Deck 7: Aggregate Demand, Aggregate Supply, and the Self-Correcting Economy

Question 1

The LM curve will shift to the

A) left if the price level falls and the quantity of money is held constant.
B) right if the price level rises and the quantity of money is held constant.
C) left if the price level is held constant and the quantity of money rises.
D) right if the price level falls and/or the quantity of money rises.

Answer 1

right if the price level falls and/or the quantity of money rises.

Question 2

A flatter IS curve implies that the aggregate demand curve will be

A) steeper and the k1 multiplier becomes larger.
B) flatter and the k1 multiplier becomes smaller.
C) unaffected and the k1 multiplier becomes smaller.
D) vertical and the k1 multiplier becomes smaller.

Answer 2

flatter and the k1 multiplier becomes smaller.

Question 3

An increase in the price level will

A) increase the real money supply and shift the aggregate demand curve.
B) decrease the real money supply and shift the aggregate demand curve.
C) change the slope of the aggregate demand curve at each income level.
D) None of the above is correct.

Answer 3

None of the above is correct.

Question 4

An increase in the nominal money supply will shift

A) AD up and raise the price level.
B) AD down and lower the price level.
C) SAS up and raise the price level.
D) SAS down and lower the price level.

Question 5

The slope of the SAS curve is important because it

A) explains the impact of supply side policies on the economy.
B) explains the impact of both supply and demand side policies on Y and P.
C) partially explains the impact of AD stabilization policies on Y and P.
D) None of the above.

Question 6

Let the government increase lump-sum taxes. The aggregate demand curve will

A) shift leftward and the IS curve will shift leftward.
B) shift rightward and the IS curve will shift rightward.
C) remain unaffected but the IS curve will shift leftward.
D) become positively sloped but the IS curve will remain negatively sloped.

Question 7

Suppose that the administration proposes to follow a contractionary fiscal policy. This would cause the

A) AD to shift rightward and raise the price level.
B) SAS to shift rightward and lower the price level.
C) AD to shift leftward and lower the price level.
D) SAS to shift leftward and raise the price level.

Question 8

Figure 7-1
Employing Figure above, assume that the initial equilibrium Y was 2500 at E0 prior to a change in the nominal money supply. The movement from E0 to represents

A) an increase in the nominal money supply with a constant interest rate.
B) an increase in the nominal money supply with a constant price level.
C) a decrease in the nominal money supply with a constant price level.
D) a decrease in the nominal money supply with a rising interest rate.

Question 9

If there are perfectly flexible prices and the economy is operating at Y(N), then an increase in government expenditures

A) will increase real GDP and the price level.
B) will increase nominal GDP and the raise price level.
C) will not lead to complete real crowding out.
D) will lead to complete nominal crowding out and have the price level unchanged.

Question 10

The AD curve will shift to the

A) right if the price level falls and the quantity of money is held constant.
B) right if the price level rises and the quantity of money is held constant.
C) right if the price level is held constant and the quantity of money rises.
D) right if the price level is held constant and the quantity of money falls.

Question 11

If money demand relative to the level of real output is constant then, the slope of the AD curve is

A) steeper the steeper the slope of the LM curve.
B) flatter the flatter the slope of the LM curve.
C) steeper the flatter the slope of the LM curve.
D) horizontal if the LM curve is vertical.

Question 12

A steeper LM curve implies that the aggregate demand curve will be

A) steeper and the k1 multiplier becomes smaller.
B) flatter and the k1 multiplier becomes larger.
C) unaffected and the k1 multiplier becomes smaller.
D) horizontal and k1 multiplier becomes larger.

Question 13

Which of the following factors will not cause the AD curve to shift?

A) tax rates.
B) autonomous exports.
C) changes in the marginal product of labor.
D) consumer confidence.

Question 14

An "easy money, easy fiscal" policy combination would shift AD

A) upward to the left and raise the price level.
B) downward to the left and raise the price level.
C) upward to the right and raise the price level.
D) downward to the left and lower the price level.

Question 15

If the interest responsiveness of business firms investment is great then the

A) IS curve is flatter and the AD curve is flatter.
B) IS curve is steeper and the AD curve is steeper.
C) IS curve is horizontal and the AD curve is perfectly vertical.
D) IS curve is horizontal and the AD curve is perfectly horizontal.

Question 16

If the marginal leakage rate is small, then the AD is

A) flatter.
B) steeper.
C) perfectly vertical.
D) perfectly horizontal.

Question 17

The slope of the AD curve is important because it explains the

A) responsiveness of consumers to changes in the price level.
B) impact on Y and P for a given change in the SAS curve.
C) responsiveness of money demand to price changes.
D) responsiveness of business firms to price changes.

Question 18

A doubling of the nominal money supply would create a new AD curve at double the vertical position of the original AD curve because

A) at each price level there is a decrease in autonomous spending.
B) each output level requires the same real money supply as in the original situation.
C) the rise in money supply causes increased expectation of further price increases and investment declines.
D) the rise in the money supply causes an excess supply of money and generates rising interest rates.

Question 19

A rise in the nominal money supply will

A) shift the IS curve and shift the AD curve.
B) shift the AD curve and raise the equilibrium price level.
C) shift the AD curve and raise the equilibrium level of nominal GDP.
D) All of the above are correct.

Question 20

The aggregate demand curve may be derived from the IS-LM analysis by shifting

A) the IS curve as the price changes.
B) the real money supply and thus LM curve for each new price level.
C) both the LM and IS curves since the real money supply and real expenditures change when P changes.
D) the LM rightward when P increases to define Y.

Question 21

Which of the following will NOT shift the aggregate demand curve?

A) an increase in the money supply
B) a change in the price level
C) a reduction in the marginal propensity to save
D) an increase in government spending

Question 22

Given the technology and the amount of other resources available, the position of the demand for labor depends on the

A) supply of labor.
B) other firms' demand for labor.
C) rate of population growth.
D) price level.

Question 23

If the price level were to rise, the short-run aggregate supply curve in the next period will

A) shift upward.
B) shift downward.
C) become steeper.
D) None of the above is correct.

Question 24

The equilibrium real wage rate

A) is equal to the nominal wage rate.
B) equals the actual real wage rate in short-run equilibrium.
C) equals the actual real wage rate at every point on the SS curve.
D) is determined by the intersection of the labor supply and demand curves.

Question 25

Assuming constant wages implies that

A) an increase in the price of goods raises profits and SAS is vertical.
B) a decrease in the price of goods lowers profits and SAS is horizontal.
C) an increase in the price of goods lowers profits and SAS is vertical.
D) an increase in the price of goods raises profits and SAS is positively sloped.

Question 26

Figure 7-3
Employing Figure above with equilibrium initially at E0, assume the nominal money supply eased. If prices are flexible, in the short run ________ and in the long run ________.

A) prices and output rise as in E2; output remains at 3000
B) prices and output remain at E0; output changes to 2500
C) prices and output rise, E0 to E2; output returns to E3
D) None of the above.

Question 27

The position of the short-run aggregate supply curve depends on

A) the price level.
B) workers' expectations.
C) aggregate demand.
D) the actions of the monetary authority.

Question 28

Figure 7-2
In the figure above, the shifts F0 to F1 and N0d to N1d may have occurred in an economy subjected to a

A) permanent fiscal deficit.
B) temporary fiscal deficit.
C) permanent increase in the relative price of energy.
D) permanent increase in the rate of growth of the money supply.

Question 29

The long-run aggregate supply curve is

A) vertical at the natural level of income.
B) horizontal at the natural price level.
C) upward-sloping for all income levels below the natural level of income.
D) downward-sloping for all income levels above the natural level of income.

Question 30

The fixed price level that was assumed in Chapters 3 through 5 implied that

A) there is always full employment.
B) there is always less than full employment.
C) the aggregate supply curve is upward sloping to the left.
D) the aggregate supply curve is horizontal.

Question 31

The short-run aggregate supply curve slopes upward because, with a given equilibrium wage rate, a higher actual price level will

A) reduce the actual real wage and induce firms to hire more labor.
B) shift the labor supply curve.
C) increase the aggregate demand for goods, so that output will rise.
D) All of these.

Question 32

As firms hire more labor

A) the supply of labor increases.
B) each additional worker hired produces an additional amount of output but at a diminishing rate.
C) each additional worker hired produces an additional amount of output but at an increasing rate.
D) the marginal labor cost of output decreases.

Question 33

If firms hire workers until the real wage, W/P, is equal to the marginal product of labor, MPN, then the firm

A) maximizes employment.
B) maximizes employment and profits.
C) maximizes profits.
D) minimizes "waste," such as pollution.

Question 34

In the short-run with fixed wages, the SAS curve is positively sloped because

A) the marginal product of labor declines, marginal costs rise.
B) the marginal product of labor increases, marginal costs rise.
C) marginal cost equals price and marginal costs decline.
D) None of the above.

Question 35

The demand for labor is determined by

A) the marginal product of labor, and technology.
B) the marginal product of labor, the price of goods, and nominal wages.
C) MPN and the CPI.
D) None of the above.

Question 36

If the productivity of labor were suddenly to increase, we would expect to observe

A) a short-run rise in output and fall in prices.
B) an increase in the natural level of real GDP.
C) a downward shift in the aggregate supply curve.
D) All of the above are correct.

Question 37

If the actual real wage rate is above the equilibrium real wage rate there will be

A) pressure for the actual real wage rate to rise.
B) pressure for the actual real wage rate to decline.
C) a tendency for prices to rise and output to fall.
D) None of the above.

Question 38

A fiscal expansion will

A) raise both the price level and real income in the long run.
B) reduce both the price level and the real income in the short run.
C) raise real income but leave the price level unaffected in the long run.
D) raise both the price level and real income in the short run.

Question 39

When the real wage falls, as a result of a rise in the price level

A) the demand for labor will fall.
B) the supply of labor will rise.
C) firms will hire more labor as they move down the demand curve for labor.
D) the nominal wage will fall.

Question 40

If, other things constant, the actual real wage is below the equilibrium real wage, the short-run aggregate supply curve in the next period would

A) be unaffected and the price level would remain constant.
B) shift upward and the price level would increase.
C) shift downward and the price level would fall.
D) be vertical and the price level would increase.

Question 41

The Pigou effect refers to the fact that autonomous expenditures may depend on

A) interest rates and variations in the perceived value of money balances
B) the real money supply and variations in the perceived value of money balances
C) income and variations in the perceived value of money balances
D) taxes and variations in the perceived value of money balances

Question 42

Figure 7-4
According to the classical economists when output Y rises above the natural rate of employment, wages and prices would

A) fall causing output to rise; unemployment would be permanent.
B) rise causing output to rise; increased employment would be temporary.
C) rise causing output to fall; increased employment would be temporary.
D) fall causing output to fall; unemployment would be temporary.

Question 43

The Pigou effect is

A) the stimulus to aggregate demand from a fall in the interest rate
B) the effect of a cut in taxes on the aggregate demand curve
C) the effect of a fall in prices on aggregate demand curve
D) the direct stimulus to consumption because of an increase in the real value of the money supply

Question 44

The SAS curve is positively sloped because workers, in the short-run, will supply the labor required by

A) households at the fixed real wage.
B) business firms at the fixed real wage.
C) business firms at the fixed nominal wage.
D) A and B.

Question 45

The term monetary impotence refers to the

A) failure of firms to lower prices even when wages are falling
B) problems that an economy faces when industries are not perfectly competitive and prices do not fluctuate
C) failure of fiscal policy to drive down prices in a depression
D) inability of an increase in real balances to raise the level of output

Question 46

Which of the following factors will not shift AD to the right

A) an increase in foreign income
B) an increase in consumer optimism
C) a decrease in housing wealth
D) an increase in government spending

Question 47

The classical economists believed that shifts in the AD and SAS curves offset each other such that the

A) price level rose and output fell unidirectionally given any change in aggregate demand
B) unemployment level is constant
C) price level is constant
D) price level is cyclical

Question 48

Suppose that the discovery of cold fusion implies that the productivity of each worker in the economy doubles. This would cause the

A) AD curve to shift up and the SAS curve to remain stationary.
B) SAS curve to shift rightward.
C) SAS curve to shift leftward.
D) AD curve to shift down and the SAS curve to shift upward.

Question 49

With a fixed nominal wage the SAS curve is positively sloped because

A) an increase in P decreases the real wage and raises profits if output is increased.
B) A decrease in P decreases the real wage and raises profits if output is increased.
C) business firms are responsive to interest rates.
D) the marginal leakage rate is small.

Question 50

If labor unions negotiate an increase in the nominal wage rate the SAS curve will shift

A) upward to the right and output will increase.
B) downward to the right and output will increase.
C) downward to the left and output will decrease.
D) upward to the left and output will decrease.

Question 51

When AD curve is curved line, this indicates:

A) a given decline in the price level will boost real GDP more when the price level is low than when the price level is high.
B) a given decline in the price level will boost real GDP less when the price level is low then when the price level is high.
C) a given change in the price level will have no effect on real GDP
D) that SAS and LAS curves are horizontal

Question 52

Classical economists believed that

A) government intervention was necessary to stabilize the economy
B) movements away from the natural rate of output were only temporary
C) monetary policy was ineffective
D) monetary impotence would make fiscal policy necessary to bring the economy out of a depression

Question 53

In the classical model, flexible prices and wages serve to

A) self-correct the economy guaranteeing a constant price level and a constant level of output
B) self-correct the economy above to the natural rate of unemployment, and constant price level
C) ensure that stabilization policy is not required on the part of fiscal authorities
D) none of the above

Question 54

In a self-correcting economy, an increase in government expenditures in the long-run will

A) raise equilibrium real GDP and raise the price level
B) lower the price level but leave real GDP unaffected
C) raise nominal GDP but leave real GDP unaffected
D) leave the price level and real GDP unaffected

Question 55

The SAS curve will be steeper the

A) greater is the marginal product of each additional worker.
B) greater is MC.
C) greater is the nominal wage.
D) the faster the MPN falls for each additional worker.

Question 56

Figure 7-4
According to the classical economists when aggregate demand declines, AD0 to AD1 in the figure above, and output, falls below the natural rate of unemployment at 3000, wages and prices would

A) fall to E1 causing output to rise and unemployment would be temporary.
B) rise to E0 causing output to rise and unemployment would be temporary.
C) rise to A causing output to fall and unemployment would be temporary.
D) fall to A causing output to fall and unemployment would be permanently increased.

Question 57

The labor supply curve may be shifted if

A) jobs are scarce.
B) jobs are plentiful.
C) real wages change.
D) immigration increases.

Question 58

What key assumption changed the quantity equation into the quantity theory of money?

A) wage rates were flexible
B) only cash, currency, and demand deposits were considered money
C) the velocity of money was relatively stable
D) the money supply grew at a steady rate over the long run

Question 59

The Classical Economists believed that

A) the cure for wage sickness was the passage of labor laws requiring the indexing of wages to changes in normal GDP.
B) the cure for unemployment was the passage of labor laws requiring the indexing of wages to changes in nominal GDP.
C) the cure for wage stickiness was to remedy market inefficiencies.
D) unemployment required active government intervention to manipulate AD.

Question 60

To the classical economists it was ________ not ________ which adjust when unemployment differs from the natural rate

A) wages; prices
B) prices; wages
C) output; prices
D) prices; output

Question 61

During the Great Depression

A) there is good evidence that the LM curve was horizontal
B) there was almost perfect price flexibility
C) wages fell continuously
D) there was a major shift in aggregate demand

Question 62

Suppose we have an initial IS-LM equilibrium at a certain price level. A rise in the price level puts ________ pressure on the interest rate as the money market re-equilibrates, which in turn causes commodity market equilibrium to occur at an output level ________ the initial one.

A) upward, above
B) upward, below
C) downward, above
D) downward, below

Question 63

Which of the following groups was not affected by the redistribution effect

A) farmers in the 1930s
B) oil producers in the 1980s
C) home owners in the 1970s
D) social security recipients in the 1970s

Question 64

Suppose we have an initial equilibrium with curves IS0 and LM0. The price level then falls. At every point on LM0 there is now an excess ________ real balances, which is eliminated at each income level by a ________ in the interest rate, meaning that the new LM curve is ________ LM0.

A) demand for, fall, above
B) demand for, fall, below
C) demand for, rise, above
D) supply of, rise, above
E) supply of, fall, below

Question 65

Keynes' argued that monetary policy would be impotent during the Great Depression, because

A) both the IS and the LM curve were vertical.
B) IS curve was continuously shifting, while the LM curve was stable.
C) IS curve was vertical and stuck at a low level of Y.
D) none of the above

Question 66

What explanation for monetary impotence was supported by the events of the Great Depression?

A) vertical IS curve and a horizontal LM curve
B) shifting IS curve and a vertical LM curve
C) horizontal IS curve and a vertical LM curve
D) a vertical IS curve and shifting IS curve

Question 67

If the Pigou effect characterizes the economy then the slope

A) of the aggregate demand curve is zero; the aggregate supply curve is vertical
B) of the aggregate supply curve is zero; the aggregate demand curve is vertical
C) of both the AD and SAS curves are vertical
D) of the AD cannot be vertical; the aggregate supply curve is unaffected

Question 68

Keynes' argued that monetary policy would be impotent during the Great Depression because a

A) fall in interest rates would stimulate investment.
B) fall in interest rates would not stimulate investment.
C) rise in interest rates should not stimulate investment.
D) rise in interest rates would stimulate investment.

Question 69

A rise in the price level causes

A) the LM curve to shift downward.
B) the LM curve to shift upward.
C) movement up along an LM curve.
D) movement down along an LM curve.

Question 70

According to Pigou, the Keynesian dilemma of a vertical AD curve is not a dilemma at all because the demand for commodities depends directly on the level of real balances. Thus, the

A) IS curve would shift to the left whenever the price level falls
B) AD curve would shift to the left whenever the price level falls
C) AD curve would shift to the right whenever the price level falls
D) AD curve would always have a negative slope

Question 71

Evidence that a horizontal LM curve occurred during the middle depression years would require showing that individuals

A) refused to spend excess money.
B) increased the spending of excess money.
C) sold bonds and bought goods.
D) sold assets and bought bonds.

Question 72

The redistribution effect refers to the situation in which

A) a redistribution policy might raise consumption because poorer people spend a greater percentage of their income than the rich.
B) rising prices might make creditors feel wealthier and encourage them to increase their spending.
C) rising prices might make debtors feel less wealthy and encourage them to cut back on their spending.
D) falling prices might make debtors feel less wealthy and encourage them to cut back on their spending.

Question 73

A single aggregate demand curve records how IS-LM equilibrium output changes as ________ changes.

A) the IS curve
B) the nominal money supply
C) government expenditure
D) the price level

Question 74

The Pigou effect might be ineffective in correcting a recession if

A) prices are falling
B) people expect the implied deflation to continue
C) there is a liquidity trap
D) the government does not expand the money supply

Question 75

Suppose we have an initial equilibrium with curves IS0 and LM0. The price level then rises. At every point on LM0 there is now an excess ________ real balances, which is eliminated at each income level by a ________ in the interest rate, meaning that the new LM curve is ________ LM0.

A) demand for, fall, above
B) demand for, fall, below
C) demand for, rise, above
D) supply of, rise, above
E) supply of, fall, below

Question 76

A fall in the price level causes

A) the LM curve to shift downward.
B) the LM curve to shift upward.
C) movement up along an LM curve.
D) movement down along an LM curve.

Question 77

We have inflation

A) only when the price of every good is rising.
B) when the prices of most goods are rising.
C) when the prices of most goods are falling.
D) only when the price of every good is falling.

Question 78

Keynes argued that monetary policy would be impotent during the Great Depression because

A) the LM curve was horizontal and the IS curve was vertical.
B) the LM curve was continuously shifting and the IS curve was vertical.
C) the LM curve was vertical and the IS curve was nearly flat.
D) both the LM curve and the IS curve were shifting rightward at the same time.

Question 79

Pigou's explanation of the existence of unemployment required

A) wage "stickiness" or slowness of wages to adjust to changes in market conditions
B) fixed goods price or slowness of prices to adjust to changes in market conditions
C) Churchill's introduction of unemployment compensation
D) all of the above

Question 80

Even in the event of a horizontal LM curve, classicists argued that government intervention would not be required if the IS curve shifts in response to changes in

A) the price level (the Pigou effect).
B) the unemployment level (the real balance effect).
C) interest rate (the Keynes effect).
D) exchange rate (the expectations effect).