Deck 10: Aggregate Demand and Aggregate Supply Analysis

Question 1

What do the 'aggregate demand' and 'aggregate supply' models help explain?

A)long-run economic growth
B)short-run fluctuations in real GDP and the price level
C)price fluctuations in an individual market
D)output fluctuations in an individual market

Answer 1

short-run fluctuations in real GDP and the price level

Question 2

What is the result of a decrease in the price level?

A)It will shift the aggregate demand curve to the left.
B)It will shift the aggregate demand curve to the right.
C)It will move the economy down along a stationary aggregate demand curve.
D)It will move the economy up along a stationary aggregate demand curve.

Answer 2

It will move the economy down along a stationary aggregate demand curve.

Question 3

What does the short-run aggregate supply curve show?

A)the relationship between the price level and the quantity of real GDP supplied
B)the relationship between the unemployment rate and real GDP
C)the desired level of national expenditure at different price levels
D)the relationship between labour supplied and the average wage rate

Answer 3

the relationship between the price level and the quantity of real GDP supplied

Question 4

The result of lower personal income taxes is:

A)a decrease in aggregate demand.
B)a decrease in disposable income.
C)an increase in aggregate demand.
D)an increase in transfer payments.

Question 5

The international-trade effect states that, ceteris paribus, an increase in the price level will:

A)increase net exports.
B)decrease net exports.
C)increase exports.
D)decrease imports.

Question 6

If Australia's economic growth rate is slower relative to other countries' economic growth rates, this will:

A)move the economy up along a stationary aggregate demand curve.
B)move the economy down along a stationary aggregate demand curve.
C)shift the aggregate demand curve to the left.
D)shift the aggregate demand curve to the right.

Question 7

When the price level in Australia rises relative to the price level of other countries, ceteris paribus, ________ will rise, ________ will fall, and ________ will fall.

A)imports; exports; net exports
B)exports; imports; net exports
C)net exports; exports; imports
D)net exports; imports; exports

Question 8

The aggregate demand curve shows the relationship between the ________ and ________.

A)inflation rate; quantity of real GDP demanded
B)real interest rate; quantity of real GDP supplied
C)nominal interest rate; quantity of real GDP demanded
D)price level; quantity of real GDP demanded

Question 9

How do changes in income tax policies affect aggregate demand?

A)Higher taxes increase disposable income, consumption and aggregate demand.
B)Higher taxes reduce disposable income, consumption and aggregate demand.
C)Higher taxes increase corporate investment and aggregate demand.
D)Higher taxes increase aggregate supply and thus increase aggregate demand as well.

Question 10

Which of the following is one of the explanations as to why the aggregate demand curve slopes downward?

A)Increases in the price level lower the interest rate and decrease consumption spending.
B)Increases in the price level lower the interest rate and decrease investment spending.
C)Increases in Australia's price level relative to the price level in other countries lowers net exports.
D)Increases in the price level raise real wealth and lowers consumption spending.

Question 11

The impact of a natural disaster on consumers in the economy can make them very pessimistic about their future incomes. How would an increase in pessimism affect the aggregate demand curve?

A)This will move the economy up along a stationary aggregate demand curve.
B)This will move the economy down along a stationary aggregate demand curve.
C)This will shift the aggregate demand curve to the left.
D)This will shift the aggregate demand curve to the right.

Question 12

The wealth effect occurs when the price level falls, causing the:

A)real value of household wealth to fall.
B)nominal value of household wealth to fall.
C)nominal value of household wealth to rise.
D)real value of household wealth to rise.

Question 13

The interest-rate effect is described as an increase in the price level which:

A)raises the interest rate, thereby reducing government spending.
B)lowers the interest rate, thereby reducing government spending.
C)raises the interest rate, thereby reducing investment and consumption spending.
D)lowers the interest rate, thereby reducing investment and consumption spending.

Question 14

Spending on the national defence force is categorised as government purchases. How do increases in spending on defence affect the aggregate demand curve?

A)This will move the economy up along a stationary aggregate demand curve.
B)This will move the economy down along a stationary aggregate demand curve.
C)This will shift the aggregate demand curve to the left.
D)This will shift the aggregate demand curve to the right.

Question 15

What does the slope of the aggregate demand curve indicate?

A)That a decrease in the price level leads to a higher level of aggregate spending.
B)That a decrease in the price level leads to a higher level of aggregate supply.
C)That a decrease in the price level leads to a lower level of aggregate spending.
D)That an increase in the price level leads to a higher level of aggregate spending.

Question 16

If the Australian dollar increases in value relative to other currencies, how does this affect the aggregate demand curve, ceteris paribus?

A)This will move the economy up along a stationary aggregate demand curve.
B)This will move the economy down along a stationary aggregate demand curve.
C)This will shift the aggregate demand curve to the left.
D)This will shift the aggregate demand curve to the right.

Question 17

How does an increase in the price level in Australia relative to the price level of other countries affect the aggregate demand curve, ceteris paribus?

A)This will move the economy up along a stationary aggregate demand curve.
B)This will move the economy down along a stationary aggregate demand curve.
C)This will shift the aggregate demand curve to the left.
D)This will shift the aggregate demand curve to the right.

Question 18

A decrease in the price level results in a(n)________ in the quantity of real GDP demanded because a lower price level ________ consumption, investment and net exports.

A)decrease; increases
B)increase; increases
C)decrease; decreases
D)increase; decreases

Question 19

Which of the following would not be considered a positive addition to household wealth?

A)the equity that homeowners have in their own homes
B)1 000 shares in Qantas Airlines
C)a credit card balance
D)the balance in a savings account

Question 20

What is the result of an increase in the price level?

A)a shift the aggregate demand curve to the left
B)a shift the aggregate demand curve to the right
C)a move the economy down along a stationary aggregate demand curve
D)a move the economy up along a stationary aggregate demand curve

Question 21

What is the level of real GDP called in the long-run?

A)frictional GDP
B)short-run GDP
C)potential GDP
D)low capacity GDP

Question 22

The aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded by households and firms, excluding government spending.

Question 23

The level of long-run aggregate supply is not affected by changes in:

A)technology.
B)the capital stock.
C)the price level.
D)the size of the labour force.

Question 24

If potential GDP is equal to $1 800 billion, what does the long-run aggregate supply curve look like?

A)It is a horizontal line at $1 800 billion of GDP.
B)It is a vertical line at $1 800 billion of GDP.
C)It is a vertical line at a level of GDP below $1 800 billion GDP.
D)It is a vertical line at a level of GDP above $1 800 billion.

Question 25

Which of the following will shift the aggregate demand curve to the left, ceteris paribus?

A)an increase in interest rates
B)an increase in disposable income
C)an increase in expected profits for firms
D)an increase in net exports

Question 26

What is another term for 'potential GDP'?

A)realised GDP
B)unemployment GDP
C)full-employment GDP
D)balanced-budget GDP

Question 27

What happens if technological change occurs in the economy?

A)The long-run aggregate supply curve will shift to the left.
B)The long-run aggregate supply curve will shift to the right.
C)The economy will move up along the long-run aggregate supply curve.
D)The economy will move down along the long-run aggregate supply curve.

Question 28

An increase in disposable income will shift the aggregate demand curve to the right.

Question 29

Which of the following is true of a long-run aggregate supply curve?

A)It is downward sloping when prices are falling and upward sloping when prices are rising.
B)It is upward sloping due to the effects of changes in the price level on production.
C)It is the same as the short-run aggregate supply curve at full-employment equilibrium.
D)It is vertical at the full employment level of output.

Question 30

When the price level rises, the interest rate effect states that wealth levels fall for all consumers as they have to withdraw more funds from banks to pay for their goods and services.

Question 31

The Australian federal government lowered personal income taxes numerous times throughout the 2000s. Explain how this policy affected the aggregate demand curve.
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Question 32

During economic contractions, the Reserve Bank of Australia often reduces interest rates. Explain how this policy affects the aggregate demand curve.
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Question 33

What effect does a change in expectations by households and firms have on the aggregate demand curve?
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Question 34

Explain how each of the following events would affect the aggregate demand curve.
a.Lower interest rates
b.A decrease in net exports
c.A decrease in the price level
d.Slower income growth in other countries
e.A decrease in imports
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Question 35

What is the result if the economy receives an influx of new workers from immigration?

A)The long-run aggregate supply curve will shift to the left.
B)The long-run aggregate supply curve will shift to the right.
C)The economy will move up along the long-run aggregate supply curve.
D)The economy will move down along the long-run aggregate supply curve.

Question 36

Changes in the price level:

A)increase the level of aggregate supply in the long run.
B)decrease the level of aggregate supply in the long run.
C)do not affect the level of aggregate supply in the long run.
D)increase the level of aggregate supply in the long run only at very high levels of output.

Question 37

List and explain the three reasons the aggregate demand curve slopes downward.
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Question 38

What is the slope of the long-run aggregate supply curve?

A)negative slope
B)steep but positive slope
C)vertical slope
D)flat slope

Question 39

The wide-spread recessions of 2007-2009 caused a reduction in German exports and reduction in net exports for Germany, shifting the German aggregate demand curve. Which of the following factors would also cause a reduction in Germany's net exports and shift Germany's aggregate demand curve?

A)real GDP in Germany increasing faster than real GDP in other countries
B)a decrease in the exchange rate of the Euro relative to other currencies
C)a decrease in the price level in Germany
D)an increase in the price level in Germany

Question 40

The long-run aggregate supply curve shows the relationship between the ________ and ________.

A)inflation rate; quantity of real GDP demanded
B)real interest rate; quantity of real GDP supplied
C)nominal interest rate; quantity of real GDP supplied
D)price level; quantity of real GDP supplied

Question 41

Workers expect the rate of inflation to fall from 5% to 2% next year. As a result, this should:

A)shift the short-run aggregate supply curve to the right.
B)shift the short-run aggregate supply curve to the left.
C)move the economy up along a stationary short-run aggregate supply curve.
D)move the economy down along a stationary short-run aggregate supply curve.

Question 42

Why is the long-run aggregate supply curve vertical?
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Question 43

An increase in the quantity of capital in the economy shifts both the short-run and long-run aggregate supply curves.

Question 44

What are sticky prices or wages, and how can contracts make them 'sticky'?
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Question 45

Which of the following will not shift the short-run aggregate supply curve?

A)a change in the price level
B)technological change
C)a reduction in the price of raw materials
D)a change in the wage rate

Question 46

If workers expect the rate of inflation to rise from 4% to 6% next year, this should:

A)shift the short-run aggregate supply curve to the right.
B)shift the short-run aggregate supply curve to the left.
C)move the economy up along a stationary short-run aggregate supply curve.
D)move the economy down along a stationary short-run aggregate supply curve.

Question 47

If more workers leave Australia to seek out better opportunities in another country than new workers arriving into Australia, then this will:

A)shift the short-run aggregate supply curve of Australia to the left.
B)shift the short-run aggregate supply curve of Australia to the right.
C)move the Australian economy up along a stationary short-run aggregate supply curve.
D)move the Australian economy down along a stationary short-run aggregate supply curve.

Question 48

When potential GDP increases, short-run aggregate supply also increases, but long-run aggregate supply does not change.

Question 49

What does the long-run aggregate supply curve show?
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Question 50

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy. As a result, the:

A)long-run aggregate supply curve will shift to the right.
B)long-run aggregate supply curve will shift to the left.
C)economy will move up along the long-run aggregate supply curve.
D)economy will move down along the long-run aggregate supply curve.

Question 51

Explain whether it is possible for a long-run aggregate supply curve to shift leftwards.
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Question 52

The short-run aggregate supply curve has a ________ slope because as prices of ________ rise, prices of ________ rise more slowly.

A)positive; final goods and services; inputs
B)vertical; final goods and services; inputs
C)positive; inputs; final goods and services
D)vertical; inputs; final goods and services

Question 53

The distinction between the short-run and long-run aggregate supply curve is necessary because in the long run:

A)technology is fixed, but in the short run it changes.
B)changes in the price level do not affect the level of real GDP but do in the short run.
C)the aggregate supply curve is horizontal, but in the short run it is upward sloping.
D)the price level is constant, but in the short run it fluctuates.

Question 54

What is the result of an increase in the price level?

A)It will shift the short-run aggregate supply curve to the left.
B)It will shift the short-run aggregate supply curve to the right.
C)It will move the economy down along a stationary short-run aggregate supply curve.
D)It will move the economy up along a stationary short-run aggregate supply curve.

Question 55

Which of the following is not a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services?

A)Contracts make prices and wages 'sticky'.
B)Firms are often slow to adjust wages.
C)Menu costs make some prices sticky.
D)Unions are successful in pushing up wages.

Question 56

The long-run aggregate supply curve shows the maximum output possible for an economy and, therefore, does not shift.

Question 57

Workers and firms both expect that prices will be 4% higher next year than they are this year. As a result:

A)workers will be willing to take lower wages next year.
B)the purchasing power of wages will rise if wages increase by 4%.
C)the short-run aggregate supply curve will shift to the left as wages increase.
D)aggregate demand will increase by 4%.

Question 58

Which of the following is true of the short-run aggregate supply curve?

A)it has a negative slope
B)it has a vertical slope
C)it has a positive slope
D)it has a horizontal slope

Question 59

The short-run aggregate supply curve is upward sloping because wages rise more slowly than output prices.

Question 60

Along a short-run aggregate supply curve, a decrease in the price level causes:

A)firms to increase their production levels, as the lower prices will increase consumer demand.
B)no change in output to occur, as at the macroeconomic level, the price level does not affect supply.
C)firms to reduce their production levels.
D)production levels to rise as the price of inputs become cheaper.

Question 61

Refer to Figure 10.1 for the following questions.
Figure 10.1

Which of the points in Figure 10.1 are possible short-run equilibriums but not long-run equilibriums?

A)A and B
B)A and C
C)C and D
D)B and D

Question 62

Refer to Figure 10.1 for the following questions.
Figure 10.1

In Figure 10.1, which of the points are possible long-run equilibriums?

A)A and B
B)A and C
C)A and D
D)B and D

Question 63

________ of unemployment during ________ make it easier for workers to ________ wages.

A)High levels; a recession; accept lower
B)Low levels; an expansion; accept lower
C)Low levels; a recession; negotiate higher
D)High levels; an expansion; negotiate higher

Question 64

Why might the short-run aggregate supply curve shift to the right in the long run, following a decrease in aggregate demand?

A)Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
B)Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
C)Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.
D)Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.

Question 65

Why does the short-run aggregate supply curve shift to the left in the long run, following an increase in aggregate demand?

A)Workers and firms adjust their expectations of wages and prices downward and they accept lower wages and prices.
B)Workers and firms adjust their expectations of wages and prices downward and they push for higher wages and prices.
C)Workers and firms adjust their expectations of wages and prices upward and they push for higher wages and prices.
D)Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and prices.

Question 66

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

A)raises; recession; lowers; expansion
B)raises; expansion; raises; recession
C)lowers; expansion; lowers; recession
D)lowers; recession; raises; expansion

Question 67

When does long-run macroeconomic equilibrium occur?

A)When aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run supply curve.
B)When aggregate demand equals short-run aggregate supply.
C)When unemployment equals zero.
D)When output is above potential GDP.

Question 68

Refer to Figure 10.1 for the following questions.
Figure 10.1

Suppose the economy is at point C in Figure 10.1. If government spending decreases in the economy, where will the eventual long-run equilibrium be?

A)A
B)B
C)C
D)D

Question 69

Outline and explain the factors that shift the aggregate demand curve and the short-run and long-run aggregate supply curves.
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Question 70

Suppose the economy is at full employment and firms become more optimistic about the future profitability of new investment. In the short run:

A)output will decline.
B)unemployment will decline.
C)prices will decline.
D)aggregate demand will shift to the left.

Question 71

Suppose the economy is at a short-run equilibrium GDP that lies above potential GDP. Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

A)output will increase
B)prices will decline
C)unemployment will decline
D)aggregate supply will shift to the left

Question 72

Refer to Figure 10.1 for the following questions.
Figure 10.1

Suppose the economy is at point A in Figure 10.1. If consumer spending increases in the economy, where will the eventual long-run equilibrium be?

A)A
B)B
C)C
D)D

Question 73

Explain how each of the following events would affect the long-run aggregate supply curve.
a.A lower price level.
b.A decrease in the labour force.
c.A decrease in the quantity of capital goods.
d.Technological change.
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Question 74

An increase in aggregate demand causes an increase in ________ only in the short run, but causes an increase in ________ in both the short run and the long run.

A)the price level; real GDP
B)real GDP; real GDP
C)the price level; the price level
D)real GDP; the price level

Question 75

What variables will shift the short-run aggregate supply curve?
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Question 76

Because of a supply shock, in the short-run:

A)the aggregate supply curve shifts to the left.
B)the price level falls.
C)unemployment falls.
D)equilibrium real GDP rises.

Question 77

When does short-run macroeconomic equilibrium occur?

A)When the price level is constant in the short-run.
B)When the equilibrium lies on the long-run supply curve.
C)When aggregate demand and short-run supply intersect.
D)The two criteria - that aggregate demand and short-run aggregate supply intersect and that the equilibrium lies on the long-run supply curve - must both be satisfied.

Question 78

Which of the following correctly describes the automatic mechanism through which the economy adjusts to long-run equilibrium?

A)The leftward shift in short-run aggregate supply that occurs after a recession.
B)The rightward shift in short-run aggregate supply that occurs after a recession.
C)The leftward shift in aggregate demand that occurs after a recession.
D)The rightward shift in aggregate demand that occurs after a recession.

Question 79

Explain how each of the following events would affect the short-run aggregate supply curve.
a.A decrease in the price level.
b.A decrease in what the price level is expected to be in the future.
c.A price level that is currently lower than expected.
d.An unexpected decrease in the price of an important raw material.
e.A decrease in the labour force.
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Question 80

Why does the short-run aggregate supply (SRAS)curve slope upward?
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