Deck 12: Aggregate Demand and Aggregate Supply

Question 1

Use the following to answer question 7:
Figure: Aggregate Demand
(Figure: Aggregate Demand) Refer to Figure: Aggregate Demand. The quantity of output demanded if the price level is 120 is:

A) $9 trillion.
B) $10 trillion.
C) $11 trillion.
D) $12 trillion.

Answer 1

$10 trillion.

Question 2

Stagflation is a combination of _____ unemployment and _____ inflation.

A) increasing; increasing
B) decreasing; decreasing
C) increasing; decreasing
D) decreasing; increasing

Answer 2

increasing; increasing

Question 3

The relationship between the aggregate price level and the quantity of aggregate output demanded by households, businesses, the government, and the rest of the world is represented by the _____ demand.

A) market
B) surplus
C) aggregate
D) simple

Answer 3

aggregate

Question 4

In 2011, the Federal Reserve was facing:

A) hyperinflation, which can be reversed only with disinflationary policies.
B) stagflation, a combination of high inflation and high unemployment, which cannot be reversed easily.
C) the deepest recession since the Great Depression combined with rapidly falling prices.
D) a very severe deflation, rare in history, which was experienced only by Japan.

Question 5

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate:

A) productivity.
B) unemployment rate.
C) quantity of output demanded by households, businesses, the government, and the rest of the world.
D) quantity of output demanded by businesses only.

Question 6

The Great Depression was caused by _____ shocks, and the stagflation of the 1970s was caused by _____ shocks.

A) demand; demand
B) demand; supply
C) supply; demand
D) supply; supply

Question 7

In general, a change in the price level, all other things unchanged, causes:

A) a movement along the aggregate demand curve.
B) a shift of the aggregate demand curve.
C) both a movement along the aggregate demand curve and a shift in the curve.
D) no change in the purchasing power of assets.

Question 8

The _____ curve shows the negative relationship between the aggregate price level and the quantity of aggregate output demanded in the economy.

A) aggregate demand
B) short-run aggregate supply
C) long-run aggregate supply
D) investment demand

Question 9

When the aggregate price level increases, the purchasing power of many assets falls, causing a decrease in consumer spending. This, the _____ effect, is a reason the _____ curve slopes _____.

A) interest rate; aggregate demand; downward
B) wealth; aggregate demand; downward
C) interest rate; investment demand; downward
D) wealth; short-run aggregate supply; upward

Question 10

A graphical representation of the relationship between the total quantity of goods and services demanded and the price level is the:

A) aggregate demand curve.
B) average price level.
C) circular-flow model.
D) GDP curve.

Question 11

According to the wealth effect, when prices decrease, the purchasing power of assets _____ and consumer spending _____.

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

Question 12

According to the aggregate demand curve, when the aggregate price level _____, the quantity of aggregate output _____.

A) rises; supplied falls
B) falls; demanded falls
C) rises; demanded falls
D) rises; demanded does not change

Question 13

The aggregate demand curve:

A) slopes downward.
B) slopes upward.
C) is horizontal at potential output.
D) is vertical at potential output.

Question 14

The economic slump in the 1970s looked different from the slump at the beginning of the Great Depression because it was:

A) the result of a lack of confidence that led businesses and consumers to spend less.
B) largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil.
C) the direct result of a contractionary monetary policy.
D) the result solely of a negative demand shock.

Question 15

The aggregate demand curve is negatively sloped in part because of the impact of:

A) the wealth effect on consumption.
B) the interest rate effect on government spending.
C) the stickiness of nominal wages and salaries.
D) the flexibility of nominal wages and salaries.

Question 16

In 2011, the Federal Reserve worried about:

A) the threat of stagflation, the simultaneous existence of high inflation and high unemployment.
B) hyperinflation, and it used strong disinflationary policies to bring the rise in prices under control.
C) a healthy, booming economy, and it used fine-tuning methods to keep the growing economy on track.
D) a deep recession with falling prices, and it used stabilization policies to take the economy out of the slump.

Question 17

The wealth effect suggests:

A) a positive relationship between the price level and consumption spending.
B) that price level changes do not affect real wealth.
C) a negative relationship between the price level and consumption spending.
D) that when the price level increases, the real value of money increases also.

Question 18

The three consequences of the decline in demand during the Great Depression were _____ prices, _____ output, and a surge in unemployment.

A) falling; declining
B) falling; increasing
C) rising; increasing
D) rising; declining

Question 19

Besides consumption, the component(s) of aggregate demand is/are:

A) investment expenditures.
B) investment expenditures and government expenditures.
C) investment expenditures and net exports.
D) investment expenditures, government expenditures, and net exports.

Question 20

The negative relationship between the aggregate price level and aggregate output demanded gives the aggregate demand curve a _____ slope.

A) positive
B) vertical
C) horizontal
D) negative

Question 21

Changes in _____ will not shift the aggregate demand curve.

A) expectations
B) wealth
C) the existing stock of physical capital
D) the price level

Question 22

Use the following to answer questions:
Figure: The Multiplier
(Figure: The Multiplier) Refer to Figure: The Multiplier. If this economy is at Y₁ and the price level decreases:

A) AD₁ will shift to the left, reflecting a multiplied decrease in real GDP at every price level.
B) AD₁ will shift to the right, reflecting a multiplied increase in real GDP at every price level.
C) an upward movement along the AD₁ will take place, reflecting an increase in the price level.
D) a downward movement along the AD₁ will take place, reflecting a decrease in the price level.

Question 23

If the price level falls by 10%, the purchasing power of $10,000 will:

A) increase to $11,000.
B) decrease to $9,000.
C) decrease to $1,000.
D) remain constant.

Question 24

The interest rate effect leads to a downward-sloping aggregate demand curve because a higher price level causes consumption to _____ and investment to _____.

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

Question 25

According to the interest rate effect, a decrease in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending.

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

Question 26

The aggregate demand curve is negatively sloped in part because of the impact of interest rates on:

A) potential output.
B) price level.
C) consumption and investment spending.
D) government purchases.

Question 27

The interest rate effect of a change in the aggregate price level causes the:

A) long-run aggregate supply curve to be vertical.
B) aggregate demand curve to be negatively sloped.
C) short-run aggregate supply curve to be positively sloped.
D) aggregate demand curve to be positively sloped.

Question 28

The wealth effect is reflected in:

A) increases in interest rates to savers.
B) the upward slope in aggregate supply.
C) the upward slope in aggregate demand.
D) the downward slope in aggregate demand.

Question 29

The interest rate effect of a change in the aggregate price level occurs when:

A) a higher price level decreases the purchasing power of money, resulting in an increase in the interest rate.
B) the Fed uses contractionary monetary policy, causing an increase in the interest rate.
C) government borrowing in the loanable funds market raises the interest rate.
D) the price of a bond increases, reducing the interest rate.

Question 30

Suppose that the stock market crashes, which causes a large decrease in the value of many households' financial assets. The most likely outcome is a _____ the aggregate demand curve.

A) rightward shift of
B) leftward shift of
C) movement up
D) movement down

Question 31

If the price level rises by 10%, the purchasing power of $10,000 will:

A) increase to $11,000.
B) decrease to $9,000.
C) decrease to $1,000.
D) remain constant.

Question 32

Which statement is FALSE?

A) A rise in the price level lowers real wealth and results in a lower level of consumer spending.
B) A rise in the price level increases the demand for money, raises the interest rate, and reduces investment spending.
C) A fall in the price level will generally lead to a rise in the level of aggregate output demanded.
D) A fall in the price level will reduce the demand for money, raise the interest rate, and increase investment spending.

Question 33

The interest rate effect of the price level is reflected in the:

A) increase in interest rates to savers.
B) upward slope in aggregate supply.
C) upward slope in aggregate demand.
D) downward slope in aggregate demand.

Question 34

According to the interest rate effect, an increase in the price level causes people to _____ their money holdings, which _____ interest rates and _____ investment spending.

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

Question 35

The aggregate demand curve is downward sloping because of:

A) the inverse relationship between price and quantity demanded.
B) changes in expectation of future prices.
C) unexpected changes in commodity prices.
D) the wealth effect of a change in aggregate price level.

Question 36

The aggregate demand curve slopes:

A) downward for the same reasons that an ordinary demand curve does.
B) downward in part because when the price level falls, the real wealth of the public falls, and this induces people to change their consumption.
C) downward in part because as the price level falls, the ability of households and firms to borrow cheaply increases.
D) upward, unlike an ordinary demand curve.

Question 37

The interest rate effect is the tendency for changes in the price level to affect:

A) the quantity of investment demanded and thus interest rates.
B) export demand and thus aggregate demand.
C) interest rates and thus the quantity of investment spending and consumption.
D) real incomes and lead to shifts in potential output.

Question 38

Use the following to answer questions:
Figure: The Multiplier
(Figure: The Multiplier) Refer to Figure: The Multiplier. If this economy is at Y₁ and investment spending increases:

A) AD₁ will shift to the left, reflecting a multiplied decrease in real GDP at every price level.
B) AD₁ will shift to the right, reflecting a multiplied increase in real GDP at every price level.
C) an upward movement along the AD₁ will take place, reflecting an increase in the price level.
D) a downward movement along the AD₁ will take place, reflecting a decrease in the price level.

Question 39

The aggregate demand curve is negatively sloped because of the:

A) substitution effect of an aggregate price level change.
B) wealth effect of an aggregate price level change.
C) elasticity effect of an aggregate price level change.
D) fiscal policy effect.

Question 40

Which factor is one of the reasons that the aggregate demand curve slopes downward?

A) the paradox of thrift
B) the interest rate effect
C) the substitution effect
D) the income effect

Question 41

If prices are constant, but the value of financial assets increases, aggregate _____ shifts to the _____.

A) supply; left
B) supply; right
C) demand; left
D) demand; right

Question 42

Increasing the quantity of money in circulation shifts the _____ curve to the _____.

A) aggregate demand; left
B) long-run aggregate supply; right
C) aggregate demand; right
D) short-run aggregate supply; right

Question 43

Changes in aggregate demand can be caused by changes in:

A) wages.
B) business costs.
C) raw materials costs.
D) government spending.

Question 44

A decrease in aggregate demand is seen as a(n) _____ the aggregate demand curve.

A) downward movement along
B) upward movement along
C) shift to the left of
D) shift to the right of

Question 45

An increase in government spending on health care is likely to shift the _____ curve to the _____.

A) short-run aggregate supply; right
B) short-run aggregate supply; left
C) aggregate demand; right
D) aggregate demand; left

Question 46

Suppose that consumer expectations improve. The aggregate demand curve will undergo a:

A) shift to the left.
B) movement upward.
C) shift to the right.
D) movement downward.

Question 47

As a result of a decrease in the value of the dollar in relation to other currencies, U.S. imports decrease and exports increase. Consequently, there is a(n):

A) increase in short-run aggregate supply.
B) decrease in the quantity of aggregate output supplied in the short run.
C) increase in aggregate demand.
D) decrease in the quantity of aggregate output demanded.

Question 48

An increase in government spending, all other things unchanged, will cause the aggregate demand curve to:

A) become positively sloped.
B) remain constant.
C) shift to the right.
D) shift to the left.

Question 49

Assuming that prices remain constant, suppose that consumer assets and wealth lose value. The aggregate demand curve will undergo a:

A) shift to the left.
B) movement upward.
C) shift to the right.
D) movement downward.

Question 50

Suppose that a presidential candidate who promised large personal income tax cuts is elected. Which outcome is MOST likely?

A) a decrease in short-run aggregate supply
B) a decrease in aggregate demand
C) an increase in short-run aggregate supply
D) an increase in aggregate demand

Question 51

Which factor would shift the aggregate demand curve to the LEFT?

A) monetary policy that raises the interest rate
B) an increase in the aggregate price level
C) an increase in consumer wealth
D) stronger consumer optimism about income

Question 52

Raising taxes shifts the _____ curve to the _____.

A) aggregate demand; left
B) long-run aggregate supply; left
C) aggregate demand; right
D) short-run aggregate supply; left

Question 53

Changes in aggregate demand can be caused by changes in:

A) the stock of physical capital.
B) business costs.
C) raw materials costs.
D) the expenses of complying with government regulations.

Question 54

If the stock of physical capital increases, all other things unchanged, the aggregate demand curve will:

A) shift to the right.
B) shift to the left.
C) remain constant.
D) become positively sloped.

Question 55

The only government policy that has a DIRECT effect on the aggregate demand curve is:

A) changing the quantity of money.
B) raising or lowering the tax rate.
C) changing the level of government purchases of final goods and services.
D) changing the level of government transfers.

Question 56

A decrease in the supply of money shifts the aggregate _____ curve to the _____.

A) supply; left
B) supply; right
C) demand; left
D) demand; right

Question 57

If government increases income tax rates, the aggregate demand curve is likely to:

A) shift to the right.
B) shift to the left.
C) remain constant.
D) become positively sloped.

Question 58

An increase in aggregate demand is seen as a(n) _____ the aggregate demand curve.

A) shift to the right of
B) downward movement along
C) upward movement along
D) shift to the left of

Question 59

A decrease in the money supply is likely to cause a(n) _____ in borrowing, a(n) _____ interest rates and a(n) _____ in aggregate demand.

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

Question 60

The aggregate demand curve would NOT shift to the left as a result of:

A) a fall in consumers' wealth.
B) a decrease in the amount of money in circulation.
C) more pessimistic consumer expectations.
D) lower labor productivity.

Question 61

The aggregate supply curve shows the relationship between the _____ and the quantity of aggregate output supplied.

A) price of oil
B) aggregate price level
C) price of money
D) level of employment

Question 62

When the price level decreases, firms in perfectly competitive markets will:

A) decrease output and increase the price.
B) decrease output.
C) increase output and decrease the price.
D) increase output.

Question 63

Aggregate demand will NOT increase when:

A) household wealth rises but prices are constant.
B) government purchases of goods rise.
C) the quantity of money increases.
D) interest rates increase.

Question 64

Aggregate demand will decrease if:

A) the aggregate price level falls.
B) the government raises tax rates.
C) productivity declines.
D) the money supply increases.

Question 65

A change in _____ has the MOST direct effect on aggregate demand.

A) taxes
B) interest rates
C) the money supply
D) government spending

Question 66

During the Great Depression, the United States moved to the _____ along its _____ curve.

A) right; aggregate demand
B) right; short-run aggregate supply
C) left; aggregate demand
D) left; short-run aggregate supply

Question 67

Government purchases of goods and services _____, while changes in taxes and transfer payments _____.

A) are exercises of fiscal policy; are exercises of monetary policy
B) are exercises of monetary policy; are exercises of fiscal policy
C) influence aggregate demand directly; influence aggregate demand indirectly
D) influence aggregate demand indirectly; influence aggregate demand directly

Question 68

If the Fed increases the quantity of money in circulation, interest rates _____, investment spending _____, and the aggregate demand curve shifts to the _____.

A) decrease; increases; right
B) increase; increases; right
C) decrease; increases; left
D) increase; decreases; left

Question 69

Examples of fiscal policy do NOT include:

A) government spending on infrastructure to stimulate aggregate demand.
B) reducing the interest rate by increasing the money supply.
C) an economic stimulus package.
D) a $1,500 per family tax rebate.

Question 70

The aggregate supply curve shows the relationship of prices to:

A) sales.
B) the quantity of output people want to buy.
C) the quantity of output producers are willing to provide.
D) both the amount of output people want to buy and the amount of output producers want to provide.

Question 71

As a result of a sharp decrease in aggregate demand between 1929 and 1933, real GDP was _____ its 1929 level.

A) 29% below
B) 100% below
C) 29% above
D) 50% above

Question 72

Reducing taxes in response to a recession is an example of _____ policy.

A) monetary
B) investment
C) consumption
D) fiscal

Question 73

If Nike sells basketball shoes for $150 per pair and the cost of producing and selling a pair of basketball shoes is $15, Nike's profit per unit on a pair of basketball shoes is:

A) $135.
B) $160
C) $165.
D) $10.

Question 74

If the Fed decreases the quantity of money in circulation, interest rates _____, investment spending _____, and the aggregate demand curve shifts to the _____.

A) decrease; increases; right
B) decrease; decreases; left
C) increase; decreases; left
D) increase; decreases; right

Question 75

The aggregate supply curve shows the relationship between the aggregate price level and the aggregate:

A) output supplied.
B) money supply.
C) unemployment rate.
D) employment.

Question 76

When demand declined in the Great Depression of 1929-1933, the GDP deflator:

A) increased by 15%.
B) increased by 26%.
C) decreased by 15%.
D) decreased by 26%.

Question 77

The economy is in a recession. The desired FISCAL policy is a(n):

A) decrease in government transfer payments.
B) increase in government purchases of goods and services.
C) increase in tax rates.
D) decrease in interest rates.

Question 78

Aggregate demand will shift to the RIGHT if:

A) the aggregate price level increases.
B) government purchases increase.
C) taxes go up.
D) the money supply shrinks.

Question 79

Aggregate demand will increase if:

A) the public becomes more optimistic.
B) the aggregate price level falls.
C) government spending is reduced.
D) household wealth decreases.

Question 80

As a result of a sharp decrease in aggregate demand between 1929 and 1933, the unemployment rate changed from _____% in 1929 to _____% in 1933.

A) 0; 3
B) 3: 25
C) 40; 5
D) 25; 0