Deck 6: Modelling Real Gdp and the Price Level in the Long Run

Question 1

The long-run aggregate supply will increase when

A)labour supply decreases.
B)increased labour productivity.
C)the price level increases.
D)taxes increase.

Answer 1

increased labour productivity.

Question 2

The sum of all planned expenditures for the entire economy is

A)aggregate supply.
B)effective demand.
C)aggregate demand.
D)actual expenditures by consumers.

Answer 2

aggregate demand.

Question 3

All of the following explain the downward slope of the aggregate demand curve EXCEPT

A)changes in the stock of real wealth held by individuals.
B)the effect of changing interest rates on the quantity demanded of interest-rate-sensitive goods.
C)the availability of foreign substitute goods.
D)the presence of unused production capacity and unemployment.

Answer 3

the presence of unused production capacity and unemployment.

Question 4

The aggregate demand curve shifts to the left when

A)aggregate prices rise.
B)there is a drop in the foreign exchange value.
C)taxes decrease.
D)when the amount of money in the economy falls.

Question 5

The full-employment and full adjustment level of real output of goods and services in the economy is represented by

A)the LRAS curve.
B)the SRAS curve.
C)the AD curve.
D)the distance between the LRAS curve and the SRAS curve.

Question 6

Which of the following statements is TRUE?

A)The long-run aggregate supply curve is upward sloping.
B)The long run aggregate demand curve is upward sloping.
C)The short-run aggregate supply curve is vertical.
D)The long-run aggregate supply curve is vertical.

Question 7

The long-run aggregate supply curve

A)shows that at higher prices,potential output increases.
B)slopes up and to the right.
C)shows that long-run aggregate supply equals potential output.
D)s very sensitive to changes in the price level.

Question 8

The long-run aggregate supply curve is

A)horizontal at the full employment level of real GDP.
B)vertical at the full employment level of real GDP.
C)sloping upward due to the effects of price level changes on output.
D)the same as the short-run aggregate supply curve.

Question 9

The aggregate demand curve gives the

A)planned purchases for all goods and services in the economy,holding other things constant such as the price level constant.
B)planned purchase rates for all goods and services in the economy at various price levels.
C)government's demand for goods and services at various price levels.
D)amount of all goods everyone wants to buy at various income levels.

Question 10

The long-run aggregate supply curve can be thought of as the

A)level of output that the nation is currently producing.
B)full-employment level of real GDP.
C)level of real GDP associated with a constant price level.
D)level of output for which real GDP equals nominal GDP.

Question 11

The aggregate demand curve shows that,if other factors are held constant,

A)higher price levels will result in lower real output demanded by the economy.
B)higher price levels will result in higher real output demanded by the economy.
C)higher price levels will result in lower interest rates.
D)lower price levels will result in inflationary conditions.

Question 12

Over time in a growing economy,the long-run aggregate supply curve will

A)move so as to match the short-run aggregate supply curve.
B)shift outward to the right.
C)shift inward to the left.
D)become increasingly steep.

Question 13

Figure 6-1
In Figure 6-1,a movement from point B to point A can be explained by

A)an increase in spending due to a war.
B)an increase in spending due to increases in education expenditures.
C)an increase in the demand for manufacturing goods due to new technology.
D)a drop in the price level.

Question 14

Figure 6-1
In Figure 6-1,a movement from point A to point B can be explained by

A)an increase in spending due to a war.
B)an increase in the price level.
C)an increase in the demand for manufacturing goods due to new technology.
D)a drop in the price level.

Question 15

Economic growth can be thought of as

A)an increase in the price level.
B)a decrease in the price level.
C)an increase in long-run aggregate supply.
D)an increase in aggregate demand.

Question 16

The aggregate demand curve plots

A)desired expenditures against production.
B)total expenditures against the level of employment.
C)desired expenditures against the price level.
D)employment against the price level.

Question 17

When the price level goes down,the aggregate demand curve

A)shifts to the right.
B)remains unchanged but there is a movement along the curve.
C)continues to slope downward.
D)causes the long-run aggregate supply to shift to the left.

Question 18

At each price level,the aggregate demand curve indicates

A)the nominal domestic income that will be produced.
B)the total amount of real domestic income that will be purchased.
C)the nominal domestic output that will be produced.
D)the total amount of real domestic output that will be produced.

Question 19

Other things constant,the economy's aggregate demand curve shows that

A)as the price level falls,so does real national income.
B)any change in the general price level causes the curve to shift.
C)real GDP decreases when the price level rises.
D)real GDP and the price level are not related.

Question 20

The long-run aggregate supply curve

A)is horizontal.
B)indicates the economy's real output under conditions of full employment.
C)shows that changes in real GDP are sensitive to changes in the price level.
D)slopes up and to the right.

Question 21

If you have $1 000 and the GDP deflator increases from 100 to 120,then

A)the $1 000 will buy 20 percent less of the goods and services produced by society.
B)the $1 000 will buy 20 percent more of the goods and services produced by society.
C)the value of the $1 000 increases.
D)you will be able to buy fewer goods,but the real value of those goods will increase.

Question 22

According to the interest rate effect,an increase in the price level,if other factors are held constant,will lead to

A)a reduction in the quantity demanded of interest-rate-sensitive goods.
B)an increase in the stock of real wealth held by the public.
C)an outward shift of the aggregate demand curve.
D)an increase in the real interest rate.

Question 23

An increase in the price level

A)increases the real value of money balances which causes borrowing to decrease,leading to a decrease in investment and the quantity demanded of aggregate output.
B)causes exports to fall and imports to rise,leading to an decrease in quantity demanded of aggregate output.
C)leads to an increase in the quantity of aggregate output because of the open economy effect.
D)causes the quantity demanded of aggregate output to increase as long as the fall is less than the fall in the price level in other countries.

Question 24

Figure 6-1
In Figure 6-1,a movement from point B to point C could be explained by

A)an increase in the price level.
B)a decrease in the price level.
C)the start of a short-term war.
D)the real-balance effect.

Question 25

Figure 6-1
In Figure 6-1,a movement from point C to point B could be explained by

A)an increase in the price level.
B)a decrease in the price level.
C)the end of a short-term war.
D)the real-balance effect.

Question 26

A rise in the price level will have a direct effect on spending because

A)people like to spend more when prices are higher.
B)the real value of the money people have varies directly with the price level,and so does their spending.
C)the real value of the money people have decreases and they can buy less with it.
D)the more money they have the more it is worth and the more goods and services they can buy.

Question 27

If you have $5 000 and the GDP deflator decreases from 100 to 80

A)the $5 000 will buy 20 percent less of the goods and services produced by society.
B)the $5 000 will buy 20 percent more of the goods and services produced by society.
C)the value of the $5 000 decreases.
D)the value of the $5 000 remains constant.

Question 28

The aggregate demand curve usually

A)is vertical.
B)slopes upward.
C)slopes downward.
D)is horizontal.

Question 29

The horizontal axis for an aggregate demand curve measures

A)quantity demanded of the representative good.
B)real GDP.
C)output of all goods and services measured as a quantity index.
D)disposable personal income.

Question 30

Figure 6-1
In Figure 6-1,a movement from point B to point A can be explained by

A)an increase in the real value of cash balances.
B)a decrease in the real value of cash balances.
C)the decrease in interest rates.
D)the increase in exports to the foreign sector.

Question 31

Higher interest rates

A)reduce the quantity of goods and services demanded because they increase the cost of borrowing money.
B)reduce the quantity of goods and services demanded because they reduce the income of bankers and other creditors.
C)increase the quantity of goods and services demanded because they increase the incomes of all people in the economy.
D)increase the quantity of goods and services demanded because they lower the costs of building new plants and equipment.

Question 32

If other factors are held constant,an increase in the price level

A)causes the quantity of goods and services demanded to increase.
B)causes the quantity of goods and services demanded to fall.
C)causes the real value of the money to increase.
D)induces people to spend their money faster.

Question 33

When prices increase the interest rate effect

A)will increase and the aggregate demand for goods and services will increase.
B)will increase and the aggregate demand for goods and services will decrease.
C)will decrease and the aggregate demand for goods and services will decrease.
D)will not be affected.

Question 34

The vertical axis for an aggregate demand curve measures

A)real GDP per year.
B)nominal GDP per year.
C)the price level.
D)real income.

Question 35

Other things equal,a higher price level is associated with

A)a higher real GDP.
B)a lower real GDP.
C)a lower nominal GDP.
D)higher income levels.

Question 36

When a change in the price level causes a change in the purchasing power of currency,which then changes the desired rate of consumption at all income levels,it is called

A)the real-balance effect.
B)the substitution effect.
C)the open-economy effect.
D)the interest rate effect.

Question 37

Figure 6-1
In Figure 6-1,a movement from point A to point B can be explained by

A)an increase in the real value of cash balances.
B)a decrease in the real value of cash balances.
C)the decrease in interest rates.
D)the increase in exports to the foreign sector.

Question 38

An individual holds $10 000 in a non-interest-earning checking account,and the overall price level rises significantly.Other things constant,we would expect

A)the individual's real wealth to decrease and consumption to diminish.
B)the individual's stock of real wealth to decrease but real national income to increase.
C)no change in the individual's real wealth but a decline in real national product.
D)the individual's wealth to increase.

Question 39

The real-balance effect implies that when

A)the price level decreases,the value of money balances held by individuals,firms,government,and foreigners increases and spending decreases.
B)the price level increases,the value of money balances held by individuals,firms,government,and foreigners increases,and spending increases.
C)the price level increases,the value of money balances held by individuals,firms,government,and foreigners decreases,and spending decreases.
D)the price level decreases,the value of money balances held by individuals,firms,government,and foreigners decreases,and spending decreases.

Question 40

When the relative prices of American-made goods go down,the result is

A)a decrease in the exports of Canadian-made goods.
B)a decrease in exports of Canadian-made goods.
C)an increase in imports of Canadian-made goods.
D)no net change in imports or exports of Canadian-made goods.

Question 41

Which of the following is a factor which determines the shape of the aggregate demand curve?

A)The real-balance effect
B)The nominal-balance effect
C)The law of diminishing marginal returns
D)The wage effect

Question 42

If the Bank of Canada were to buy back Canada Savings bonds from the public,we would expect

A)the AD curve to remain unchanged since this has no effect on the money supply.
B)the AD curve to shift to the right since this has the effect of increasing the money supply.
C)the AD curve to shift to the left since this has the effect of decreasing the money supply.
D)will see a marked effect from the interest rate effect.

Question 43

A price level increase tends to reduce net exports,thereby reducing the amount of real goods and services purchased in Canada.Economists refer to this phenomenon as

A)the wealth effect.
B)the barrier effect.
C)the open-economy effect.
D)the GDP effect.

Question 44

Higher interest rates tend to

A)reduce the quantity demanded of goods and services.
B)lower the costs of building new plants and equipment.
C)increase the quantity demanded of goods and services.
D)make it less costly for people to buy houses and cars.

Question 45

If the Bank of Canada were to raise the Bank rate,we would expect

A)the AD curve to remain unchanged since this has no effect on the money supply.
B)the AD curve to shift to the right since this has the effect of increasing the money supply.
C)the AD curve to shift to the left since this has the effect of decreasing the money supply.
D)will see a marked effect from the interest rate effect.

Question 46

If the price level increases,then

A)the exchange rate will increase,causing Canadian goods to become cheaper and increasing the quantity demanded for domestic goods.
B)imports increase but exports do not change.Therefore,there is no effect on the quantity demanded for goods and services.
C)foreigners buy fewer Canadian goods,leaving more goods for Canadians and an increase in the quantity demanded for goods and services produced domestically.
D)domestic goods are more expensive relative to foreign goods,which reduces quantity demanded for domestic goods.

Question 47

When the relative prices of Canadian-made goods go up,the result is

A)an increase in exports.
B)a decrease in exports.
C)a decrease in imports.
D)no net change in imports or exports.

Question 48

Higher interest rates

A)reduce the quantity of goods and services demanded because they increase the cost of borrowing money.
B)reduce the quantity of goods and services demanded because they reduce the income of bankers and other creditors.
C)increase the quantity of goods and services demanded because they increase the incomes of all people in the economy.
D)increase the quantity of goods and services demanded because they lower the costs of building new plants and equipment.

Question 49

A higher domestic price level should

A)decrease net exports.
B)increase desired investment.
C)increase real wealth and consumption.
D)none of these.

Question 50

If you have $1 000 and the GDP deflator increases from 112 to 120,then

A)the value of the $1 000 increases.
B)the $1 000 will buy 7 percent more of the goods and services produced by society.
C)the $1 000 will buy 7 percent less of the goods and services produced by society.
D)you will be able to more goods,but the real value of those goods will decrease at the same time.

Question 51

The real balance effect shows that

A)aggregate demand is upward sloping.
B)a higher price level leads to higher interest rates.
C)a lower price level will increase the purchasing power of currency and increase personal consumption.
D)consumption and the price level are positively correlated.

Question 52

The interest rate effect is considered to have

A)a direct effect because interest rates move in the same direction as changes in quantity demanded.
B)a direct effect because increases in the price level lead to increases in interest rates.
C)an indirect effect because price level increases cause borrowing to increase,which raises interest rates and reduces quantity demanded for goods and services.
D)an indirect effect because higher prices lead to lower interest rates.

Question 53

According to the interest rate effect,a fall in the price level will

A)decrease the real value of money balances which causes the quantity demanded of aggregate output to increase.
B)increase lending which causes interest rates to fall,increasing investment spending and increasing the quantity demanded of aggregate output.
C)lead to a decrease in net exports,which causes the quantity demanded of aggregate output to decrease.
D)increase the real value of money balances which causes interest rates to increase,reducing the quantity demanded of aggregate output.

Question 54

Another term for the real-balance effect is

A)the substitution effect.
B)the wealth effect.
C)the indirect effect.
D)the interest rate effect.

Question 55

A fall in the price level

A)increases the real value of money balances which causes borrowing to decrease,leading to a decrease in investment and the quantity demanded of aggregate output.
B)causes exports to rise and imports to fall,leading to an increase in quantity demanded of aggregate output.
C)leads to an increase in the quantity of aggregate output because of the indirect effect.
D)causes the quantity demanded of aggregate output to increase as long as the fall is less than the fall in the price level in other countries.

Question 56

One reason that the aggregate demand curve slopes downward is because

A)higher price levels increase real wealth and consumption.
B)higher price levels reduce net exports.
C)higher price levels increase interest rates.
D)higher price levels increase investment.

Question 57

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

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

Question 58

Suppose a country has no trade with other countries and people can borrow as much money as they want at the current interest rate.An increase in the price level will generate

A)a decrease in quantity demanded because of the real-balance effect.
B)a decrease in quantity demanded because of the open-economy effect and the indirect effect.
C)a decrease in quantity demanded because the real-balance effect will be stronger than the indirect effect and the open-economy effect.
D)a decrease in quantity demanded because the indirect effect will be stronger than the real-balance effect.

Question 59

An indirect effect of an increase in the price level works through

A)people substituting out of domestic goods and into foreign goods as exchange rates rise.
B)changes in trade balances as domestic goods become more expensive,causing interest rates to move in the opposite direction from the change in the exchange rate.
C)interest rates as people save more as the higher prices make their money balances less attractive.
D)interest rates as people borrow to maintain their money balances,bidding up interest rates and reducing the quantity demanded for goods and services.

Question 60

The real-balance effect refers to

A)the real interest rate.
B)the production of real goods and services as opposed to financial instruments.
C)the prices of goods and services.
D)the real value of cash balances that a person is holding.

Question 61

Lower interest rates

A)increase the quantity of goods and services demanded because they decrease the cost of borrowing money.
B)increase the quantity of goods and services demanded because they increase the income of bankers and other creditors.
C)decrease the quantity of goods and services demanded because they decrease the incomes of all people in the economy.
D)decrease the quantity of goods and services demanded because they raise the costs of building new plants and equipment.

Question 62

An individual holds $10 000 in an interest-earning checking account,and the overall price level rises significantly.Other things constant,we would expect

A)the individual's real wealth to decrease and consumption to diminish.
B)the individual's stock of real wealth to decrease but real national income to increase.
C)no change in the individual's real wealth but a decline in real national product.
D)we cannot be sure since we do not know the magnitude of the interest earned relative to the increase in price level.

Question 63

An indirect effect because price level increases cause borrowing to increase,which raises interest rates and reduces quantity demanded for goods and services is known as:

A)the interest rate effect..
B)the real balance effect.
C)the open economy effect.
D)the Fisher effect.

Question 64

When the Harper government decreases the level of taxes in the economy,this has the effect of

A)increasing AD.
B)decreasing AD.
C)increasing AS in the long run.
D)decreasing AS in the long run.

Question 65

Which of the following statements best categorizes the LRAS curve.

A)Vertical at the current level of real output.
B)Depends on the position of the AD curve.
C)The full-employment and full adjustment level of real output of goods and services in the economy.
D)Depends on the aggregate price level in the economy.

Question 66

The aggregate demand curve

A)is like individual demand curves in that prices of other goods are held constant.
B)is like individual demand curves in that income is constant.
C)differs from individual demand curves in that the aggregate demand curve is not downward sloping.
D)differs from individual demand curves in that the aggregate demand curve looks at the entire circular flow of income and product while the individual demand curve looks at only one good.

Question 67

When the real interest rate rises,

A)AD shifts left..
B)the long-run aggregate supply curve shifts to the right.
C)the multiplier stays the same.
D)AD shifts right.

Question 68

The aggregate demand curve differs from an individual's demand curve in that

A)the aggregate demand curve may not slope down while an individual demand curve must always slope down.
B)the aggregate demand curve looks at the entire circular flow of income and product,while an individual demand curve looks at one good,holding everything else constant.
C)prices change along an individual demand curve but prices are held constant along an aggregate demand curve.
D)the aggregate demand curve slopes up while an individual demand curve slopes down.

Question 69

Which of the following statements is FALSE?

A)The aggregate demand curve is downward sloping.
B)The long run aggregate demand curve is upward sloping.
C)The short-run aggregate supply curve is upward sloping.
D)The long-run aggregate supply curve is vertical.

Question 70

A reduction in the quantity demanded of interest-rate-sensitive goods as a result of an increase in the price level,if other factors are held constant,is known as

A)the interest rate effect.
B)the real-balance effect.
C)the open-economy effect.an outward shift of the aggregate demand curve.
D)the open-money balance effect.

Question 71

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

A)a drop in the price level.
B)tax increases.
C)a drop in the foreign exchange value of the dollar.
D)a decrease in the amount of money in circulation.

Question 72

Which of the following would cause aggregate demand to decrease?

A)The government increases taxes on both business and personal income.
B)There is a reduction in the nation's labour supply.
C)The Bank of Canada increases the amount of money in circulation.
D)Businesses and households believe that the economy is headed for good times,so they begin to feel increased security about their jobs.

Question 73

Because we have full employment at the level of potential output,

A)aggregate demand is downward sloping.
B)aggregate demand is upward sloping.
C)the long-run aggregate supply curve is upward sloping at potential output.
D)the long-run aggregate supply curve is vertical at potential output .

Question 74

If you have $2 000 and the GDP deflator decreases from 120 to 110,then

A)the value of the $1 000 decreases.
B)the $1 000 will buy 8.3 percent less of the goods and services produced by society.
C)the $1 000 will buy 8.3 percent more of the goods and services produced by society.
D)you will be able to less goods,but the real value of those goods will decrease at the same time.

Question 75

If exports were to rise and imports to fall,leading to an increase in quantity demanded of aggregate output,we would expect as a result,

A)An increase in the price level
B)A fall in the price level.
C)the open economy effect to lessen.
D)No change in the price level.

Question 76

Suppose a country has no trade with other countries and people can borrow as much money as they want at the current interest rate.A decrease in the price level will generate

A)an increase in quantity demanded because of the real-balance effect.
B)an increase in quantity demanded because of the open-economy effect and the indirect effect.
C)an increase in quantity demanded because the real-balance effect will be stronger than the indirect effect and the open-economy effect.
D)an increase in quantity demanded because the indirect effect will be stronger than the real-balance effect.

Question 77

An individual holds $20 000 in an interest-earning checking account earning 10% interest,and the overall price level rises by 12%.Other things constant,we would expect

A)the individual's real wealth to decrease and consumption to diminish.
B)the individual's stock of real wealth to decrease but real national income to increase.
C)no change in the individual's real wealth but a decline in real national product.
D)real wealth has gone down by 12%.

Question 78

An aggregate demand curve

A)shifts to the right when the price level increases and to the left when the price level falls.
B)shifts to the right when any non-price-level change that increases aggregate spending occurs.
C)shifts to the right when population decreases and shifts to the left when population increases.
D)does not shift,unlike individual or market demand curves.

Question 79

The horizontal axis for an aggregate demand curve measures

A)real GDP per year.
B)nominal GDP per year.
C)the price level.
D)real income.

Question 80

The aggregate demand curve would shift to the left if

A)the economic conditions in Europe improved.
B)there was a tax decrease.
C)the Bank of Canada caused the real interest rate to increase.
D)the foreign exchange rate of the dollar decreased.