Deck 12: B: Aggregate Demand and Aggregate Supply

Question 1

The interest-rate effect is one of the determinants of aggregate demand.

Answer 1

False

Question 2

An increase in wealth from a substantial increase in stock prices will move the economy along the existing aggregate demand curve.

Answer 2

False

Question 3

Per-unit production cost is determined by dividing output by total input cost.

Answer 3

False

Question 4

An increase in imports (independently of a change in our price level) will increase both aggregate supply and aggregate demand.

Question 5

The real-balances effect indicates that:

A)an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
B)a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C)a higher price level will increase the real value of many financial assets and therefore increase spending.
D)a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Question 6

A decrease in per unit production costs will shift the aggregate supply curve leftward.

Question 7

A fall in real interest rates will reduce aggregate demand.

Question 8

Other things being equal, the higher the price level, the lower the level of domestic output purchased.This occurs because of:

A)the real-balances effect.
B)consumer spending on capital goods.
C)the full-employment-unemployment rate.
D)the sensitivity to demand-pull inflation.

Question 9

An increase in business taxes will shift the aggregate supply curve leftward.

Question 10

Minimum wage laws tend to make the price level more flexible rather than less flexible.

Question 11

Depreciation of the dollar relative to foreign currencies will tend to increase net exports and aggregate demand.

Question 12

Other things equal, an increase in productivity will shift the aggregate supply curve rightward.

Question 13

The recession that began in 2008 dispelled the idea of The Great Moderation.

Question 14

The aggregate demand curve shows the:

A)inverse relationship between the price level and real GDP purchased.
B)direct relationship between the price level and real GDP produced.
C)inverse relationship between interest rates and real GDP produced.
D)direct relationship between real-balances and real GDP purchased.

Question 15

The aggregate demand curve:

A)is upward sloping because a higher price level is necessary to make production profitable as production costs rise.
B)is downward sloping because production costs decline as real output increases?
C)shows the amount of expenditures required to induce the production of each possible level of real output.
D)shows the amount of real output which will be purchased at each possible price level.

Question 16

The real-balances effect suggests that a:

A)lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
B)lower price level will decrease the real value of many financial assets and therefore cause an increase in spending.
C)lower price level will increase the real value of many financial assets and therefore cause an increase in spending.
D)higher price level will increase the real value of many financial assets and therefore cause an increase in spending.

Question 17

Which effect best explains the downward slope of the aggregate demand curve?

A)a multiplier effect
B)an income effect
C)a substitution effect
D)a real-balances effect

Question 18

A change in business taxes and regulation can affect input prices and aggregate supply.

Question 19

The aggregate supply curve slopes downward.

Question 20

An increase in consumer wealth will decrease aggregate demand.

Question 21

The following table is for a particular country in which C is consumption expenditures, I_g is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars. Refer to the above table.The interest rate effect of changes in the price level is shown by columns:

A)(1) and (4) of the table.
B)(5) and (6) of the table.
C)(1) and (3) of the table.
D)(2) and (4) of the table.

Question 22

The factors which affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the:

A)wealth, interest rate, and foreign trade effects.
B)determinants of aggregate supply.
C)determinants of aggregate demand.
D)sole determinants of the equilibrium price level and the equilibrium real output.

Question 23

The interest-rate effect suggests that:

A)a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending.
B)an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
C)an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
D)an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

Question 24

The aggregate demand curve is:

A)vertical if full employment exists.
B)horizontal when there is considerable unemployment in the economy.
C)downward sloping because of the interest-rate, real balances, and foreign trade effects.
D)downward sloping because production costs decrease as real output increases.

Question 25

The foreign trade effect:

A)shifts the aggregate demand curve rightward.
B)shifts the aggregate demand curve leftward.
C)shifts the aggregate supply curve rightward.
D)none of these.

Question 26

The foreign trade effect suggests that a decrease in the Canadian price level relative to other countries will:

A)shift the aggregate demand curve leftward.
B)shift the aggregate supply curve leftward.
C)decrease Canadian exports and increase Canadian imports.
D)increase Canadian exports and decrease Canadian imports.

Question 27

The foreign trade effect suggests that an increase in the Canadian price level relative to other countries will:

A)increase the amount of Canadian real output purchased.
B)increase Canadian imports and decrease Canadian exports.
C)increase both Canadian imports and Canadian exports.
D)decrease both Canadian imports and Canadian exports.

Question 28

A decrease in interest rates caused by a change in the price level would cause a(n):

A)decrease in aggregate demand.
B)increase in aggregate demand.
C)decrease in the quantity of real domestic output demanded.
D)increase in the quantity of real domestic output demanded.

Question 29

The real-balances, interest rate, and foreign trade effects all help explain:

A)why the aggregate demand curve is downward sloping.
B)why the aggregate supply curve is upward sloping.
C)shifts in the aggregate demand curve.
D)shifts in the aggregate supply curve.

Question 30

Which effect best explains the downward slope of the aggregate demand curve?

A)a multiplier effect
B)an income effect
C)a substitution effect
D)an interest rate effect

Question 31

Which of the factors below best explain the downward slope of aggregate demand curve? The following list of factors, are related to the aggregate demand curve.Real-balances effect
Household expectations
Interest-rate effect
Personal income tax rates
Profit expectations
National income abroad
Government spending
Foreign trade effect
Exchange rates
Degree of excess capacity

A)2, 4, and 6
B)7, 9, and 10
C)1, 3, and 8
D)4, 6, and 7

Question 32

If the price level increases in Canada relative to foreign countries, then Canadian consumers will purchase more foreign goods and fewer Canadian goods.This statement describes:

A)the output effect.
B)the foreign trade effect.
C)the real-balances effect.
D)the shift-of-spending effect.

Question 33

The following table is for a particular country in which C is consumption expenditures, I_g is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.Each question is independent of the other questions. Refer to the above table.The wealth or real balances effect of changes in the price level is:

A)shown by columns (1) and (2) of the table.
B)shown by columns (1) and (5) of the table.
C)shown by columns (1) and (4) of the table.
D)not shown by the data in the table.

Question 34

The determinants of aggregate demand:

A)explain why the aggregate demand curve is downward sloping.
B)explain shifts in the aggregate demand curve.
C)demonstrate why real output and the price level are inversely related.
D)include input prices and resource productivity.

Question 35

The interest rate effect indicates that a(n):

A)decrease in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
B)decrease in the price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending.
C)increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
D)increase in the supply of money will increase interest rates and decrease interest-sensitive consumption and investment spending.

Question 36

The shape of the aggregate demand curve is explained by the:

A)interest rate, real balances, and foreign trade effects.
B)rate of inflation and the natural rate of unemployment.
C)policies to stabilize prices and reduce unemployment.
D)ratchet effect.

Question 37

When the price level decreases:

A)the demand for money falls and the interest rate falls.
B)holders of financial assets with fixed money values decrease their spending.
C)holders of financial assets with fixed money values have less purchasing power.
D)there is a decrease in consumer spending that is sensitive to changes in interest rates.

Question 38

Which of the following explains why the aggregate demand schedule is downward sloping?

A)the real-balances effect
B)the interest rate effect
C)the foreign trade effect
D)all of these

Question 39

Which of the following is incorrect?

A)As the Canadian price level rises, Canadian goods become relatively more expensive so that its exports fall and its imports rise.
B)As the price level falls, the demand for money declines, the interest rate declines, and interest rate-sensitive spending increases.
C)When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending.
D)Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.

Question 40

The interest-rate and real-balances effects are important because they help explain:

A)rightward and leftward shifts of the aggregate demand curve.
B)why demand-management policy cannot be used effectively to curb stagflation.
C)the shape of the aggregate demand curve.
D)the shape of the aggregate supply curve.

Question 41

A decrease in government spending will cause a(n):

A)increase in the quantity of real domestic output demanded.
B)decrease in the quantity of real domestic output demanded.
C)decrease in aggregate demand.
D)increase in aggregate demand.

Question 42

Which of the above diagrams best portrays the effects of declines in the incomes of other major nations with whom we trade?

A)A
B)B
C)C
D)D

Question 43

Which one of the following would not shift the aggregate demand curve?

A)a change in the price level
B)depreciation of the international value of the dollar
C)a decline in the interest rate at each possible price level
D)an increase in personal income tax rates

Question 44

Which of the diagrams below best portrays the effects of an increase in consumer spending?

A)A
B)B
C)C
D)D

Question 45

An increase in aggregate demand is most likely to be caused by a decrease in:

A)the wealth of consumers.
B)consumer confidence.
C)business confidence.
D)the tax rates on household income.

Question 46

An expected decline in the prices of consumer goods will:

A)decrease aggregate demand.
B)increase the quantity of real domestic output demanded.
C)increase aggregate demand.
D)decrease the quantity of real domestic output demanded.

Question 47

When the excess capacity of business rises, aggregate:

A)demand increases.
B)demand decreases.
C)supply increases.
D)supply decreases.

Question 48

Which of the above diagrams best portrays the effects of a substantial reduction in government spending?

A)A
B)B
C)C
D)D

Question 49

An increase in the GDP price level will:

A)decrease aggregate demand.
B)increase the quantity of real domestic output demanded.
C)increase aggregate demand.
D)decrease the quantity of real domestic output demanded.

Question 50

A n expected rise in the rate of inflation for consumer goods will:

A)decrease aggregate demand.
B)increase aggregate supply.
C)increase aggregate demand.
D)decrease aggregate supply.

Question 51

A decrease in aggregate demand is most likely to be caused by:

A)an increase in the wealth of consumers.
B)an increase in consumer confidence.
C)an increase in interest rates for home mortgages.
D)a decrease in tax rates on household income.

Question 52

We would expect a decline in personal and corporate income taxes to:

A)shift the aggregate demand curve rightward.
B)increase consumption and investment spending.
C)increase the real output.
D)all of these.

Question 53

An increase in investment spending caused by a decline in the interest rate will:

A)shift the aggregate supply curve to the left.
B)move the economy up along an existing aggregate demand curve.
C)shift the aggregate demand curve to the left.
D)shift the aggregate demand curve to the right.

Question 54

An increase in household borrowing for consumption will:

A)decrease aggregate demand.
B)increase aggregate supply.
C)increase aggregate demand.
D)decrease aggregate supply.

Question 55

Refer to the information below.Investment spending would most likely be influenced by changes in: The following list of factors, are related to the aggregate demand curve.Real-balances effect
Household expectations
Interest-rate effect
Personal income tax rates
Profit expectations
National income abroad
Government spending
Foreign trade effect
Exchange rates
Degree of excess capacity

A)1 and 3.
B)4 and 6.
C)5 and 10.
D)8 and 9.

Question 56

An increase in taxes will cause a(n):

A)decrease in the quantity of real domestic output demanded.
B)increase in the quantity of real domestic output demanded.
C)decrease in aggregate demand.
D)increase in aggregate demand.

Question 57

Refer to the list below.Which two factors would most likely cause a change in investment spending? The following list of items is related to aggregate demand.Entrepreneurial ability
Consumer expectations
Degree of excess capacity
Personal income tax rates
Productivity
National income abroad
Business taxes
Domestic resource availability
Prices of imported products
Profit expectations on investments

A)2 and 5
B)3 and 10
C)2 and 7
D)6 and 9

Question 58

Which of the above diagrams best portrays the effects of an increase in foreign spending on our products?

A)A
B)B
C)C
D)D

Question 59

A decrease in taxes will cause a(n):

A)decrease in the quantity of real domestic output demanded.
B)increase in the quantity of real domestic output demanded.
C)increase in aggregate demand.
D)decrease in aggregate demand.

Question 60

Changes in which of the two factors below would most likely cause a change in consumer spending? The following list of factors, are related to the aggregate demand curve.Real-balances effect
Household expectations
Interest-rate effect
Personal income tax rates
Profit expectations
National income abroad
Government spending
Foreign trade effect
Exchange rates
Degree of excess capacity

A)1 and 3
B)2 and 4
C)5 and 10
D)8 and 9

Question 61

In terms of aggregate supply, the short run is a period in which:

A)the price level is fixed.
B)employment is fixed.
C)real output is fixed.
D)nominal wages and other input prices are fixed.

Question 62

Suppose the full-employment level of real output (Q) for a hypothetical economy is $500 and that the price level (P) initially is 100.Use the following short-run aggregate supply schedules to answer the next question. Refer to the information above.If the price level unexpectedly declines from 100 to 75, the level of real output in the short run will:

A)rise from $500 to $560.
B)fall from $500 to $440.
C)fall from $560 to $500.
D)rise from $440 to $500.

Question 63

In terms of aggregate supply, in the immediate short run:

A)the price level is variable.
B)real output is fixed.
C)nominal wages are variable.
D)both input prices and output prices are fixed.

Question 64

Other things being equal, if the national incomes of our major international lending partners were to rise, our:

A)aggregate demand curve would shift to the right.
B)aggregate supply curve would shift to the left.
C)aggregate supply curve would shift to the right.
D)aggregate demand curve would shift to the left.

Question 65

Other things equal, a decrease in the price level will:

A)shift the short run aggregate supply curve to the left.
B)shift the aggregate demand curve to the left.
C)cause a movement up a short-run aggregate supply curve.
D)cause a movement down a short run aggregate supply curve.

Question 66

The short run aggregate supply curve:

A)shows the various amounts of real output which businesses will produce at each price level.
B)is downward sloping because real purchasing power increases as the price level falls.
C)contains a vertical range where real output is variable and the price level is constant.
D)is explained by the interest rate, wealth, and foreign trade effects.

Question 67

Refer to the above diagram.If the price level rises above P₁ because of an increase in aggregate demand, the:

A)economy will move up along curve B and output will temporarily increase.
B)long-run aggregate supply curve C will shift upward.
C)short-run aggregate supply curve B will automatically shift to the right.
D)economy's output first will decline, then increase, and finally return to Q₁.

Question 68

Refer to the information below.A change in net export spending would most likely be caused by changes in: The following list of factors is related to the aggregate demand curve.Real-balances effect
Household expectations
Interest-rate effect
Personal income tax rates
Profit expectations
National income abroad
Government spending
Foreign trade effect
Exchange rates
Degree of excess capacity

A)2 and 3.
B)5 and 6.
C)7 and 8.
D)6 and 9.

Question 69

Suppose the full-employment level of real output (Q) for a hypothetical economy is $500 and that the price level (P) initially is 100.Use the following short-run aggregate supply schedules to answer the next question. Refer to the information above.In the long run, an increase in the price level from 100 to 125 will:

A)increase real output from $500 to $560.
B)decrease real output from $500 to $440.
C)change the aggregate supply schedule from (a) to (c) and result in an equilibrium level of real output of $560.
D)change the aggregate supply schedule from (a) to (b) and result in an equilibrium level of real output of $500.

Question 70

In terms of aggregate supply, the difference between the long run and the short run is that in the long run:

A)the price level is variable.
B)employment is variable.
C)real output is variable.
D)nominal wages and other input prices are variable.

Question 71

Suppose the full-employment level of real output (Q) for a hypothetical economy is $500 and that the price level (P) initially is 100.Use the following short-run aggregate supply schedules to answer the next question. Refer to the information above.In the long run, a fall in the price level from 100 to 75 will:

A)decrease real output from $500 to $440.
B)increase real output from $500 to $620.
C)change the aggregate supply schedule from (a) to (c) and produce an equilibrium level of real output of $500.
D)change the aggregate supply schedule from (a) to (b) and produce an equilibrium level of real output of $500.

Question 72

The short-run aggregate supply curve is upward-sloping because:

A)of the interest-rate effect.
B)higher price levels create incentives to expand output when resource prices remain constant.
C)of the net export effect.
D)higher price levels create an expectation among producers of still higher price levels.

Question 73

Which of the following would not shift the aggregate supply curve?

A)an increase in labour productivity
B)a decline in the price of imported oil
C)a decline in business taxes
D)an increase in the price level

Question 74

Other things equal, an increase in the price level will:

A)shift the short run aggregate supply curve to the right.
B)shift the aggregate demand curve to the right.
C)cause a movement up along a short-run aggregate supply curve.
D)cause a movement down a short run aggregate supply curve.

Question 75

Refer to the diagram given below. Assume that the nominal wages of workers in an economy are initially set on the basis of the price level P₂ and that the economy is initially operating at the full-employment level of output Q_f.In the short run, an increase in the price level from P₂ to P₃ will:

A)shift the aggregate supply curve from AS₂ to AS₃.
B)increase the real output from Q₁ to Q₂.
C)shift the aggregate supply curve from AS₂ to AS₁.
D)increase the real output from Q_f to Q₂.

Question 76

The long-run aggregate supply curve is vertical:

A)because the rate of inflation is steady in the long run.
B)because resource prices eventually catch up with product prices.
C)because product prices always increase at a faster rate than resource prices.
D)only when the money supply increases at the same rate as real GDP.

Question 77

The horizontal shape of the immediate short run aggregate supply implies that:

A)the total amount of output in the economy depends only on the general price level.
B)the total amount of output in the economy depends only on the volume of spending.
C)the total amount of output in the economy is fixed.
D)the total amount of spending depends on the price of inputs.

Question 78

Refer to the diagram below. Which of the following would shift the aggregate demand curve from AD₂ to AD₁?

A)A decline in personal income tax rates
B)An increase in the international value of the Canadian dollar
C)An increase in government spending
D)An increase in expected returns on investment projects

Question 79

Suppose the full-employment level of real output (Q) for a hypothetical economy is $500 and that the price level (P) initially is 100.Use the following short-run aggregate supply schedules to answer the next question. Refer to the information above.If the price level unexpectedly increases from 100 to 125, the level of real output in the short run will:

A)rise from $500 to $560.
B)fall from $500 to $440.
C)fall from $560 to $500.
D)rise from $440 to $500.

Question 80

With output and input prices fixed, the immediate short run aggregate supply curve is:

A)vertical.
B)upward sloping.
C)horizontal.
D)downward sloping.