Deck 14: Aggregate Demand and Aggregate Supply

Question 1

Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs. Which pair of GDP growth rates and unemployment rates is most realistic?

A) -3 percent, 2 percent
B) -1 percent, 20 percent
C) 1 percent, 7 percent
D) 6 percent, 0 percent

Answer 1

C

Question 2

According to the classical view in economics, which variable or policy can influence economic growth in the long run?

A) an increase in capital stock
B) an increase in money supply
C) an increase in unemployment benefits
D) an increase in nominal interest rates

Answer 2

A

Question 3

How does the size of investment as a fraction of GDP compare to its importance in creating economic fluctuations?

A) Investment is a small part of real GDP, and it accounts for a small share of the fluctuation in real GDP.
B) Investment is a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
C) Investment is a large part of real GDP, and it accounts for a large share of the fluctuation in real GDP.
D) Investment is a large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP.

Answer 3

B

Question 4

Which of the following happens during recessions?

A) Firms produce less but invest more.
B) Firms have to increase production because of falling prices.
C) Incomes increase because workers have to work overtime.
D) Unemployment rates increase.

Question 5

During Canada's three last recessions, investment spending accounted for what percentage of the decline in GDP?

A) 20 percent
B) 40 percent
C) 60 percent
D) 80 percent

Question 6

What does the economy experience during a recession?

A) rising employment and income
B) rising employment and falling income
C) rising income and falling employment
D) falling employment and income

Question 7

Which statement characterizes business cycles?

A) They are predictable fluctuations in consumption.
B) They are no longer very important due to government policy.
C) They are fluctuations in real GDP and related variables over time.
D) They are easily predicted by competent economists.

Question 8

What happens to sales and profit during recessions?

A) sales and profits fall
B) sales and profits rise
C) sales rise and profits fall
D) profits fall and sales rise

Question 9

On average, over the past 130 years, at about what rate has the Canadian economy grown?

A) 1 percent per year
B) 2 percent per year
C) 4 percent per year
D) 8 percent per year

Question 10

Which of the following best defines business cycles?

A) long-term trends in economic activity
B) regular, predictable fluctuations in GDP
C) the rise and fall of multinational companies
D) fluctuations in the economy

Question 11

Which term refers to a short period of falling incomes and rising unemployment?

A) depression
B) recession
C) expansion
D) business cycle

Question 12

What typically rises during a recession?

A) the price level
B) unemployment
C) corporate profits
D) automobile sales

Question 13

Which part of real GDP fluctuate most over the course of the business cycle?

A) consumption
B) government expenditures
C) investment
D) net exports

Question 14

What does real GDP measure?

A) the dollar value of all goods
B) economic activity and income
C) primarily long-run trends
D) profitability of all companies in the economy

Question 15

In 1982, Canada was in a recession. What would you expect NOT to have happened?

A) layoffs and firings
B) a higher rate of foreclosures
C) increased claims for unemployment insurance
D) increased investment spending

Question 16

How does real GDP change over time?

A) It moves in the same direction as unemployment.
B) It moves in the same direction as inflation.
C) It has a long-term upward trend.
D) It is approximately constant because it is measured in constant dollars.

Question 17

Which statement best describes the beginning of a recession?

A) Production and unemployment both rise.
B) Production rises and unemployment falls.
C) Production falls and unemployment rises.
D) Production and unemployment both fall.

Question 18

Which expenditure item is responsible for the decrease in real GDP during a recession?

A) mostly investment spending
B) mostly consumption spending
C) mostly government spending
D) mostly exports

Question 19

Most economists use the aggregate demand and aggregate supply model primarily to analyze which of the following?

A) short-run fluctuations in the economy
B) the effects of macroeconomic policy on the prices of individual goods
C) the long-run effects of international trade policies
D) productivity and economic growth

Question 20

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

A) increases in prices of goods and services
B) increases in stock prices
C) aging population
D) technological innovation

Question 21

What is the current estimate of the natural rate of unemployment in Canada?

A) 5 percent
B) 7 percent
C) 9 percent
D) 11 percent

Question 22

Why is the aggregate demand curve downward sloping?

A) because the more people buy, the fewer additional purchases they need
B) because people buy something else when the price goes up
C) because people feel poorer and buy less when prices go up
D) because the more people wish to consume, the lower the price is

Question 23

What is included in the aggregate demand for goods and services?

A) intermediate goods
B) technology
C) net exports
D) government deficit

Question 24

What is NOT included in aggregate demand?

A) purchases of stock and bonds
B) purchases of services such as visits to the dentist
C) purchases of capital goods such as ovens in a bakery
D) purchases by foreigners of consumer goods produced in Canada

Question 25

Which of the following measures the overall price level?

A) the price of some particular commodity or service
B) the rate of inflation
C) the consumer price index
D) the nominal GDP

Question 26

What is classical dichotomy?

A) It is the separation of variables that move with the business cycle and variables that do not.
B) It is the separation of changes in money and changes in government expenditures.
C) It is the separation of endogenous and exogenous variables.
D) It is the separation of real and nominal variables.

Question 27

What are the variables on the vertical and horizontal axes of the aggregate supply and demand curve?

A) the price level and real output
B) real output and employment
C) unemployment and the inflation rate
D) inflation rate and the price level

Question 28

When did the recession that saw the largest spike in the unemployment rate in Canada begin?

A) 1979
B) 1982
C) 1991
D) 2008

Question 29

Which statement is consistent with an increase in the price level?

A) Dollars become more valuable, and interest rates rise.
B) Dollars become more valuable, and interest rates fall.
C) Dollars become less valuable, and interest rates rise.
D) Dollars become less valuable, and interest rates fall.

Question 30

What does the downward slope of the aggregate-demand curve show?

A) that an increase in the money supply causes the aggregate quantity of goods and services demanded to increase
B) that an increase in the money supply causes the aggregate quantity of goods and services demanded to decrease
C) that an increase in the price level causes the aggregate quantity of goods and services demanded to increase
D) that an increase in the price level causes the aggregate quantity of goods and services demanded to decrease

Question 31

How is the effect of an increase in the price level represented?

A) by a shift to the right of the aggregate-demand curve
B) by a shift to the left of the aggregate-demand curve
C) by a movement to the left along a given aggregate-demand curve
D) by a movement to the right along a given aggregate-demand curve

Question 32

Which relationship does the model of aggregate demand and aggregate supply explain?

A) the relationship between the price and quantity of a particular good
B) the relationship between the interest rate and output
C) the relationship between wages and employment
D) the relationship between real GDP and the price level

Question 33

In addition to the price level, what does the aggregate demand and aggregate supply model focus on?

A) real GDP
B) nominal GDP
C) the real interest rate
D) stock prices

Question 34

Which of the following adjusts to bring aggregate supply and demand into balance?

A) the price level
B) the real rate of interest
C) the money supply
D) immigration

Question 35

What does a rise in the economy's overall level of prices tend to do?

A) It tends to raise both the quantity demanded and supplied of goods and services.
B) It tends to raise the quantity demanded of goods and services but lower the quantity supplied.
C) It tends to lower the quantity demanded of goods and services but raise the quantity supplied.
D) It tends to lower both the quantity demanded and the quantity supplied of goods and services.

Question 36

All else equal, what happens as the price level falls?

A) The money supply falls.
B) Interest rates rise.
C) Dollars become more valuable.
D) Dollars become less valuable.

Question 37

Which statement best describes the aggregate demand and aggregate supply model?

A) Aggregate supply adjusts to equate aggregate demand at the prevailing market prices.
B) The price level adjusts to equate aggregate demand to aggregate supply.
C) Aggregate demand adjusts to equate aggregate supply at the prevailing market prices.
D) Both aggregate demand and supply adjust to become equal at the prevailing market prices.

Question 38

According to classical economic theory, which of the following do changes in the money supply affect?

A) real GDP
B) real interest rates
C) the price level
D) unemployment

Question 39

According to classical economic theory, which of the following do changes in the money supply affect?

A) incentives to invest
B) prices
C) unemployment rates
D) aggregate supply

Question 40

What does a fall in the economy's overall level of prices tend to do?

A) It tends to raise both the quantity demanded and supplied of goods and services.
B) It tends to raise the quantity demanded of goods and services, but lower the quantity supplied.
C) It tends to lower the quantity demanded of goods and services, but raise the quantity supplied.
D) It tends to lower both the quantity demanded and the quantity supplied of goods and services.

Question 41

Which statement best explains an increase in consumer spending?

A) People spend more when the price level rises because the dollars they hold are worth more.
B) People spend more when the price level rises because the dollars they hold are worth less.
C) People spend more when the price level falls because the dollars they hold are worth more.
D) People spend more when the price level falls because the dollars they hold are worth less.

Question 42

Which statement best describes the effects of a fall in the price level?

A) The real exchange rate and interest rates rise.
B) The real exchange rate and interest rates fall.
C) The real exchange rate falls, and interest rates rise.
D) The real exchange rate rises, and interest rates fall.

Question 43

In which situation are people most likely to spend more?

A) when stock prices and interest rates rise
B) when their real wealth rises and interest rates fall
C) when stock prices fall and interest rates rise
D) when their real wealth and interest rates fall

Question 44

What happens when the price level rises?

A) The value of money rises, and exchange rates and interest rates also rise.
B) The value of money rises, while exchange rates and interest rates fall.
C) The value of money falls while exchange rates and interest rates rise.
D) The value of money falls, and exchange rates and interest rates also fall.

Question 45

Which statement best describes the effects of a fall in the price level?

A) Dollars are worth more, so people spend more.
B) Dollars are worth more, so people spend less.
C) Dollars are worth less, so people spend more.
D) Dollars are worth less, so people spend less.

Question 46

Which statement best describes the effects of a fall in the price level?

A) The real value of money and the real exchange rate rise.
B) The real value of money and the real exchange rate fall.
C) The real value of money rises, and the real exchange rate falls.
D) The real value of money falls, and the real exchange rate rises.

Question 47

Which statement best describes the effects of an increase in the price level?

A) Dollars are worth more, so people spend more.
B) Dollars are worth more, so people spend less.
C) Dollars are worth less, so people spend more.
D) Dollars are worth less, so people spend less.

Question 48

Which statement best describes the effects of an increase in the price level?

A) Real exchange rates and interest rates rise.
B) Real exchange rates and interest rates fall.
C) Real exchange rates fall, and interest rates rise.
D) Real exchange rates rise, and interest rates fall.

Question 49

An increase in the price level makes consumers feel less wealthy. How is this situation represented?

A) Aggregate demand shifts right.
B) Aggregate demand shifts left.
C) There is a movement to right along a given aggregate-demand curve.
D) There is a movement to the left along a given aggregate-demand curve.

Question 50

In the aggregate demand and aggregate supply model, when does the aggregate quantity of goods demanded increase?

A) when real wealth falls
B) when the interest rate rises
C) when the dollar depreciates
D) when stock prices decrease

Question 51

Which statement best describes the effects of a fall in the price level?

A) Dollars become more valuable, and interest rates rise.
B) Dollars become more valuable, and interest rates fall.
C) Dollars become less valuable, and interest rates rise.
D) Dollars become less valuable, and interest rates fall.

Question 52

In the aggregate demand and aggregate supply model, when does the aggregate quantity of goods demanded decrease?

A) when real wealth increases
B) when the interest rate falls
C) when the dollar depreciates
D) when stock prices fall

Question 53

Which statement best describes what happens when the price level falls?

A) Households increase foreign bond purchases, and the supply of dollars increases.
B) Households increase foreign bond purchases, and the supply of dollars decreases.
C) Households decrease foreign bond purchases, and the supply of dollars increases.
D) Households decrease foreign bond purchases, and the supply of dollars decreases.

Question 54

What are the effects of an increase in the price level?

A) People hold less money, so they lend less, and the interest rate rises.
B) People hold less money, so they lend more, and the interest rate falls.
C) People hold more money, so they lend more, and the interest rate falls.
D) People hold more money, so they lend less, and the interest rate rises.

Question 55

What happens when the price level falls?

A) Interest rates rise, so firms increase investment.
B) Interest rates rise, so firms decrease investment.
C) Interest rates fall, so firms increase investment.
D) Interest rates fall, so firms decrease investment.

Question 56

What happens when the price level rises?

A) Interest rates rise, so firms increase investment.
B) Interest rates rise, so firms decrease investment.
C) Interest rates fall, so firms increase investment.
D) Interest rates fall, so firms decrease investment.

Question 57

In which situation does investment spending increase?

A) when the price level rises, causing interest rates to rise
B) when the price level rises, causing interest rates to fall
C) when the price level falls, causing interest rates to rise
D) when the price level falls, causing interest rates to fall

Question 58

What are the effects of a decrease in the price level?

A) People hold less money, so they lend less, and the interest rate rises.
B) People hold less money, so they lend more, and the interest rate falls.
C) People hold more money, so they lend more, and the interest rate rises.
D) People hold more money, so they lend less, and the interest rate falls.

Question 59

In the aggregate demand and aggregate supply model, when does the aggregate quantity of goods demanded increase?

A) when real wealth rises
B) when the interest rate rises
C) when the dollar appreciates
D) when the expected price level rises

Question 60

Which statement best describes what happens when the price level rises?

A) Households increase foreign bond purchases, and the supply of dollars increases.
B) Households increase foreign bond purchases, and the supply of dollars decreases.
C) Households decrease foreign bond purchases, and the supply of dollars increases.
D) Households decrease foreign bond purchases, and the supply of dollars decreases.

Question 61

How does the aggregate demand and supply model reflect a decrease in taxes?

A) Consumption increases, so aggregate demand shifts right.
B) Consumption increases, so aggregate supply shifts right.
C) Consumption decreases, so aggregate demand shifts left.
D) Consumption decreases, so aggregate supply shifts left.

Question 62

What are the implications of a depreciation of the dollar?

A) The dollar buys more foreign currency, so it buys more foreign goods.
B) The dollar buys more foreign currency, so it buys fewer foreign goods.
C) The dollar buys less foreign currency, so it buys more foreign goods.
D) The dollar buys less foreign currency, so it buys fewer foreign goods.

Question 63

Suppose a stock market crash makes people feel less wealthy. What are the effects of this decrease in wealth?

A) a decrease in consumption, which shifts aggregate supply left
B) a decrease in consumption, which shifts aggregate demand left
C) an increase in consumption, which shifts aggregate supply right
D) an increase in consumption, which shifts aggregate demand right

Question 64

Why does an increase in the price level result in a decrease in the aggregate quantity of goods and services demanded?

A) because as wealth rises, interest rates rise, and the dollar appreciates
B) because as wealth rises, interest rates fall, and the dollar depreciates
C) because as wealth falls, interest rates rise, and the dollar appreciates
D) because as wealth falls, interest rates fall, and the dollar depreciates

Question 65

Which statement best explains the downward slope of the aggregate-demand curve?

A) As the Canadian price level increases, the dollar depreciates and people buy more imports.
B) As the Canadian price level increases, the interest rate falls and firms invest less.
C) As the Canadian price level increases, people feel less wealthy and buy less goods and services.
D) As the Canadian price level increases, people buy more substitute goods.

Question 66

Suppose a fall in stock prices makes people feel less wealthy. What are the effects of this decrease in wealth?

A) decreased consumption, shown as a movement to the left along a given aggregate-demand curve
B) increased consumption, shown as a movement to the right along a given aggregate-demand curve
C) decreased consumption, which shifts the aggregate-demand curve to the left
D) increased in consumption, which shifts the aggregate-demand curve to the right

Question 67

Which statement best characterizes the aggregate-demand curve?

A) It slopes downward because higher prices cause the exchange rate to depreciate.
B) It slopes downward because higher prices cause real wealth to decrease and interest rates to increase.
C) It slopes upward because higher prices cause people to increase their production.
D) It slopes upward because higher prices cause real wealth to increase and interest rates to decrease.

Question 68

What are the effects of a decrease in the price level?

A) The real interest rate increases, the dollar appreciates, and net exports increase.
B) The real interest rate increases, the dollar depreciates, and net exports decrease.
C) The real interest rate decreases, the dollar depreciates, and net exports increase.
D) The real interest rate decreases, the dollar appreciates, and net exports decrease.

Question 69

When taxes decrease, consumption increases. How is this situation represented in the aggregate demand and aggregate supply model?

A) by a movement to the right along a given aggregate-demand curve
B) by shifting aggregate demand to the right
C) by shifting aggregate supply to the right
D) by a movement to the left along a given aggregate-demand curve

Question 70

When taxes increase, consumption decreases. How is this situation represented in the aggregate demand and aggregate supply model?

A) by a movement to the left along a given aggregate-demand curve
B) by shifting aggregate demand to the left
C) by shifting aggregate supply to the left
D) by a movement to the right along a given aggregate-demand curve

Question 71

What happens when the dollar depreciates?

A) Canadian exports and imports increase.
B) Canadian exports increase, while imports decrease.
C) Canadian exports decrease, while imports increase.
D) Canadian exports and imports decrease.

Question 72

In which situation does investment spending decrease?

A) when the price level rises, causing interest rates to rise
B) when the price level rises, causing interest rates to fall
C) when the price level falls, causing interest rates to rise
D) when the price level falls, causing interest rates to fall

Question 73

What are the effects of a decrease in Canadian interest rates?

A) a depreciation of the dollar and greater net exports
B) a depreciation of the dollar and smaller net exports
C) an appreciation of the dollar and greater net exports
D) an appreciation of the dollar and smaller net exports

Question 74

What are the effects of a decrease in the price level?

A) Wealth falls, people lend less, interest rates fall, and the dollar appreciates.
B) Wealth falls, people lend less, interest rates rise, and the dollar depreciates.
C) Wealth rises, people lend more, interest rates rise, and the dollar appreciates.
D) Wealth rises, people lend more, interest rates fall, and the dollar depreciates.

Question 75

What are the effects of an increase in the price level?

A) The interest rate increases, the dollar depreciates, and net exports increase.
B) The interest rate increases, the dollar appreciates, and net exports decrease.
C) The interest rate decreases, the dollar depreciates, and net exports increase.
D) The interest rate decreases, the dollar appreciates, and net exports decrease.

Question 76

Suppose a stock market boom makes people feel wealthier. What are the effects of this increase in wealth?

A) increased consumption, which shifts the aggregate-demand curve right
B) increased consumption, which shifts the aggregate-demand curve left
C) decreased consumption, which shifts the aggregate-demand curve right
D) decreased consumption, which shifts the aggregate-demand curve left

Question 77

What happens when the dollar appreciates?

A) Canadian exports decrease while imports increase.
B) Canadian exports and imports decrease.
C) Canadian exports and imports increase.
D) Canadian exports increase while imports decrease.

Question 78

What does an increase in the interest rate cause?

A) It causes investment to rise and the exchange rate to appreciate.
B) It causes investment to fall and the exchange rate to depreciate.
C) It causes investment to rise and the exchange rate to depreciate.
D) It causes investment to fall and the exchange rate to appreciate.

Question 79

Why does a decrease in the price level induce an increase in the aggregate quantity of goods and services demanded?

A) because as wealth falls, interest rates rise, and the dollar appreciates
B) because as wealth falls, interest rates rise, and the dollar depreciates
C) because as wealth rises, interest rates rise, and the dollar appreciates
D) because as wealth rises, interest rates fall, and the dollar depreciates

Question 80

Changes in the price level affect which component of aggregate demand?

A) only consumption and investment
B) only consumption and net exports
C) only consumption
D) consumption, investment, and net exports