Deck 14: Aggregate Demand and Aggregate Supply

Question 1

Which of the following types of workers might have wages that change quickly?

A)unskilled, low-wage workers
B)union workers
C)employees of state and local governments
D)movie stars and rock stars

Answer 1

movie stars and rock stars

Question 2

Stickiness of wages

A)is unrelated to stickiness of prices.
B)lessens the stickiness of prices.
C)reinforces stickiness of prices.
D)may or may not reinforce stickiness of prices.

Answer 2

reinforces stickiness of prices.

Question 3

Prices that adjust nearly on a daily basis are

A)custom prices.
B)auction prices.
C)sticky prices.
D)heavy prices.

Answer 3

auction prices.

Question 4

Which of the following is a problem with the price system that can lead to a breakdown in the coordination of economic activity?

A)The price system works silently in the background.
B)Prices can be slow to adjust.
C)Prices may be flexible.
D)all of the above

Question 5

If prices are sticky

A)economic activity will be coordinated efficiently.
B)economic activity will not be coordinated efficiently.
C)prices will quickly adjust to changes in demand.
D)quantity supplied will always equal quantity demand.

Question 6

In modern economies

A)all prices are very flexible.
B)some prices are very flexible while others are not.
C)no prices are very flexible.
D)prices become less flexible as they increase.

Question 7

Recessions occur because of

A)real adverse shocks to the economy.
B)shocks to technology.
C)difficulties in coordinating economic affairs.
D)all of the above

Question 8

Suppose the demand for hamburgers increases. In the short run, firms that produce hamburgers will experience a rise in prices, which will induce them to

A)decrease production and decrease the number of workers.
B)increase production and increase the number of workers.
C)decrease production and increase the number of workers.
D)increase production and decrease the number of workers.

Question 9

The economic theory that emphasizes the role of difficulties in coordinating economic affairs as a cause of economic fluctuations is known as

A)Keynesian economics.
B)investment cycle theory.
C)real business cycle theory.
D)technology shock theory.

Question 10

Prices for fresh fruit, vegetables and other food products are examples of

A)custom prices.
B)auction prices.
C)sticky prices.
D)temporary prices.

Question 11

The mechanism that normally coordinates what goes on in an economy is the

A)government.
B)price system.
C)stock market.
D)Federal Reserve.

Question 12

Workers whose wages tend to adjust slowly include all of the following EXCEPT

A)union workers.
B)unskilled, low wage workers.
C)those with long-term contracts.
D)movie stars, professional athletes, and rock stars.

Question 13

Prices that adjust slowly are

A)custom prices.
B)auction prices.
C)flexible prices.
D)heavy prices.

Question 14

Prices for industrial commodities such as steel rods or machine tools are

A)heavy prices.
B)sticky prices.
C)auction prices.
D)custom prices.

Question 15

Workers often have _______ contracts and so their wages are _______.

A)long-term; flexible
B)long-term; sticky
C)short-term; sticky
D)short-term; flexible

Question 16

Real business cycle theory emphasizes the role of

A)demand shocks as a cause of economic fluctuations.
B)technology shocks as a cause of economic fluctuations.
C)shocks to the money supply as a cause of economic fluctuations.
D)government spending as a cause of economic fluctuations.

Question 17

Suppose the demand for hot dogs decreases. In the short run, firms that produce hot dogs will experience a fall in prices, which will induce them to

A)increase production and increase the number of workers.
B)decrease production and increase the number of workers.
C)decrease production and reduce the number of workers.
D)increase production and reduce the number of workers.

Question 18

In which market would the price be least likely to be ʺsticky?ʺ

A)refrigerators
B)steel rods
C)fresh fruit
D)trucks

Question 19

The economyʹs ability to coordinate economic activity is hindered by

A)sticky wages causing sticky prices.
B)auction prices.
C)workers whose wages change quickly.
D)all of the above

Question 20

Which of the following is a problem with the price system that can lead to fluctuations in output?

A)The price system works silently in the background.
B)Prices can be slow to adjust.
C)Prices may be flexible.
D)all of the above

Question 21

The relationship between the level of prices and the total demand for all goods and services is known as

A)aggregate supply.
B)market supply.
C)aggregate demand.
D)market demand.

Question 22

Prices of industrial products and wages tend to be the most ʺflexible.ʺ

Question 23

Aggregate demand refers to the relationship between

A)prices and the quantity of a good supplied.
B)the price level and the quantity of real GDP supplied.
C)prices and the quantity of a good demanded.
D)the price level and the quantity of real GDP demanded.

Question 24

The short run in macroeconomics is the period in which

A)prices change significantly.
B)no contracts or agreements exist to fix prices.
C)demand determines output.
D)the demand curve is vertical.

Question 25

Suppose consumer tastes and preferences shift from tacos to pizzas. In the short run, these changing tastes will result in pizza restaurants _______ pizza prices and _______ taco restaurants taco prices.

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

Question 26

For most firms, the biggest cost of doing business is wages.

Question 27

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s).
Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. Kashyap tracked the prices from the companiesʹ catalogs which
were reissued every six months.
Even though the catalogs listed in the Application were reissued every six months, the prices which were tracked in these retail catalogs

A)were typically fixed for a year or more.
B)changed every month.
C)tended to fall during periods of high inflation.
D)were not listed due to low rates of inflation.

Question 28

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s).
Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. Kashyap tracked the prices from the companiesʹ catalogs which
were reissued every six months.
This Application examines the concept of

A)the wealth effect.
B)sticky prices.
C)consumer spending habits.
D)stagflation.

Question 29

Suppose consumer tastes and preferences shift from pizza to tacos. In the short run case, these changing tastes will result in pizza restaurants _______ pizza prices and taco restaurants _______ taco prices.

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

Question 30

What are the two types of prices in an economy?

Question 31

As the price level _______ , the purchasing power of money _______.

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; stays the same

Question 32

Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts.

Question 33

The increase in spending that occurs because the real value of money increases when the price level falls is known as the

A)interest rate effect.
B)international trade effect.
C)price effect.
D)wealth effect.

Question 34

The price system always works instantaneously.

Question 35

The aggregate demand curve is

A)downward sloping.
B)upward sloping.
C)a vertical line at potential output.
D)a horizontal line at the current price level.

Question 36

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s).
Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. Kashyap tracked the prices from the companiesʹ catalogs which
were reissued every six months.
According to this Application, the prices which were tracked in the retail catalogs exemplified the macroeconomic concept of the short run, a period of time in which

A)price changes are significant because the aggregate supply curve is vertical.
B)prices never change because the aggregate demand curve is vertical.
C)prices change frequently because of changes in aggregate supply.
D)prices donʹt change very much, implying that aggregate supply is relatively flat.

Question 37

What is the total demand for goods and services in an entire economy called?

A)supply and demand
B)aggregate demand
C)consumer demand
D)GDP demand

Question 38

The price system works in an economy on a day-to-day basis to match the desires of consumers with the output from producers.

Question 39

Suppose that demand for a product falls, but prices are sticky. What is likely to happen to prices and output in that market, in the short run?

Question 40

What are some reasons why coordination of economic affairs through the price system may not work perfectly?

Question 41

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD2 could be caused by an)

A)decrease in the money supply.
B)increase in taxes.
C)decrease in the price level.
D)increase in government spending.

Question 42

The increase in spending that occurs because domestic goods become cheaper relative to foreign goods when the price level falls is known as the

A)interest rate effect.
B)international trade effect.
C)price effect.
D)wealth effect.

Question 43

Which of the following does NOT shift the U.S. aggregate demand curve?

A)an increase in the supply of money
B)an increase in GDP in Japan
C)a decrease in taxes
D)a decrease in the price level

Question 44

One reason the aggregate demand curve is downward sloping is because of the

A)interest rate effect.
B)welfare effect.
C)price effect.
D)tariff effect.

Question 45

The purchasing power of money decreases as the

A)production decreases.
B)price level increases.
C)employment increases.
D)demand increases.

Question 46

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD0 could be caused by an)

A)increase in the money supply.
B)decrease in taxes.
C)increase in the price level.
D)decrease in government spending.

Question 47

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from curve AD0 to curve AD1 could be caused by an)

A)decrease in the money supply.
B)decrease in taxes.
C)decrease in the price level.
D)decrease in government spending.

Question 48

Which of the following does NOT decrease aggregate demand in the United States?

A)a decrease in the price of oil
B)a decrease in GDP in Germany
C)a decrease in government spending
D)a decrease in the supply of money

Question 49

When interest rates are lower, consumers and companies are able to borrow money cheaply in order to make major purchases. As a result, the demand for goods in an economy will generally

A)decrease.
B)increase.
C)remain the same.
D)be minimally affected.

Question 50

The purchasing power of money increases as the

A)demand increases.
B)unemployment decreases.
C)price level falls.
D)production increases.

Question 51

Which of the following causes a movement along the aggregate demand curve?

A)a fall in wages
B)an increase in prices
C)an increase in government spending
D)an increase in the money supply

Question 52

The real value of money _______ as the price level falls.

A)remains the same
B)decreases
C)increases
D)none of the above

Question 53

When the price level is low, resulting in domestic goods being cheaper than imported foreign goods,

A)consumers hold more money.
B)consumers spend less.
C)the demand for domestic goods will increase.
D)there will be a reduction in import tariffs.

Question 54

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD2 could be caused by an)

A)increase in the money supply.
B)increase in taxes.
C)increase in the price level.
D)decrease in government spending.

Question 55

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from curve AD1 to curve AD0 could be caused by an)

A)decrease in the money supply.
B)decrease in taxes.
C)increase in the price level.
D)increase in government spending.

Question 56

The increase in spending that occurs because the demand for investment goods increases when the price level falls is known as the

A)interest rate effect.
B)international trade effect.
C)price effect.
D)wealth effect.

Question 57

Which of the following would cause a decrease in aggregate demand?

A)a rise in wages
B)an increase in prices
C)an increase in the money supply
D)a fall in investor confidence

Question 58

Which of the following would cause an increase in aggregate demand in the short run?

A)an increase in the supply of money
B)a decrease in the price level
C)an increase in taxes
D)a crop failure

Question 59

When the price level is low and the demand for domestic goods increases, how does it affect international trade?

A)Net exports will decrease.
B)Net exports will increase.
C)Prices of all international goods will decrease.
D)Prices of all international goods will increase.

Question 60

Which one of the following would shift the aggregate demand curve to the left?

A)an increase in the money supply
B)an increase in government spending
C)an increase in exports
D)an increase in taxes

Question 61

If the government decreases its purchases of goods and services by $12,000 and the MPS is 0.5, GDP and income will eventually decrease by

A)$2,400.
B)$6,000.
C)$24,000.
D)$60,000.

Question 62

When consumers spend and buy things regardless of their level of income, this is known as

A)bad financial management.
B)living the good life.
C)autonomous consumption spending.
D)using credit to its maximum.

Question 63

Summary of the article:
U.S. Economy: New-Home Sales Decline to Record Low (Update 1)
By Bob Willis
Bloomberg Businessweek
February 24, 2010
In January 2010, new home sales in the United States dropped to their lowest level on record, as
homebuilders faced significant competition from foreclosures of existing homes. The decline in sales occurred
despite projections made just one month earlier that new home sales would rise in January. The sales decline
reemphasized Fed Chairman Ben Bernankeʹs comments regarding the slow recovery of the economy and the
need for continued low interest rates.
New home sales declined in the Northeast, South, and West, with only the Midwest showing a small gain.
For the entire nation, the median price of a new home fell to its lowest level since December 2003. Based on
the sales rate in January 2010, the country had a 9.1-month inventory of homes, its highest rate since May
2009.
If home prices are falling, consumers purchasing a home will find their purchasing power of money has increased. This benefit to consumers is called the

A)inflation effect.
B)wealth effect.
C)home equity effect.
D)multiplier effect.

Question 64

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from point b to point a could be caused by an)

A)decrease in the money supply.
B)increase in taxes.
C)increase in the price level.
D)increase in government spending.

Question 65

If the multiplier = 2.5, the MPS would be

A)0.25.
B)0.4.
C)0.6.
D)0.75.

Question 66

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from curve AD2 to curve AD1 could be caused by an)

A)increase in the money supply.
B)increase in taxes.
C)increase in the price level.
D)increase in government spending.

Question 67

Summary of the article:
U.S. Economy: New-Home Sales Decline to Record Low (Update 1)
By Bob Willis
Bloomberg Businessweek
February 24, 2010
In January 2010, new home sales in the United States dropped to their lowest level on record, as
homebuilders faced significant competition from foreclosures of existing homes. The decline in sales occurred
despite projections made just one month earlier that new home sales would rise in January. The sales decline
reemphasized Fed Chairman Ben Bernankeʹs comments regarding the slow recovery of the economy and the
need for continued low interest rates.
New home sales declined in the Northeast, South, and West, with only the Midwest showing a small gain.
For the entire nation, the median price of a new home fell to its lowest level since December 2003. Based on
the sales rate in January 2010, the country had a 9.1-month inventory of homes, its highest rate since May
2009.
The excess inventory of homes has put downward pressure on home prices. All else equal, in the market for homes, this means

A)demand should increase.
B)supply should decrease.
C)quantity demanded should increase.
D)quantity supplied should increase.

Question 68

If the MPS = 0.2, the multiplier would be

A)0.5.
B)1.
C)2.
D)5.

Question 69

Summary of the article:
U.S. Economy: New-Home Sales Decline to Record Low (Update 1)
By Bob Willis
Bloomberg Businessweek
February 24, 2010
In January 2010, new home sales in the United States dropped to their lowest level on record, as
homebuilders faced significant competition from foreclosures of existing homes. The decline in sales occurred
despite projections made just one month earlier that new home sales would rise in January. The sales decline
reemphasized Fed Chairman Ben Bernankeʹs comments regarding the slow recovery of the economy and the
need for continued low interest rates.
New home sales declined in the Northeast, South, and West, with only the Midwest showing a small gain.
For the entire nation, the median price of a new home fell to its lowest level since December 2003. Based on
the sales rate in January 2010, the country had a 9.1-month inventory of homes, its highest rate since May
2009.
The decrease in spending on new homes will, other things equal,

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

Question 70

The marginal propensity to save MPS)is the

A)amount of saving that is later consumed.
B)fraction of additional income that is saved.
C)part of consumption spending that does not depend on income.
D)total amount of income that is saved.

Question 71

If the government increased its purchases of goods and services by $12,000, and this resulted in an eventual increase in GDP and income of $60,000, the MPS would be equal to

A)0.2.
B)0.4.
C)0.8.
D)2.

Question 72

If the multiplier = 2.5, the MPC would be

A)0.25.
B)0.4.
C)0.6.
D)0.75.

Question 73

Assuming the price level has not changed, how would an increase in the aggregate demand affect real GDP?

A)It decreases.
B)It increases.
C)It only changes with changes in imports.
D)It only changes with changes in exports.

Question 74

If the government increases its purchases of goods and services by $3,000 and the MPC is 0.8, GDP and income will eventually increase by

A)$2,400.
B)$6,000.
C)$15,000.
D)$24,000.

Question 75

When consumers realize additional income in a household and spend the additional monies, it is called the

A)credit increase theory.
B)marginal propensity to consume.
C)aggregate demand factor.
D)measure of individual wealth.

Question 76

The multiplier represents the ratio of the total shift in aggregate demand to the

A)total shift in short-run aggregate supply.
B)initial shift in short-run aggregate supply.
C)initial shift in aggregate demand.
D)total shift in long-run aggregate supply.

Question 77

If the MPC = 0.9, the multiplier would be

A)0.1.
B)2.
C)9.
D)10.

Question 78

If the government decreased its purchases of goods and services by $4,000, and this resulted in an eventual decrease in GDP and income of $10,000, the MPC would be equal to

A)2.5.
B)1.5.
C)0.6.
D)0.4.

Question 79

Figure 14.1
Figure 14.1 shows three aggregate demand curves. A movement from point b to point c could be caused by an)

A)increase in the money supply.
B)decrease in taxes.
C)decrease in the price level.
D)decrease in government spending.

Question 80

The relationship between consumer spending and income is known as the

A)rate of income.
B)consumption function.
C)inflation rate.
D)rate of individual wealth.