Deck 15: Aggregate Demand and Aggregate Supply

Question 1

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 small amount.

Answer 1

B

Question 2

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.

Answer 2

D

Question 3

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.

Answer 3

C

Question 4

During a recession the economy experiences

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

Question 5

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

A) the inflation rate.
B) real GDP.
C) interest rates.
D) value of the U.S. dollar in the foreign exchange market.

Question 6

A relatively mild period of falling incomes and rising unemployment is called an)

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

Question 7

Which of the following is correct?

A) Over the business cycle investment fluctuates more than consumption.
B) Economic fluctuations are easy to predict.
C) During recessions employment rises.
D) Because of government policy the U.S. had zero recessions in the last 25 years.

Question 8

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 9

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 10

During recessions

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

Question 11

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 12

During recessions declines in investment account for about

A) 1/6 of the decline in real GDP.
B) 1/7 of the decline in real GDP.
C) 1/3 of the decline in real GDP.
D) 2/3 of the decline in real GDP.

Question 13

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 14

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 15

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 16

Which of the following is not correct?

A) The model of aggregate demand and aggregate supply is used by most economists to analyze short-run fluctuations.
B) During a recession firms cut back production and workers are laid off.
C) A recession is a period of declining real incomes and declining unemployment.
D) A depression is a severe recession.

Question 17

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 18

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 19

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 20

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 profits.
C) Recessions come at irregular intervals and are easy to predict.
D) When real GDP falls, the rate of unemployment rises.

Question 21

Figure 33-2.
Refer to Figure 33-2. Line X is

A) investment spending.
B) real GDP.
C) unemployment rate.
D) CPI.

Question 22

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 23

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 24

Which of the following is correct concerning recessions?

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

Question 25

Figure 33-1.
Refer to Figure 33-1. Line A is

A) investment spending.
B) real GDP.
C) unemployment rate.
D) CPI.

Question 26

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) 10 percent, 1 percent
B) 2 percent, 12 percent
C) -1 percent, 8 percent
D) -2 percent, 2 percent

Question 27

Which of the following typically rises during a recession?

A) investment.
B) unemployment.
C) tax revenues.
D) new home construction.

Question 28

As recessions begin, income

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

Question 29

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 30

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

A) the decline in government purchases.
B) the decline in total consumption spending.
C) the decline in investment spending.
D) the decline in net exports.

Question 31

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 32

During the last half of 2012, the U.S. unemployment rate was just under 8 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 33

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 34

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 35

During recessions employment typically

A) falls substantially. As the recession ends, employment rises rapidly.
B) rises substantially. As the recession ends, employment declines gradually.
C) falls substantially. As the recession ends, employment rises gradually.
D) rises substantially. As the recession ends, employment declines rapidly.

Question 36

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 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

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 39

Real GDP

A) moves in the opposite direction as unemployment.
B) increases as production falls.
C) falls when households save a smaller fraction of their income.
D) All of the above are correct.

Question 40

In 2008, 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 real GDP.

Question 41

Economic variables we are most interested in are

A) real variables, but we usually observe nominal variables.
B) nominal variables, but we usually observe real variables.
C) real variables, which we usually observe.
D) nominal variables, which we usually observe.

Question 42

The division of variables into real and nominal is a dichotomy assumed by

A) classical economists.
B) John Maynard Keynes.
C) the wealth effect.
D) short-run macroeconomic theory.

Question 43

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 44

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

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

Question 45

"Money is a veil" best describes the

A) new-Keynesian view.
B) Keynesian view.
C) classical view.
D) economy in the short run but not the long run.

Question 46

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 47

Most economists believe that money neutrality

A) does not hold in the short run.
B) does not hold in the long run.
C) does not hold in either the short run or long run.
D) holds in the short run and the long run.

Question 48

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 49

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 50

If money is neutral, then changes in the quantity of money

A) do not affect real output.
B) affect both nominal and real output
C) do not affect nominal output.
D) affect neither nominal nor real output.

Question 51

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 52

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 53

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

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

Question 54

Microeconomic substitution is impossible for the economy as a whole because

A) money is a veil.
B) real GDP measures the total quantity of goods and services produced by all firms in all markets.
C) the prices of some goods and services adjust sluggishly in response to changing economic conditions.
D) a lower price level increases real wealth, which stimulates spending by consumers and vice-versa.

Question 55

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 56

According to the classical model, an increase in the money supply causes

A) output to increase in the long run.
B) the unemployment rate to fall in the long run.
C) prices to rise in the long run.
D) interest rates to fall in the long run.

Question 57

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 58

Most economists believe that classical theory describes the world

A) in the short run.
B) in the long run.
C) in both the short run and the long run.
D) in neither the short run nor the long run.

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

The classical dichotomy refers to the separation of

A) prices and nominal interest rates.
B) taxes and government spending.
C) decisions made by the public and decisions made by the government.
D) real and nominal variables.

Question 61

Aggregate demand includes

A) the quantity of goods and services the government, households, firms, and customers abroad want to buy.
B) neither the quantity of goods and services the government, households, nor firms want 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 households, firms, or customers abroad want to buy.
D) the quantity of goods and services households and firms want to buy, but not the quantity of goods and services the government wants to buy.

Question 62

The average price level is measured by

A) the price of oil.
B) the rate of inflation.
C) the nominal interest rate.
D) the GDP deflator.

Question 63

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 64

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 65

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 66

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 67

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 68

The model of short-run economic fluctuations focuses on

A) the price level and real GDP.
B) productivity and economic growth.
C) the neutrality of money and inflation.
D) None of the above is correct.

Question 69

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 70

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 71

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 72

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 73

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

A) an increase in firms' inventories.
B) purchases of goods by households.
C) firms' purchases of newly produced machinery.
D) government's tax collections.

Question 74

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 75

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 76

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 77

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 78

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 79

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 80

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.