Deck 13: Aggregate Demand and Aggregate Supply Analysis

Question 1

When the economy enters into a recession,your employer is ________ to reduce your wages because ________.

A) unlikely; output and input prices generally fall during recession
B) unlikely; lower wages reduce productivity and morale
C) likely; output prices always fall during recession
D) likely; aggregate demand is vertical in the long run

Answer 1

unlikely; output and input prices generally fall during recession

Question 2

When the price level in the United States falls relative to the price level of other countries,________ will fall,________ will rise,and ________ will rise.

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

Answer 2

imports; exports; net exports

Question 3

FedEx plays such a large role in moving packages around the country that there is usually a close relationship between fluctuations in FedEx's business and fluctuations in GDP.Some economists refer to this relationship as the

A) shipping cycle.
B) FedEx indicator.
C) overnight delivery index.
D) package prognostication process.

Answer 3

FedEx indicator.

Question 4

An increase in the price level results in a(n)________ in the quantity of real GDP demanded because ________.

A) decrease; a higher price level reduces consumption, investment, and net exports.
B) increase; a higher price level reduces consumption, investment, and net exports.
C) decrease; a higher price level increases consumption, investment, and net exports.
D) increase; a higher price level increases consumption, investment, and net exports.

Question 5

The ________ shows the relationship between the price level and quantity of real GDP demanded.

A) consumer price index
B) aggregate expenditure line
C) 45-degree line
D) aggregate demand curve

Question 6

An increase in the price level will

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

Question 7

Higher personal income taxes

A) increase aggregate demand.
B) increase disposable income.
C) decrease aggregate demand.
D) both B and C

Question 8

The basic aggregate demand and aggregate supply curve model helps explain

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

Question 9

All of the following would be considered a positive addition to household wealth except

A) the equity in one's home
B) 500 shares of Google stock
C) the balance in your savings account
D) a credit card balance

Question 10

Which of the following best describes the "wealth effect"?

A) When the price level falls, the real value of household wealth falls.
B) When the price level falls, the nominal value of household wealth falls.
C) When the price level falls, the nominal value of household wealth rises.
D) When the price level falls, the real value of household wealth rises.

Question 11

The recession of 2007-2009 made many consumers pessimistic about their future incomes.How does this increased 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

German luxury car exports were hurt in 2009 as a result of the recession.How would this decrease in exports have affected Germany's aggregate demand curve?

A) The aggregate demand curve would have shifted to the right.
B) The aggregate demand curve would not have shifted, but there would have been a movement up the aggregate demand curve.
C) The aggregate demand curve would not have shifted, but there would have been a movement down the aggregate demand curve.
D) The aggregate demand curve would have shifted to the left.

Question 13

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

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

Question 14

If the U.S.dollar decreases in value relative to other currencies,how does this 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

Deflation will

A) increase aggregate demand.
B) increase the quantity of real GDP demanded.
C) decrease aggregate demand.
D) decrease the quantity of real GDP demanded.

Question 16

The "interest rate effect" can be described as an increase in the price level that raises the interest rate and chokes off

A) government spending.
B) government spending and unplanned investment.
C) investment and consumption spending.
D) net exports.

Question 17

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

A) Decreases in the price level raise the interest rate and increase consumption spending.
B) Decreases in the price level raise the interest rate and increase investment spending.
C) Decreases in the U.S. price level relative to the price level in other countries lower net exports.
D) Decreases in the price level raise real wealth and increase consumption spending.

Question 18

Because of the slope of the aggregate demand curve,we can say that

A) a decrease in the price level leads to a lower level of real GDP demanded.
B) an increase in the price level leads to no change in the level of real GDP demanded.
C) a decrease in the price level leads to a higher level of real GDP demanded.
D) an increase in the price level leads to a higher level of real GDP demanded.

Question 19

Spending on the war in Afghanistan is essentially categorized as government purchases.How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

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

Question 20

The international trade effect states that

A) an increase in the price level will raise net exports.
B) an increase in the price level will lower net exports.
C) an increase in the price level will raise exports.
D) an increase in the price level will lower imports.

Question 21

Using an aggregate demand graph,illustrate the impact of an increase in the price level on aggregate demand.

Question 22

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,an increase in the price level would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 23

During the recession of 2007-2009 in the United States,________ relative to potential GDP.

A) business fixed investment spending rose and net export spending declined
B) consumption spending rose and residential construction spending declined
C) federal government purchases rose and changes in business inventories declined
D) net export spending rose and consumption spending declined

Question 24

Suppose the U.S.GDP growth rate is faster relative to other countries' GDP 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 25

How do lower taxes affect aggregate demand?

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

Question 26

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,a decrease in government spending would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 27

President Obama has discussed raising income taxes for individuals earning over $250,000 in income.Explain how these higher income taxes will affect the aggregate demand curve.

Question 28

In September of 2007,the Federal Reserve Board Open Market Committee voted to lower interest rates for the first time that year.Explain how lower interest rates affect the aggregate demand curve.

Question 29

An increase in imports increases aggregate demand.

Question 30

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,an increase in households' expectations of their future income would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 31

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,an increase in personal income taxes would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 32

An increase in the price level shifts the aggregate demand curve to the left.

Question 33

If aggregate demand just increased,which of the following may have caused the increase?

A) an increase in government purchases
B) an increase in the interest rate
C) an increase in the price level
D) an increase in imports

Question 34

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,an increase in interest rates would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 35

Last week,six Swedish kronor could purchase one U.S.dollar.This week,it takes eight Swedish kronor to purchase one U.S.dollar.This change in the value of the dollar will ________ exports from the United States to Sweden and ________ U.S.aggregate demand.

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

Question 36

Using an aggregate demand graph,illustrate the impact of an increase in the interest rate.

Question 37

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,a decrease in the growth rate of domestic GDP relative to the growth rate of foreign GDP would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 38

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,an increase in the value of the domestic currency relative to foreign currencies would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 39

A decrease in disposable income will shift the aggregate demand curve to the left.

Question 40

Figure 24-1

Refer to Figure 24-1.Ceteris paribus,a decrease in firms' expectations of the future profitability of investment spending would be represented by a movement from

A) AD1 to AD2.
B) AD2 to AD1.
C) point A to point B.
D) point B to point A.

Question 41

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

A) changes in technology.
B) changes in the capital stock.
C) changes in the price level.
D) changes in the number of workers.

Question 42

All of the following are reasons why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services except

A) unions are successful in pushing up wages.
B) firms are often slow to adjust wages.
C) contracts make prices and wages "sticky."
D) menu costs make some prices sticky.

Question 43

Which aggregate supply curve has a positive slope?

A) long run only
B) short run only
C) both long run and short run
D) neither long run nor short run

Question 44

Full-employment GDP is also known as

A) realized GDP.
B) potential GDP.
C) politico-economic GDP.
D) balanced-budget GDP.

Question 45

Hurricane Katrina destroyed oil and natural gas refining capacity in the Gulf of Mexico which subsequently drove up natural gas,gasoline,and heating oil prices.Three years later,once the refining capacity was restored,these prices came back down.The restoration of refining capacity should

A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
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 46

If,due to a recession,foreign workers begin to leave the United States to search for temporary work in their home countries until the recession has ended,this will

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

Question 47

The long-run aggregate supply curve will shift to the right if the economy

A) experiences technological change.
B) has a decrease in population.
C) experiences high levels of inflation.
D) net exports decrease.

Question 48

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 49

When the price level rises from 110 to 115,the aggregate level of GDP supplied rises from $80 billion to $120 billion.This ________ relationship represents the ________ relationship between the quantity of real GDP firms are willing to supply and the price level.

A) negative; short-run
B) positive; short-run
C) negative; long-run
D) positive; long-run

Question 50

The invention of the cotton gin ushered in the Industrial Revolution and began a long period of technological innovation.What did this technological change do the short-run supply curve?

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

Question 51

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

A) the long-run aggregate supply curve will shift to the right.
B) the long-run aggregate supply curve will shift to the left.
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 52

If stricter immigration laws are imposed and many foreign workers in the United States are forced to go back to their home countries,

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

Question 53

An increase in the price level will

A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
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 54

Potential GDP refers to the level of

A) real GDP in the long run.
B) nominal GDP in the long run.
C) real GDP in the short run.
D) nominal GDP in the short run.

Question 55

What is potential GDP?

A) It is the level of real GDP in the long run.
B) It is the difference between current GDP and maximum GDP.
C) It is the level of real GDP in the short run.
D) It is the level of GDP at which inflation is constant.

Question 56

On the long-run aggregate supply curve,

A) a decrease in the price level decreases the level of potential GDP.
B) a decrease in the price level increases the aggregate quantity of GDP supplied.
C) a decrease in the price level decreases the aggregate quantity of GDP supplied.
D) a decrease in the price level has no effect on the aggregate quantity of GDP supplied.

Question 57

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 58

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

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

Question 59

The long-run aggregate supply curve

A) has a negative slope.
B) has a steep but positive slope.
C) is horizontal.
D) is vertical.

Question 60

If full-employment GDP is equal to $4.2 trillion,what does the long-run aggregate supply curve look like?

A) It is a horizontal line at $4.2 trillion of GDP.
B) It is a vertical line at a level of GDP below $4.2 trillion.
C) It is a vertical line at $4.2 trillion of GDP.
D) It is a vertical line at a level of GDP above $4.2 trillion.

Question 61

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,an increase in the labor force would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.

Question 62

Which of the following would cause the short-run aggregate supply curve to shift to the right?

A) an increase in the price level
B) a decrease in inflation expectations
C) a technological advance
D) an increase in interest rates

Question 63

Workers expect inflation to rise from 3% to 5% next year.As a result,this should

A) shift the short-run aggregate supply curve to the left.
B) shift the short-run aggregate supply curve to the right.
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 64

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,an increase in the price level would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.

Question 65

What variables cause the short-run aggregate supply curve to shift? For each variable,identify whether an increase in that variable will cause the short-run aggregate supply curve to shift to the right or to the left.

Question 66

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,an increase in the expected price of an important natural resource would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.

Question 67

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,an increase in workers and firms adjusting to having previously overestimated the price level would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.

Question 68

A supply shock causes the long-run aggregate supply curve to shift left,decreasing the price level.

Question 69

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,a decrease in the capital stock would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.

Question 70

An increase in aggregate demand results in a(n)________ in the ________.

A) recession; long run
B) expansion; long run
C) expansion; short run
D) recession; short run

Question 71

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,an increase in the expected future price level would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.

Question 72

A decrease in investment causes the price level to ________ in the short run and ________ in the long run.

A) increase; increase further
B) increase; decrease
C) decrease; decrease further
D) decrease; increase

Question 73

Long-run macroeconomic equilibrium occurs when

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

Question 74

When potential GDP increases,long-run aggregate supply also increases.

Question 75

The long-run aggregate supply curve is vertical.

Question 76

Explain why the long-run aggregate supply curve is vertical.

Question 77

Workers and firms both expect that prices will be 2.5% higher next year than they are this year.As a result,

A) workers will be willing to take lower wages next year, but not lower than a 2.5 percent decrease.
B) the purchasing power of wages will rise if wages increase by 2.5%.
C) the short-run aggregate supply curve will shift to the left as wages increase.
D) aggregate demand will increase by 2.5%.

Question 78

Explain how "menu costs" affect the slope of the short-run aggregate supply curve.

Question 79

Suppose there has been an increase in investment.As a result,real GDP will ________ in the short run,and ________ in the long run.

A) increase; increases further
B) increase; decrease to its initial value
C) decrease; decrease further
D) decrease; increase to its initial level

Question 80

Figure 24-2

Refer to Figure 24-2.Ceteris paribus,an increase in productivity would be represented by a movement from

A) SRAS1 to SRAS2.
B) SRAS2 to SRAS1.
C) point A to point B.
D) point B to point A.