Question 1

An increase in aggregate demand normally does not cause inflation.

Accepted Answer

A) True 
 B)False

Question 2

Which of the following does not account for a movement along a given AD curve?

Accepted Answer

A)  The wealth effect 
B)  The interest rate effect 
C)  The real-balance effect 
D)  The international trade effect 
E)  The government spending effect

Question 3

The aggregate quantity of goods and services produced will decrease at every price level when resource price rises.

Accepted Answer

A) True 
 B)False

Question 4

The table given below reports the inflation rate in the U.S. and Canada for two years.
Table 8.1
 $\begin{array}{|c|c|c|}
\hline & \text { United States } & \text { Canada } \
\hline \text { Inflation Rate (year 1) } & 0 \% & 0 \% \
\hline \text { Inflation Rate (year 2) } & 0 \% & 3.6 \% \
\hline
\end{array}$
-Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = 1 USD and that price changes for lumber are identical to the inflation rate for each country. If Canadian lumber is sold in year 1 for 5,500 CAD, what is the price of that lumber in year 2, given that exchange rates do not change?

Accepted Answer

A)  5,500 CAD 
B)  7,977 CAD 
C)  5,698 CAD 
D)  7,700 CAD 
E)  9,700 CAD

Question 5

Which of the following statements is true about the economy in the long run?

Accepted Answer

A)  Equilibrium output must be below potential GDP and the rate of unemployment must exceed the natural rate. 
B)  Production costs are close to zero. 
C)  The rate of unemployment is zero in the long run. 
D)  The aggregate demand curve plays no role in determining the equilibrium level of real GDP. 
E)  The aggregate supply curve is a horizontal line.

Question 6

A higher domestic price level lowers aggregate expenditures and, therefore, shifts the aggregate demand curve to the left.

Accepted Answer

A) True 
 B)False

Question 7

Assuming a fixed exchange rate, a decrease in U.S. prices relative to European prices will:

Accepted Answer

A)  decrease European exports to the United States. 
B)  increase U.S. imports from Europe. 
C)  decrease aggregate spending in the U.S. 
D)  not affect U.S. exports or imports. 
E)  raise the purchasing power of U.S. consumers.

Question 8

Which of the following is most likely to lead to an economic contraction?

Accepted Answer

A)  A decrease in the average price level 
B)  An increase in aggregate supply 
C)  A decrease in aggregate demand 
D)  A decrease in taxes 
E)  An increase in transaction demand for money

Question 9

Aggregate demand represents the _____ at alternative price levels.

Accepted Answer

A)  total spending in the economy 
B)  total saving in the economy 
C)  total investment in the economy 
D)  total output of the economy 
E)  total money supply in the economy

Question 10

Other things equal, an increase in aggregate supply will cause:

Accepted Answer

A)  a decrease in equilibrium real GDP and a decrease in the equilibrium price level. 
B)  an economic contraction. 
C)  an increase in equilibrium real GDP and an increase in the equilibrium price level. 
D)  cost-push inflation. 
E)  a reduction in unemployment and a decline in inflation.

Question 11

The interest rate effect suggests that investment spending and planned aggregate expenditures fall when the general price level rises.

Accepted Answer

A) True 
 B)False

Question 12

Which of the following is an incorrect statement?

Accepted Answer

A)  Macroeconomic equilibrium occurs at the intersection of the aggregate demand and aggregate supply curves. 
B)  The aggregate supply curve indicates a positive relationship between the price level and GDP. 
C)  Other things equal, a downward shift of the aggregate demand curve implies that the economy is entering a contractionary phase. 
D)  Aggregate demand and aggregate supply determine the equilibrium price and quantity of any given good. 
E)  The aggregate demand curve indicates a negative relationship between the price level and GDP.

Question 13

Which of the following explains the effect of prices on profits in the short-run?

Accepted Answer

A)  The direct relationship between aggregate quantity demanded and national output. 
B)  The direct relationship between aggregate quantity supplied and the price level. 
C)  The inverse relationship between aggregate quantity demanded and national output. 
D)  The inverse relationship between aggregate quantity supplied and profits. 
E)  The inverse relationship between aggregate quantity supplied and national output.

Question 14

The wealth effect of a change in the price level refers to the fact that wealthier individuals tend to spend more on foreign goods.

Accepted Answer

A) True 
 B)False

Question 15

Increased household spending reduces aggregate expenditures.

Accepted Answer

A) True 
 B)False

Question 16

When the actual inflation rate rises more rapidly than nominal wage rates, we would expect the short-run aggregate supply curve to shift to the right.

Accepted Answer

A) True 
 B)False

Question 17

Other things remaining unchanged, the flatter the aggregate supply curve:

Accepted Answer

A)  the greater the expansionary effect of an increase in aggregate demand. 
B)  the smaller the inflationary effect of an increase in aggregate demand. 
C)  the greater the recessionary effect of a decrease in aggregate demand. 
D)  the greater the expansionary effect of a decrease in aggregate demand. 
E)  the smaller the recessionary effect of an increase in aggregate demand.

Question 18

If foreign income falls, we can expect to see all of the following, except:

Accepted Answer

A)  a decrease in foreign spending. 
B)  a rise in domestic aggregate demand. 
C)  no change in either domestic net exports or aggregate demand. 
D)  a decrease in domestic net exports. 
E)  a decrease in domestic aggregate demand.

Question 19

Given that energy is an input in production, the development of a cheaper source of energy will result in:

Accepted Answer

A)  a lower price level and a lower amount of production. 
B)  a higher price level and a higher amount of production. 
C)  a lower amount of production at every price level. 
D)  a higher amount of production at every price level. 
E)  a lower profit at every price level.

Question 20

The degree of responsiveness of aggregate output to a price change declines as the:

Accepted Answer

A)  rate of savings increases. 
B)  economy approaches its potential output. 
C)  GDP gap widens over time. 
D)  the price elasticity of imports declines. 
E)  the excess capacity of all the firms in the economy increases over time.

Exam 8: Macroeconomic Equilibrium: Aggregate Demand and Supply

An increase in aggregate demand normally does not cause inflation.

Which of the following does not account for a movement along a given AD curve?

The aggregate quantity of goods and services produced will decrease at every price level when resource price rises.

Which of the following statements is true about the economy in the long run?

A higher domestic price level lowers aggregate expenditures and, therefore, shifts the aggregate demand curve to the left.

Assuming a fixed exchange rate, a decrease in U.S. prices relative to European prices will:

Which of the following is most likely to lead to an economic contraction?

Aggregate demand represents the _____ at alternative price levels.

Other things equal, an increase in aggregate supply will cause:

The interest rate effect suggests that investment spending and planned aggregate expenditures fall when the general price level rises.

Which of the following is an incorrect statement?

Which of the following explains the effect of prices on profits in the short-run?

The wealth effect of a change in the price level refers to the fact that wealthier individuals tend to spend more on foreign goods.

Increased household spending reduces aggregate expenditures.

When the actual inflation rate rises more rapidly than nominal wage rates, we would expect the short-run aggregate supply curve to shift to the right.

Other things remaining unchanged, the flatter the aggregate supply curve:

If foreign income falls, we can expect to see all of the following, except:

Given that energy is an input in production, the development of a cheaper source of energy will result in:

The degree of responsiveness of aggregate output to a price change declines as the: