Deck 33: Aggregate Demand and Aggregate Supply

Question 1

The explanations for the slopes of the aggregate demand and short-run aggregate supply curves are the same as the explanations for the slopes of demand and supply curves for specific goods and services.

Answer 1

False

Question 2

Most economists believe that classical theory describes the world in the short run but not in the long run.

Answer 2

False

Question 3

Most macroeconomic variables that measure some type of income,spending,or production fluctuate closely together.

Answer 3

True

Question 4

If speculators bid up the value of the dollar in the market for foreign-currency exchange,U.S.aggregate demand would shift to the left.

Question 5

A change in the money supply changes only nominal variables in the long run.

Question 6

An increase in the money supply shifts the long-run aggregate supply curve to the right.

Question 7

The exchange-rate effect is the idea that a higher U.S.price level causes the value of the dollar to increase in foreign exchange markets,and this effect contributes to the downward slope of the aggregate-demand curve.

Question 8

According to classical macroeconomic theory,changes in the money supply change nominal but not real variables.

Question 9

Because economists understand what things change GDP,they can predict recessions with a fair amount of accuracy.

Question 10

Technological progress shifts the long-run aggregate supply curve to the right.

Question 11

The effect of a change in the value of the dollar in the foreign exchange market due to a change in the price level helps explain the slope of aggregate demand,but does not shift it.The effects of a change in the value of the dollar in the foreign exchange market due to speculation is shown by shifting the aggregate demand curve.

Question 12

The aggregate-demand curve shows the quantity of domestic goods and services that households,firms,the government,and customers abroad want to buy at each price level.

Question 13

Like real GDP,investment fluctuates,but it fluctuates much less than real GDP..

Question 14

Aggregate demand shifts to the left if the money supply increases.

Question 15

The downward slope of the aggregate demand curve is based on logic that as the price level rises,consumption,investment,and net exports all fall.

Question 16

When output rises,unemployment falls.

Question 17

Other things the same,a decrease in the price level makes the interest rate decrease,which leads to a depreciation of the dollar in the foreign-currency exchange.

Question 18

A decrease in the money supply causes the interest rate to rise so that investment falls.

Question 19

An increase in the money supply causes output to rise in the long run.

Question 20

A decrease in the price level makes consumers feel wealthier,so they purchase more.This logic helps explain why the aggregate demand curve slopes downward.

Question 21

Increased uncertainty and pessimism about the future of the economy leads firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Question 22

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Question 23

An increase in the actual price level does not shift the short-run aggregate supply curve,but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Question 24

If not all prices adjust instantly to changing economic circumstances,an unexpected fall in the price level leaves some firms with higher-than-desired prices,and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Question 25

All explanations for the upward slope of the short-run aggregate supply curve suppose that the quantity of output supplied increases when the actual price level exceeds the expected price level.

Question 26

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Question 27

Other things the same,technological progress raises the price level..

Question 28

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Question 29

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

Question 30

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

Question 31

If the central bank increased the money supply in response to a decrease in short-run aggregate supply,unemployment would return towards its natural rate,but prices would rise even more.

Question 32

We could explain continued increases in both output and the price level by supposing that only aggregate demand shifted right over time.

Question 33

The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run.

Question 34

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

Question 35

In response to a decrease in output,the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply.

Question 36

If aggregate demand shifts right,then eventually price level expectations rise.The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

Question 37

Because the price level does not affect the long-run determinants of real GDP,the long-run aggregate-supply is vertical.

Question 38

If aggregate demand and aggregate supply both shift right,we can be sure that the price level is higher in the short run.

Question 39

During World War II government expenditures increased almost five-fold and output almost doubled.

Question 40

Stagflation results from continued decreases in aggregate demand.

Question 41

The long-run trend in real GDP is upward.How is this possible given business cycles? What explains the upward trend?

Question 42

Which of the following is correct?

A) Short run fluctuations in economic activity happen only in developing countries.
B) During economic contractions most firms experience rising sales.
C) Recessions come at regular intervals and are easy to predict.
D) When real GDP falls,the rate of unemployment rises.

Question 43

Make a list of things that would shift the aggregate demand curve to the right.

Question 44

Suppose that a decrease in the demand for goods and services pushes the economy into recession.What happens to the price level? If the government does nothing,what ensures that the economy still eventually gets back to the natural rate of output?

Question 45

Most economists use the aggregate demand and aggregate supply model primarily to analyze

A) short-run fluctuations in the economy.
B) the effects of macroeconomic policy on the prices of individual goods.
C) the long-run effects of international trade policies.
D) productivity and economic growth.

Question 46

Explain how an increase in the price level changes interest rates.How does this change in interest rates lead to changes in investment and net exports?

Question 47

A relaively mild period of falling incomes and rising unemployment is called a

A) depression.
B) recession.
C) expansion.
D) business cycle.

Question 48

Historical evidence for the U.S.economy indicates that

A) recessions have occurred roughly once every six years since the 1960s.
B) the unemployment rate usually decreases during a recession and increases shortly after the recession ends.
C) real GDP usually remains roughly constant during a recession and decreases shortly after the recession ends.
D) changes in real GDP over the business cycle are largely attributable to changes in investment over the business cycle.

Question 49

What do most economists believe concerning the relation between the price level and real output?

Question 50

Which of the following is most commonly used to monitor short-run changes in economic activity?

A) the inflation rate
B) real GDP
C) aggregate demand
D) aggregate supply

Question 51

Illustrate the classical analysis of growth and inflation with aggregate demand and long-run aggregate supply curves.

Question 52

Which of the following explains why production rises in most years?

A) increases in the labor force
B) increases in the capital stock
C) advances in technological knowledge
D) All of the above are correct.

Question 53

During recessions

A) workers are laid off.
B) factories are idle.
C) firms may find they are unable to sell all they produce.
D) All of the above are correct.

Question 54

Keynes thought that the behavior of the economy in the short run was influenced by what he called "animal spirits." By this he meant that business people sometimes felt good about the economy,and carried out lots of investment,and at other times felt bad about the economy,and so cut back on their investment spending.Explain how such fluctuations in investment would lead to fluctuations in real GDP and prices.

Question 55

Make a list of expenditures whose sum equals GDP.

Question 56

During a recession the economy experiences

A) rising employment and income.
B) rising employment and falling income.
C) rising income and falling employment.
D) falling employment and income.

Question 57

Make a list of things that would shift the long-run aggregate supply curve to the right.

Question 58

What variables besides real GDP tend to decline during recessions? Given the definition of real GDP,argue that declines in these variables are to be expected.

Question 59

Most economists use the aggregate demand and aggregate supply model primarily to analyze

A) short-run fluctuations in the economy.
B) the effects of macroeconomic policy on the prices of individual goods.
C) the long-run effects of international trade policies.
D) productivity and economic growth.

Question 60

Use sticky-wage theory to explain why an increase in the expected price level shifts the aggregate supply curve.

Question 61

Historically,the change in real GDP during recessions has been

A) mostly a change in investment spending.
B) mostly a change in consumption spending.
C) about equally divided between consumption and investment spending.
D) sometimes mostly a change in consumption and sometimes mostly a change in investment.

Question 62

Recession come at

A) regular intervals.During recessions consumption spending falls relatively more than investment spending.
B) regular intervals.During recessions investment spending falls relatively more than consumption spending.
C) irregular intervals.During recessions consumption spending falls relatively more than investment spending.
D) irregular intervals.During recessions investment spending falls relatively more than consumption spending.

Question 63

During recessions which type of spending falls?

A) consumption and investment
B) investment but not consumption
C) consumption but not investment
D) neither consumption nor investment

Question 64

Below are pairs of GDP growth rates and unemployment rates.Economists would be shocked to see most of these pairs in the U.S.Which pair of GDP growth rates and unemployment rates is realistic?

A) 6 percent,0 percent
B) 3 percent,10 percent
C) -1 percent,6 percent
D) -3 percent,2 percent

Question 65

During recessions

A) sales and profits fall.
B) sales and profits rise.
C) sales rise,profits fall.
D) profits fall,sales rise.

Question 66

As recessions begin,production

A) and unemployment both rise.
B) rises and unemployment falls.
C) falls and unemployment rises.
D) and unemployment both fall.

Question 67

In 2001,the United States was in recession.Which of the following things would you expect not to have happened?

A) increased layoffs and firings
B) a higher rate of bankruptcy
C) increased claims for unemployment insurance
D) increased investment spending

Question 68

Investment is a

A) small part of real GDP,so it accounts for a small share of the fluctuation in real GDP.
B) small part of real GDP,yet it accounts for a large share of the fluctuation in real GDP.
C) large part of real GDP,so it accounts for a large share of the fluctuation in real GDP.
D) large part of real GDP,yet it accounts for a small share of the fluctuation in real GDP.

Question 69

Which of the following is correct?

A) Economic fluctuations are easily predicted by competent economists.
B) Recessions have never occurred very close together.
C) Other measures of spending,income,and production do not fluctuate closely with real GDP.
D) None of the above is correct.

Question 70

Real GDP

A) moves in the same direction as unemployment.
B) is not adjusted for inflation.
C) measures economic activity and real income.
D) All of the above are correct.

Question 71

Which of the following is correct?

A) Over the business cycle consumption fluctuates more than investment.
B) Economic fluctuations are easy to predict.
C) During recessions sales and profits tend to fall.
D) Because of government policy the U.S.has suffered no recessions in the last 25 years.

Question 72

Real GDP

A) is the current dollar value of all goods produced by the citizens of an economy within a given time.
B) measures economic activity and income.
C) is used primarily to measure long-run changes rather than short-run fluctuations.
D) All of the above are correct.

Question 73

Which part of real GDP fluctuates most over the course of the business cycle?

A) consumption expenditures
B) government expenditures
C) investment expenditures
D) net exports

Question 74

Which of the following typically rises during a recession?

A) garbage collection
B) unemployment
C) corporate profits
D) automobile sales

Question 75

Which of the following is correct concerning recessions?

A) They come at fairly regular and predictable intervals.
B) They are associated with comparatively large declines in investment spending.
C) They are any period when real GDP growth is less than average.
D) They tend to be associated with falling unemployment rates.

Question 76

Which of the following statements is correct?

A) Most economists use the model of aggregate demand and aggregate supply to analyze short-run economic fluctuations.
B) Economic fluctuations are essentially unrelated to changes in business conditions.
C) Economic fluctuations follow a regular,predictable pattern.
D) All of the above are correct.

Question 77

During recessions investment

A) falls by a larger percentage than GDP.
B) falls by about the same percentage as GDP.
C) falls by a smaller percentage than GDP.
D) falls but the percentage change is sometimes much larger and sometimes much smaller.

Question 78

During recessions declines in investment account for about

A) 1/6 of the decline in real GDP.
B) 1/3 of the decline in real GDP.
C) 1/2 of the decline in real GDP.
D) 2/3 of the decline in real GDP.

Question 79

When we say that economic fluctuations are "irregular and unpredictable," we mean that

A) the relationship between output and unemployment is erratic and difficult to characterize.
B) when one macroeconomic variable that measures income or spending is falling,other macroeconomic variables that measure income or spending are likely to be rising.
C) recessions do not occur at regular intervals.
D) All of the above are correct.

Question 80

Below are pairs of GDP growth rates and unemployment rates.Economists would be shocked to see most of these pairs in the U.S.Which pair of GDP growth rates and unemployment rates is realistic?

A) 5 percent,1 percent
B) 3 percent,5 percent
C) -1 percent,3 percent
D) -2 percent,4 percent