Deck 11: A Traditional Ad As Model

Question 1

Which of the following statements is false?

A) Along a given aggregate demand curve for real GDP, the real money balance (M/P) is constant.
B) Along a given aggregate demand curve for real GDP, the nominal money balance (M) is constant.
C) Along a given aggregate demand curve for real GDP, the real money balance (M) increases as price-level decreases.
D) Along a given aggregate demand curve for real GDP, taxes and government expenditures are constant.

Answer 1

Along a given aggregate demand curve for real GDP, the real money balance (M/P) is constant.

Question 2

The aggregate demand curve shows:

A) the relationship between income and employment at every level of output and price.
B) all levels of aggregate output corresponding to a particular aggregate price level, given full employment.
C) the equilibrium level of output corresponding to each price level where planned spending equals income.
D) all levels of output and prices where income exceeds planned spending.

Answer 2

the equilibrium level of output corresponding to each price level where planned spending equals income.

Question 3

Other things remaining constant, an increase in the overall price level:

A) causes a decrease in aggregate supply.
B) has no effect on aggregate supply.
C) causes a decrease in aggregate expenditure.
D) causes an increase in aggregate expenditure.

Answer 3

causes a decrease in aggregate expenditure.

Question 4

An economy's aggregate demand curve shows that, other things constant:

A) when the general price level changes, there is a shift in the curve.
B) there is some price level which generates an aggregate equilibrium in the economy.
C) any reduction in the general price level causes a reduction in GDP.
D) none of the above

Question 5

The aggregate demand curve for the hypothetical country of Betania shows:

A) the country's equilibrium level of output corresponding to each price level.
B) a positive relationship between the equilibrium level of output and the price level.
C) the levels of national output and prices where planned spending is less than income.
D) all of the equilibrium levels of aggregate output corresponding to a particular price level.

Question 6

The aggregate demand curve for a particular economy establishes a relationship between:

A) the level of total spending in the economy and the level of employment.
B) the level of planned production in the economy and the general price level.
C) the level of aggregate expenditure in the economy and the general price level.
D) the general price level and the interest rate.

Question 7

Other things constant, if the general price level rises, we would expect the aggregate expenditure (AE) function to shift:

A) down because aggregate demand shifts upward.
B) down because the real money supply falls and interest rates rise.
C) up because the aggregate supply curve shifts upward.
D) up because households have more real income.

Question 8

Because decreases in the price level decrease interest rates and increase planned aggregate expenditure and short-run equilibrium output through monetary transmission mechanism:

A) the short-run aggregate supply line is horizontal.
B) the short-run aggregate supply line is downward sloping.
C) the aggregate demand curve is horizontal.
D) the aggregate demand curve is downward sloping.

Question 9

Because decreases in the price level increase the real money supply and increase planned aggregate expenditure and short-run equilibrium output according to the monetary transmission mechanism:

A) the short-run aggregate supply line is horizontal.
B) the short-run aggregate supply line is upward sloping.
C) the aggregate demand curve is horizontal.
D) the aggregate demand curve is downward sloping.

Question 10

If the general price level rises, given the money stock, we would expect:

A) aggregate real income to rise.
B) the rate of interest to fall since it is the cost of money.
C) the rate of interest to rise and interest sensitive expenditure to fall.
D) aggregate demand to increase.

Question 11

All of the following statements are correct except:

A) an increase in the overall price level reduces overall aggregate expenditure.
B) when the price level falls, aggregate expenditure will eventually fall.
C) any excess demand for real balances puts pressure on interest rates to rise.
D) when overall prices decrease, aggregate expenditure increases.

Question 12

All of the following statements are correct except:

A) an increase in the overall price level will eventually reduce aggregate expenditure.
B) a change in the general price level causes a movement along the aggregate demand curve.
C) a reduction in the overall price level will eventually increase aggregate demand.
D) a reduction in the overall price level will eventually reduce aggregate demand.

Question 13

The real money supply:

A) is the nominal money supply minus the price level.
B) is money backed by gold.
C) is increased by a fall in the price level.
D) is made from precious metals.

Question 14

-Refer to Figure 11.1. Panels a) and b) of the Figure show the relationship between the:

A) short-run and the long-run equilibrium output.
B) planned aggregate expenditure curve and the aggregate demand curve.
C) real-balance effect and the interest-rate effect.
D) nominal and the real expenditure curves.

Question 15

-Refer to Figure 11.1. If autonomous expenditure A₀ in panel a) of the figure increased:

A) real GDP would increase and the economy would move down along the AD function.
B) real GDP would increase and the AD function would shift to the left.
C) real GDP would decrease and the economy would move up along the AD function.
D) real GDP would increase and the AD function would shift to the right.

Question 16

-Refer to Figure 11.1. If the AE function in panel a) had a lower slope, in panel b):

A) the AD function would have a lower slope.
B) the AD function would have a steeper slope.
C) the AD function would be vertical.
D) the AD function would not be affected.

Question 17

Flatter money demand curve implies one of the following:

A) The money demand is less sensitive to interest rate.
B) Small increases in interest rates (and yields) lead to larger switches from money to interest-earning assets.
C) The money demand is less sensitive to changes in output.
D) The money demand is less sensitive to changes in exchange rates.

Question 18

Which of the following arrow-diagram is correct?

A) Increase in P ? increase in M/P ? increase in interest rate ? lower expenditure.
B) Increase in P ? decrease in M/P ? increase in interest rate ? lower expenditure.
C) Decrease in P ? increase in M/P ? decrease in interest rate ? increase expenditure.
D) Decrease in P ? decrease in M/P ? decrease in interest rate ? increase expenditure.

Question 19

-Refer to Figure 11.1. If the AE function in panel a) had a steeper slope:

A) an increase in exports would not shift the AD function.
B) an increase in exports would shift AD to the left rather than to the right.
C) an increase in exports would shift AD to the right by a larger amount.
D) the AD function would have a steeper slope.

Question 20

If aggregate expenditure is ___________ to interest rates, the AD function is ______.

A) insensitive, flat
B) sensitive, steep
C) insensitive, steep
D) sensitive, curved

Question 21

Other things constant, an increase in the general price level with no increase in the nominal money supply will:

A) increase the demand for money balances and increase aggregate expenditure.
B) decrease the demand for money and increase aggregate expenditure.
C) increase the demand for money and decrease aggregate expenditure.
D) decrease the demand for money and decrease aggregate expenditure.

Question 22

Other things being equal, an increase in the nominal money stock:

A) increases the stock of real balances.
B) lowers the interest rate and increases expenditures.
C) shifts the aggregate demand curve to the right.
D) all of the above.

Question 23

A shift in the position of the AD curve may result from:

A) a change in autonomous consumption and private investment.
B) a change in autonomous net exports.
C) a change in fiscal and monetary policies.
D) all of the above.

Question 24

An increase in the price level, given the nominal money stock:

A) leads to a reduction in investment spending.
B) increases the stock of real balances.
C) generates an overall increase in aggregate demand.
D) leads to an increase in investment spending.

Question 25

Suppose that expenditure is not very responsive to interest rates, so that a sizable increase in interest rates has only a minor effect on expenditure. In this case, changes in the price level would:

A) have no effect on output resulting in a vertical AD function.
B) have a small effect on output at best resulting in a steep AD function.
C) have a substantial effect on output resulting in a flat AD function.
D) have a massive effect on output resulting in a horizontal AD function.

Question 26

Smaller the interest-sensitivity of investment:

A) steeper the AD curve.
B) flatter the AD curve.
C) flatter the expenditure function.
D) flatter the investment curve.

Question 27

Suppose that expenditure is very responsive to interest rates, so even a small change in interest rates has a substantial effect on investment. In this case, a fall in the price level that results in a small drop in interest rates will:

A) not increase output, resulting in a vertical AD function.
B) increase output only slightly, resulting in a steep AD function.
C) increase output modestly, resulting in a horizontal AD function.
D) increase output sharply, resulting in a low slope in the AD function.

Question 28

For an economy with no international trade, the slope of ________________ reflects the
__________.

A) aggregate supply, tax rates
B) aggregate supply, marginal propensity to spend out of national income
C) aggregate demand, tax rates
D) aggregate demand, marginal propensity to spend out of national income

Question 29

_____________ shifts to the right if fiscal policy eases, net exports rise, or monetary policy eases.

A) The aggregate demand function
B) Unemployment
C) Stagflation
D) Inventories

Question 30

The primary goal of the AD-AS model is to show how changes in economic events and policies can result in changes in:

A) the price level.
B) the output level.
C) the price level and the output level.
D) the money supply level.

Question 31

The AD-AS model combines:

A) a short-run AS curve and an AD curve.
B) a potential output line and an AD curve.
C) a short-run AS curve and a potential output line.
D) a short-run AS curve and an AE function.

Question 32

A horizontal AS supply curve expresses the idea that:

A) the price level is dependent of the output level in the short run.
B) the output level is dependent on the price level in the short run.
C) potential output is fixed in the short run.
D) firms will supply the output demanded at the fixed price level.

Question 33

The upward sloping aggregate supply curve for the country of Betania:

A) is valid for the long run but not for the short run.
B) shows a positive relationship between aggregate production and the general price level.
C) shows a negative relationship between aggregate production and the general price level.
D) is horizontal if the economy is at full employment.

Question 34

The upward-sloping aggregate supply curve for an economy shows:

A) a negative relationship between the general price level and the level of aggregate output.
B) that the aggregate output firms are willing and able to supply at each price level falls as the price level rises.
C) when wages are completely flexible, aggregate supply is positively related to the price level.
D) there is some quantity of real output that firms are willing and able to produce and offer at each price level.

Question 35

When there is an intersection of an economy's aggregate demand and aggregate supply curves:

A) there may be either a surplus or shortage of labour on the labour market.
B) an equilibrium price level is established in the economy.
C) an equilibrium level of real GNP is established.
D) all of the above are correct.

Question 36

Suppose that the aggregate demand curve and the aggregate supply curve both make simultaneous shifts upward. We can conclude that:

A) the level of aggregate employment falls.
B) the general price level rises and the level of unemployment falls.
C) the general price level rises.
D) the general price level falls and unemployment rises.

Question 37

Which one of the following statements does not describe some aspect of a short-run macroeconomic equilibrium?

A) Aggregate demand equals aggregate supply.
B) A price level is established at which the goods and money markets are in equilibrium.
C) There is no tendency for the price or output levels to change.
D) All individuals who are willing to work at the going market wage are able to find a job.

Question 38

Which one of the following statements is correct?

A) If the general price level increases, aggregate demand will eventually increase also.
B) A reduction in the general price level results in a reduction in aggregate demand.
C) When adjusted for inflation, there is no relationship between the general price level and the level of real aggregate demand.
D) A shift of the aggregate demand curve will eventually change both the price level and the level of real output.

Question 39

The AD-AS model predicts that a positive AD shock will cause the price level to _____ from the initial equilibrium level. But, the model is silent about how fast the price level will _____from the initial to the new level; the model cannot explain _____.

A) increase; increase; the inflation rate
B) increase; increase; the price level
C) decrease; decrease; the inflation rate
D) increase; increase; stagflation

Question 40

Potential output refers to:

A) the amount of goods and services the economy has produced during the current period.
B) the amount of goods and services the economy can produce per period, by utilizing available resources at above normal rates.
C) the amount of goods and services the economy can produce per period, by utilizing available resources at the normal rate.
D) the amount of goods and services the economy can produce per period, by utilizing available resources at below normal rates.

Question 41

The Y_P curve is drawn as a vertical line at potential output to indicate that:

A) Y_P is independent of the price level.
B) Y_P equals actual output Y at all times.
C) Y_P is independent of the price level when actual output Y < Y_P.
D) Y_P is independent of the price level when actual output Y > Y_P.

Question 42

Suppose that an economy is operating at less than full employment. An increase in AD will result in:

A) an increase in aggregate output and perhaps a decrease in the general price level.
B) an increase in the general price level and perhaps a decrease in aggregate output.
C) an increase in aggregate output and perhaps an increase in the general price level.
D) a decrease in the general price level and perhaps a decrease in aggregate output.

Question 43

An AD shock such as an increase in exports would:

A) shift AD to the left and reduce equilibrium Y and P.
B) shift AD to the right and increase equilibrium Y and P.
C) move the economy along the AD curve to a new equilibrium Y and P.
D) shift both Ad and AS leaving equilibrium Y and P unchanged.

Question 44

A fall in investment expenditure by business is:

A) an AS shock that will shift AS down to the right, lowering equilibrium Y and P.
B) an AD shock that will shift AD to the left lowering equilibrium Y and P.
C) a fall in potential output that does not affect short run Y and P.
D) a shift in aggregate expenditure from investment to consumption that has no effect on AD or AS.

Question 45

In the AD/AS model, the potential output line:

A) is vertical and shows that potential output is not determined by the price level.
B) is horizontal and shows that potential output is sensitive to changes in the price level.
C) shows how aggregate output changes when the price level changes.
D) slopes up and to the right.

Question 46

In the AD/AS model, the potential output line:

A) shows short-run equilibrium price and real output.
B) provides a benchmark for evaluating the economy's short-run performance.
C) is upward-sloping to show higher potential output means higher prices.
D) shifts to the right when AD increases.

Question 47

The business cycle describes fluctuations in output around the ____________.

A) potential output
B) boom output
C) recession output
D) actual output

Question 48

Fluctuations in output around potential output are known as the:

A) inventory cycle.
B) business cycle.
C) political cycle.
D) climate cycle.

Question 49

Which one of the following will cause an upward (leftward) shift in aggregate supply?

A) The marginal tax rates fall.
B) The level of government spending increases.
C) The overall level of labour productivity falls.
D) The level of private investment spending rises.

Question 50

Suppose that the economy experiences an adverse supply shock. We can conclude that:

A) the firms' cost of production increases for every level of output.
B) the level of aggregate employment increases.
C) the general price level will fall.
D) there will be an increase in aggregate demand.

Question 51

The output gap is the deviation of __________ output from ___________ output.

A) real, nominal
B) real, potential
C) actual, real
D) actual, potential

Question 52

Suppose that the economy experiences an adverse supply shock when the price of an essential imported resource increases. We would expect:

A) the price level and the level of real output to increase.
B) the price level to decrease and the level of real output to increase.
C) the price level and the level of real output to decrease.
D) the price level to rise and the level of real output to decrease.

Question 53

Which one of the following would most likely shift the upward-sloping aggregate supply curve upwards and to the left?

A) The government reduces marginal tax rates.
B) The overall productivity of labour falls.
C) The level of planned investment spending falls.
D) Households begin to consume more out of each pound of income that they receive.

Question 54

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

A) Higher price of oil.
B) Lower productivity of labour.
C) Higher Minimum Wage.
D) Higher price-level.

Question 55

The prevention of major swings in economic activity can be handled most easily by the:

A) household sector.
B) business sector.
C) financial sector.
D) government sector.

Question 56

Which of the following is an example of positive demand shock?

A) Loss of financial assets due to financial crisis.
B) Global recessions resulting in the reduction of exports.
C) Improved consumer sentiments.
D) Lower price of energy.

Question 57

Which of the following is not an example of positive demand shock?

A) Increase in autonomous exports.
B) Increase in autonomous government expenditure.
C) Increase in autonomous taxes.
D) Increase in autonomous wealth.

Question 58

Consider a negative demand shock and determine which of the following effects is correct.

A) Flatter the aggregate supply curve, larger is the reduction of output.
B) Steeper the aggregate supply curve, larger is the reduction of output.
C) Flatter the aggregate supply curve, larger is the reduction in the price-level.
D) Flatter the aggregate supply curve, larger is the inflationary pressure.

Question 59

Consider a negative (adverse) supply shock and determine which of the following effects is correct?

A) Flatter the aggregate demand curve, larger is the reduction of output.
B) Steeper the aggregate demand curve, larger is the reduction of output.
C) Flatter the aggregate demand curve, larger is the reduction in the price-level.
D) Flatter the aggregate demand curve, larger is the inflationary pressure.

Question 60

Which of the following is an example of positive supply shock?

A) Loss of financial assets due to financial crisis.
B) Global recessions resulting in the reduction of exports.
C) Improved consumer sentiments.
D) Lower price of energy.

Question 61

Consider a negative (adverse) supply shock and negative (adverse) demand shock. As a result:

A) output may increase or decrease or remain the same.
B) price will decrease.
C) price will increase.
D) price may increase or decrease or remain the same.

Question 62

Consider a negative (adverse) supply shock and a positive (favourable) demand shock. As a result:

A) output may increase or decrease or remain the same.
B) output will decrease.
C) output will increase.
D) price may increase or decrease or remain the same.

Question 63

The outcome of higher energy price and easy credit conditions will be:

A) output may increase or decrease or remain the same.
B) output will decrease.
C) output will increase.
D) price may increase or decrease or remain the same.

Question 64

In a recessionary gap, the economy may encounter:

A) fast adjustment in factor prices.
B) expansionary monetary and fiscal policy to dampen the recessionary gap in the short-run.
C) higher wages.
D) lower money supply, lower price and higher real GDP.

Question 65

Expansionary fiscal policy:

A) decreases aggregate demand.
B) occurs when the government cuts taxes and/or increases spending.
C) occurs when the government increases taxes and cuts spending.
D) occurs when the government cuts taxes by less than it cuts spending.

Question 66

Assume that the tax-multiplier is -3 and the government expenditure multiplier is +4. Increase in both autonomous taxes and government expenditure by 100 will:

A) have no effect on aggregate demand.
B) shift the AD curve to the right by 100.
C) shift the AD curve to the left by 100.
D) shift the AD curve to the right by 200.

Question 67

Government's action intended to keep GDP close to its potential level is called:

A) deficit-reduction policy.
B) stabilization policy.
C) budget surplus policy.
D) monetary policy.

Question 68

Fiscal policy attempts to:

A) influence interest rates and credit conditions in order to stabilize investment.
B) alter exchange rates in order to eliminate trade deficits.
C) manage AD through changes in the government budget.
D) maintain competition through antitrust enforcement.

Question 69

One possible fiscal policy objective is:

A) to control the money supply to achieve equilibrium at Y_P.
B) to increase the country's exports in order to increase AD.
C) to stabilize AD at the level necessary for equilibrium at Y_P.
D) to reduce the size of the government sector in the economy.

Question 70

One of the instruments of fiscal policy is:

A) exchange rate.
B) money supply.
C) interest rate.
D) government expenditure.

Question 71

Rise in structural primary budget balance indicates:

A) expansionary fiscal policy.
B) contractionary fiscal policy.
C) expansionary monetary policy.
D) contractionary monetary policy.

Question 72

To the economist, the term fiscal policy refers to:

A) the inequality of private saving and investment in the short run.
B) the use of the spending and taxing powers of government to affect aggregate demand and output.
C) the role of the private sector in determining the size of gross domestic product.
D) the attempt by government to finance all of its public spending with tax revenues.

Question 73

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

A) A reduction in government spending.
B) A decrease in the money supply.
C) An increase in taxes.
D) A decrease in taxes.

Question 74

-Refer to Figure 11.2. The economy is currently at AD₁. If the government's fiscal policy objective is to stabilize GDP at Y_P, the government should:

A) reduce the structural primary budget balance by changing expenditure and taxes to shift the AD to the left.
B) change taxes and expenditure to move the economy to the left along the BB function and lower AD.
C) increase the structural primary budget balance by increasing taxes and /or cutting expenditures to shift the AD to the left.
D) allow the automatic fiscal stabilization reflected in the slope of the BB line to establish equilibrium at Y_P.

Question 75

-Refer to Figure 11.2. If the aggregate demand curve were AD₂, the economy would have a(n):

A) inflationary gap that calls for fiscal policy to raise the BB function.
B) recessionary gap calling for a cut in the structural budget balance (SBB).
C) contractionary fiscal policy.
D) recessionary gap calling for an increase in the structural budget balance (SBB).

Question 76

-Refer to Figure 11.2. Discretionary fiscal policy aimed at AD management:

A) moves the economy along the BB function in panel b).
B) shifts the BB function up or down, changing the structural balance (SBB) to shift AD.
C) changes the slope of the BB function through changes in the net tax rate and changes the slope of AD.
D) B and/or C but not

Question 77

Which of the following is an example of counter cyclical fiscal policy?

A) A reduction in taxes when the economy is booming.
B) An increase in government spending when the economy is booming.
C) An increase in taxes when the economy has a recessionary gap.
D) An increase in government spending when the economy has a recessionary gap.

Question 78

A government deficit is financed mainly by borrowing from the public by:

A) printing money.
B) raising taxes.
C) borrowing overseas.
D) selling bonds.

Question 79

The stock of outstanding government debt is known as:

A) the public debt.
B) the budget deficit.
C) the medium term fiscal strategy.
D) the yellow brick road.

Question 80

The Canadian public debt:

A) refers to the debts of all units of government-federal, provincial, and municipal.
B) consists of the total debt of Canadian households, businesses, and government.
C) refers to the collective amount that Canadian citizens and businesses owe to foreigners.
D) consists of the historical accumulation of all federal government deficits and surpluses.