Deck 14: Aggregate Demand and Supply

Question 1

An aggregate supply curve with a positive slope is associated with an economy in which:

A) input prices and final goods prices always change by the same amount.
B) firms expect output prices to be unaffected by changes in input prices.
C) nominal wages and salaries do not change much in the short run.
D)  firms expect consumer demand to be unaffected by changes in prices of final goods.

Answer 1

C

Question 2

Which of the following causes a leftward shift in the short-run aggregate supply curve?

A) an increase of goods prices while nominal incomes are unchanged
B) an increase in nominal incomes (wages and salaries)
C) an increase of full-employment real GDP
D) an increase of personal consumption expenditures while the price level is unchanged

Answer 2

B

Question 3

Which of the following would cause a decrease (leftward shift) in the short-run aggregate supply curve (SRAS)?

A) an increase in oil prices
B) an advance in technology
C) an increase in the CPI
D) an increase in the long-run aggregate supply curve (LRAS)

Answer 3

A

Question 4

An explanation for why the short-run aggregate supply curve is upward-sloping is because:

A) the quantity of real output supplied is inversely related to the aggregate supply curve.
B) nominal incomes are fixed.
C) the capital-output ratio is fixed.
D) an increase in price will increase the marginal aggregate output.

Question 5

If nominal wages and salaries are fixed as firms change product prices, the short-run aggregate supply curve is:

A)  vertical.
B)  horizontal.
C) negatively sloped.
D) positively sloped.

Question 6

Which of the following explains why higher prices in the goods and services market measured by the CPI leads to an upward-sloping aggregate supply curve?

A) The higher prices will temporarily improve profit margins because the cost of wages and salaries are fixed in the short run.
B) The higher prices will reduce the purchasing power of the fixed quantity of money and, thereby, stimulate additional output.
C) The higher prices will expand the economy's resource base and, thereby, stimulate additional output.
D) The higher prices will improve technology and, thereby, stimulate additional output.

Question 7

Long-run full-employment equilibrium assumes:

A) a downward-sloping production function.
B) a downward-sloping long-run supply curve (LRAS).
C) the CPI index price level equals the equilibrium wage rate.
D) aggregate demand (AD) equals short-run aggregate supply (SRAS) equals long-run aggregate supply (LRAS).

Question 8

In the self-correcting AD-AS model, the economy's short-run equilibrium position is indicated by the intersection of which two curves?

A) short-run aggregate supply and long-run aggregate supply
B) short-run aggregate supply and aggregate demand
C) long-run aggregate supply and aggregate demand
D) long-run aggregate demand and short-run personal consumption expenditures curve

Question 9

One reason for the short-run aggregate supply curve (SRAS) is:

A) a fixed CPI market basket.
B) perfect knowledge of workers.
C) fixed-wage contracts.
D) the upward-sloping production function.

Question 10

The short-run aggregate supply curve (SRAS) is the amount of real GDP:  

A) produced at various price levels.
B) produced at various savings rate levels.
C) purchased at various price levels.
D) purchased at various saving rate levels.

Question 11

A short-run aggregate supply curve (SRAS) assumes:

A) the CPI is fixed.
B) each point on the SRAS is potential real GDP.
C) fixed or sticky nominal wages.
D) nominal wages vary directly with price changes.

Question 12

In the short run, an increase in the price level causes:

A) a rightward shift in the aggregate demand curve.
B) a leftward shift in the short-run aggregate supply curve.
C) a rightward shift in the short-run aggregate supply curve.
D) a movement upward along the short-run aggregate supply curve.

Question 13

In the long run, a decrease in aggregate demand causes the price level to _______ and the long-run aggregate supply curve to _____________.

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

Question 14

In the long run, wages and prices are considered to be:

A) fixed.
B)  sticky.
C) flexible.
D) unstable.

Question 15

If an economy is operating at short-run equilibrium below the full-employment level of real GDP, the self-correction model result is that :

A) unemployment increases.
B) unemployment falls.
C) cyclical unemployment increases.
D) frictional and structural unemployment increase.

Question 16

In the short run, a price increase in the goods and services market measured by the CPI will:

A) increase the purchasing power of money.
B) improve producer profits and, thereby, induce suppliers to expand output.
C) increase resource prices, lower profits, and lead to a decline in output.
D) reduce the natural rate of unemployment.

Question 17

Which of the following causes a leftward shift in the short-run aggregate supply curve?

A) An increase of goods prices while nominal incomes are unchanged.
B) An increase in nominal incomes.
C) An increase of full-employment real GDP.
D) An increase of personal consumption expenditures while the price level is unchanged.

Question 18

The position of the long-run aggregate supply curve corresponds to the economy's:

A) full-employment real GDP.
B) maximum possible level of employment.
C)   natural level of personal consumption expenditure.
D) maximum possible level of personal consumption expenditures.

Question 19

If both the price level and nominal incomes change by the same percentage:

A) real GDP will remain constant.
B) the aggregate supply curve will be upward-sloping.
C) profit margins will change in real terms.
D) the long-run aggregate supply curve will be horizontal.

Question 20

A decrease in nominal incomes cause a:

A) rightward shift in the short-run aggregate supply curve.
B) leftward shift in the short-run aggregate supply curve.
C) rightward shift in the long-run aggregate supply curve.
D) leftward shift in the long-run aggregate supply curve.

Question 21

Exhibit 14A-5 Macro AD-AS Model
 
Economic growth is represented in Exhibit 14A-5 by:

A) leftward shift in the long-run aggregate supply curve (LRAS).
B)  inward shift of the production possibilities curve.
C) rightward shift in the long-run aggregate supply curve (LRAS).
D) movement along the long-run aggregate supply curve (LRAS).

Question 22

Exhibit 14A-1 Aggregate demand and supply model

Beginning from long-run equilibrium at point E₁ in Exhibit 14A-1, the aggregate demand curve shifts to AD₂ . The real GDP and price level (CPI) in short-run equilibrium will be:

A) $12 billion and 200.
B) $8 billion and 250.
C) $8 billion and 150.
D) $12 billion and 250.

Question 23

Beginning from a position of long-run equilibrium at the full-employment level of real GDP, the economy's short-run response to an increase in the aggregate demand curve would be:

A) a movement upward along the short-run aggregate supply curve.
B) a movement upward along the long-run aggregate supply curve.
C) a downward shift in the short-run aggregate supply curve.
D) a shift in both the aggregate demand curve and the short-run aggregate supply c urve with a movement along the long-run aggregate supply curve.

Question 24

Exhibit 14A-1 Aggregate demand and supply model

Beginning in Exhibit 14A-1 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂ . The economy's path to a new long-run equilibrium is represented by a movement from:

A) E ₃ to E ₁ to E ₂ .
B) E ₁ to E ₃ to E ₂ .
C) E ₂ to E ₁ to E ₂ .
D) E ₁ to E ₂ to E ₃ .

Question 25

Beginning from full-employment macro equilibrium, increase in government spending will cause real GDP to:

A) increase in the short run.
B) decline in the long run.
C) decline in the short run.
D)  increase in the long run.

Question 26

  Macro AD-AS Model
In Exhibit 14A-4, the self-correction argument is that in the long run, competition:

A) from unemployed workers causes an increase in nominal wages and a leftward shift in SRAS.
B) from unemployed workers causes a rightward shift in SRAS.
C) among firms for workers increases nominal wages and this causes a leftward shift in SRAS.
D) among consumers causes an increase in the CPI and a rightward shift in SRAS.

Question 27

Exhibit 14A-6 Aggregate demand and supply model

Given the shift of the aggregate demand curve from AD₁ to AD₂ in Exhibit 14A-6, the real GDP and price level (CPI) in long-run equilibrium will be:

A) $10 billion and 200.
B) $4 billion and 150.
C) $10 billion and 150.
D) $10 billion and 100.

Question 28

Exhibit 14A-1 Aggregate demand and supply model

Given the shift of the aggregate demand curve from AD₁ to AD₂   in Exhibit 10A-1, the real GDP and price level (CPI) in long-run equilibrium will be:

A) $8 billion and 150.
B) $12 billion and 200.
C) $8 billion and 250.
D) $8 billion and 200.

Question 29

Exhibit 14A-2 Macro AD-AS Model

I n Exhibit 14A- 2, the intersection of AD with SRAS indicates:

A) a short-run equilibrium.
B) a long-run equilibrium.
C) that the economy needs policies to increase  unemployment.
D) that the economy is at full employment.

Question 30

The full-employment level of real GDP is the level which can be produced with:

A) given technology and productive resources.
B) frictional and structural unemployment equal to zero.
C) cyclical unemployment greater than zero.
D) future technology.

Question 31

Beginning from the full-employment level of real GDP, an increase in one of the components of the aggregate demand curve will increase the:

A) average level of prices (CPI).
B) unemployment rate.
C) natural level of real GDP.
D) level of investment spending.

Question 32

Economic growth is represented by a:

A) leftward shift of a production possibilities curve.
B) rightward shift of the long-run aggregate supply curve (LRAS).
C) horizontal long-run aggregate supply curve (LRAS).
D) downward shift of an aggregate production function.

Question 33

Along the short-run aggregate supply curve (SRAS), an increase (rightward shift) in the aggregate demand curve will increase:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level but reduce real GDP.

Question 34

Exhibit 14A-1 Aggregate demand and supply model

Based on Exhibit 14A-1, when the aggregate demand curve shifts to the position AD₂ and the economy is operating at point E₂, the economy's position of long-run equilibrium corresponds to point:

A) E ₁ .
B) E ₂ .
C) E ₃ .
D) E ₁ or E ₃ .

Question 35

Exhibit 14A-6 Aggregate demand and supply model

Beginning from a point of short-run equilibrium at point E₂ in Exhibit 14A-6, the economy's movement to a new position of long-run equilibrium from that point would best be described as:

A) a movement along the AD ₂ curve caused by a shift in the SRAS ₁ curve to SRAS ₂ .
B) a movement along the SRAS1 curve with a shift in the aggregate demand curve.
C) a shift in the LRAS curve to an intersection at E ₃ .
D)  no shift of any kind.

Question 36

Exhibit 14A-2 Macro AD-AS Model

In Exhibit 14A-2, the long-run aggregate supply curve represents:

A) potential real GDP output for this economy.
B)  that the economy is experiencing zero inflation.
C) that the economy is experiencing technological change .
D) the level of real GDP where the unemployment rate is zero.

Question 37

Exhibit 14A-1 Aggregate demand and supply model

Beginning from short-run equilibrium at point E₂ in Exhibit 10A-1, the economy's movement to a new position of long-run equilibrium would best be described as:

A) a movement along the AD ₂ curve with a shift in the SRAS ₁ curve.
B) a movement along the SRAS ₂ curve with a shift in the AD ₂ curve.
C)  a shift in the LRAS curve to an intersection at E ₁ .
D) no shift of any kind.

Question 38

Exhibit 14A-1 Aggregate demand and supply model

As shown in Exhibit 14A-1 and assuming the aggregate demand curve shifts from AD ₁ to AD ₂ , the full-employment level of real GDP is:

A) $12 billion.
B) $8 billion.
C) $150 billion.
D) unable to be determined.

Question 39

A rightward shift in potential real GDP is not likely to result from which of the following?

A) a discovery of new oil reserves
B) workers' acquisition of new skills
C) retirement of a large and aging segment of the workforce
D) an improvement in technology

Question 40

Along the short-run supply curve (SRAS), a decrease in the aggregate demand curve will decrease:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level but increase real GDP .

Question 41

Which of the following correctly describes the interest-rate effect?

A) If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
B) If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
C) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
D) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.

Question 42

The aggregate demand curve indicates the relationship between:

A) the real wage rate and the quality of resources demanded by producers of goods and services.
B) the interest rate and the amount of loanable funds demanded by borrowers.
C) the natural rate of unemployment and the demand for goods and services when the economy is in long-run equilibrium.
D) the general price level and the aggregate quantity of goods and services demanded.

Question 43

Economic growth is measured by the percentage change in:

A) potential nominal GDP.
B) structural unemployment.
C) inflation
D) potential real GDP (LRAS).

Question 44

Which of the following reasons helps explain why the aggregate demand curve is downward sloping?

A) The real balances effect or wealth effect: Consumers spend more on goods and services when the price level falls because lower prices increase consumer purchasing power.
B) The producer-push effect: At less than full employment, increases in quantity demanded will raise price, and thus will motivate sellers to produce more.
C) The hidden inflation effect: As the price level rises, consumers fail to recognize that prices are higher, and consequently they fail to reduce expenditures on goods and services.
D) The cost-pull effect: As costs of production rise, consumers are pulled to buy more of the products they want most.

Question 45

Which of the following is not a reason for the downward slope of the aggregate demand curve?

A) Real balances effect
B) Interest-rate effect
C) Net exports effect
D) Government spending effect

Question 46

The aggregate demand curve shows how real GDP purchased varies with changes in:

A) unemployment.
B) the price of a particular good.
C) the overall price level.
D) the interest rate.

Question 47

According to the interest rate effect, as the price level rises,:

A) people feel poorer and buy less.
B) United States products become more expensive and foreigners buy less U.S. goods.
C) interest rates fall, and people buy less.
D) interest rates rise, and people buy less.

Question 48

For an economy, aggregate demand equals:

A) consumption plus investment plus government spending plus exports.
B) consumption plus investment plus government spending plus (exports minus imports).
C) consumption plus investment plus (taxes minus transfers) plus (exports minus imports).
D) consumption plus investment plus government spending plus (imports minus exports).

Question 49

  Macro AD-AS Model
In Exhibit 14A-4, the level of real GDP represented by Y _p :

A) would be associated with considerable unemployment.
B) indicates that the economy is experiencing zero inflation.
C) indicates the short-run equilibrium level of real GDP.
D) is potential real GDP for this economy.

Question 50

According to the net exports effect, as the price level falls relative to the rest of the world,

A) foreigners buy fewer goods.
B) foreigners buy more U.S. goods.
C) the aggregate demand curve shifts to the left.
D) the aggregate demand curve shifts to the right.

Question 51

When the price level falls, the total quantities of goods and services demanded:

A) decrease.
B) stay the same.
C) increase.
D) increases and then decreases.

Question 52

If the overall price level rises from 100 to 150, the aggregate

A) quantity demanded could increase from $5 trillion to $6 trillion.
B) quantity demanded could decrease from $5 trillion to $4 trillion.
C) demand curve could shift to the right.
D) demand curve could shift to the left.

Question 53

The aggregate demand curve slopes downward indicating that:

A) an increase in the general price level will reduce the aggregate quantity of goods and services demanded.
B) an increase in the general price level will increase the aggregate quantity of goods and services demanded.
C) a change in the interest rate will alter the aggregate quantity of goods and services demanded.
D) consumers substitute between domestic-made and foreign-made goods as their relative prices change.

Question 54

The net exports effect is the ____ relationship between net exports and the price level of an economy.

A) inverse
B) independent
C) direct
D) linear

Question 55

In the aggregate demand and supply model, the:

A) aggregate supply curve is horizontal at full-employment real GDP.
B) vertical axis measures real GDP.
C) vertical axis measures the overall price level.
D) horizontal axis measures the overall price level.

Question 56

When price level in the United States rises,

A) there is a increased demand for borrowed money.
B) producers' demand for new machinery increases, contributing to an increase in aggregate demand.
C) Americans tend to buy more foreign goods and services.
D) the French, Canadians, and Japanese would find our exports more attractive.

Question 57

Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following?

A) People's desire to maintain real wealth holdings, the interest rate, and international trade.
B) People's desire to increase the price level, the interest rate, and the economic growth effect.
C) The interest rate, the economic growth effect, and international trade.
D) Cost-pull inflation, demand-pull inflation, and the need to maintain real wealth holdings.

Question 58

When moving along a market demand curve, the prices of related goods are assumed to be constant. With an aggregate demand curve,

A) the assumption is meaningless because we are using a market basket for all goods and services.
B) the prices of related goods have an inverse relationship.
C) all goods are assumed to have the same price.
D) the same assumption holds true.

Question 59

When the CPI is 300, a real GDP of $8 trillion is demanded in a given year. If the CPI is 250, which of the following could be the real GDP demanded?

A) $10 trillion
B) $8 trillion
C) $6 trillion
D) $4 trillion

Question 60

The net exports effect is the inverse relationship between net exports and the ____ of an economy.

A) potential real GDP
B) chain-price deflator
C) price level
D) consumption spending

Question 61

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:

A) interest-rate effect.
B) real balance effect.
C) investment effect.
D) disinvestment effect.

Question 62

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:

A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Question 63

Which of the following will not shift the aggregate demand curve to the right?

A) consumers becoming more optimistic about the future
B) an increase in government spending
C) business optimism increases
D) consumers become pessimistic about the future

Question 64

Which of the following is true , other things equal?

A) A reduction in prices will increase the real wealth of those holding a fixed quantity of money.
B) A reduction in prices will lead to a decline in net exports.
C) A reduction in prices will increase the scarcity of money, raise the real interest rate, and, thereby, encourage investment and consumption.
D) A reduction in prices will increase profit margins and, thereby, stimulate additional investment.

Question 65

Which of the following will most likely increase aggregate demand?

A) a decrease in stock market prices
B) an increase in business investment spending
C) a decrease in the expected inflation rate
D) a decrease in real GDP

Question 66

Which of the following could not be expected to shift the aggregate demand curve?

A) net exports fall
B) consumption spending decreases
C) an increase in government spending
D) a change in real GDP

Question 67

Which of the following will increase aggregate demand in the United States?

A) a higher price level
B) an increase in the real interest rate
C) an increase in wealth due to a substantial appreciation in the value of stocks
D) a decrease in real income in Japan and Western Europe

Question 68

Why does the aggregate demand (AD) curve slope downward? What could cause the AD curve to shift to the right? What impact would a rightward shift of the AD curve have on the economy?

Question 69

Which one of the following factors will most likely cause an increase in aggregate demand?

A) An increase in net exports.
B) An increase in the real interest rate.
C) A decrease in net exports due to falling incomes abroad.
D) A technological development that decreases the cost of producing computer chips.

Question 70

The interest rate effect predicts that higher prices:

A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) increase borrowing, leading to lower interest rates and more investment.
D) increase borrowing, leading to higher interest rates and less investment.

Question 71

The real balance effect (wealth effect), the interest rate effect, and the net exports effect all help to explain the:

A) decrease in supply in the loanable funds market.
B) large federal budget deficit.
C) increase in short-run aggregate supply.
D) downward-sloping aggregate demand curve.

Question 72

Suppose the price level falls. The result is that the:

A) aggregate supply curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) general price level would rise causing a movement up the aggregate demand curve.
D) aggregate demand curve would slope downward because of the real balances effect.

Question 73

As prices rise, people will buy fewer goods and services because:

A) the interest rate has declined.
B) aggregate demand has increased.
C) the purchasing power of the fixed quantity of money has declined.
D) the income of households has increased.

Question 74

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

A) An increase in exports.
B) An increase in investment.
C) An increase in government spending.
D) A decrease in government spending.

Question 75

A rightward shift in the aggregate demand curve can be caused by an increase in:

A) the price level.
B) business investment spending.
C) taxes.
D) production costs.

Question 76

The aggregate demand curve is downward sloping because:

A) an increase in the price level will cause an increase in spending.
B) at lower price levels, real wealth decreases, causing a decrease in the quantities of goods and services demanded.
C) at lower price levels, interest rates decrease, causing a decrease in the quantities of goods and services demanded.
D) at lower price levels, exports increase, causing an increase in real GDP.

Question 77

The real balances effect predicts that higher prices:

A) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
B) make people worse off by reducing the value of their wealth, leading them to save less and spend more.
C) make people better off by increasing the value of their wealth, leading them to save less and spend more.
D) increase borrowing, leading to higher interest rates and less investment.

Question 78

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:

A) real balances effect.
B) interest-rate effect.
C) net exports effect.
D) substitution effect.

Question 79

Which of the following will not shift the aggregate demand curve to the left?

A) Consumers become more optimistic about the future.
B) Government spending decreases.
C) Business optimism decreases.
D) Consumers become pessimistic about the future.

Question 80

Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then:

A) aggregate demand will decrease.
B) aggregate demand will increase.
C) long-run aggregate supply will increase.
D) long-run aggregate supply will decrease.