Deck 11: Aggregate Demand and Supply  

Question 1

The circular flow diagram depicts the flow of income and output between

A) labor and management.
B) the service sector and the manufacturing sector.
C) businesses and households.
D) agriculture and manufacturing.

Answer 1

businesses and households.

Question 2

Which of the following correctly describes the exchanges depicted in the circular flow model?

A) Households sell factors of production to the business sector and the business sector sells goods and services to households.
B) Households sell goods and services to the business sector and buy factors of production from the government.
C) Households buy factors of production from the business sector and sell goods and services to the government.
D) Households and businesses buy goods and services from the government

Answer 2

Households sell factors of production to the business sector and the business sector sells goods and services to households.

Question 3

The slope of the aggregate demand curve reflects the fact that

A) consumers buy more at higher prices.
B) businesses supply more at higher prices.
C) an increase in the price level reduces the amount of real output consumers plan to buy.
D) the only thing that changes the spending plans of consumers is changes in their income.

Answer 3

an increase in the price level reduces the amount of real output consumers plan to buy.

Question 4

The aggregate demand curve slopes

A) down.
B) up.
C) either up or down, depending on whether there is a recession or not.
D) neither up nor down; it is horizontal.

Question 5

According to the real-balance effect, an increase in the price level will

A) leave the total quantity of goods and services purchased unchanged since the price level of all goods has increased.
B) decrease the total quantity of goods and services purchased because of an increase in interest rates.
C) lead to a corresponding increase in the purchase of goods and services since businesses are now earning more money.
D) decrease the quantity of goods and services as a result of a decrease in the real value of money balances.

Question 6

The real-balance effect partially explains

A) the downward slope of aggregate demand.
B) the upward slope of aggregate supply.
C) the behavior of firms in response to increases in wages.
D) the behavior of firms in response to changes in selling prices of their products.

Question 7

Holding nominal money balances constant, a decrease in the price level

A) causes the real value of the money balances to increase, in turn increasing the quantity of goods and services demanded.
B) causes the real value of the money balances to decrease, in turn decreasing the quantity of goods and services demanded.
C) causes the real value of the money balances to increase, thereby increasing the interest rate.
D) generates a reduction in the value of the money balances, leading to higher interest rates and a decrease in the quantity of goods and services demanded.

Question 8

Aggregate demand shows the relationship between

A) the rate of inflation and the level of imports.
B) the interest rate and the level of exports.
C) the price level and the level of real output.
D) the level of real cash balances and wages.

Question 9

A fall in the price level

A) increases the real value of money balances.
B) decreases the value of real money balances.
C) shifts aggregate demand to the right.
D) shifts aggregate demand to the left.

Question 10

Which of the following is true about how the aggregate demand curve differs from the individual's demand curve?

A) The individual's demand curve shows the relationship between price and quantity demanded while the aggregate demand curve is not influenced by price.
B) For the individual's demand curve equilibrium is determined by the intersection of supply and demand while for the aggregate demand curve equilibrium is determined by the real balance effect.
C) The individual's demand curve is just for an individual while the aggregate demand curve looks at the entire circular flow of income.
D) The individual's demand curve will shift when there is a change in taxes while the aggregate demand curve will not.

Question 11

The aggregate demand curve would shift to the right as a result of

A) a drop in the price level.
B) tax increases.
C) a reduction in economic uncertainty.
D) an increase in energy prices.

Question 12

The U.S. aggregate demand curve would shift to the left if

A) economic conditions in Europe improved.
B) there was a tax decrease.
C) there was a tax increase.
D) the aggregate supply curve shifts to the right.

Question 13

The aggregate demand curve

A) tells us what the employment level will be for any given level of output.
B) tells us what portion of output is exported.
C) tells us what portion of consumption goods are imported
D) cannot tell us how the total dollar values of spending will ultimately be divided between output and prices.

Question 14

An increase in the level of prices of goods and services will

A) shift aggregate supply to the right.
B) shift aggregate supply to the left.
C) leave the aggregate supply curve unchanged.
D) cause firms to reduce the quantity of goods produced.

Question 15

Which one of the following correctly describes the slope of the aggregate supply curve?

A) Because individual supply curves slope up, the aggregate supply curve slopes down.
B) The slope of the aggregate supply curve is determined by the willingness of consumers to substitute between goods in response to changes in their relative prices.
C) The aggregate supply curve slopes up to reflect the fact that firms are willing to increase output when their selling prices rise but wages do not.
D) The aggregate supply curve slopes up to reflect the fact that firms are willing to increase output when wages rise but their selling prices do not.

Question 16

Real GDP can increase as a result of

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

Question 17

Which one of the following would most likely lead to an increase in aggregate supply?

A) An increase in the size of the labor force
B) An increase in taxes
C) A decrease in taxes
D) A change in economic conditions in other countries

Question 18

An increase in government spending

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

Question 19

As consumers increase their planned spending

A) aggregate demand increases.
B) aggregate demand decreases.
C) aggregate supply increases.
D) aggregate supply decreases.

Question 20

An increase in investment spending by firms causes

A) an increase in aggregate demand and a decrease in aggregate supply.
B) a decrease in aggregate supply only.
C) an increase in aggregate demand only.
D) an increase in the labor force participation rate.

Question 21

If an aging population results in increased numbers of retirements so that the labor force participation rate declines, what will be the economic effect?

A) Aggregate supply will decrease.
B) Aggregate supply will increase.
C) Aggregate demand will decrease.
D) Aggregate demand will increase.

Question 22

The downward slope of the aggregate demand curve shows that

A) an increase in aggregate demand reduces aggregate supply.
B) there can never be an equilibrium between aggregate supply and aggregate demand.
C) a higher price level will cause real output demanded to be higher.
D) a lower price level will cause real output demanded to be higher.

Question 23

The open economy effect and the real balance effect are two of the reasons why

A) higher price levels increase long-run aggregate supply.
B) the aggregate demand curve slopes downward.
C) capital formation does not contribute to economic growth in poor countries.
D) growth of the labor force does not contribute to economic growth in wealthy countries.

Question 24

The real balance effect involves the way that

A) banks change their lending policies when interest rates rise.
B) banks change their lending polices when the price level rises.
C) firms change their investment plans when the price level rises.
D) consumers change their planned purchases when the price level rises.

Question 25

The open economy effect involves the way that

A) investors alter their stock portfolios when the price level rises.
B) investors alter their stock portfolios when the interest rate rises.
C) the demand for imports is dependent on the domestic price level.
D) consumers change their planned purchases when the unemployment rate changes.

Question 26

Along a given aggregate demand curve, _____ is constant.

A) the level of exports.
B) the level of imports.
C) the population.
D) the price level.

Question 27

The aggregate demand curve is

A) horizontal if the economy is experiencing full employment.
B) vertical if the economy is experiencing full employment.
C) a representation of the spending plans of consumers, firms, and governments.
D) a representation of the willingness of firms to expand production as the price level rises.

Question 28

The aggregate supply curve is

A) horizontal if the economy is experiencing full employment.
B) a representation of the effect of interest rate changes on the savings rate.
C) a representation of the spending plans of consumers, firms, and governments.
D) a representation of the willingness of firms to expand production as the price level rises.

Question 29

The real-balance effect indicates that a higher price level causes

A) the real value of financial assets to decrease.
B) the real value of financial assets to increase.
C) consumers to save more.
D) banks to be more restrictive in their lending practices.

Question 30

The upward slope of the supply curve is explained by

A) the profit motive of firms.
B) the bargaining strength of labor unions.
C) the open economy effect.
D) the real balance effect.

Question 31

The aggregate demand curve will shift to the left if

A) consumers are more confident about the health of the national economy.
B) economic conditions worsen in other countries.
C) economic conditions improve in other countries.
D) the price level rises.

Question 32

The aggregate demand curve shows the relationship between

A) the price level and the level of real GDP.
B) stock market prices and interest rates.
C) employment levels and interest rates.
D) employment levels and rates of profit.

Question 33

Which of the following factors causes the aggregate demand curve to slope downward and to the right?

A) The substitution effect
B) The income effect
C) The open economy effect
D) The profit motive

Question 34

When an increase in the price level reduces the purchasing power of financial assets

A) the amount of real goods and services people can purchase declines.
B) people work harder to regain the same initial purchasing power.
C) the aggregate demand curve shifts left.
D) the aggregate demand curve shifts right.

Question 35

When consumers buy more imported goods in response to increases in the domestic price level, this is known as the

A) external shock effect.
B) real economy effect.
C) open economy effect.
D) substitution effect.

Question 36

All of the following would cause the aggregate demand curve to shift EXCEPT

A) an increase in the price level.
B) an increase in taxes.
C) a decrease in taxes.
D) improving levels of prosperity in other countries.

Question 37

Which of the following will NOT shift the aggregate demand curve?

A) A shift in the aggregate supply curve
B) An increase in tax rates
C) A decrease in tax rates
D) A change in economic conditions in other countries

Question 38

An increase in the price level in the United States would cause a

A) shift of the aggregate demand curve to the right.
B) shift of the aggregate demand curve to the left.
C) movement up along the aggregate demand curve.
D) movement down along the aggregate demand curve.

Question 39

Which of the following would likely result in a shift of the AD curve to the right?

A) Tax decreases
B) Decreases in job security
C) Tax increases
D) Worsening economic conditions in other countries

Question 40

The equilibrium price level for our domestic economy occurs when the aggregate demand curve intersects the ___________ ___________ curve.

A) production possibilities
B) opportunity cost
C) wage effect
D) aggregate supply

Question 41

A rightward-shift of aggregate supply without any change in aggregate demand

A) will leave real GDP unchanged.
B) will leave the price level unchanged.
C) decreases the price level without any change in real output.
D) decreases the price level along with an increase in output.

Question 42

A rightward-shift of aggregate demand without any change in aggregate supply

A) will leave real GDP unchanged.
B) will leave the price level unchanged.
C) increases the price level without any change in real output.
D) increases the price level along with an increase in output.

Question 43

Increases in aggregate demand

A) will leave real GDP unchanged.
B) will cause aggregate supply to increase.
C) will cause aggregate supply to decrease.
D) lead to increases in the price level.

Question 44

Increases in aggregate supply

A) increase real output.
B) will leave the price level unchanged.
C) lead to increases in aggregate demand.
D) lead to decreases in aggregate demand.

Question 45

The equilibrium price level

A) is determined by the intersection of aggregate supply and aggregate demand.
B) is determined by the percentage of the labor force composed of immigrants.
C) is not affected by changes in aggregate demand.
D) is not affected by changes in aggregate supply.

Question 46

When the economy is in equilibrium,

A) the labor force participation rate is 100 percent.
B) planned spending equals planned output.
C) politicians are aware of the concerns of the average consumer.
D) real output is divided equally between consumption goods and investment goods.

Question 47

Which of the following would decrease aggregate demand?

A) An increase in the relative price of domestic goods versus foreign goods
B) A decrease in the foreign exchange value of the dollar
C) A decrease in taxes
D) An improvement in consumer confidence

Question 48

The intersection of aggregate supply and aggregate demand indicates

A) the level of full employment.
B) the optimal rate of investment.
C) the equilibrium level of real output.
D) the equilibrium level of nominal output.

Question 49

If the amount of goods supplied by firms exceeds planned spending then

A) inventories are depleted and firms raise prices.
B) inventories accumulate and firms raise prices.
C) inventories accumulate and firms reduce prices.
D) inventories are depleted and firms reduce prices.

Question 50

Increases in aggregate demand result in

A) an increase in the price level and a reduction in real output.
B) an increase in the price level and an increase in real output.
C) a decrease in the price level and a reduction in real output.
D) a decrease in the price level and an increase in real output.

Question 51

Decreases in aggregate demand result in

A) an increase in the price level and a reduction in real output.
B) an increase in the price level and an increase in real output.
C) a decrease in the price level and a reduction in real output.
D) a decrease in the price level and an increase in real output.

Question 52

Increases in aggregate supply result in

A) an increase in the price level and a reduction in real output.
B) an increase in the price level and an increase in real output.
C) a decrease in the price level and a reduction in real output.
D) a decrease in the price level and an increase in real output.

Question 53

Decreases in aggregate supply result in

A) an increase in the price level and a reduction in real output.
B) an increase in the price level and an increase in real output.
C) a decrease in the price level and a reduction in real output.
D) a decrease in the price level and an increase in real output.

Question 54

A change in the exchange value of the dollar most directly affects

A) government employees.
B) corporate employees.
C) aggregate demand.
D) aggregate supply.

Question 55

A decrease in the exchange value of the dollar will

A) decrease aggregate demand, thereby decreasing the price level.
B) decrease aggregate demand, thereby increasing the price level.
C) increase aggregate demand, thereby decreasing the price level.
D) increase aggregate demand, thereby increasing the price level.

Question 56

An increase in the exchange value of the dollar will

A) decrease aggregate demand, thereby decreasing the price level.
B) decrease aggregate demand, thereby increasing the price level.
C) increase aggregate demand, thereby decreasing the price level.
D) increase aggregate demand, thereby increasing the price level.

Question 57

A decrease in the exchange value of the dollar will

A) lower the nominal price of imported goods.
B) raise the nominal price of imported goods.
C) not affect the household sector.
D) not affect the business sector.

Question 58

Suppose that, over time, an economy has experienced decreases in real income and increases in the price level. What would account for this?

A) A decrease in aggregate demand
B) An increase in aggregate demand
C) A decrease in aggregate supply
D) An increase in aggregate supply

Question 59

Suppose that, over time, an economy has experienced decreases in real income and decreases in the price level as well. What would account for this?

A) A decrease in aggregate demand
B) An increase in aggregate demand
C) A decrease in aggregate supply
D) An increase in aggregate supply

Question 60

Suppose that, over time, an economy has experienced increases in real income and decreases in the price level. What would account for this?

A) A decrease in aggregate demand
B) An increase in aggregate demand
C) A decrease in aggregate supply
D) An increase in aggregate supply

Question 61

The circular flow model represents the

A) flow of immigration.
B) flow of imports and exports.
C) microeconomy.
D) macroeconomy.

Question 62

Which one of the following changes when aggregate demand changes?

A) The equilibrium price level
B) The position of the aggregate supply curve
C) The slope of the aggregate supply curve
D) All of the above

Question 63

Which one of the following changes when aggregate supply changes?

A) The equilibrium level of real output
B) The position of the aggregate demand curve
C) The slope of the aggregate demand curve
D) All of the above

Question 64

The circular flow model depicts exchanges of goods and money between the household sector and the _________ sector.

Question 65

The circular flow model represents the _________ market and the factor market.

Question 66

Aggregate demand is composed of consumption, _________, government expenditures, and net exports.

Question 67

The aggregate supply curve slopes up due to the _________ motive.

Question 68

The intersection of aggregate supply and aggregate demand determines the equilibrium price level and the equilibrium level of _________ _________ .

Question 69

An increase in aggregate demand causes the price level to _________ .

Question 70

An increase in aggregate supply causes the price level to _________ .

Question 71

An increase in the foreign exchange value of the dollar causes aggregate demand to _________ .

Question 72

An improvement in consumer confidence causes aggregate demand to _________.

Question 73

If planned expenditures exceed planned output, _________ will be depleted.

Question 74

If economic conditions improve in other countries, aggregate demand in the U. S. will _________ .

Question 75

If business inventories accumulate, the _________ _________ eventually will fall.

Question 76

Increases in the price level reduce the _________ power of financial assets.

Question 77

The two reasons for the downward slope of aggregate demand are the _________ _________ effect and the _________ _________ effect.

Question 78

Changes in the price level result from a shift of either _________ supply or _________ demand.

Question 79

Which two sectors of the economy are represented in the circular flow model?

Question 80

Which two markets are represented in the circular flow model?