Deck 15: Aggregate Demand and Aggregate Supply

Question 1

During recessions

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

Answer 1

A

Question 2

Which of the following is correct?

A) Short run fluctuations in economic activity happen only in developing countries.
B) During economic contractions most firms experience rising sales.
C) Recessions come at regular intervals and are easy to predict.
D) When real GDP falls, the rate of unemployment rises.

Answer 2

D

Question 3

Which of the following is most commonly used to monitor short-run changes in economic activity?

A) the inflation rate
B) real GDP
C) aggregate demand
D) aggregate supply

Answer 3

B

Question 4

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

A) increases in the labor force
B) increases in the capital stock
C) advances in technological knowledge
D) All of the above are correct.

Question 5

Most economists use the aggregate demand and aggregate supply model primarily to analyze

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

Question 6

Investment is a

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

Question 7

Which of the following is correct?

A) Over the business cycle consumption fluctuates more than investment.
B) Economic fluctuations are easy to predict.
C) During recessions sales and profits tend to fall.
D) Because of government policy the U.S. has suffered no recessions in the last 25 years.

Question 8

During recessions which type of spending falls?

A) consumption and investment
B) investment but not consumption
C) consumption but not investment
D) neither consumption nor investment

Question 9

During recessions investment

A) falls by a larger percentage than GDP.
B) falls by about the same percentage as GDP.
C) falls by a smaller percentage than GDP.
D) falls but the percentage change is sometimes much larger and sometimes much smaller.

Question 10

Which of the following is correct?

A) Economic fluctuations are easily predicted by competent economists.
B) Recessions have never occurred very close together.
C) Spending, income, and production do not fluctuate closely with real GDP.
D) None of the above is correct.

Question 11

During recessions declines in investment account for about

A) 1/6 of the decline in real GDP.
B) 1/3 of the decline in real GDP.
C) 1/2 of the decline in real GDP.
D) 2/3 of the decline in real GDP.

Question 12

The investment component of GDP measures spending on

A) financial assets such as stocks and bonds. During recessions it declines by a relatively large amount.
B) residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount.
C) financial assets such as stocks and bonds. During recessions it declines by a relatively small amount.
D) residential construction, business equipment, business structures, and changes in inventory. During recessions it declines by a relatively large amount.

Question 13

Which of the following fall during a recession?

A) both retail sales and employment
B) retail sales but not employment
C) employment but not retail sales
D) neither employment nor retail sales

Question 14

Which of the following is correct?

A) Real GDP is the variable most commonly used to measure short-run economic fluctuations. These fluctuations can be predicted with some accuracy.
B) Real GDP is the variable most commonly used to measure short-run economic fluctuations. It is almost impossible to predict these fluctuations with much accuracy.
C) Nominal GDP is the variable most commonly used to measure short-run economic fluctuations. These fluctuations can be predicted with some accuracy.
D) Nominal GDP is the variable most commonly used to measure short-run economic fluctuations. It is almost impossible to predict these fluctuations with much accuracy.

Question 15

Real GDP

A) is the current dollar value of all goods produced by the citizens of an economy within a given time.
B) measures economic activity and income.
C) is used primarily to measure long-run changes rather than short-run fluctuations.
D) All of the above are correct.

Question 16

When we say that economic fluctuations are "irregular and unpredictable," we mean that

A) the relationship between output and unemployment is erratic and difficult to characterize.
B) when one macroeconomic variable that measures income or spending is falling, other macroeconomic variables that measure income or spending are likely to be rising.
C) recessions do not occur at regular intervals.
D) All of the above are correct.

Question 17

During recessions

A) workers are laid off.
B) factories are idle.
C) firms may find they are unable to sell all they produce.
D) All of the above are correct.

Question 18

A relatively mild period of falling incomes and rising unemployment is called a(n)

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

Question 19

Historically, the change in real GDP during recessions has been

A) mostly a change in investment spending.
B) mostly a change in consumption spending.
C) about equally divided between consumption and investment spending.
D) sometimes mostly a change in consumption and sometimes mostly a change in investment.

Question 20

During a recession the economy experiences

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

Question 21

Which of the following accounts for about two-thirds of the decline in output during a recession?

A) the decline in consumption expenditures on consumer durables alone
B) the decline in total consumption spending alone
C) the decline in investment spending alone
D) the combined decline in consumption and investment spending

Question 22

Historical evidence for the U.S. economy indicates that

A) recessions have occurred roughly once every six years since the 1960s.
B) the unemployment rate usually decreases during a recession and increases shortly after the recession ends.
C) real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends.
D) changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle.

Question 23

Real GDP

A) moves in the same direction as unemployment.
B) is not adjusted for inflation.
C) measures economic activity and real income.
D) All of the above are correct.

Question 24

During the last half of 1980, the U.S. unemployment rate was about 7.5 percent. Historical experience suggests that this is

A) above the natural rate, so real GDP growth was likely low.
B) above the natural rate, so real GDP growth was likely high.
C) below the natural rate, so real GDP growth was likely low.
D) below the natural rate, so real GDP growth was likely high.

Question 25

According to classical macroeconomic theory, changes in the money supply affect

A) real GDP and the price level.
B) real GDP but not the price level.
C) the price level, but not real GDP.
D) neither the price level nor real GDP.

Question 26

Which of the following typically rises during a recession?

A) consumption
B) unemployment
C) corporate profits
D) automobile sales

Question 27

Which of the following is correct concerning recessions?

A) They come at fairly regular and predictable intervals.
B) They are associated with comparatively large declines in investment spending.
C) They are any period when real GDP growth is less than average.
D) They tend to be associated with falling unemployment rates.

Question 28

During recessions unemployment typically rises

A) little. As the recession ends, unemployment declines gradually.
B) little. As the recession ends, unemployment declines rapidly.
C) substantially. As the recession ends, unemployment declines gradually.
D) substantially. As the recession ends, unemployment declines rapidly.

Question 29

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

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

Question 30

According to classical macroeconomic theory, changes in the money supply affect

A) variables measured in terms of money and variables measured in terms of quantities or relative prices
B) variables measured in terms of money but not variables measured in terms of quantities or relative prices
C) variables measured in terms of quantities or relative prices, but not variables measured in terms of money
D) neither variables measured in terms of money nor variables measured in terms of quantities or relative prices

Question 31

Historically, as recessions have ended the unemployment rate declined

A) gradually to near zero.
B) rapidly to near zero.
C) gradually to a rate of about 5%-6%.
D) rapidly to a rate of about 5%-6%.

Question 32

According to classical macroeconomic theory, changes in the money supply affect

A) nominal variables and real variables.
B) nominal variables, but not real variables.
C) real variables, but not nominal variables.
D) neither nominal nor real variables.

Question 33

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

A) 6 percent, 0 percent
B) 3 percent, 10 percent
C) -1 percent, 6 percent
D) -3 percent, 2 percent

Question 34

In 2001, the United States was in recession. Which of the following things would you not expect to have happened?

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

Question 35

In the last half of 1999, the U.S. unemployment rate was about 4 percent. Historical experience suggests that this is

A) above the natural rate, so real GDP growth was likely low.
B) above the natural rate, so real GDP growth was likely high.
C) below the natural rate, so real GDP growth was likely low.
D) below the natural rate, so real GDP growth was likely high.

Question 36

Recession come at

A) regular intervals. During recessions consumption spending falls relatively more than investment spending.
B) regular intervals. During recessions investment spending falls relatively more than consumption spending.
C) irregular intervals. During recessions consumption spending falls relatively more than investment spending.
D) irregular intervals. During recessions investment spending falls relatively more than consumption spending.

Question 37

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

A) 5 percent, 1 percent
B) 3 percent, 5 percent
C) -1 percent, 3 percent
D) -2 percent, 4 percent

Question 38

As recessions begin, production

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

Question 39

Which of the following rises during recessions?

A) layoffs and consumer spending
B) layoffs but not consumer spending
C) consumer spending but not layoffs
D) neither layoffs nor consumer spending

Question 40

The classical dichotomy refers to the separation of

A) variables that move with the business cycle and variables that do not.
B) changes in money and changes in government expenditures.
C) decisions made by the public and decisions made by the government.
D) real and nominal variables.

Question 41

When looking at a graph of aggregate demand, which of the following is correct?

A) There are nominal variables on both the vertical and the horizontal axes.
B) There are real variables on both the vertical and horizontal axes.
C) The variable on the vertical axis is nominal; the variable on the horizontal axis is real
D) The variable on the vertical axis is real; the variable on the horizontal axis is nominal

Question 42

Classical economist David Hume observed that as the money supply expanded after gold discoveries

A) prices and output both increased immediately.
B) prices increased immediately while output remained unchanged.
C) it took time for prices to rise; in the meantime output was lower.
D) it took time for prices to rise; in the meantime output was higher.

Question 43

Classical economist David Hume observed that as the money supply expanded after gold discoveries it took some time for prices to rise and in the meantime the economy enjoyed higher employment and production. This is inconsistent with monetary neutrality because

A) monetary neutrality would mean that neither prices nor production should have risen.
B) monetary neutrality would mean that production should have risen, but prices should not have.
C) monetary neutrality would mean the prices should have risen, but production should not have changed.
D) monetary neutrality would mean that prices and production should both have fallen.

Question 44

According to the classical model, which of the following would double if the quantity of money doubled?

A) prices but not nominal income
B) nominal income but not prices
C) both prices and nominal income
D) neither prices nor nominal income

Question 45

The aggregate demand and aggregate supply graph has

A) quantity of output on the horizontal axis. Output can be measured by the GDP deflator.
B) quantity of output on the horizontal axis. Output can be measured by real GDP.
C) quantity of output on the vertical axis. Output can be measured by the GDP deflator.
D) quantity of output on the vertical axis. Output can be measured by real GDP.

Question 46

The model of short-run economic fluctuations focuses on the price level and

A) real GDP.
B) economic growth.
C) the neutrality of money.
D) None of the above is correct.

Question 47

We depart from the assumptions of classical economics when we focus on the relationship between

A) the quantity of output and the price level.
B) the quantity of output and the unemployment rate.
C) the price level and the inflation rate.
D) inflation and the nominal interest rate.

Question 48

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

A) both the short run and the long run.
B) the short run, but not the long run.
C) the long run, but not the short run.
D) neither the long run nor the short run.

Question 49

The variables on the vertical and horizontal axes of the aggregate demand and supply graph are

A) the price level and real output.
B) real output and employment.
C) employment and the inflation rate.
D) the value of money and the price level.

Question 50

The average price level is measured by

A) any real variable.
B) the rate of inflation.
C) the level of the money supply.
D) the CPI or the GDP deflator.

Question 51

The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning

A) both the short run and the long run.
B) the short run, but not the long run.
C) the long run, but not the short run.
D) neither the long run nor the short run.

Question 52

In order to understand how the economy works in the short run, we need to

A) study the classical model.
B) study a model in which real and nominal variables interact.
C) understand that "money is a veil."
D) understand that money is neutral in the short run.

Question 53

Most economists believe that in the long run, changes in the money supply

A) affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical theory.
B) affect nominal but not real variables. This view that money is ultimately neutral is inconsistent with classical theory.
C) affect real but not nominal variables. This view that money is ultimately neutral is consistent with classical theory.
D) affect real but not nominal variables. This view that money is ultimately neutral is inconsistent with classical theory.

Question 54

Most economists believe that classical macroeconomic theory is a good description of the economy

A) in neither the short nor long run.
B) in the short run and in the long run.
C) in the short run, but not in the long run.
D) in the long run, but not in the short run.

Question 55

Most economists believe that in the short run

A) real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend.
B) real and nominal variables are determined independently but that money can temporarily move real GDP away from its long-run trend.
C) real and nominal variables are highly intertwined but that money cannot move real GDP away from its long-run trend.
D) real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

Question 56

Most economists believe that money neutrality holds

A) in the short run but not the long run.
B) in the long run but not the short run.
C) in both the short run and the long run.
D) in neither the short run nor the long run.

Question 57

The aggregate demand and aggregate supply graph has

A) the price level on the horizontal axis. The price level can be measured by the GDP deflator.
B) the price level on the horizontal axis. The price level can be measured by real GDP.
C) the price level on the vertical axis. The price level can be measured by the GDP deflator.
D) the price level on the vertical axis. The price level can be measured by GDP.

Question 58

The classical model is appropriate for analysis of the economy in the

A) long run, since evidence indicates that money is not neutral in the long run.
B) long run, since real and nominal variables are essentially determined separately in the long run.
C) short run, provided money is not neutral.
D) short run, provided real and nominal variables are highly intertwined.

Question 59

The saying "Money is a veil." means that

A) while nominal variables are the first thing we may observe about an economy, what's important are the real variables and the forces that determine them.
B) money is the principal medium of exchange in most economies.
C) the primary determinant of short-run economic fluctuations is not real variables, but rather changes in the money supply.
D) in the long run money is of no importance to the determination of either real or nominal variables.

Question 60

Economic variables are most often expressed in

A) nominal terms, and that's what's important.
B) nominal terms, but real variables are what's important.
C) real terms, and that's what's important.
D) real terms, but nominal variables are what's important.

Question 61

The model of aggregate demand and aggregate supply

A) is different from the model of supply and demand for a particular market, in that we cannot focus on the substitution of resources between markets to explain aggregate relationships.
B) is different from the model of supply and demand for a particular market, in that we have to separate real and nominal variables in the aggregate model.
C) is a straightforward extension of the model of supply and demand for a particular market, in which substitution of resources between markets is highlighted.
D) is a straightforward extension of the model of supply and demand for a particular market, in which the interaction between real and nominal variables is highlighted.

Question 62

The curve that shows the quantity of goods and services that firms produce and sell

A) as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-demand curve.
B) as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-supply curve.
C) as it relates to the overall price level is called the aggregate-demand curve.
D) as it relates to the overall price level is called the aggregate-supply curve.

Question 63

Aggregate demand includes

A) only the quantity of goods and services households want to buy.
B) only the quantity of goods and services households and firms want to buy.
C) only the quantity of goods and services households, firms, and the government want to buy.
D) the quantity of goods and services households, firms, the government, and customer abroad want to buy.

Question 64

Which of the following is included in the aggregate demand for goods and services?

A) consumption demand
B) investment demand
C) net exports
D) All of the above are correct.

Question 65

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

A) the price level and real output
B) the real rate of interest and the money supply
C) government expenditures and taxes
D) the saving rate and net exports

Question 66

The aggregate-demand curve

A) has a slope that is explained in the same way as the slope of the demand curve for a particular product.
B) is vertical in the long run.
C) shows an inverse relation between the price level and the quantity of all goods and services demanded.
D) All of the above are correct.

Question 67

Which of the following is not included in aggregate demand?

A) purchases of stock and bonds
B) purchases of services such as visits to the doctor
C) purchases of capital goods such as equipment in a factory
D) purchases by foreigners of consumer goods produced in the United States

Question 68

Which of the following would not be included in aggregate demand?

A) additions of newly produced goods to inventory
B) purchases of U.S. services by foreigners
C) the purchase of newly produced capital goods
D) government transfer payments such as Social Security payments

Question 69

Other things the same, as the price level decreases it induces greater spending on

A) both net exports and investment.
B) net exports but not investment.
C) investment but not net exports.
D) neither net exports nor investment.

Question 70

The aggregate demand and aggregate supply graph has the

A) quantity of output on the horizontal axis. Output is best measured by real GDP.
B) quantity of output on the horizontal axis. Output is best measured by nominal GDP.
C) quantity of output on the vertical axis. Output is best measured by real GDP.
D) quantity of output on the vertical axis. Output is best measured by nominal GDP.

Question 71

The aggregate-demand curve shows that a decrease in the price level

A) decreases the dollar value of goods and services demanded in the economy.
B) decreases the real value of goods and services demanded in the economy.
C) increases the dollar value of goods and services demanded in the economy.
D) increases the real value of goods and services demanded in the economy.

Question 72

When the price level falls the quantity of

A) consumption goods demanded rises, while the quantity of net exports demanded falls.
B) consumption goods demanded and the quantity of net exports demanded both rise.
C) consumption goods demanded and the quantity of net exports demanded both fall.
D) consumption goods demanded falls, while the quantity of net exports demand rises.

Question 73

Which of the following statements concerning the aggregate demand and aggregate supply model is correct?

A) The aggregate demand and aggregate supply model is nothing more than a large version of the model of market demand and supply.
B) The price level and quantity of output adjust to bring aggregate demand and supply into balance.
C) The aggregate supply curve shows the quantity of goods and services that households, firms, and the government want to buy at each price.
D) All of the above are correct.

Question 74

The model of aggregate demand and aggregate supply explains the relationship between

A) the price and quantity of a particular good.
B) unemployment and output.
C) wages and employment.
D) real GDP and the price level.

Question 75

The effect of an increase in the price level on the aggregate-demand curve is represented by a

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

Question 76

Other things the same, a fall in an economy's overall level of prices tends to

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

Question 77

The aggregate-demand curve shows the

A) quantity of labor and other inputs that firms want to buy at each price level.
B) quantity of labor and other inputs that firms want to buy at each inflation rate.
C) quantity of domestically produced goods and services that households want to buy at each price level.
D) quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.

Question 78

The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for

A) the slope of short-run aggregate supply.
B) the slope of long-run aggregate supply.
C) the slope of the aggregate-demand curve.
D) everything that makes the aggregate-demand curve shift.

Question 79

Which of the following effects helps to explain the slope of the aggregate-demand curve?

A) the exchange-rate effect
B) the wealth effect
C) the interest-rate effect
D) All of the above are correct.

Question 80

Aggregate demand includes

A) both the quantity of goods and services the government and customers abroad want to buy.
B) neither the quantity of goods and services the government wants to buy nor the quantity of goods and services customers abroad want to buy.
C) the quantity of goods and service the government wants to buy, but not the quantity of goods and services customers abroad want to buy.
D) the quantity of goods and services customers abroad want to buy, but not the quantity of goods and services the government wants to buy.