the interest rate.

Question 51

If firms' expectations about the future become pessimistic so that they think future profits will be lower, then

A) the quantity of real GDP demanded decreases, and there is a movement up along the AD curve.
B) aggregate demand decreases and the AD curve shifts leftward.
C) aggregate demand increases and the AD curve shifts rightward.
D) the aggregate demand curve does not shift, but potential GDP decreases.
E) the quantity of real GDP demanded increases, and there is a movement down along the AD curve.

Question 52

If the Reserve Bank increases the quantity of money, then

A) the quantity of real GDP demanded decreases and there is a movement up along the AD curve.
B) the quantity of real GDP demanded increases and there is a movement down along the AD curve.
C) both the aggregate demand curve and the aggregate supply curve shift leftward.
D) aggregate demand decreases and the AD curve shifts leftward.
E) aggregate demand increases and the AD curve shifts rightward.

Question 53

An increase in government expenditure on goods and services leads to

A) the aggregate supply curve shifting rightward.
B) the aggregate demand curve shifting leftward.
C) the aggregate demand curve shifting rightward.
D) potential GDP increasing.
E) the aggregate supply curve shifting leftward.

Question 54

If the Chinese economy enters a recession,

A) Australia's aggregate demand increases and the AD curve shifts rightward.
B) Australia's aggregate demand decreases and the AD curve shifts leftward.
C) the quantity of real GDP demanded in Australia decreases and there is a movement down along the AD curve.
D) Australia's aggregate demand decreases and the AD curve shifts rightward.
E) the quantity of real GDP demanded in Australia increases and there is a movement up along the AD curve.

Question 55

Suppose the exchange rate in the year 2017 was 5 yuan per dollar and in 2018 the exchange rate fell to 4 yuan per dollar. If the price of a Chinese jumper was 120 yuan in both years, the new dollar price in 2018 would be ________ and imports of Chinese jumpers would ________.

A) $40; decrease
B) $40; stay the same because the price stayed the same at 120 yuan
C) $30; increase
D) $40; increase
E) $30; decrease

Question 56

The aggregate demand curve in the figure above shifts rightward if

A) potential GDP increases.
B) the money wage rate falls.
C) government expenditure decreases.
D) taxes are hiked.
E) the expected future profit increases so that investment increases.

Question 57

The aggregate demand multiplier effect says that an initial increase in expenditure plans leads to an induced

A) increase in production expenditure.
B) increase in exports.
C) increase in consumption expenditure.
D) decrease in the price level.
E) increase in government expenditures on goods and services.

Question 58

If investment spending increases by $1 million, then the aggregate demand curve shifts

A) leftward by less than $1 million.
B) rightward by $1 million.
C) rightward by less than $1 million.
D) rightward by more than $1 million.
E) leftward by more than $1 million.

Question 59

A recessionary gap occurs when ________ so that real GDP is ________ potential GDP.

A) aggregate supply decreases; less than
B) aggregate demand increases; greater than
C) aggregate supply increases; less than
D) aggregate demand decreases; less than
E) potential GDP decreases; greater than

Question 60

If the economy is at macroeconomic equilibrium, then real GDP

A) might be equal to, greater than or less than potential GDP
B) must be greater than potential GDP.
C) must equal potential GDP.
D) must be less than potential GDP.
E) cannot be compared to potential GDP.

Question 61

In the figure above, the economy is at an equilibrium with real GDP of $16 trillion and a price level of 110. As the economy moves toward its ultimate equilibrium, the ________ curve shifts ________ because ________.

A) aggregate supply; rightward; the money wage rate falls
B) potential GDP; leftward; the money wage rate falls
C) aggregate supply; leftward; the money wage rate rises
D) aggregate demand; rightward; the money wage rate falls
E) aggregate demand; leftward; the money wage rate rises

Question 62

The table gives the aggregate demand and aggregate supply schedules for a nation.
The table above gives data for the nation of Pearl, a small island in the South Pacific. If aggregate demand increases so that the quantity of real GDP demanded is $6 billion more at each price level, the new equilibrium real GDP is ________, and the nation is now experiencing a(n) ________.

A) $22 billion; recessionary gap
B) $28 billion; recessionary gap
C) $28 billion; inflationary gap
D) $25 billion; equilibrium
E) $22 billion; inflationary gap

Question 63

The main sources of cost-push inflation are increases in

A) the real wage rate and the price of raw materials.
B) the quantity of money and the real wage rate.
C) the money wage rate and aggregate demand.
D) government expenditure and the quantity of money.
E) the money wage rate and the price of raw materials.

Question 64

If demand-pull inflation occurs when the economy is already at potential GDP then, following the initial increase in aggregate demand, the

A) potential GDP line shifts leftward.
B) AS curve shifts leftward.
C) AS curve shifts rightward.
D) potential GDP line shifts rightward.
E) None of the above is correct because demand-pull inflation shifts only the aggregate demand curve.

Question 65

In the figure above, the economy is at an equilibrium with real GDP of $16 trillion and a price level of 110. At this point there is

A) price stability.
B) a recessionary gap.
C) a full-employment equilibrium.
D) an above full-employment equilibrium.
E) an inflationary gap.

Question 66

Cost-push inflation can start with

A) a decrease in government expenditure.
B) a decrease in the quantity of money.
C) an increase in oil prices.
D) a decrease in investment.
E) an increase in government expenditure.

Question 67

At a peak in the business cycle, the macroeconomic equilibrium is ________ the level of potential real GDP.

A) greater than
B) less than
C) equal to
D) falling below
E) None of the above answers is always correct because the relationship depends on whether the previous phase of the business cycle had been a recession or an expansion.

Question 68

In a demand-pull inflation, money wage rates rise because

A) a decrease in aggregate demand creates a labour surplus.
B) an increase in aggregate demand creates a labour shortage.
C) a decrease in aggregate demand creates a labour shortage.
D) an increase in aggregate demand creates a labour surplus.
E) an increase in aggregate supply creates a labour shortage.

Question 69

If the equilibrium price level is 135 but the actual price level is 120, then

A) the quantity of real GDP demanded is less than the quantity of real GDP supplied.
B) aggregate demand will decrease to restore equilibrium.
C) aggregate demand will increase to restore equilibrium.
D) firms decrease their production because they cannot sell the output they produce.
E) the quantity of real GDP demanded is greater than the quantity of real GDP supplied.

Question 70

Initially, demand-pull inflation will

A) increase the price level and not change real GDP.
B) increase the price level and decrease real GDP.
C) shift the aggregate supply curve rightward.
D) increase both the price level and increase real GDP.
E) decrease potential GDP.

Question 71

The table gives the aggregate demand and aggregate supply schedules for a nation.
The table above gives data for the nation of Pearl, a small island in the South Pacific. When the economy is at full employment the price level is

A) 150.
B) 110.
C) 120.
D) 140.
E) 130.

Question 72

Demand-pull inflation results from continually increasing the quantity of money, which leads to continually

A) decreasing aggregate demand.
B) decreasing potential GDP.
C) increasing aggregate supply.
D) increasing potential GDP.
E) increasing aggregate demand.

Question 73

The table gives the aggregate demand and aggregate supply schedules for a nation.
The table above gives data for the nation of Pearl, a small island in the South Pacific. If a supply shock decreases the quantity of real GDP supplied by $6 billion at each price level, the new equilibrium real GDP is

A) $22 billion.
B) $17 billion.
C) $16 billion.
D) $23 billion.
E) $19 billion.

Question 74

An economy experiences a recessionary gap. As the economy adjusts to full employment, the money wage rate

A) rises, shifting the aggregate demand curve rightward.
B) falls, shifting the aggregate demand curve leftward.
C) falls, increasing potential GDP.
D) falls, shifting the aggregate supply curve rightward.
E) rises, shifting the aggregate supply curve leftward.

Question 75

Starting from a situation of full employment, an increase in aggregate demand creates ________ and ________ the price level.

A) a recessionary gap; lowers
B) a recessionary gap; raises
C) a recessionary gap; does not change
D) an inflationary gap; raises
E) an inflationary gap; lowers

Question 76

If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP less than potential GDP, there is

A) an inflationary gap.
B) falling real GDP.
C) an above full-employment equilibrium.
D) a recessionary gap.
E) a rising price level.

Question 77

Demand-pull inflation starts with a shift of the

A) AD curve leftward.
B) AD curve rightward.
C) potential GDP line leftward.
D) AS curve leftward.
E) AS curve rightward.

Question 78

The table gives the aggregate demand and aggregate supply schedules for a nation.
The table above gives data for the nation of Pearl, a small island in the South Pacific. The economy is at full employment when real GDP is

A) $22 billion.
B) $34 billion.
C) $25 billion.
D) $31 billion.
E) $28 billion.

Question 79

If the aggregate demand curve and the aggregate supply curve intersect at a level of real GDP greater than potential GDP, there is

A) a falling price level.
B) rising real GDP.
C) a below-full employment equilibrium.
D) an inflationary gap.
E) a recessionary gap.

Question 80

Which of the following factors could start a demand-pull inflation?

A) A decrease in the money wage rate
B) An increase in the money wage rate
C) A decrease in government expenditure
D) An increase in the quantity of money
E) An increase in tax rates