Deck 15: Aggregate Demand and Aggregate Supply

Question 1

In the long run, an increase in government spending tends to increase output and prices.

Answer 1

False

Question 2

The short run effect of an increase in aggregate demand is an increase in output and an increase in the price level.

Answer 2

True

Question 3

If policy makers choose to try to move the economy out of a recession, they should use their policy tools to decrease aggregate demand.

Answer 3

False

Question 4

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Question 5

Most economists believe that money neutrality holds

A)in the short run but not the long run.
B)in the long run but not the short run.
C)in both the short run and the long run.
D)in neither the short run nor the long run.

Question 6

Investment is a particularly volatile component of spending across the business cycle.

Question 7

If the classical dichotomy and monetary neutrality hold in the long run, then the long run aggregate supply curve should be vertical.

Question 8

Which of the following is most commonly used to monitor short run changes in economic activity?

A)The inflation rate.
B)Real GDP.
C)Aggregate demand.
D)Aggregate supply.

Question 9

A rise in price expectations that causes wages to rise causes the short run aggregate supply curve to shift to the left.

Question 10

Which of the following is correct?

A)Short run fluctuations in economic activity happen only in developing countries.
B)During economic contractions most firms experience rising sales.
C)Recessions come at regular intervals and are easy to predict.
D)When real GDP falls, the rate of unemployment rises.

Question 11

Shifts in aggregate demand affect the price level in

A)the short run but not in the long run.
B)the long run but not in the short run.
C)both the short and long run.
D)neither the short nor long run.

Question 12

An increase in price expectations shifts the long run aggregate supply curve to the left.

Question 13

According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices

A)increase money holdings, decrease lending, interest rates rise, and investment spending falls.
B)increase the value of money holdings and consumer spending increases.
C)decrease the value of money holdings and consumer spending decreases.
D)reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Question 14

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Question 15

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

Question 16

According to classical macroeconomic theory, changes in the money supply affect

A)nominal variables and real variables.
B)nominal variables, but not real variables.
C)real variables, but not nominal variables.
D)neither nominal nor real variables.

Question 17

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Question 18

Most economists believe that classical macroeconomic theory is a good description of the economy

A)in neither the short nor long run.
B)in the short run and in the long run.
C)in the short run, but not in the long run.
D)in the long run, but not in the short run.

Question 19

The classical dichotomy refers to the separation of

A)variables that move with the business cycle and variables that do not.
B)changes in money and changes in government expenditures.
C)decisions made by the public and decisions made by the government.
D)real and nominal variables.

Question 20

When we say that economic fluctuations are "irregular and unpredictable," we mean that

A)the relationship between output and unemployment is erratic and difficult to characterize.
B)when one macroeconomic variable that measures income or spending is falling, other macroeconomic variables that measure income or spending are likely to be rising.
C)recessions do not occur at regular intervals.
D)All of the above are correct.

Question 21

The long run effect of an increase in government spending that shifts the economy's aggregate demand curve to the right is to raise

A)both real output and the price level.
B)real output and lower the price level.
C)real output and leave the price level unchanged.
D)the price level and leave real output unchanged.

Question 22

Suppose the price level falls, but suppliers only notice that the price of their particular product has fallen.Thinking there has been a fall in the relative price of their product, they cut back on production.This is a demonstration of the

A)misperceptions theory of the short run aggregate supply curve.
B)classical dichotomy theory of the short run aggregate supply curve.
C)sticky price theory of the short run aggregate supply curve.
D)sticky wage theory of the short run aggregate supply curve.

Question 23

Which of the following is not a determinant of long run aggregate supply?

A)The level of skills in the workforce.
B)The price level.
C)Technology.
D)The quantity of capital.

Question 24

Which of the following statements is true regarding the long run aggregate supply curve? The long run aggregate supply curve

A)is vertical, because an equal change in all prices and wages leaves output unaffected.
B)is positively sloped, because price expectations and wages tend to be fixed in the long run.
C)shifts right when the government raises the minimum wage.
D)shifts left when the natural rate of unemployment falls.

Question 25

The natural rate of output is the amount of real GDP produced when

A)the economy is at the natural rate of unemployment.
B)the economy is at the natural rate of investment.
C)the economy is at the natural rate of aggregate demand.
D)there is no unemployment.

Question 26

Which of the following will reduce the price level and raise real output?

A)An adjustment of prices to equilibrium.
B)An increase in wage rates.
C)The short run aggregate supply curve becoming steeper.
D)Technical progress.

Question 27

Suppose the economy is initially in long run equilibrium.Then suppose there is an increase in military spending due to rising international tensions.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

A)Output falls; prices are unchanged from the initial value.
B)Prices fall; output is unchanged from its initial value.
C)Output and the price level are unchanged from their initial values.
D)Prices rise; output is unchanged from its initial value.
E)Output rises; prices are unchanged from the initial value.

Question 28

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

A)aggregate supply curve is horizontal.
B)aggregate supply curve is vertical.
C)aggregate supply curve is upward sloping.
D)aggregate demand curve is downward sloping.

Question 29

Suppose the economy is initially in long run equilibrium.Then suppose there is a drought that destroys much of the wheat crop.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

A)Prices rise; output falls.
B)Prices fall; output rises.
C)Prices rise; output rises.
D)Prices fall; output falls.

Question 30

To say that nominal prices are sticky means

A)the average price level seldom changes.
B)relative prices seldom change.
C)it takes at least one year for prices to change to a new equilibrium level.
D)it takes time for prices to adjust to equilibrium.

Question 31

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to shift the

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

Question 32

Movements along the aggregate supply curve are caused by changes in

A)technology.
B)government regulations.
C)wages and salaries.
D)the price level.

Question 33

When studying the short run, the assumption of money neutrality is

A)not appropriate.
B)increasingly important.
C)still relevant, but the classical dichotomy no longer holds.
D)Both b and c are correct.

Question 34

Which of the following is not a reason why the aggregate demand curve slopes downward?

A)The exchange rate effect.
B)The wealth effect.
C)The classical dichotomy/monetary neutrality effects.
D)The interest rate effect.
E)All of these answers are reasons why the aggregate demand curve slopes downward.

Question 35

Which of the following would not cause a shift in the long run aggregate supply curve? An increase in

A)the available capital.
B)the available labour.
C)the available technology.
D)price expectations.

Question 36

Suppose the economy is initially in long run equilibrium.Then suppose there is a drought that destroys much of the wheat crop.If policymakers allow the economy to adjust to long run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

A)Output rises; prices are unchanged from the initial value.
B)Output and the price level are unchanged from their initial values.
C)Output falls; prices are unchanged from the initial value.
D)Prices fall; output is unchanged from its initial value.
E)Prices rise; output is unchanged from its initial value.

Question 37

Suppose the price level falls but because of fixed nominal wage contracts, the real wage rises and firms cut back on production.This is a demonstration of the

A)sticky wage theory of the short run aggregate supply curve.
B)classical dichotomy theory of the short run aggregate supply curve.
C)misperceptions theory of the short run aggregate supply curve.
D)sticky price theory of the short run aggregate supply curve.

Question 38

Which of the following explains why production rises in most years?

A)Increases in the labour force.
B)Increases in the capital stock.
C)Advances in technological knowledge.
D)All of the above are correct.

Question 39

According to the wealth effect, aggregate demand slopes downward (negatively) because lower prices

A)increase the value of money holdings and consumer spending increases.
B)decrease the value of money holdings and consumer spending decreases.
C)reduce money holdings, increase lending, interest rates fall, and investment spending increases.
D)increase money holdings, decrease lending, interest rates rise, and investment spending falls.

Question 40

Suppose the economy is initially in long run equilibrium.Then suppose there is an increase in military spending due to rising international tensions.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

A)Prices fall; output rises.
B)Prices fall; output falls.
C)Prices rise; output falls.
D)Prices rise; output rises.

Question 41

If there is speculation that the economy will soon enter a recession, which means that our incomes will probably fall, then the immediate effect on the economy now will be that the

A)aggregate supply curve will shift to the left.
B)aggregate demand curve will shift to the right.
C)price level will rise and real output will rise.
D)price level will fall and real output will fall.

Question 42

Figure 1

Refer to the Figure above.Suppose the economy is operating in a recession such as point B.If policymakers wished to move output to its long run natural rate, they should attempt to shift

A)aggregate demand to the left.
B)short run aggregate supply to the left.
C)aggregate demand to the right.
D)short run aggregate supply to the right.

Question 43

Make a list of things that would shift the aggregate demand curve to the right.

Question 44

There are three factors that help explain the downward slope of the aggregate demand curve.Discuss the importance of these factors.

Question 45

Policy makers are said to "accommodate" an adverse supply shock if they

A)fail to respond to the adverse supply shock and allow the economy to adjust on its own.
B)respond to the adverse supply shock by decreasing aggregate demand, which lowers prices.
C)respond to the adverse supply shock by decreasing short run aggregate supply.
D)respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

Question 46

Explain how an increase in the price level changes interest rates.How does this change in interest rates lead to changes in investment and net exports?

Question 47

Which of the following will reduce the price level and reduce real output in the short run?

A)An increase in the money supply.
B)An increase in oil prices.
C)A decrease in the money supply.
D)Technical progress.

Question 48

Figure 1

Refer to the Figure above.Suppose the economy is operating in a recession such as point B.If policymakers allow the economy to adjust to the long run natural rate on its own, people will

A)reduce their price expectations and the short run aggregate supply will shift to the right.
B)raise their price expectations and aggregate demand will shift to the left.
C)raise their price expectations and the short run aggregate supply will shift to the left.
D)reduce their price expectations and aggregate demand will shift to the right.

Question 49

Any factor that increases resource availability causes

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

Question 50

Stagflation occurs when the economy experiences

A)rising prices and rising output.
B)rising prices and falling output.
C)falling prices and falling output.
D)falling prices and rising output.

Question 51

Explain the short run and long run effects on output and prices of a recession overseas causing foreigners to buy fewer SA goods.Create a chart to demonstrate the effects.

Question 52

Make a list of things that would shift the long run aggregate supply curve to the right.

Question 53

Explain the short run and long run effects on output and prices of technological improvements.Create a chart to demonstrate the effects.

Question 54

Recession in SA will cause

A)an upward movement along the SA aggregate demand curve.
B)a downward movement along the SA aggregate demand curve.
C)the SA aggregate supply curve to shift to the right.
D)the SA aggregate demand curve to shift to the left.

Question 55

Use sticky wage theory to explain why an increase in the expected price level shifts the aggregate supply curve.

Question 56

Which of the following will cause stagflation?

A)An increase in the money supply (which shifts the economy's aggregate demand curve to the right).
B)An increase in oil prices (which shifts the economy's aggregate supply curve to the left).
C)A decrease in the money supply (which shifts the economy's aggregate demand curve to the right).
D)Technical progress (which shifts the economy's aggregate supply curve to the right).

Question 57

What do most economists believe concerning the relation between the price level and real output?

Question 58

Which of the following events shifts the short run aggregate supply curve to the right?

A)A decrease in the money supply.
B)A drop in oil prices.
C)An increase in government spending on military equipment.
D)None of these answers.
E)An increase in price expectations.

Question 59

List and discuss three key facts about economic fluctuations.

Question 60

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause prices to

A)rise and output to rise.
B)fall and output to remain unchanged.
C)fall and output to fall.
D)rise and output to remain unchanged.

Question 61

Suppose an economy is in recession.If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? Create a chart to depict an economy in recession.