Deck 8: Aggregate Demand, aggregate Supply, and the Great Depression

Question 1

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.

Answer 1

flatter and the k1 multiplier becomes larger.

Question 2

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

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

Answer 2

flatter.

Question 3

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.

Answer 3

IS curve is flatter and the AD curve is flatter.

Question 4

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 5

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 6

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 7

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 8

A fall in the price level causes changes in the IS-LM diagram that can also be recorded as a

A)rightward shift of the AD curve.
B)leftward shift of the AD curve.
C)movement downward along an AD curve.
D)movement upward along an AD curve.

Question 9

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 10

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 11

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.

Question 12

Figure 7-1

Employing Figure 7-1 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 13

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 14

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.

Question 15

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 16

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.

Question 17

At every point to the right of the AD curve there is

A)an excess demand for real balances.
B)an excess supply of real balances.
C)an excess demand for commodities.
D)an excess supply of commodities.

Question 18

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 19

Consider an initial IS-LM equilibrium in which the nominal money supply is 1000 and the price level is 1.0.As the price level falls to 0.5,then to 0.333,and then to 0.25,the effect on real balances means that AD

A)becomes flatter.
B)shifts upward by less and less.
C)shifts downward by less and less.
D)shifts downward by the same amount.
E)becomes upward-sloping at price levels below 1.0.

Question 20

The fixed price level that was assumed in Chapters 3 through 7 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 21

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 22

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 23

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 24

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 25

Suppose the aggregate demand curve shifts rightward against an upward-sloping short-run aggregate supply curve.Real GDP would ________ while the price level ________.

A)remain unchanged,rises
B)rise,rises
C)remain unchanged,falls
D)rise,remain unchanged
E)fall,rises

Question 26

Consider an initial IS-LM equilibrium point which corresponds to a point labeled "A" on the current AD curve.
Refer to the information above.If the overall tax rate increases with no change in the price level,the resulting IS-LM equilibrium corresponds to a point in the AD diagram

A)which has moved upward along the same AD curve.
B)straight above A on a new AD curve.
C)straight below A on a new AD curve.
D)directly to the right of A on a new AD curve.
E)directly to the left of A on a new AD curve.

Question 27

Consider an initial IS-LM equilibrium point which corresponds to a point labeled "A" on the current AD curve.
Refer to the information above.If government spending increases with no change in the price level,the resulting IS-LM equilibrium corresponds to a point in the AD diagram

A)which has moved downward along the same AD curve.
B)straight above A on a new AD curve.
C)straight below A on a new AD curve.
D)directly to the right of A on a new AD curve.
E)directly to the left of A on a new AD curve.

Question 28

If firms are willing to produce and sell more output when prices rise,this implies

A)an upward-sloping short-run aggregate supply curve.
B)a vertical short-run aggregate supply curve.
C)an upward-sloping aggregate demand curve.
D)a horizontal aggregate supply curve.

Question 29

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 30

Should the nominal money supply rise by six percent,real balances would remain unaffected if at the same time the price level ________ by six percent,which translates into the aggregate demand diagram as ________.

A)rises,a movement upward along AD by six percent
B)rises,an upward shift of AD by six percent
C)rises,a movement downward along AD by six percent
D)falls,a movement downward along AD by six percent
E)falls,a downward shift of AD by six percent

Question 31

Suppose the aggregate demand curve shifts rightward against a horizontal short-run aggregate supply curve.Real GDP would ________ while the price level ________.

A)remain unchanged,rises
B)rise,rises
C)remain unchanged,falls
D)rise,remain unchanged
E)fall,rises

Question 32

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 33

The labor supply curve may be shifted if

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

Question 34

Consider an initial IS-LM equilibrium point which corresponds to a point labeled "A" on the current AD curve.
Refer to the information above.If business confidence improves with no change in the price level,the resulting IS-LM equilibrium corresponds to a point in the AD diagram

A)which has moved downward along the same AD curve.
B)straight above A on a new AD curve.
C)straight below A on a new AD curve.
D)directly to the right of A on a new AD curve.
E)directly to the left of A on a new AD curve.

Question 35

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 36

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 37

Consider an initial IS-LM equilibrium point which corresponds to a point labeled "A" on the current AD curve.
Refer to the information above.If the nominal money supply falls by 4 percent,accompanied by a 4 percent fall in the price level,the resulting IS-LM equilibrium corresponds to a point in the AD diagram

A)which is exactly point A again.
B)4 percent straight above A on a new AD curve.
C)4 percent straight below A on a new AD curve.
D)directly to the right of A on a new AD curve.
E)directly to the left of A on a new AD curve.

Question 38

From one period to the next,the change in real GDP depends on the shift in aggregate demand

A)but not on how SAS might shift.
B)and on SAS,but only if it also shifts.
C)and on SAS,but only if it is horizontal.
D)and on the slope and shifting of SAS.

Question 39

Consider an initial IS-LM equilibrium point which corresponds to a point labeled "A" on the current AD curve.
Refer to the information above.If the nominal money supply falls by 4 percent with no change in the price level,the resulting IS-LM equilibrium corresponds to a point in the AD diagram

A)which has moved upward along the same AD curve.
B)4 percent straight above A on a new AD curve.
C)4 percent straight below A on a new AD curve.
D)directly to the right of A on a new AD curve.
E)directly to the left of A on a new AD curve.

Question 40

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 41

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 42

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 43

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 44

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 45

When the nominal wage rate rises by x percent we

A)move upward along the SAS curve by x percent.
B)move downward along the SAS curve by x percent.
C)shift SAS upward by x percent.
D)shift SAS downward by x percent.

Question 46

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 47

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 48

Figure 7-5

In Figure 7-5,a fiscal expansion from point A with no initial change in the nominal wage causes a movement to point

A)B.
B)C.
C)D.
D)E.
E)F.

Question 49

Figure 7-3

Employing Figure 7-3 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 50

What is held constant at all points along a single SAS curve?

A)the nominal wage rate
B)the amount of labor employed
C)the price level
D)the real wage rate
E)real GDP

Question 51

We derive the aggregate labor demand curve by horizontally adding all firms'

A)marginal product of labor curves.
B)production function curves.
C)supply curves.
D)horizontal lines at the real wage.

Question 52

With the nominal wage rate given,an increase in the price level leads to

A)movement downward along a short-run aggregate supply curve (SAS).
B)movement upward along a short-run aggregate supply curve(SAS).
C)a rightward shift of the short-run aggregate supply curve(SAS).
D)a leftward shift of the short-run aggregate supply curve(SAS).

Question 53

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 54

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 55

Along a short-run aggregate supply curve firms are willing to produce more output if a ________ causes the real wage to ________.

A)higher nominal wage,rise
B)lower nominal wage,fall
C)higher price level,rise
D)lower nominal wage,rise
E)higher price level,fall

Question 56

Figure 7-5

In Figure 7-5 above,we begin with the expansion of aggregate demand in the IS-LM model,with a result transferred into this model as a movement from points A to

A)B.
B)C.
C)D.
D)E.
E)F.

Question 57

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 58

Suppose that the nominal wage falls by x percent,and a certain change in the price level maintains the same real wage as before.In the SAS diagram these events cause

A)no change at all,as they offset each other.
B)a downward movement along the SAS curve.
C)an upward movement along the SAS curve.
D)a downward shift of the SAS curve.
E)an upward shift of the SAS curve.

Question 59

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 60

The long-run buildup of an economy's capital stock ________ the marginal product of labor thus shifting the labor demand curve to the ________,which then causes ________.

A)increases,right,SAS to shift to the right
B)increases,right,movement up the SAS curve
C)increases,left,SAS to shift to the left
D)decreases,right,SAS to shift to the left
E)decreases,left,movement down the SAS curve

Question 61

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 62

Figure 7-5

In Figure 7-5 above,at point C,the real wage is ________ its equilibrium value,leading to changes in the nominal wage that ________.

A)above,shift AD₁ back to AD₀
B)below,shift AD₁ further to the right
C)below,shift SAS₀ upward
D)above,shift SAS₀ downward

Question 63

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 64

Figure 7-5

In Figure 7-5 above,from point A sudden increases in the price of crude oil would move us to point

A)B.
B)C.
C)D.
D)E.
E)F.

Question 65

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 66

Figure 7-5

In Figure 7-5 above,at point F,the real wage is ________ its equilibrium value,leading to changes in the nominal wage that ________.

A)above,shift AD₀ back to AD₁
B)below,shift AD₀ further to the left
C)below,shift SAS₃ upward
D)above,shift SAS₃ downward

Question 67

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 68

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 69

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 70

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 71

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 72

That the LAS curve is vertical means that

A)firms are willing to produce any amount of output demanded at the fixed price level.
B)actual real GDP does not depend on the value of natural real GDP.
C)natural real GDP does not depend on the price level.
D)output never deviates from the natural real GDP.

Question 73

Figure 7-5

In Figure 7-5 above,from initial point A,suppose AD₀ shifts to AD₁.Under the assumptions of classical macroeconomics,we would

A)stay at point A.
B)almost immediately move to and then stay at point B.
C)almost immediately move to and then stay at point C.
D)almost immediately move to and then stay at point E.

Question 74

Figure 7-5

In Figure 7-5 above,from point A suppose the shift in aggregate demand is due to a 6 percent rise in the money supply.Suppose that at the same time the nominal wage also rises by 6 percent.We would move from points A to

A)B.
B)C.
C)D.
D)E.
E)F.

Question 75

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 76

Figure 7-5

In Figure 7-5 above,from an initial long-run equilibrium the net tax rate rises with no initial change in the nominal wage.We would show this as a movement from points

A)A to B.
B)A to F.
C)B to E.
D)E to B.
E)E to F.

Question 77

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 78

Figure 7-5

In Figure 7-5 above,from initial point E,suppose AD₁ shifts to AD₀.Under the assumptions of classical macroeconomics,we would

A)stay at point E.
B)almost immediately move to and then stay at point A.
C)almost immediately move to and then stay at point F.
D)almost immediately move to and then stay at point B.

Question 79

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 80

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.