Question 1

Assuming the economy is in long-run equilibrium,using an AS/AD diagram,demonstrate graphically and explain verbally the long-run impact on the price level and real output of an expectation by business executives of a recession in the near future.

Accepted Answer

The answer of Assuming the economy is in long-run equilibrium,using...

Question 2

If the price level had more flexibility,would recessions and depressions be less likely?

Accepted Answer

The answer of If the price level had more flexibility,would...

Question 3

Keynes believed that:

Accepted Answer

A) the government could not aid market forces to push the economy to its potential income. 
B) market forces pushing the economy into cumulative spirals were weak. 
C) market forces pushing the economy to potential income were weak. 
D) market forces pushing the economy to potential income were strong.

Question 4

Refer to the following diagram.  A decline in U.S. housing prices, as in 2007, pushed the AD curve from AD1 to AD2. Dynamic feedback effects that would destabilize the economy could shift:

Accepted Answer

A) SAS1 to SAS2. 
B) SAS2 to SAS3. 
C) AD2 to AD1. 
D) AD2 to AD3.

Question 5

Refer to the graph shown. A movement from A to B is most likely to be caused by:

Accepted Answer

A) an increase in input prices. 
B) a decrease in input prices. 
C) an increase in aggregate demand. 
D) a decrease in aggregate demand.

Question 6

An increase in the price level might cause:

Accepted Answer

A) a decrease in the quantity of aggregate demand because of the substitution effect. 
B) an increase in the quantity of aggregate demand because of the money wealth effect. 
C) a decrease in the quantity of aggregate demand because of the interest rate effect. 
D) an increase in the quantity of aggregate demand because of the multiplier effect.

Question 7

A fall in the U.S. price level will cause foreigners to:

Accepted Answer

A) substitute U.S. goods for their own domestically-produced goods. 
B) substitute their own domestically-produced goods for U.S. goods. 
C) buy more of their own domestically-produced goods. 
D) buy fewer U.S. goods.

Question 8

A decrease in the expected future income of the United States would likely:

Accepted Answer

A) shift its AD curve to the left. 
B) shift its AD curve to the right. 
C) make its AD curve flatter. 
D) make its AD curve steeper.

Question 9

Keynes did not agree with the way the Classical economists described the workings of the economy.What was the essence of his thinking?

Accepted Answer

The answer of Keynes did not agree with the way...

Question 10

If actual output exceeds potential output for a prolonged period of time, we would eventually expect factor prices to:

Accepted Answer

A) rise, causing the SAS curve to shift up (to the left). 
B) fall, causing the SAS curve to shift down (to the right). 
C) rise, causing the LAS curve to shift out to the right. 
D) fall, causing the LAS curve to shift in to the left.

Question 11

In the AS/AD model, as the price level falls, the holders of money become richer and buy more. This is one reason why the aggregate demand curve is downward sloping.

Accepted Answer

A) True 
 B)False

Question 12

The repercussions that the money wealth and international effects have on aggregate production and aggregate expenditure cause the aggregate demand curve to become steeper than it would be without such repercussions.

Accepted Answer

A) True 
 B)False

Question 13

The long-run aggregate supply curve shows the output level that an economy can produce when:

Accepted Answer

A) firms adjust quantity rather than price. 
B) capital is fully employed. 
C) labor is fully employed. 
D) both capital and labor are fully employed.

Question 14

Refer to the graph shown. If the economy is at point D, which of the following policies is most appropriate to bring the economy to potential?

Accepted Answer

A) Cut in government spending 
B) Cut in taxes 
C) Increase in taxes 
D) No change in taxes or government spending

Question 15

If a country is experiencing high inflation, other things equal, the expectations of worsening inflation in the future would probably:

Accepted Answer

A) shift the AD curve to the left. 
B) shift the AD curve to the right. 
C) make the AD curve flatter. 
D) make the AD curve steeper.

Question 16

Suppose that consumer spending is expected to decrease in the near future. If output is at potential output, which of the following policies is most appropriate according to the AS/AD model?

Accepted Answer

A) An increase in government spending 
B) An increase in taxes 
C) A reduction in government spending 
D) No change in taxes or government spending

Question 17

If the depreciation of a country's currency increases its aggregate expenditures by 20, the AD curve will:

Accepted Answer

A) shift right by more than 20. 
B) shift right by less than 20. 
C) shift right by exactly 20. 
D) not shift at all.

Question 18

Refer to the graph shown. During the Reagan Administration (1981 to 1989), tax rates were reduced significantly, while federal defense spending rose by 80 percent. The effect of these policies on the AD curve is best shown as a movement from:

Accepted Answer

A) A to B. 
B) A to C. 
C) A to D. 
D) B to A.

Question 19

If the price level falls but people don't feel richer because of that fall, then the AD curve would likely:

Accepted Answer

A) shift in. 
B) shift out. 
C) be flatter than it otherwise would be. 
D) be steeper than it otherwise would be.

Question 20

The reason why the AS/AD model does not depend upon the concepts of substitution and opportunity cost is that:

Accepted Answer

A) in groups, people do not make the same choices as when they are alone. 
B) the AS/AD model considers total output. There are no goods to substitute. 
C) the AS/AD model considers the effects of other countries' decisions. 
D) other things remain constant in the AS/AD model.

Exam 26: The Keynesian Short-Run Policy Model: Demand-Side Policies