Deck 14: Aggregate Demand and Supply

Question 1

When the price level falls,the total quantities of goods and services demanded:

A) decreases.
B) stays the same.
C) increases.
D) increases and then decreases.
E) decreases and then increases.

Answer 1

C

Question 2

The total quantity of goods and services demanded by households,firms,foreigners,and government at varying price levels is:

A) gross domestic product.
B) aggregate demand.
C) aggregate expenditure.
D) total demand.
E) total expenditure.

Answer 2

B

Question 3

The real balance effect (wealth effect),the interest rate effect,and the net exports effect all help to explain the:

A) decrease in supply in the loanable funds market.
B) large federal budget deficit.
C) increase in short-run aggregate supply.
D) downward-sloping aggregate demand curve.

Answer 3

D

Question 4

When price level in the United States rises,

A) there is a increased demand for borrowed money.
B) producers' demand for new machinery increases, contributing to an increase in aggregate demand.
C) Americans tend to buy more foreign goods and services.
D) the French, Canadians, and Japanese would find our exports more attractive.
E) to replenish the value of your real wealth, you would save less and consume more.

Question 5

Which of the following reasons helps explain why the aggregate demand curve is downward sloping?

A) The real balances effect or wealth effect: Consumers spend more on goods and services when the price level falls because lower prices increase consumer purchasing power.
B) The producer-push effect: At less than full employment, increases in quantity demanded will raise price, and thus will motivate sellers to produce more.
C) The hidden inflation effect: As the price level rises, consumers fail to recognize that prices are higher, and consequently they fail to reduce expenditures on goods and services.
D) None of the above.

Question 6

Which of the following is not a component of the aggregate demand curve?

A) Government spending (G).
B) Investment (I).
C) Consumption (C).
D) Net exports (X-M).
E) Saving.

Question 7

The aggregate demand curve is drawn downward-sloping,because increases in the price level cause decreases in:

A) unemployment.
B) total spending (real GDP).
C) households' savings.
D) the value of the dollar.

Question 8

Which of the following is true,other things equal?

A) A reduction in prices will increase the real wealth of those holding a fixed quantity of money.
B) A reduction in prices will lead to a decline in net exports.
C) A reduction in prices will increase the scarcity of money, raise the real interest rate, and, thereby, encourage investment and consumption.
D) A reduction in prices will increase profit margins and, thereby, stimulate additional investment.

Question 9

Which of the following is not a reason for the downward slope of an aggregate demand curve?

A) Real balances effect.
B) Real interest-rate effect.
C) Net exports effect.
D) All of the above are reasons.

Question 10

Which of the following helps explain why real GDP is inversely related to the price level within the framework of the AD-AS model?

A) As prices fall, domestic consumers have an incentive to buy more of the cheaper goods and services.
B) As prices fall, the monetary authorities will have to increase the money supply, which will lead to an increase in the quantity of goods and services purchased.
C) As prices fall, the government will have to reduce taxes, which will lead to an increase in the quantity of goods and services purchased.
D) As prices fall, the wealth of people holding the fixed quantity of money increases, causing them to expand their purchases of goods and services.

Question 11

The aggregate demand curve shows how real GDP purchased varies with changes in:

A) unemployment.
B) output.
C) the price level.
D) the interest rate.

Question 12

Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following?

A) People's desire to maintain real wealth holdings, the interest rate, and international trade.
B) People's desire to increase the price level, the interest rate, and the economic growth effect.
C) The interest rate, the economic growth effect, and international trade.
D) Cost-pull inflation, demand-pull inflation, and the need to maintain real wealth holdings.
E) Recession phases of the business cycle, upturns, and downturns.

Question 13

Which of the following is not a reason for the downward slope of the aggregate demand curve?

A) Real balances effect
B) Interest-rate effect
C) Net exports effect
D) Government spending effect

Question 14

The aggregate demand curve:

A) would be little affected by a technological advancement.
B) shifts to the right when spending decreases.
C) shifts to the left when there is a decrease in taxes.
D) cannot move independently of the aggregate supply curve.
E) shifts to the right when there is an expectation that future income will fall.

Question 15

The aggregate demand curve slopes downward indicating that:

A) an increase in the general price level will reduce the aggregate quantity of goods and services demanded.
B) an increase in the general price level will increase the aggregate quantity of goods and services demanded.
C) a change in the interest rate will alter the aggregate quantity of goods and services demanded.
D) consumers substitute between domestic-made and foreign-made goods as their relative prices change.

Question 16

As prices rise,people will buy fewer goods and services because:

A) the interest rate has declined.
B) aggregate demand has increased.
C) the purchasing power of the fixed quantity of money has declined.
D) the income of households has increased.

Question 17

The aggregate demand curve indicates the relationship between:

A) the real wage rate and the quality of resources demanded by producers of goods and services.
B) the interest rate and the amount of loanable funds demanded by borrowers.
C) the natural rate of unemployment and the demand for goods and services when the economy is in long-run equilibrium.
D) the general price level and the aggregate quantity of goods and services demanded.

Question 18

The aggregate demand curve:

A) shows the level of real GDP purchased in the economy at different possible price levels during a period of time.
B) shows the level of real GDP produced in the economy at different possible price levels during a period of time.
C) shifts to the left whenever there is an increase in aggregate expenditures.
D) slopes upward.

Question 19

Which of the following is not a component of the aggregate demand curve?

A) Consumption (C).
B) Investment (I).
C) Government spending (G).
D) Net exports (X-M).
E) All of the above are components.

Question 20

For an economy,aggregate demand equals:

A) consumption plus investment plus government spending plus exports.
B) consumption plus investment plus government spending plus (exports minus imports).
C) consumption plus investment plus (taxes minus transfers) plus (exports minus imports).
D) consumption plus investment plus government spending plus net exports (imports minus exports).

Question 21

Which of the following will increase aggregate demand in the United States?

A) A higher price level.
B) An increase in the real interest rate.
C) An increase in wealth due to a substantial appreciation in the value of stocks.
D) A decrease in real income in Japan and Western Europe.

Question 22

The negative slope of the aggregate demand curve is caused by:

A) the real balances effect, the interest rate effect, and the price level effect.
B) the real balances effect, the money supply effect, and the net exports effect.
C) the interest rate effect, the net exports effect, and the real GDP effect.
D) the real balances effect, the interest rate effect, and the net exports effect.
E) the real balances effect, the interest rate effect, and the net export effect.

Question 23

The real balances effect predicts that higher prices:

A) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
B) make people worse off by reducing the value of their wealth, leading them to save less and spend more.
C) make people better off by increasing the value of their wealth, leading them to save less and spend more.
D) increase borrowing, leading to higher interest rates and less investment.
E) make domestic goods relatively more expensive, increasing the demand for domestic goods and decreasing the demand for foreign goods.

Question 24

The interest rate effect predicts that higher prices:

A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) decrease borrowing, leading to higher interest rates and less investment.
D) decrease borrowing, leading to lower interest rates and more investment.
E) increase borrowing, leading to higher interest rates and less investment.

Question 25

When the supply of credit is fixed,an increase in the price level stimulates the demand for credit,which in turn reduces consumption and investment spending.This argument is called the:

A) real balances effect.
B) interest-rate effect.
C) net exports effect.
D) substitution effect.

Question 26

The net exports effect is the inverse relationship between net exports and the ____ of an economy.

A) potential real GDP
B) chain-price deflator
C) price level
D) consumption spending

Question 27

When prices rise,consumers and businesses hold larger money balances.This reduces the supply of loanable funds,increases the interest rate,and discourages both consumption and investment.This process is called the:

A) interest-rate effect.
B) real balance effect.
C) investment effect.
D) disinvestment effect.

Question 28

The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and the interest rate.

A) direct
B) independent
C) linear
D) inverse

Question 29

The aggregate demand curve is downward sloping because:

A) an increase in the price level will cause an increase in spending.
B) at lower price levels, real wealth decreases, causing a decrease in the quantities of goods and services demanded.
C) at lower price levels, interest rates decrease, causing a decrease in the quantities of goods and services demanded.
D) at lower price levels, exports increase, causing an increase in real GDP.
E) increases in the price level do not affect people's real wealth.

Question 30

The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the:

A) price level.
B) exports.
C) consumption.
D) investment.

Question 31

Which of the following correctly describes the interest-rate effect?

A) If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
B) If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
C) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
D) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.

Question 32

The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption is known as the:

A) real balances effect.
B) interest rate effect.
C) foreign purchases effect.
D) income effect.
E) aggregate demand effect.

Question 33

The real balances effect is the impact on real GDP caused by the ____ relationship between the price level and the real value of financial assets.

A) direct
B) inverse
C) independent
D) linear

Question 34

The real balances effect occurs because a higher price level will reduce the real value of people's:

A) financial assets.
B) wages.
C) unpaid debt.
D) physical investments.

Question 35

Suppose the price level falls.The result is that the:

A) aggregate supply curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) general price level would rise causing a movement up the aggregate demand curve.
D) aggregate demand curve would slope downward because of the real balances effect.

Question 36

According to the interest rate effect,as the price level:

A) rises, people feel poorer and buy less.
B) rises, United States products become more expensive and foreigners buy less U.S. goods.
C) rises, interest rates fall, and people buy less.
D) rises, interest rates rise, and people buy less.
E) falls, interest rates fall, and people buy less.

Question 37

Which of the following will most likely increase aggregate demand?

A) A decrease in stock market prices.
B) An increase in business investment spending.
C) A decrease in the expected inflation rate.
D) A decrease in real GDP.

Question 38

According to the net exports effect,as the price level falls relative to the rest of the world,

A) foreigners buy fewer goods.
B) foreigners buy more U.S. goods.
C) the aggregate demand curve shifts to the left.
D) the aggregate demand curve shifts to the right.
E) the supply of U.S.-made goods increases.

Question 39

The net exports effect is the ____ relationship between net exports and the price level of an economy.

A) inverse
B) independent
C) direct
D) linear

Question 40

The net exports effect exists because a:

A) higher price level will reduce interest rates and stimulate foreign investment.
B) lower price level will make domestically produced exports less expensive relative to foreign goods.
C) higher price level will reduce the purchasing power of money.
D) lower price level will encourage Americans to import more foreign goods.

Question 41

A change in which of the following would shift the aggregate demand curve?

A) Consumption (C)
B) Investment (I)
C) Government spending (G)
D) Net Exports (NX)
E) All of the above

Question 42

Which of the following could not be expected to shift the aggregate demand curve?

A) Net exports fall.
B) Consumption spending decreases.
C) An increase in government spending.
D) A change in real GDP.

Question 43

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

A) An increase in exports.
B) An increase in investment.
C) An increase in government spending.
D) A decrease in government spending.

Question 44

Which of the following could be expected to shift the aggregate demand curve?

A) An increase in government spending.
B) Consumption spending decreases.
C) Net exports fall.
D) All of the above.

Question 45

Which of the following will not shift the aggregate demand cure to the left?

A) Consumers become more optimistic about the future.
B) Government spending decreases.
C) Business optimism decreases.
D) Consumers become pessimistic about the future.

Question 46

The aggregate supply curve is defined as:

A) net national product.
B) the sum of wages, rent, interest, and profits.
C) the real GDP produced at different price levels.
D) the total dollar value of household expenditures.

Question 47

The aggregate supply curve:

A) shows the level of real GDP produced in the economy at different possible price levels during a period of time.
B) is horizontal in the Keynesian range.
C) is vertical in the classical range.
D) all of the above.

Question 48

Which of the following correctly describes the aggregate supply curve?

A) A curve that shows the level of real GDP demanded at different possible price levels.
B) A curve that shows the level of real GDP produced at different possible price levels.
C) A curve that shows the level of quantity supplied by firms in a market at different possible prices, such as the supply of oranges in the oranges market.
D) None of the above.

Question 49

The aggregate supply curve indicates the:

A) relationship between prices and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports).
B) relationship between prices and the natural rate of unemployment.
C) relationship between the real wage rate and the quantity of labor supplied by households.
D) quantity of goods and services producers will supply at different price levels.

Question 50

Which of the following will not shift the aggregate demand curve to the right?

A) Consumers becoming more optimistic about the future.
B) An increase in government spending.
C) Business optimism increases.
D) Consumers become pessimistic about the future.

Question 51

The aggregate demand curve will shift rightward when there is:

A) a decrease in government spending.
B) a decrease in incomes abroad.
C) a tax increase.
D) the expectation that future consumer income will rise.

Question 52

A cut in government spending,a decrease in income abroad,an increase in taxes,or an expectation that future consumer income will fall will all cause aggregate:

A) demand to shift outward.
B) demand to shift inward.
C) supply to shift outward.
D) supply to shift inward.
E) supply and aggregate demand to both shift equally inward.

Question 53

Which one of the following factors will most likely cause an increase in aggregate demand?

A) An increase in net exports.
B) An increase in the real interest rate.
C) A decrease in net exports due to falling incomes abroad.
D) A technological development that decreases the cost of producing computer chips.

Question 54

Using the AD-AS model,if consumers and business become more optimistic about the future direction of the economy and increase spending,then:

A) aggregate demand will decrease.
B) aggregate demand will increase.
C) long-run aggregate supply will increase.
D) long-run aggregate supply will decrease.

Question 55

To illustrate the classical argument that "supply creates its own demand," the aggregate supply curve should be drawn:

A) downward-sloping.
B) upward-sloping.
C) horizontal.
D) vertical.

Question 56

Suppose an increase in government spending stimulates real GDP without affecting the price level.What is the relevant range of the aggregate supply curve in this case?

A) The classical range.
B) The intermediate range.
C) The Keynesian range.
D) The monetarist range.

Question 57

A rightward shift in the aggregate demand curve can be caused by an increase in:

A) the price level.
B) business investment spending.
C) taxes.
D) production costs.

Question 58

Which of the following would cause a rightward shift in the aggregate supply curve?

A) Larger-than-expected wage increases.
B) Lower oil prices.
C) Increased investment spending.
D) Greater government regulation.

Question 59

In the intermediate range of the aggregate supply curve,higher aggregate demand will increase:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level but reduce real GDP.

Question 60

Suppose workers become pessimistic about their future employment,which causes them to save more and spend less.If the economy is on the intermediate range of the aggregate supply curve,then:

A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Question 61

The pre-Keynesian or classical economic theory predicted that in the long-run the economy would experience:

A) long periods of high unemployment.
B) rising rates of inflation.
C) only temporary periods of high unemployment.
D) idle factors of production.

Question 62

The aggregate supply curve relating the price level to real GDP has three distinguishing segments.Which one of the following indicates the segments?

A) The horizontal segment reflects the increasing pressure on the price level as firms bid for resources. The upward-sloping segment reflects the availability of unused resources. The vertical segment reflects the full employment of all resources.
B) The horizontal segment reflects the availability of unused resources. The upward-sloping segment reflects the full employment of all resources. The vertical segment reflects the increasing pressure on the price level as firms bid for resources.
C) The horizontal segment reflects the full employment of all resources. The upward-sloping segment reflects the increasing pressure on the price level as firms bid for resources. The vertical segment reflects the availability of unused resources.
D) The horizontal segment reflects the availability of unused resources. The downward-sloping segment reflects decreasing pressure on the price level as firms bid for resources. The vertical segment reflects the full employment of all resources.
E) The horizontal segment reflects the availability of unused resources. The upward-sloping segment reflects increasing pressure on the price level as firms bid for resources. The vertical segment reflects the full employment of all resources.

Question 63

In the intermediate range of the aggregate supply curve,if government spending increases caused the aggregate demand curve to shift outwards,which of the following is most likely to occur?

A) The price level and real GDP will both rise.
B) The price level will not change, but real GDP will increase.
C) The price level will rise, but real GDP will not change.
D) Both the price level and real GDP will not change.

Question 64

Assuming prices and wages are fully flexible,the aggregate supply curve will be:

A) upward sloping, but not vertical.
B) vertical.
C) horizontal.
D) downward sloping.

Question 65

In the horizontal segment of the aggregate supply curve,when GDP:

A) increases, the price level rises.
B) decreases, the price level falls.
C) increases, the price level does not change.
D) increases, the price level falls.
E) increases, the price level first rises and then falls.

Question 66

Which of the following are beliefs of classical theory?

A) Long-run full employment.
B) Inflexible wages.
C) Inflexible prices.
D) All of the above.

Question 67

The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be:

A) horizontal at the full-employment level of real GDP.
B) positively sloped at the full-employment level of real GDP.
C) vertical at the full-employment level of real GDP.
D) backward bending at the full-employment level of real GDP.

Question 68

In the vertical segment of the aggregate supply curve,

A) different levels of GDP correspond with high unemployment.
B) competition among producers for already-employed resources can succeed only in lowering the economy's price level.
C) full employment is achieved.
D) producers are able to hire more workers at lower wages.
E) increases in GDP are due solely to production gains.

Question 69

According to classical macroeconomic theory,if real GDP is below the full-employment level,then an increase in aggregate demand will result in which of the following changes in equilibrium?

A) Real GDP will rise, but the price level will remain constant.
B) Real GDP and the price level will both rise.
C) Real GDP will remain unchanged but the price level will rise.
D) None of the above.

Question 70

According to classical theory,if the aggregate demand curve decreased and the economy experienced unemployment,then:

A) the economy would remain in this condition indefinitely.
B) the government must increase spending to restore full employment.
C) prices and wages would fall quickly to restore full employment.
D) the supply of money would increase until the economy returned to full employment.

Question 71

In the upward-sloping segment of the aggregate supply curve,

A) increases in output are linked to decreases in the price level.
B) increasing prices drag down resource costs.
C) producers can hire more workers without having to raise the wage rate.
D) the economy can increase aggregate supply without prices going up.
E) firms are willing to pay higher wages to get more labor.

Question 72

Which of the following characterizes the classical view of the economy?

A) The economy is inherently unstable.
B) Prices and wages are not flexible.
C) The economy will "self-adjust" to full employment.
D) None of the above.

Question 73

Gradual adjustment of prices and wages to an increase in the aggregate demand curve implies that the aggregate supply curve is:

A) horizontal.
B) vertical.
C) upward sloping but not vertical.
D) downward sloping.

Question 74

The horizontal segment of the aggregate supply curve:

A) shows that real GDP can increase only by affecting the economy's price level.
B) shows that real GDP can increase without affecting the economy's price level.
C) depicts a positive relationship between real GDP and the price level.
D) depicts a negative relationship between real GDP and the price level.
E) marks the full-employment level of real GDP.

Question 75

Which of the following are inherent in classical theory?

A) Flexible prices.
B) Flexible wages.
C) Long-run full employment.
D) All of the above.

Question 76

The vertical portion of the aggregate supply curve shows that at full employment an increase in the price level will:

A) not alter the economy's full-employment real GDP.
B) increase the economy's full-employment real GDP.
C) reduce the quantity of goods and services purchasers will demand.
D) improve the overall efficiency of resource use.

Question 77

Which of the following is a range on the eclectic or general view of the aggregate supply curve?

A) Keynesian range.
B) Intermediate range.
C) Classical range.
D) All of the above.

Question 78

In the classical range of the aggregate supply curve,greater spending for consumer and investment goods results in:

A) stagflation.
B) more unemployment.
C) greater output.
D) a higher price level.

Question 79

In the upward-sloping segment of the aggregate supply curve,

A) when GDP increases, the price level rises.
B) when GDP increases, the price level does not change.
C) when GDP decreases, the price level rises.
D) when GDP increases, the price level falls.
E) there is no relationship between changes in GDP and changes in the price level.

Question 80

According to Keynesian theory,if equilibrium real GDP is below the full-employment level,then an increase in aggregate demand will result in which of the following changes in equilibrium?

A) Real GDP will rise, but the price level will remain constant.
B) Real GDP and the price level will both rise.
C) Real GDP will remain unchanged but the price level will rise.
D) None of the above.