Deck 32: Aggregate Demand and Aggregate Supply

Question 1

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the

A)net export effect.
B)wealth effect.
C)real-balances effect.
D)multiplier effect.

Answer 1

multiplier effect.

Question 2

A decline in investment will shift the AD curve to the

A)left by a multiple of the change in investment.
B)left by the same amount as the change in investment.
C)right by the same amount as the change in investment.
D)right by a multiple of the change in investment.

Answer 2

left by a multiple of the change in investment.

Question 3

The aggregate demand curve

A)is upsloping because a higher price level is necessary to make production profitable as production costs rise.
B)is downsloping because production costs decline as real output increases.
C)shows the amount of expenditures required to induce the production of each possible level of real output.
D)shows the amount of real output that will be purchased at each possible price level.

Answer 3

shows the amount of real output that will be purchased at each possible price level.

Question 4

The aggregate demand curve is

A)vertical under conditions of full employment.
B)horizontal when there is considerable unemployment in the economy.
C)downsloping because of the interest-rate, real-balances, and foreign purchases effects.
D)downsloping because production costs decrease as real output rises.

Question 5

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.

A)aggregate demand curve would shift to the right.
B)aggregate supply curve would shift to the left.
C)aggregate supply curve would shift to the right.
D)aggregate demand curve would shift to the left.

Question 6

Which one of the following would not shift the aggregate demand curve?

A)a change in the price level
B)depreciation of the international value of the dollar
C)a decline in the interest rate at each possible price level
D)an increase in personal income tax rates

Question 7

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S.goods.This statement describes

A)the output effect.
B)the foreign purchases effect.
C)the real-balances effect.
D)the shift-of-spending effect.

Question 8

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the

A)real-balances, interest-rate, and foreign purchases effects.
B)determinants of aggregate supply.
C)determinants of aggregate demand.
D)sole determinants of the equilibrium price level and the equilibrium real output.

Question 9

If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift

A)leftward by $40 billion at each price level.
B)rightward by $20 billion at each price level.
C)rightward by $40 billion at each price level.
D)leftward by $20 billion at each price level.

Question 10

The foreign purchases effect suggests that an increase in the U.S.price level relative to other countries will

A)increase the amount of U.S.real output purchased.
B)increase U.S.imports and decrease U.S.exports.
C)increase both U.S.imports and U.S.exports.
D)decrease both U.S.imports and U.S.exports.

Question 11

The foreign purchases effect suggests that a decrease in the U.S.price level relative to other countries will

A)shift the aggregate demand curve leftward.
B)shift the aggregate supply curve leftward.
C)decrease U.S.exports and increase U.S.imports.
D)increase U.S.exports and decrease U.S.imports.

Question 12

Which of the following is incorrect?

A)As the U.S.price level rises, U.S.goods become relatively more expensive so that U.S.exports fall and U.S.imports rise.
B)As the price level falls, the demand for money declines, the interest rate declines, and interest-rate-sensitive spending increases.
C)When the price level increases, real balances increase and businesses and households find themselves wealthier and therefore increase their spending.
D)Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward-flexible prices, reduces the price level.

Question 13

If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift

A)leftward by $50 billion at each price level.
B)rightward by $10 billion at each price level.
C)rightward by $50 billion at each price level.
D)leftward by $40 billion at each price level.

Question 14

The real-balances, interest-rate, and foreign purchases effects all help explain

A)why the aggregate demand curve is downsloping.
B)why the aggregate supply curve is upsloping.
C)shifts in the aggregate demand curve.
D)shifts in the aggregate supply curve.

Question 15

Other things equal, a decrease in the real interest rate will

A)expand investment and shift the AD curve to the left.
B)expand investment and shift the AD curve to the right.
C)reduce investment and shift the AD curve to the left.
D)reduce investment and shift the AD curve to the right.

Question 16

An increase in net exports will shift the AD curve to the

A)left by a multiple of the change in net exports.
B)left by the same amount as the change in net exports.
C)right by the same amount as the change in net exports.
D)right by a multiple of the change in net exports.

Question 17

The interest-rate effect suggests that

A)a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending.
B)an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending.
C)an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending.
D)an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

Question 18

The foreign purchases effect

A)shifts the aggregate demand curve rightward.
B)shifts the aggregate demand curve leftward.
C)shifts the aggregate supply curve rightward.
D)moves the economy along a fixed aggregate demand curve.

Question 19

The real-balances effect indicates that

A)an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending.
B)a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C)a higher price level will increase the real value of many financial assets and therefore increase spending.
D)a higher price level will decrease the real value of many financial assets and therefore reduce spending.

Question 20

The determinants of aggregate demand

A)explain why the aggregate demand curve is downsloping.
B)explain shifts in the aggregate demand curve.
C)demonstrate why real output and the price level are inversely related.
D)include input prices and resource productivity.

Question 21

The aggregate supply curve (short run)

A)graphs as a horizontal line.
B)is steeper above the full-employment output than below it.
C)slopes downward and to the right.
D)presumes that changes in wages and other resource prices match changes in the price level.

Question 22

A rightward shift in the aggregate supply curve is best explained by an increase in

A)business taxes.
B)productivity.
C)nominal wages.
D)the price of imported resources.

Question 23

The aggregate supply curve (short run)

A)slopes downward and to the right.
B)graphs as a vertical line.
C)slopes upward and to the right.
D)graphs as a horizontal line.

Question 24

The immediate-short-run aggregate supply curve represents circumstances where

A)both input and output prices are fixed.
B)both input and output prices are flexible.
C)input prices are fixed, but output prices are flexible.
D)input prices are flexible, but output prices are fixed.

Question 25

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4.The per-unit cost of production in the economy described is

A)$0.50.
B)$1.
C)$2.
D)$5.

Question 26

Other things equal, an improvement in productivity will

A)shift the aggregate demand curve to the left.
B)shift the aggregate supply curve to the left.
C)shift the aggregate supply curve to the right.
D)increase the price level.

Question 27

Which one of the following would increase per-unit production cost and therefore shift the aggregate supply curve to the left?

A)a reduction in business taxes
B)production bottlenecks occurring when producers near full plant capacity
C)an increase in the price of imported resources
D)deregulation of industry

Question 28

The aggregate supply curve (short run) is upsloping because

A)wages and other resource prices match changes in the price level.
B)the price level is flexible upward but inflexible downward.
C)per-unit production costs rise as the economy moves toward and beyond its full-employment real output.
D)wages and other resource prices are flexible upward but inflexible downward.

Question 29

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households.We would expect this to

A)affect neither aggregate supply nor aggregate demand.
B)increase aggregate demand.
C)reduce aggregate demand.
D)reduce aggregate supply.

Question 30

Which of the following would most likely shift the aggregate demand curve to the right?

A)an increase in stock prices that increases consumer wealth
B)increased fear that a recession will cause workers to lose their jobs
C)an increase in personal income tax rates
D)a reduction in household borrowing because of tighter lending practices

Question 31

What percentage of the average U.S.firm's costs is accounted for by wages and salaries?

A)40
B)60
C)75
D)85

Question 32

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4.All else being equal, if the price of each input increased from $4 to $6, productivity would

A)fall from 2 to 3.
B)fall from 0.50 to 0.33.
C)rise from 1 to 2.
D)remain unchanged.

Question 33

Other things equal, if the U.S.dollar were to depreciate, the

A)aggregate demand curve would remain fixed in place.
B)aggregate supply curve would shift to the left.
C)aggregate supply curve would shift to the right.
D)aggregate demand curve would shift to the left.

Question 34

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)?

A)a reduced amount of excess capacity
B)increased government spending on military equipment
C)an appreciation of the U.S.dollar
D)increased consumer optimism regarding future economic conditions

Question 35

The aggregate supply curve

A)is explained by the interest rate, real-balances, and foreign purchases effects.
B)gets steeper as the economy moves from the top of the curve to the bottom of the curve.
C)shows the various amounts of real output that businesses will produce at each price level.
D)is downsloping because real purchasing power increases as the price level falls.

Question 36

The immediate-short-run aggregate supply curve is

A)downsloping.
B)upsloping.
C)vertical.
D)horizontal.

Question 37

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4.The level of productivity is

A)20.
B)10.
C)5.
D)2.

Question 38

Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4.Given an increase in input price from $4 to $6, we would expect the aggregate

A)supply curve to shift to the left.
B)supply curve to shift to the right.
C)demand curve to shift to the left.
D)supply and demand curves to both remain unchanged.

Question 39

Suppose that technological advancements stimulate $20 billion in additional investment spending.If the MPC = 0.6, how much will the change in investment increase aggregate demand?

A)$12 billion
B)$20 billion
C)$33.3 billion
D)$50 billion

Question 40

The shape of the immediate-short-run aggregate supply curve implies that

A)total output depends on the volume of spending.
B)increases in aggregate demand are inflationary.
C)output prices are flexible, but input prices are not.
D)government cannot bring an economy out of a recession by increasing spending.

Question 41

Suppose that nominal wages fall and productivity rises in a particular economy.Other things equal, the aggregate

A)demand curve will shift leftward.
B)supply curve will shift rightward.
C)supply curve will shift leftward.
D)expenditures curve will shift downward.

Question 42

A rightward shift of the AD curve in the very steep upper part of the short-run AS curve will

A)increase real output by more than the price level.
B)increase the price level by more than real output.
C)reduce real output by more than the price level.
D)reduce the price level by more than real output.

Question 43

The determinants of aggregate supply

A)are consumption, investment, government, and net export spending.
B)explain why real domestic output and the price level are directly related.
C)explain the three distinct ranges of the aggregate supply curve.
D)include resource prices and resource productivity.

Question 44

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units.Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3.The per-unit cost of production in this economy is

A)$0.05.
B)$0.10.
C)$0.50.
D)$1.00.

Question 45

The table gives information about the relationship between input quantities and real domestic output in a hypothetical economy.The level of productivity in the economy is

A)2.
B)0.5.
C)4.
D) 200

Question 46

A rightward shift of the AD curve in the very flat part of the short-run AS curve will

A)increase real output by more than the price level.
B)increase the price level by more than real output.
C)reduce real output by more than the price level.
D)reduce the price level by more than real output.

Question 47

Other things equal, appreciation of the dollar

A)increases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.
B)increases aggregate demand in the United States and may decrease aggregate supply by reducing the prices of imported resources.
C)decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources.
D)decreases aggregate demand in the United States and may reduce aggregate supply by increasing the prices of imported resources.

Question 48

Graphically, demand-pull inflation is shown as a

A)rightward shift of the AD curve along an upsloping AS curve.
B)leftward shift of the AS curve along a downsloping AD curve.
C)leftward shift of the AS curve along an upsloping AD curve.
D)rightward shift of the AD curve along a downsloping AS curve.

Question 49

Given a fixed upsloping AS curve, a rightward shift of the AD curve will

A)cause cost-push inflation.
B)increase real output but not the price level.
C)increase the price level but not real output.
D)increase both the price level and real output.

Question 50

Productivity measures

A)real output per unit of input.
B)per-unit production costs.
C)the changes in real wealth caused by price level changes.
D)the amount of capital goods used per worker.

Question 51

Graphically, cost-push inflation is shown as a

A)leftward shift of the AD curve.
B)rightward shift of the AS curve.
C)leftward shift of the AS curve.
D)rightward shift of the AD curve.

Question 52

The table gives aggregate demand and supply schedules for a hypothetical economy.If the amount of real output demanded at each price level falls by $200, this might have been caused by

A)an increase in net exports.
B)a worsening of business expectations.
C)an increase in consumer wealth.
D)a decrease in the personal income tax.

Question 53

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units.Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3.If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the aggregate

A)supply curve would shift to the left.
B)supply curve would shift to the right.
C)demand curve would shift to the left.
D)demand curve would shift to the right.

Question 54

Per-unit production cost is

A)real output divided by inputs.
B)total input cost divided by units of output.
C)units of output divided by total input cost.
D)a determinant of aggregate demand.

Question 55

Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a

A)rightward shift of the aggregate demand curve along a fixed aggregate supply curve.
B)rightward shift of the aggregate supply curve along a fixed aggregate demand curve.
C)rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve.
D)leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve.

Question 56

Other things equal, an improvement in productivity will

A)increase the equilibrium price level.
B)shift the aggregate supply curve to the left.
C)shift the aggregate supply curve to the right.
D)shift the aggregate demand curve to the left.

Question 57

Which of the following would not shift the aggregate supply curve?

A)an increase in labor productivity
B)a decline in the price of imported oil
C)a decline in business taxes
D)an increase in the price level

Question 58

Other things equal, a reduction in personal and business taxes can be expected to

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

Question 59

An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units.Each unit of capital costs $10; each unit of raw materials, $4; and each unit of labor, $3.If the per-unit price of raw materials rises from $4 to $8 and all else remains constant, the per-unit cost of production will rise by about

A)100 percent.
B)50 percent.
C)40 percent.
D)30 percent.

Question 60

If aggregate demand decreases, and, as a result, real output and employment decline but the price level remains unchanged, it is most likely that

A)the money supply has declined.
B)the price level is inflexible downward and a recession has occurred.
C)cost-push inflation has occurred.
D)productivity has declined.

Question 61

An increase in input productivity will

A)shift the aggregate supply curve leftward.
B)reduce the equilibrium price level, assuming downward flexible prices.
C)reduce the equilibrium real output.
D)reduce aggregate demand.

Question 62

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.If this nation's equilibrium price level is 125, its net exports will be

A)minus $4 billion.
B)minus $2 billion.
C)zero.
D)$2 billion.

Question 63

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.If the equilibrium level of real GDP is $43 billion, its level of consumption will be

A)$20 billion.
B)$22 billion.
C)$24 billion.
D)$26 billion.

Question 64

Which of the following is a true statement?

A)Firms and resource suppliers generally find it easier to reduce prices than to raise them.
B)As the price level increases, interest rates will rise and therefore consumption and investment spending will also rise.
C)An initial increase in aggregate demand may cause a further increase in aggregate demand because higher prices mean higher incomes.
D)A decline in aggregate demand will primarily affect real output and employment if prices are inflexible downward.

Question 65

When aggregate demand declines, some firms may reduce employment rather than wages because wage reductions may

A)not be possible due to the minimum wage law.
B)increase the cost of raising money capital.
C)reduce the demands for their products.
D)set off a price war.

Question 66

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.If the amounts of GDP supplied at the price levels shown (in descending order) are $45, $43, $40, $37, and $31, the equilibrium level of real GDP will be

A)$37 billion.
B)$35 billion.
C)$26 billion.
D)$43 billion.

Question 67

When aggregate demand declines, the price level may remain constant, at least for a time, because

A)firms individually may fear that their price cut may set off a price war.
B)menu costs rise.
C)price cuts tend to increase efficiency wages.
D)product markets are highly competitive.

Question 68

If aggregate demand increases and aggregate supply decreases, the price level

A)will decrease, but real output may increase, decrease, or remain unchanged.
B)will increase, but real output may increase, decrease, or remain unchanged.
C)and real output will both increase.
D)and real output will both decrease.

Question 69

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.If the amounts of GDP supplied at the price levels shown (in descending order) are $27, $25, $22, $18, and $13, the equilibrium price level will be

A)128.
B)125.
C)122.
D)119.

Question 70

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium

A)output would necessarily rise.
B)output would necessarily fall.
C)price level would necessarily fall.
D)price level would necessarily rise.

Question 71

In which of the following sets of circumstances can we confidently expect inflation?

A)Aggregate supply and aggregate demand both increase.
B)Aggregate supply and aggregate demand both decrease.
C)Aggregate supply decreases and aggregate demand increases.
D)Aggregate supply increases and aggregate demand decreases.

Question 72

If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect

A)aggregate demand to decrease and aggregate supply to increase.
B)both aggregate demand and aggregate supply to decrease.
C)both aggregate demand and aggregate supply to increase.
D)aggregate demand to increase and aggregate supply to decrease.

Question 73

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.If equilibrium real GDP is $31 billion, the equilibrium price level will be

A)128.
B)125.
C)122.
D)119.

Question 74

Efficiency wages are

A)above-market wages that bring forth so much added work effort that per-unit production costs are lower than at market wages.
B)wage payments necessary to compensate workers for unpleasant or risky work conditions.
C)usually less than market wages.
D)relevant to macroeconomics because they explain rightward shifts in aggregate demand.

Question 75

Prices and wages tend to be

A)flexible both upward and downward.
B)inflexible both upward and downward.
C)flexible downward but inflexible upward.
D)flexible upward but inflexible downward.

Question 76

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.A decline in the international value of the dollar would

A)increase the values in the X and M columns and reduce aggregate demand.
B)decrease the values in the X and M columns and increase aggregate demand.
C)decrease the values in column X increase the values in column M , and reduce aggregate demand.
D)increase the values in column X , decrease the values in column M , and increase aggregate demand.

Question 77

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of

A)the foreign purchases effect.
B)inflexible product prices.
C)wage contracts.
D)the wealth effect.

Question 78

A decrease in aggregate demand will cause a greater decline in real output the

A)less flexible is the economy's price level.
B)more flexible is the economy's price level.
C)steeper is the economy's AS curve.
D)larger is the economy's marginal propensity to save.

Question 79

In the accompanying table for a particular country, C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports.All figures are in billions of dollars.A decrease in the interest rate not caused by a change in the price level would

A)increase the values in column Ig and increase aggregate demand.
B)decrease the values in column Ig and increase aggregate demand.
C)increase the values in column C and decrease aggregate demand.
D)decrease the values in column C and decrease aggregate demand.

Question 80

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may

A)reduce per-unit production costs.
B)reduce worker morale and work effort and thus lower productivity.
C)increase the firms' cost of raising financial capital.
D)reduce the demands for their products.