Deck 24: Aggregate Demand and Aggregate Supply

Question 1

Economic growth

A)is an increase in potential GDP as the long- run aggregate supply curve shifts rightward.
B)occurs when the long- run aggregate supply curve shifts upward.
C)requires a compensating decrease in aggregate demand to offset the increase in aggregate supply.
D)All of the above answers are correct.

Answer 1

A

Question 2

Based on the figure above, short- run equilibrium occurs at the price level of

A)140 and real GDP of $12 billion.
B)130 and real GDP of $12 billion.
C)120 and real GDP of $4 billion.
D)130 and real GDP of $8 billion.

Answer 2

D

Question 3

In a short- run macroeconomic equilibrium, potential GDP exceeds real GDP. If aggregate demand does not change, then the

A)long- run aggregate supply curve will shift leftward as the money wage rate falls.
B)short- run aggregate supply curve will shift rightward as the money wage rate falls.
C)long- run aggregate supply curve will shift leftward as the money wage rate rises.
D)short- run aggregate supply curve will shift leftward as the money wage rate rises.

Answer 3

B

Question 4

In the above figure, the economy is initially at point B. Then the price level falls by 10. The wealth effect will help

A)move the economy to point C.
B)keep the economy at point B.
C)move the economy to point D.
D)move the economy to point A.

Question 5

economists believe that the economy is self- regulating and will be at full employment as long as monetary policy is not erratic.

A)Classical
B)Keynesian
C)Monetarist
D)All

Question 6

In the above figure, the economy is at point A. Then the money wage rate and the price level both fall by 10 per cent. Firms will be willing to supply output equal to

A)more than $13.0 billion.
B)$13.0 billion.
C)less than $13.0 billion.
D)Without more information, it is impossible to determine which of the above answers is correct.

Question 7

In the short run, firms expand their production when the price level rises because

A)the money wage rate remains constant so the higher prices for their product makes it profitable for firms to expand production.
B)each firm must keep its production up to the level of its rivals, and some firms will expand production as the price level increases.
C)firms can increase their profits by increasing their maintenance.
D)the higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits.

Question 8

Moving upward along the SAS results in a in the price level and in real GDP.

A)rise; an increase
B)fall; an increase
C)rise; a decrease
D)fall; a decrease

Question 9

In Australia, during the past five decades, economic growth was most rapid during the _.

A)1990s
B)2000s
C)1960s
D)1970s

Question 10

The short- run aggregate supply curve is upward- sloping because in the short run the

A)money wage rate changes but the price level does not.
B)neither the money wage rate nor the price level can change.
C)both the money wage rate and the price level change.
D)price level changes but the money wage rate does not.

Question 11

Technological progress will

A)shift the SAS curve rightward but will not shift the LAS curve.
B)shift both the LAS and SAS curves rightward.
C)shift the LAS curve rightward but will not shift the SAS curve.
D)not shift either the LAS or the SAS curve.

Question 12

In the above figure, the economy is at point A. Then the price level falls to 90 while the money wage rate does not change. Firms will be willing to supply output equal to

A)$13.0 billion.
B)more than $13.0 billion.
C)less than $13.0 billion.
D)Without more information, it is impossible to determine which of the above answers is correct.

Question 13

Which of the following helps determine the growth rate of potential GDP?
I. Capital accumulation
II. Technology advances
III. Growth in the quantity of money

A)I
B)I and II
C)I and III
D)I, II and III

Question 14

The AS/AD model studies the relationship between

A)the price level and real GDP.
B)the price level and unemployment.
C)nominal GDP and inflation.
D)unemployment and real GDP.

Question 15

In the above figure, point A represents

A)an inflationary gap.
B)an increase in aggregate demand.
C)a full- employment equilibrium.
D)a recessionary gap.

Question 16

The short- run aggregate supply curve shifts when
I. the full- employment quantity of capital changes.
II. technology advances.

A)I only
B)II only
C)Neither I nor II
D)Both I and II

Question 17

Which of the following statements is FALSE?

A)Taxes and transfer payments affect aggregate demand by changing disposable income.
B)Fiscal policy is the attempt to influence the economy using taxes, transfer payments and government expenditures.
C)An increase in disposable income leads to a decrease in aggregate demand.
D)Government expenditure affects aggregate demand directly because government expenditure is a component of aggregate demand.

Question 18

An aggregate supply curve depicts the relationship between

A)the price level and nominal GDP.
B)the price level and the aggregate quantity supplied.
C)household expenditures and household income.
D)the price level and the aggregate quantity demanded.

Question 19

Keynesian macroeconomists recommend

A)policies that actively offset the changes in long- run aggregate supply that result in negative economic growth.
B)policies that minimise the disincentive effects of taxes on employment, investment and technological change.
C)policies that actively offset the changes in aggregate demand that bring recession.
D)an increase in the quantity of money to offset decreases in aggregate demand and a decrease in the quantity of money to offset increases in aggregate demand.

Question 20

The long- run aggregate supply (LAS)curve

A)has a negative slope.
B)is horizontal.
C)has a positive slope.
D)is vertical.

Question 21

Which of the following statements is INCORRECT?

A)A monetarist believes that recessions are the result of erratic monetary policy.
B)A classical macroeconomist believes that the money wage rate adjusts slowly.
C)A new classical macroeconomist believes the business cycle is the efficient response to the uneven pace of technological change.
D)A Keynesian believes the business cycle is mainly influenced by changes in people's expectations.

Question 22

Inflation occurs over time as a result of

A)long- run aggregate supply increasing faster than short- run aggregate supply.
B)long- run aggregate supply increasing faster than aggregate demand.
C)decreases in aggregate demand.
D)aggregate demand increasing faster than long- run aggregate supply.

Question 23

Which of the following increases aggregate demand and shifts the AD curve rightward?

A)An increase in the quantity of money and a resulting fall in the interest rate
B)An increase in the exchange rate that makes imports less expensive
C)Predictions of a recession that lead to expectations of lower future income
D)A fall in the price level

Question 24

In the figure above, the economy is at point A when the price level rises to 120. Money wage rates and other resource prices remain constant. Firms are willing to supply output equal to

A)$13.0 billion.
B)$12.5 billion.
C)$13.5 billion.
D)None of the above answers is correct.

Question 25

In the above figure, which movement illustrates the impact of a falling price level and a constant money wage rate?

A)E to F
B)E to J
C)E to I
D)E to H

Question 26

In the above figure, point C represents

A)a decrease in aggregate demand.
B)a recessionary gap.
C)an inflationary gap.
D)a full- employment equilibrium.

Question 27

Which of the following statements regarding aggregate supply is correct?

A)Moving along the long- run aggregate supply curve, the money wage rate changes but the price level is constant.
B)Moving along the short- run aggregate supply curve, the money wage rate changes but the price level is constant.
C)Moving along the short- run aggregate supply curve, both the price level and the money wage rate change by the same percentage.
D)Moving along the long- run aggregate supply curve, both the price level and the money wage rate change by the same percentage.

Question 28

An increase in foreign incomes

A)decreases the aggregate quantity demanded in Australia.
B)increases aggregate demand in Australia.
C)decreases aggregate demand in Australia.
D)increases the aggregate quantity demanded in Australia.

Question 29

A decrease in government expenditure shifts the AD curve and a decrease in taxes shifts the AD curve .

A)rightward; leftward
B)leftward; rightward
C)rightward; rightward
D)leftward; leftward

Question 30

Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate demand does not change, the money wage rate , unemployment , and the price level .

A)rises; rises; rises
B)falls; falls; falls
C)rises; falls; rises
D)falls; rises; falls

Question 31

The positive relationship between short- run aggregate supply and the price level indicates that, in the short run,

A)firms produce more output as the price level rises.
B)the money wage rate increases when moving along the short- run aggregate supply curve.
C)firms produce more output as the price level falls.
D)lower price levels are more profitable for firms.

Question 32

The SAS curve shifts if there is a change in

A)the price level.
B)nominal GDP.
C)potential GDP.
D)real GDP.

Question 33

In the above figure, which movement illustrates the impact of a constant price level and a rising money wage rate?

A)E to J
B)E to I
C)E to H
D)E to F

Question 34

In the above figure, the economy is at point A when changes occur. If the new equilibrium has a price level of 120 and real GDP of $12 billion, then it must be the case that

A)aggregate supply has decreased.
B)aggregate supply has increased.
C)aggregate demand has increased.
D)aggregate demand has decreased.

Question 35

An economy is at full employment. Which of the following events can create a recessionary gap?

A)A decrease in money wages
B)A decrease in the quantity of capital
C)An increase in taxes
D)An increase in foreign income

Question 36

One result of a decrease in aggregate demand and no change in aggregate supply is

A)an increase in employment levels.
B)an economic expansion.
C)a rise in the price level.
D)a recession.

Question 37

The Australian exchange rate rises. As a result, there is a

A)movement along the aggregate demand curve but the curve does not shift.
B)leftward shift in the aggregate demand curve.
C)rightward shift in the aggregate demand curve.
D)rightward shift in the long- run aggregate supply curve.

Question 38

Which of the following news quotes BEST describes a Keynesian view of a recession?

A)"Businesses are very worried about future sales and have lowered their purchases of capital equipment."
B)"The unexpectedly tight fiscal policy is raising spending and lowering unemployment."
C)"The anti- inflationary policy of the Reserve Bank of Australia is increasing spending."
D)"The cuts in government spending have helped lower consumer spending and created unemployment."

Question 39

In the short run, an increase in government expenditure on goods and services real GDP and the price level.

A)decreases; increases
B)decreases; decreases
C)increases; decreases
D)increases; increases

Question 40

A Keynesian economist believes that

A)the economy is self- regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic.
B)if the economy was left alone, it would rarely operate at full employment.
C)the economy is self- regulating and always at full employment.
D)the economy is self- regulating and will normally, though not always, operate at full employment if monetary policy is not erratic.

Question 41

Stagflation is the combination of

A)deflation with increasing real GDP.
B)inflation and increasing real GDP.
C)inflation and recession.
D)deflation and recession.

Question 42

If the money price of a resource such as oil falls, then the

A)SAS curve shifts leftward.
B)SAS curve shifts rightward.
C)LAS curve shifts rightward.
D)LAS curve shifts leftward.

Question 43

The above figure depicts an economy with a short- run equilibrium

A)at full employment.
B)at higher than full employment.
C)below full employment.
D)None of the above answers is correct.

Question 44

Which of the following changes would NOT shift the aggregate demand curve?

A)An increase in technology
B)A change in expectations about future income
C)A change in fiscal policy
D)A change in monetary policy

Question 45

In short- run macroeconomic equilibrium,

A)real GDP is less than potential GDP.
B)the price level is fixed and short- run aggregate supply determines real GDP.
C)real GDP equals potential GDP and aggregate demand determines the price level.
D)real GDP and the price level are determined by short- run aggregate supply and aggregate demand.

Question 46

There are several reasons why the aggregate demand curve is downward- sloping. Which of the following correctly describes one of these explanations?

A)A fall in the price level, holding foreign prices and the exchange rate constant, increases net exports.
B)A rise in the price level raises the purchasing power of wealth and increases desired consumption.
C)A rise in the price level lowers the interest rate and increases investment spending.
D)A rise in the price level raises interest rates and increases investment spending.

Question 47

Suppose the Australian exchange rate falls from 90 yen per dollar to 80 yen per dollar. Australian exports will , Australian imports will , and Australian aggregate demand will
.

A)increase; decrease; increase
B)decrease; increase; decrease
C)decrease; increase; increase
D)increase; increase; increase

Question 48

Business cycles are the result of

A)regular shifts of the AD curve only.
B)regular shifts of both the AD and SAS curves.
C)irregular shifts of both the AD and SAS curves.
D)irregular shifts of the SAS curve only.

Question 49

Economic growth is BEST defined as

A)rightward shifts of the SAS curve.
B)rightward shifts of the AD curve.
C)increases in potential GDP.
D)decreases in potential GDP.

Question 50

Full- employment equilibrium occurs

A)when potential GDP exceeds real GDP.
B)when real GDP exceeds potential GDP.
C)when real GDP equals potential GDP.
D)as a result of an increase in long- run aggregate supply.

Question 51

In the above figure, if the economy is at point a, an increase in will move the economy to
.

A)expected future income; point c
B)real wealth from the fall in the price level; point b
C)expected future income; point d
D)real wealth from the fall in the price level; point c

Question 52

According to the intertemporal substitution effect, when the price level increases, the interest rate

A)rises and the quantity of real GDP demanded decreases.
B)is not affected.
C)rises and the quantity of real GDP demanded increases.
D)falls and the quantity of real GDP demanded decreases.

Question 53

In the above figure, the economy is initially at point B. If the Reserve Bank decreases the quantity of money, there is

A)a movement to point A.
B)a shift to AD₂.
C)a shift to AD₁.
D)a movement to point C.

Question 54

In a long- run equilibrium, an increase in the quantity of capital leads to

A)a decrease in the equilibrium price level and an increase in equilibrium real GDP.
B)no change in the equilibrium price level, but an increase in equilibrium real GDP.
C)a decrease in the equilibrium price level, but no change in equilibrium real GDP.
D)an increase in the equilibrium price level and an increase in equilibrium real GDP.

Question 55

In the macroeconomic long run,

A)real GDP equals potential GDP.
B)regardless of the price level, the economy is producing at potential GDP.
C)the economy is at full employment.
D)All of the above are correct.

Question 56

A classical economist believes that

A)the economy is self- regulating and will normally, though not always, operate at full employment if fiscal policy is not erratic.
B)if the economy was left alone, it would rarely operate at full employment.
C)the economy is self- regulating and will normally, though not always, operate at full employment if monetary policy is not erratic.
D)the economy is self- regulating and always at full employment.

Question 57

In the above figure, the economy is at point A. Then the price level rises to 120 while the money wage rate remains constant. Firms will be willing to supply output equal to

A)$13.0 billion.
B)more than $13.0 billion.
C)less than $13.0 billion.
D)Without more information, it is impossible to determine which of the above answers is correct.

Question 58

The Reserve Bank lowers interest rates. As a result, in the short run, real GDP and the price level .

A)increases; falls
B)decreases; falls
C)decreases; rises
D)increases; rises

Question 59

According to the intertemporal substitution effect, a fall in the price level will

A)increase the real value of wealth, which raises the interest rate so that the quantity of real GDP demanded decreases.
B)increase net exports, which causes the quantity of real GDP demanded to increase.
C)decrease the real value of wealth, which increases the quantity of real GDP demanded.
D)cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases.

Question 60

Suppose there is an increase in short- run aggregate supply with no change in long- run aggregate supply. This situation could be the result of

A)an increase in the quantity of capital.
B)a decrease in the money wage rate.
C)an increase in the price of oil.
D)a technological advancement.

Question 61

The short- run aggregate supply curve

A)is vertical.
B)is horizontal.
C)has a negative slope.
D)has a positive slope.

Question 62

The intertemporal substitution effect refers to the substitution of

A)goods and services today for goods and services in the future.
B)goods and services produced domestically for goods and services produced in another country.
C)goods for services.
D)goods and services for less expensive goods and services.

Question 63

For movements along the short- run aggregate supply curve,

A)potential GDP remains constant.
B)the real wage rate changes.
C)the money wage rate is constant.
D)All of the above are correct.

Question 64

Which of the following statements correctly describes the policy stance of a macroeconomist?

A)A new classical macroeconomist believes that fiscal and monetary policy are required to maintain full employment.
B)A monetarist believes that the quantity of money should be constantly changed in order to offset changes in aggregate demand.
C)A Keynesian believes that if taxes are always kept low and the quantity of money is kept on a steady growth path, no policy actions will be needed to maintain full employment.
D)A classical macroeconomist believes that maintaining consistently low taxes will allow the economy to expand at an appropriate and rapid pace.

Question 65

Aggregate demand increases if the quantity of money .

A)increases or tax rates decrease
B)remains constant or tax rates increase
C)decreases or tax rates increase
D)or transfer payments decrease

Question 66

If aggregate demand grows only slightly faster than potential GDP, then the economy will
.

A)be at a business- cycle peak
B)experience economic growth with low inflation
C)experience economic growth with high inflation
D)experience recession

Question 67

A recessionary gap means that short- run macroeconomic equilibrium GDP

A)is more than full- employment GDP.
B)is less than full- employment GDP.
C)equals full- employment GDP.
D)may be less than, more than, or the same as full- employment GDP depending on the level of potential GDP.

Question 68

Which of the following changes does NOT shift the short- run aggregate supply curve?

A)An increase in technology
B)An increase in the price level
C)An increase in the quantity of capital
D)An increase in the money wage rate

Question 69

Other things being constant, the economy's aggregate demand curve shows that

A)as the price level falls, real GDP decreases.
B)the quantity of real GDP demanded decreases when the price level rises.
C)any change in the price level shifts the aggregate demand curve.
D)the quantity of real GDP demanded and the price level are not related.

Question 70

The data in the above figure indicate that the economy will be in a long- run macroeconomic equilibrium at a price level of

A)100.
B)120.
C)130.
D)140.

Question 71

In the short run, the intersection of the aggregate demand and the short- run aggregate supply curves,

A)determines the equilibrium level of real GDP.
B)is a point where there is neither a surplus nor a shortage of goods.
C)determines the equilibrium price level.
D)All of the above answers are correct.

Question 72

Which of the following does NOT shift the short- run aggregate supply curve?

A)A change in the money wage rate
B)A change in the price level
C)Technological progress
D)A reduction in the price of a raw material

Question 73

When talking about aggregate supply, it is necessary to

A)distinguish between long- run full employment and short- run full employment.
B)focus on the short run.
C)focus on the long run.
D)distinguish between long- run aggregate supply and short- run aggregate supply.

Question 74

One reason that the aggregate demand curve has a negative slope is because

A)people buy more foreign goods when the domestic price level rises.
B)firms supply less when prices rise.
C)firms supply more when prices rise.
D)the amount of money in the economy increases when the price level rises.

Question 75

In the macroeconomic short run,

A)actual real GDP always equals potential GDP.
B)actual real GDP may be less than or more than potential GDP.
C)by definition, the economy is always moving away from full employment.
D)the unemployment rate is zero.

Question 76

Aggregate demand increases when

A)interest rates rise.
B)foreign incomes fall.
C)the exchange rate rises.
D)None of the above answers is correct.

Question 77

An increase in aggregate demand is shown by a

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

Question 78

In the above figure, if the economy is at point a, an increase in will move the economy to
.

A)expected future income; point d
B)expected future income; point b
C)real wealth; point d
D)real wealth from a fall in the price level; point d

Question 79

Which of the following directly shifts the short- run aggregate supply curve?

A)A change in resource prices
B)A change in the price level
C)A change in aggregate demand
D)All of the above

Question 80

Short- run macroeconomic equilibrium occurs when the quantity of real GDP demanded .

A)equals full- employment GDP
B)equals the quantity of real GDP supplied
C)does not equal full- employment GDP
D)equals potential GDP