Deck 33: Aggregate Demand and Aggregate Supply

Question 1

According to Okun's law, if real GDP grows at an average rate of 3 per cent, the unemployment rate remains unchanged.

Answer 1

True

Question 2

The new classical misperceptions theory, based on the work of Milton Friedman and Robert Lucas, suggests that a lower price level causes misperceptions about relative prices, which induces suppliers to increase the quantity of goods and services supplied.

Answer 2

False

Question 3

The long run aggregate supply curve is the summation of the short-run aggregate supply curves.

Answer 3

False

Question 4

The combination of rising unemployment and rising price level is called stagflation.

Question 5

The short-run aggregate curve's shape is affected by the economy's position in regards to full employment.

Question 6

A decrease in the price of imported raw materials owing to appreciation of the $A would shift the AS-curve to the right.

Question 7

Investment spending averages about two-thirds of GDP, yet declines in investment account for only about one-seventh of the declines in GDP during recessions.

Question 8

For a given level of inflation, if a stock market crash makes consumers less willing to spend (the wealth effect), then the aggregate demand curve shifts left.

Question 9

The position of the long-run aggregate-supply curve shows the quality of goods and services predicted by classical macroeconomic theory.

Question 10

An economy can produce more if it experiences:

A)advances in technology
B)an increase in labour
C)an increase in capital
D)all of the above
E)none of the above

Question 11

The business cycle follows a regular and predictable pattern.

Question 12

Economic growth is:

A)bad for the economy as it reduces the standard of living
B)good for society to the extent that it allows everyone to enjoy a higher standard of living
C)bad for society as it allows producers to make more profit
D)bad for society because it creates more inequities
E)none of the above

Question 13

When inflation is decreasing, prices are falling.

Question 14

In the long run, the quantity of goods and services supplied depends on the economy's labour, capital, technology and overall level of prices.

Question 15

The aggregate-demand curve is downward-sloping because of Pigou's wealth effect, Keynes's interest-rate effect, Mundell-Fleming's exchange-rate effect and Veblen's envy effect.

Question 16

The new Keynesian sticky-price theory suggests that an unexpected fall in the price level leaves some firms with higher-than-desired prices because of menu costs, causing sales to be depressed and inducing the firms to increase the quantity of goods and services they produce.

Question 17

The slope of the AD curve only reflects the total price demanded by consumers in the economy.

Question 18

A short period of falling incomes and rising unemployment is called:

A)a business cycle
B)a boom
C)a recession
D)a depression

Question 19

An increase in net lump-sum taxes shifts the AD curve to the right.

Question 20

An increase in inflation shifts the AD curve to the right.

Question 21

Which of the following is a policy instrument?

A)Money supply
B)Government expenditure
C)Taxes
D)All of the above

Question 22

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

A)aggregate demand curve; right
B)aggregate demand curve; left
C)short-run aggregate supply line; upward
D)short-run aggregate supply line; downward

Question 23

The behaviour by the Reserve Bank is a key factor underlying the link between ______ and _____, and is summarised by the aggregate demand curve.

A)inflation; input
B)inflation; output
C)inflation; income
D)inflation; taxes

Question 24

Deteriorating economic conditions could be due to:

A)increases in investment spending
B)decreases in the national debt
C)decreases in spending on factories, housing and inventories
D)consumers buying too much on credit

Question 25

For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the _____ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)short-run aggregate supply line; upward
D)short-run aggregate supply line; downward

Question 26

The components of aggregate expenditure that depend negatively on the interest rate are:

A)consumption, investment and government expenditure
B)investment, government expenditure and net exports
C)consumption, investment and net exports
D)consumption, taxes and net exports

Question 27

A prolonged period of falling incomes and rising unemployment is called:

A)a recession
B)a boom
C)a business cycle
D)a depression

Question 28

For a given level of inflation, if a stock market crash makes consumers less willing to spend (the wealth effect), then the _____ shifts _____.

A)aggregate demand curve; right
B)aggregate demand curve; left
C)short-run aggregate supply line; upward
D)short-run aggregate supply line; downward

Question 29

The classical dichotomy refers to the separation of:

A)monetary and fiscal variables
B)predictable and unpredictable variables
C)endogenous and exogenous variables
D)real and nominal variables

Question 30

The downward slope of the aggregate-demand curve shows that:

A)a fall in the price level reduces the overall quantity of goods and services demanded
B)a rise in the price level increases the overall quantity of goods and services demanded
C)a fall in the price level has no effect on the overall quantity of goods and services demanded
D)a fall in the price level increases the overall quantity of goods and services demanded

Question 31

When the price level falls:

A)households try to increase their holdings of money
B)households try to reduce their holdings of money
C)households don't change their holdings of money
D)none of the above

Question 32

The aggregate-supply curve shows:

A)the quantity of goods and services that firms produce and sell at any income level
B)the quantity of goods and services that firms produce and sell at any price level
C)the quantity of goods and services that firms purchase at any income level
D)the quantity of goods and services that firms purchase at any price level

Question 33

The wealth effect implies that:

A)when consumer wealth goes up, consumers spend more
B)when the price level decreases, consumer purchasing power goes up, and therefore consumers spend more
C)when consumers are wealthier, they spend more, and therefore the price level increases
D)when the price level decreases, consumers save more, and therefore become wealthier

Question 34

When firms cut back production:

A)they employ more people, so unemployment rises
B)they employ more people, so unemployment falls
C)they employ fewer people, so unemployment rises
D)they employ fewer people, so unemployment falls

Question 35

Most economists believe that classical economic theory is a good description of the world:

A)in the short run, but not in the long run
B)in the long run, but not in the short run
C)in the short run and in the long run
D)in the nineteenth century, but not in the twentieth century

Question 36

Most economists believe that in the short run:

A)real and nominal variables are highly interrelated
B)only real variables are highly interrelated
C)only nominal variables are highly interrelated
D)none of the above

Question 37

Another reason for the downward slope of the aggregate demand curve is the effect of inflation on the:

A)real value of net assets
B)real value of properties held by investors
C)nominal value of net assets
D)real value of equilibrium output

Question 38

Okun's law looks at the relationship between:

A)inflation and unemployment
B)inflation and real GDP
C)incentives and productivity
D)real GDP fluctuations and unemployment

Question 39

The aggregate-demand curve shows:

A)the quantity of goods and services that households want to buy at any price level
B)the quantity of goods and services that households, firms and government want to buy at any price level
C)the quantity of goods and services that households, firms and government want to buy at any income level
D)the quantity of goods and services that households want to buy at any income level

Question 40

In a recession, real GDP falls and:

A)unemployment may rise or fall
B)unemployment falls
C)unemployment rises
D)unemployment is unaffected

Question 41

Which of the following statements about aggregate supply is correct?

A)Shifts in aggregate supply can cause stagflation
B)Shifts in aggregate supply can cause a fall in output and a rise in prices
C)Shifts in aggregate supply can cause a recession
D)All of the above

Question 42

If people's expectations about future price levels change:

A)the short-run aggregate-supply curve shifts
B)the short-run aggregate-supply curve is not affected
C)the short-run aggregate-supply curve becomes vertical
D)the short-run aggregate-supply curve becomes horizontal
E)all of the above are possible

Question 43

Keynes attempted to explain:

A)short-run economic fluctuations and advocated policies to increase aggregate supply
B)short-run economic fluctuations and advocated policies to increase aggregate demand
C)long-run economic growth and advocated policies to increase aggregate demand
D)long-run economic growth and advocated policies to increase aggregate supply

Question 44

The upward slope of the aggregate-supply curve in the short run shows that:

A)a fall in the price level raises the overall quantity of goods and services supplied
B)an increase in the price level increases the overall quantity of goods and services demanded
C)a fall in the price level has no effect on the overall quantity of goods and services supplied
D)a fall in the price level reduces the overall quantity of goods and services supplied

Question 45

The new Keynesian sticky-price theory states that in the short run:

A)the aggregate-supply curve is downward-sloping
B)the aggregate-supply curve is upward-sloping
C)the aggregate-supply curve is horizontal
D)the aggregate-supply curve is vertical

Question 46

When production costs rise, in the short run:

A)the aggregate-supply curve shifts down to the right
B)the aggregate-demand curve shifts down to the left
C)the aggregate-demand curve shifts up to the right
D)the aggregate-supply curve shifts up to the left
E)both the aggregate-demand curve and the aggregate-supply curve shift to the left

Question 47

According to the new classical misperceptions theory, the upward slope of the short-run aggregate-supply curve results from:

A)misperceptions about the quantity of goods and services demanded
B)misperceptions about the ability of production
C)misperceptions about relative prices
D)none of the above

Question 48

A decrease in aggregate expenditure shifts the aggregate demand curve to the:

A)right by the level of decrease in aggregate expenditure
B)left by the level of decrease in aggregate expenditure times the multiplier
C)left by the level of decrease in aggregate expenditure
D)right by the level of decrease in aggregate expenditure times the multiplier

Question 49

The Keynesian sticky-wage theory states that in the short run:

A)wages do not adjust to changes in prices; therefore, real wages change and suppliers adjust their output levels
B)wages adjust to changes in prices; therefore, real wages are unchanged and suppliers do not adjust their output levels
C)wages adjust instantaneously to changes in prices
D)none of the above is an implication of the Keynesian sticky-wage theory

Question 50

Starting with AD₁ and AS1 in the graph below, if the world price of oil rises, then in the short run:
NARRBEGIN: 14-3
Graph 14-3

A)output stays the same and prices fall
B)output decreases and prices fall
C)output decreases and prices rise
D)output increases and prices rise
E)output stays the same and prices rise

Question 51

Keynes's interest-rate effect implies that a lower price level:

A)reduces the interest rate and reduces the quantity of goods and services demanded
B)reduces the interest rate and increases the quantity of goods and services demanded
C)increases the interest rate and increases the quantity of goods and services demanded
D)increases the interest rate and reduces the quantity of goods and services demanded

Question 52

Starting with AD₁ and AS1 in the graph below, if taxes increase, then in the short run:
NARRBEGIN: 14-1
Graph 14-1

A)output stays the same and prices fall
B)output increases and prices rise
C)output increases and prices fall
D)output decreases and prices rise
E)output decreases and prices fall

Question 53

If resources become more productive:

A)neither the short-run aggregate curve nor the long-run supply curve shifts
B)the short-run aggregate-supply curve is not affected but the long-run aggregate curve shifts
C)the aggregate-demand curve shifts
D)both the short-run and the long-run aggregate-supply curves shift

Question 54

When factors (other than price level) that affect the quantity of goods and services supplied change:

A)the aggregate-supply curve shifts
B)the aggregate-supply curve is not affected
C)the aggregate supply becomes vertical
D)the aggregate-supply curve becomes horizontal
E)the aggregate-demand curve shifts

Question 55

A fall in the price level causes the aggregate supply to _____ in the short run.

A)fall
B)increase
C)fluctuate
D)keep constant

Question 56

The Pigou effect implies that:

A)when the price level decreases, consumer purchasing power goes up, and therefore consumers spend more
B)when consumers spend more, the price level increases
C)when consumer income increases, consumers spend more
D)when the price level decreases, consumers save more, and therefore become wealthier

Question 57

The aggregate-supply curve is vertical in the long run because:

A)of the classical dichotomy and money neutrality
B)aggregate demand is downward-sloping
C)overall output goes up when prices go up
D)overall output goes down when prices go up

Question 58

Mundell-Fleming's effect implies that a currency depreciation:

A)increases net exports and decreases the quantity of goods and services demanded
B)decreases net exports and increases the quantity of goods and services demanded
C)increases net exports and increases the quantity of goods and services demanded
D)decreases net exports and decreases the quantity of goods and services demanded

Question 59

The long-run aggregate supply is called:

A)potential output
B)full-employment output
C)natural rate of output
D)all of the above

Question 60

Starting with AD₁ and AS1 in the graph below, if resources become more productive:
NARRBEGIN: 14-2
Graph 14-2

A)equilibrium in the economy moves from point c to point b
B)equilibrium in the economy moves from point b to point c
C)equilibrium in the economy moves from point c to point d
D)equilibrium in the economy moves from point d to point c
E)equilibrium in the economy moves from point c to point a

Question 61

The aggregate supply curve shows the relationship between:

A)the general level of prices and real domestic output purchased
B)real domestic output produced and the general level of prices
C)the price level at which the producers are willing to provide output
D)real domestic output purchased and real domestic output produced

Question 62

Aggregate demand is negatively related to interest rates because

A)higher interest rates encourage consumption
B)higher interest rates encourage saving and deferring consumption
C)new houses are usually financed by borrowing
D)changes in interest rates affect exchange rates

Question 63

Write each of the following words or phrases in the correct column in the table: costs of production, technology, income tax, sales tax, GST, interest rates, transfer payments, level of workers' productivity, cost of imported raw materials, government spending, savings, expectations about inflation, capital stock, level of labour force, a wage award, net exports. $\begin{array}{|l|l|}\hline\text { Shifts AD }&\text { Shifts AS }\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline\\\hline \end{array}$

Question 64

As long as aggregate supply remains constant, the greater the increase in aggregate demand the:

A)greater the increase in the general level of prices
B)greater the increase in the rate of unemployment
C)smaller the decrease in employment
D)larger the increase in real output

Question 65

If there is an excess demand situation in the economy at the current price level, then the:

A)price level will remain the same
B)economy must be operating on the flat section of the AS curve
C)price level will increase
D)price level will definitely decrease

Question 66

Which statement is correct?

A)A movement along the AD curve results from a price change
B)The AS curve will shift leftwards if the labour force decreases
C)If there is excess aggregate demand at the current price level, the price level will rise
D)The long-run AS curve shows each firm is producing at its capacity and there is full employment

Question 67

An increase in aggregate supply will:

A)reduce both the price level and real domestic output
B)reduce the price level but increase real domestic output
C)increase both the price level and real domestic output
D)increase the price level but reduce real domestic output

Question 68

The new classical misperceptions theory states that:

A)changes in the relative price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve
B)changes in the overall price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve
C)changes in the overall price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve
D)changes in the relative price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve

Question 69

Which of the following explanations for the upward slope of the short-run aggregate-supply curve is correct?

A)Misperceptions
B)Sticky wages
C)Sticky prices
D)All of the above

Question 70

Pigou's wealth effect suggests that when the price level falls, consumers feel wealthier and so increase their spending.Another implication of falling prices, however, is that the real value of dollar-denominated debts will increase.For example, if you owe $100, the real value of your debt goes up, and you are worse off.If someone owes you $100, then falling prices make you better off.Now suppose that on average those who borrow money tend to spend a larger fraction of their income than do those who lend money.Will spending rise or fall as a result of a fall in the price level?

Question 71

What are three alternative explanations for the upward slope of the short-run aggregate-supply curve? Do these explanations also apply in the long run?

Question 72

A decrease in aggregate expenditure shifts the aggregate demand curve to the:

A)right by the level of decrease in aggregate expenditure
B)left by the level of decrease in aggregate expenditure times the multiplier
C)left by the level of decrease in aggregate expenditure
D)right by the level of decrease in aggregate expenditure times the multiplier

Question 73

Explain why the short-run aggregate supply curve is upward sloping.

Question 74

We can use the aggregate demand and supply model to think about the long run as well as the short run.Using this framework, show the effects of (1) long-run growth in the money supply, and (2) long-run growth in GDP.Show that if the economy is growing, then the price level might fall over time even if the money supply is growing.

Question 75

If there is an increase in both the price level and employment, which of the following could possibly explain this?

A)Price level fall
B)Interest rate fall
C)Productivity increase
D)All of the above

Question 76

The short-run equilibrium level of real GDP and inflation is given by the intersection of:

A)the aggregate demand curve and the long-run aggregate supply
B)the aggregate demand curve and the short-run aggregate supply
C)the aggregate demand curve, the short-run aggregate supply and the long-run aggregate supply
D)the aggregate demand curve and the zero inflation line

Question 77

When an increase in the economy's capital stock increases productivity:

A)the short-run aggregate-supply curve shifts to the right, and the long-run aggregate-supply curve shifts to the left
B)the short-run aggregate-supply curve shifts to the left, and the long-run aggregate-supply curve shifts to the right
C)both short-run and long-run aggregate-supply curves shift to the left
D)both short-run and long-run aggregate-supply curves shift to the right

Question 78

When an increase in the minimum wage raises the natural rate of unemployment:

A)the short-run aggregate-supply curve shifts to the right, and the long-run aggregate-supply curve shifts to the left
B)the short-run aggregate-supply curve shifts to the left, and the long-run aggregate-supply curve shifts to the right
C)both short-run and long-run aggregate-supply curves shift to the left
D)both short-run and long-run aggregate-supply curves shift to the right

Question 79

What causes shifts in the aggregate demand curve?

Question 80

In the long-run persistent increases in aggregate demand will:

A)result in stagflation
B)eliminate structural unemployment
C)result in inflation with no changes in real GDP
D)result in shifts of the long-run aggregate supply curve to the right