Question 1

The rise and fall of real GDP over the course of the business cycle suggests that

Accepted Answer

A)  the economy is always at full employment. 
B)  the economy may not always be in long-run equilibrium. 
C)  the economy is always at its potential output level. 
D)  wage and price stickiness ensures that the economy moves from a peak to a trough.

Question 2

A change in the aggregate quantity of goods and services supplied at every price level is called a

Accepted Answer

A)  change in short-run aggregate supply. 
B)  change in long-run aggregate supply. 
C)  change in short-run aggregate quantity of output supplied. 
D)  determinant of short-run aggregate supply.

Question 3

A change in the price level, all other things unchanged, causes

Accepted Answer

A)  a movement along the aggregate demand curve. 
B)  a shift of the aggregate demand curve. 
C)  both a movement along the aggregate demand curve and a shift in the curve. 
D)  no change in the value of assets held in the form of money.

Question 4

Figure 7-6 
-Refer to Figure 7-6. Suppose the economy is initially in short-run equilibrium at B. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any?

Accepted Answer

A)  A stabilization policy would return real GDP to its potential at a price level of Pa while a nonintervention policy would return real GDP to its potential at a price level of Pd. 
B)  A stabilization policy would return real GDP to its potential at a price level of Pd while a nonintervention policy would return real GDP to its potential at a price level of Pa. 
C)  Both policies would return real GDP to its potential at a price level of Pa. 
D)  Both policies would return real GDP to its potential at a price level of Pd.

Question 5

The aggregate demand curve shifts due to changes in consumption expenditures, investment expenditures, government purchases, or net exports.

Accepted Answer

A) True 
 B)False

Question 6

Figure 7-3 
-Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. As a result of this,

Accepted Answer

A)  real GDP is temporarily above potential output. 
B)  the economy's potential output increases to Y2. 
C)  the economy moves to a new long-run equilibrium at point B. 
D)  there is some cyclical unemployment.

Question 7

Figure 7-7 
-Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at K. Which of the following stabilization policies could be used to close the gap?

Accepted Answer

A)  Decrease government welfare spending 
B)  Decrease personal income taxes 
C)  Decrease government spending on defense 
D)  Increase payroll taxes

Question 8

The short run in macroeconomic analysis is a period

Accepted Answer

A)  in which wages and some other prices do not respond to changes in economic conditions. 
B)  in which full wage and price flexibility and market adjustment have been achieved. 
C)  of less than 12 months. 
D)  in which all macroeconomic variables are fixed.

Question 9

What happens in the domestic economy when there is a decrease in foreign prices, all other things unchanged?

Accepted Answer

A)  Net exports and aggregate demand fall. 
B)  Net exports fall and aggregate demand increases. 
C)  Net exports and aggregate demand increase. 
D)  Net exports rise and aggregate demand falls.

Question 10

Suppose the U.S. experiences a recession while foreign countries that trade with the U.S. prosper. How will this affect the U.S.?

Accepted Answer

A)  U.S. imports and its aggregate demand will decrease. 
B)  U.S. net exports and its aggregate demand will decrease. 
C)  U.S. exports and its aggregate demand will decrease. 
D)  U.S. exports and its aggregate demand will increase.

Question 11

Figure 7-4 
-Refer to Figure 7-4. What are the prevailing price level and the output level in the economy?

Accepted Answer

A)  Price level = P1; real GDP = Yp 
B)  Price level = P1; real GDP = Y1 
C)  Price level = P2; real GDP = Y2 
D)  Price level = P3; real GDP = Yp

Question 12

Figure 7-3 
-Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. In the short run,

Accepted Answer

A)  unemployment is above its natural level. 
B)  those who were cyclically unemployed will now find jobs at the going nominal wage rate. 
C)  those who were structurally or frictionally unemployed will now find jobs at the going nominal wage rate. 
D)  the nominal wage rate rises.

Question 13

Figure 7-2 
-Refer to Figure 7-2. If the real GDP is $7,000 billion and the implicit price deflator is 1.12, what is the value of nominal GDP?

Accepted Answer

A)  $6,250 billion 
B)  $7,840 billion 
C)  $9,000 billion 
D)  cannot be determined from the information given

Question 14

Figure 7-3 
-Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the long-run, all other things unchanged?

Accepted Answer

A)  The aggregate demand curve will shift back to AD1. 
B)  The economy will be stuck at an output level below its potential level. 
C)  The economy returns to full-employment equilibrium at point A. 
D)  The economy returns to full-employment equilibrium at point D.

Question 15

As a recessionary gap is eliminated through an economy's self-correcting adjustments process,

Accepted Answer

A)  the equilibrium price level increases and the equilibrium real output decreases. 
B)  the equilibrium price level decreases and the equilibrium real output increases. 
C)  the equilibrium price level and the equilibrium real output increase. 
D)  the equilibrium price level and the equilibrium real output decrease.

Question 16

The long-run aggregate supply curve is vertical at

Accepted Answer

A)  potential output. 
B)  the actual level of real output. 
C)  the actual level of nominal output. 
D)  100% employment of the labor force.

Question 17

In the long run, the output level is determined by

Accepted Answer

A)  aggregate demand. 
B)  long-run aggregate supply. 
C)  the government. 
D)  household income.

Question 18

The use central bank policies to influence the level of economic activity is called

Accepted Answer

A)  banking and finance policy. 
B)  financial market policy. 
C)  monetary policy. 
D)  congressional policy.

Question 19

During the recession of 2001, despite the decrease in aggregate demand, the price level was essentially stable. Which of the following is a reason for this?

Accepted Answer

A)  Firms responded to the decline in output demanded by making quantity adjustments and not price adjustments. 
B)  The short-run aggregate supply curve must have also shifted to the left. 
C)  The short-run aggregate supply curve must have also shifted to the right. 
D)  The short-run aggregate supply curve must be horizontal due to severe wage and price stickiness.

Question 20

A change in the price level produces an immediate shift of the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False

Exam 7: Aggregate Demand and Aggregate Supply

The rise and fall of real GDP over the course of the business cycle suggests that

A change in the aggregate quantity of goods and services supplied at every price level is called a

A change in the price level, all other things unchanged, causes

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially in short-run equilibrium at B. Policy makers could either pursue a stabilization policy or allow the economy to adjust on its own. What is the difference between the two policy choices, if any?

The aggregate demand curve shifts due to changes in consumption expenditures, investment expenditures, government purchases, or net exports.

Figure 7-3 -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. As a result of this,

Figure 7-7 -Refer to Figure 7-7. Suppose the economy is initially in short-run equilibrium at K. Which of the following stabilization policies could be used to close the gap?

The short run in macroeconomic analysis is a period

What happens in the domestic economy when there is a decrease in foreign prices, all other things unchanged?

Suppose the U.S. experiences a recession while foreign countries that trade with the U.S. prosper. How will this affect the U.S.?

Figure 7-4 -Refer to Figure 7-4. What are the prevailing price level and the output level in the economy?

Figure 7-3 -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose net exports increase. In the short run,

Figure 7-2 -Refer to Figure 7-2. If the real GDP is $7,000 billion and the implicit price deflator is 1.12, what is the value of nominal GDP?

Figure 7-3 -Refer to Figure 7-3. Suppose that the economy is in long-run equilibrium at point A. Now suppose the stock market crashes, significantly reducing household wealth. What happens in the long-run, all other things unchanged?