Deck 20: Aggregate Demand and Supply

Question 1

The aggregate demand curve slopes downward indicating that:

A) an increase in the general price level will reduce the aggregate quantity of goods and services demanded.
B) an increase in the general price level will increase the aggregate quantity of goods and services demanded.
C) a change in the interest rate will alter the aggregate quantity of goods and services demanded.
D) consumers substitute between domestic-made and foreign-made goods as their relative prices change.

Answer 1

A

Question 2

If the overall price level rises from 100 to 150, the aggregate

A) quantity demanded could increase from $5 trillion to $6 trillion.
B) quantity demanded could decrease from $5 trillion to $4 trillion.
C) demand curve could shift to the right.
D) demand curve could shift to the left.

Answer 2

B

Question 3

Which of the following is true , other things equal?

A) A reduction in prices will increase the real wealth of those holding a fixed quantity of money.
B) A reduction in prices will lead to a decline in net exports.
C) A reduction in prices will increase the scarcity of money, raise the real interest rate, and, thereby, encourage investment and consumption.
D) A reduction in prices will increase profit margins and, thereby, stimulate additional investment.

Answer 3

A

Question 4

Which of the following correctly describes the interest-rate effect?

A) If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
B) If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
C) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
D) If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.

Question 5

The aggregate demand curve indicates the relationship between:

A) the real wage rate and the quality of resources demanded by producers of goods and services.
B) the interest rate and the amount of loanable funds demanded by borrowers.
C) the natural rate of unemployment and the demand for goods and services when the economy is in long-run equilibrium.
D) the general price level and the aggregate quantity of goods and services demanded.

Question 6

When price level in the United States rises,

A) there is a increased demand for borrowed money.
B) producers' demand for new machinery increases, contributing to an increase in aggregate demand.
C) Americans tend to buy more foreign goods and services.
D) the French, Canadians, and Japanese would find our exports more attractive.

Question 7

The net exports effect is the inverse relationship between net exports and the ____ of an economy.

A) potential real GDP
B) chain-price deflator
C) price level
D) consumption spending

Question 8

For an economy, aggregate demand equals:

A) consumption plus investment plus government spending plus exports.
B) consumption plus investment plus government spending plus (exports minus imports).
C) consumption plus investment plus (taxes minus transfers) plus (exports minus imports).
D) consumption plus investment plus government spending plus net exports (imports minus exports).

Question 9

Which of the following reasons helps explain why the aggregate demand curve is downward sloping?

A) The real balances effect or wealth effect: Consumers spend more on goods and services when the price level falls because lower prices increase consumer purchasing power.
B) The producer-push effect: At less than full employment, increases in quantity demanded will raise price, and thus will motivate sellers to produce more.
C) The hidden inflation effect: As the price level rises, consumers fail to recognize that prices are higher, and consequently they fail to reduce expenditures on goods and services.
D) The cost-pull effect: As costs of production rise, consumers are pulled to buy more of the products they want most.

Question 10

Which of the following is not a reason for the downward slope of the aggregate demand curve?

A) Real balances effect
B) Interest-rate effect
C) Net exports effect
D) Government spending effect

Question 11

When the CPI is 300, a real GDP of $8 trillion is demanded in a given year. If the CPI is 250, which of the following could be the real GDP demanded?

A) $10 trillion
B) $8 trillion
C) $6 trillion
D) $4 trillion

Question 12

The net exports effect is the ____ relationship between net exports and the price level of an economy.

A) inverse
B) independent
C) direct
D) linear

Question 13

The aggregate demand curve is downward sloping because:

A) an increase in the price level will cause an increase in spending.
B) at lower price levels, real wealth decreases, causing a decrease in the quantities of goods and services demanded.
C) at lower price levels, interest rates decrease, causing a decrease in the quantities of goods and services demanded.
D) at lower price levels, exports increase, causing an increase in real GDP.

Question 14

Aggregate demand's downward-sloping character reflects three principal influences as shown in which of the following?

A) People's desire to maintain real wealth holdings, the interest rate, and international trade.
B) People's desire to increase the price level, the interest rate, and the economic growth effect.
C) The interest rate, the economic growth effect, and international trade.
D) Cost-pull inflation, demand-pull inflation, and the need to maintain real wealth holdings.

Question 15

According to the interest rate effect, as the price level rises,:

A) people feel poorer and buy less.
B) United States products become more expensive and foreigners buy less U.S. goods.
C) interest rates fall, and people buy less.
D) interest rates rise, and people buy less.

Question 16

When moving along a market demand curve, the prices of related goods are assumed to be constant. With an aggregate demand curve,

A) the assumption is meaningless because we are using a market basket for all goods and services.
B) the prices of related goods have an inverse relationship.
C) all goods are assumed to have the same price.
D) the same assumption holds true.

Question 17

According to the net exports effect, as the price level falls relative to the rest of the world,

A) foreigners buy fewer goods.
B) foreigners buy more U.S. goods.
C) the aggregate demand curve shifts to the left.
D) the aggregate demand curve shifts to the right.

Question 18

In the aggregate demand and supply model, the:

A) aggregate supply curve is horizontal at full-employment real GDP.
B) vertical axis measures real GDP.
C) vertical axis measures the overall price level.
D) horizontal axis measures the overall price level.

Question 19

When the price level falls, the total quantities of goods and services demanded:

A) decrease.
B) stay the same.
C) increase.
D) increases and then decreases.

Question 20

The aggregate demand curve shows how real GDP purchased varies with changes in:

A) unemployment.
B) the price of a particular good.
C) the overall price level.
D) the interest rate.

Question 21

Which one of the following factors will most likely cause an increase in aggregate demand?

A) An increase in net exports.
B) An increase in the real interest rate.
C) A decrease in net exports due to falling incomes abroad.
D) A technological development that decreases the cost of producing computer chips.

Question 22

The interest rate effect predicts that higher prices:

A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) increase borrowing, leading to lower interest rates and more investment.
D) increase borrowing, leading to higher interest rates and less investment.

Question 23

Which of the following will most likely increase aggregate demand?

A) a decrease in stock market prices
B) an increase in business investment spending
C) a decrease in the expected inflation rate
D) a decrease in real GDP

Question 24

A rightward shift in the aggregate demand curve can be caused by an increase in:

A) the price level.
B) business investment spending.
C) taxes.
D) production costs.

Question 25

Which of the following will not shift the aggregate demand curve to the right?

A) consumers becoming more optimistic about the future
B) an increase in government spending
C) business optimism increases
D) consumers become pessimistic about the future

Question 26

The aggregate demand curve will shift rightward when there is:

A) a decrease in government spending.
B) a decrease in incomes abroad.
C) a tax increase.
D) the expectation that future consumer income will rise.

Question 27

The real balances effect predicts that higher prices:

A) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
B) make people worse off by reducing the value of their wealth, leading them to save less and spend more.
C) make people better off by increasing the value of their wealth, leading them to save less and spend more.
D) increase borrowing, leading to higher interest rates and less investment.

Question 28

Which of the following will increase aggregate demand in the United States?

A) a higher price level
B) an increase in the real interest rate
C) an increase in wealth due to a substantial appreciation in the value of stocks
D) a decrease in real income in Japan and Western Europe

Question 29

Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then:

A) aggregate demand will decrease.
B) aggregate demand will increase.
C) long-run aggregate supply will increase.
D) long-run aggregate supply will decrease.

Question 30

The real balance effect (wealth effect), the interest rate effect, and the net exports effect all help to explain the:

A) decrease in supply in the loanable funds market.
B) large federal budget deficit.
C) increase in short-run aggregate supply.
D) downward-sloping aggregate demand curve.

Question 31

Which of the following will not shift the aggregate demand curve to the left?

A) Consumers become more optimistic about the future.
B) Government spending decreases.
C) Business optimism decreases.
D) Consumers become pessimistic about the future.

Question 32

Which of the following could not be expected to shift the aggregate demand curve?

A) net exports fall
B) consumption spending decreases
C) an increase in government spending
D) a change in real GDP

Question 33

Suppose the price level falls. The result is that the:

A) aggregate supply curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) general price level would rise causing a movement up the aggregate demand curve.
D) aggregate demand curve would slope downward because of the real balances effect.

Question 34

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:

A) real balances effect.
B) interest-rate effect.
C) net exports effect.
D) substitution effect.

Question 35

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:

A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Question 36

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:

A) interest-rate effect.
B) real balance effect.
C) investment effect.
D) disinvestment effect.

Question 37

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

A) An increase in exports.
B) An increase in investment.
C) An increase in government spending.
D) A decrease in government spending.

Question 38

As prices rise, people will buy fewer goods and services because:

A) the interest rate has declined.
B) aggregate demand has increased.
C) the purchasing power of the fixed quantity of money has declined.
D) the income of households has increased.

Question 39

A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future consumer income will fall will all cause aggregate:

A) demand to shift rightward.
B) demand to shift leftward.
C) supply to shift rightward.
D) supply to shift leftward.

Question 40

Why does the aggregate demand (AD) curve slope downward? What could cause the AD curve to shift to the right? What impact would a rightward shift of the AD curve have on the economy?

Question 41

Suppose an increase in government spending stimulates real GDP without affecting the price level. What is the relevant range of the aggregate supply curve in this case?

A) the classical range
B) the intermediate range
C) the Keynesian range
D) the monetarist range

Question 42

Exhibit 10-5 Aggregate demand curves

In Exhibit 10-5, which one of the following could cause the U.S. aggregate demand curve to move from AD₃ to AD₂?

A) greater resource availability
B) nonfluctuating resource availability
C) a recession in Japan
D) an increase in government grants for AIDS awareness programs

Question 43

Exhibit 10-1 Aggregate supply curve

In Exhibit 10-1, there are plenty of idle resources and no upward pressure on prices in:

A) the segment labeled ab.
B) the segment labeled bc.
C) the segment labeled cd.
D) both segment bc and segment cd.

Question 44

In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate demand curve to shift outwards, which of the following is most likely to occur?

A) The price level and real GDP will both rise.
B) The price level will not change, but real GDP will increase.
C) The price level will rise, but real GDP will not change.
D) Both the price level and real GDP will not change.

Question 45

In the classical range of the aggregate supply curve, greater spending for consumer and investment goods results in:

A) stagflation.
B) more unemployment.
C) greater output.
D) a higher price level.

Question 46

To illustrate the classical argument that "supply creates its own demand," the aggregate supply curve should be drawn:

A) downward-sloping.
B) upward-sloping.
C) horizontal.
D) vertical.

Question 47

The vertical portion of the aggregate supply curve shows that at full employment an increase in the price level will:

A) not alter the economy's full-employment real GDP.
B) increase the economy's full-employment real GDP.
C) reduce the quantity of goods and services purchasers will demand.
D) improve the overall efficiency of resource use.

Question 48

According to classical theory, if the aggregate demand curve decreased and the economy experienced unemployment, then:

A) the economy would remain in this condition indefinitely.
B) the government must increase spending to restore full employment.
C) prices and wages would fall quickly to restore full employment.
D) the supply of money would increase until the economy returned to full employment.

Question 49

In the intermediate range of the aggregate supply curve, higher aggregate demand will increase:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level but reduce real GDP.

Question 50

In the aggregate demand/aggregate supply model, a country's full-employment real GDP is represented by:

A) prices.
B) aggregate demand.
C) aggregate supply.
D) an increase in the general level of prices.

Question 51

In the upward-sloping segment of the aggregate supply curve,

A) increases in output are linked to decreases in the price level.
B) firms are willing to pay higher wages to get more labor.
C) producers can hire more workers without having to raise the wage rate.
D) the economy can increase aggregate supply without prices going up.

Question 52

Exhibit 10-1 Aggregate supply curve

In Exhibit 10-1, higher price levels allow producers to earn higher profits, stimulating production and employment in:

A) the segment labeled ab.
B) the segment labeled bc.
C) the segment labeled cd.
D) both segment bc and segment cd.

Question 53

The aggregate supply curve indicates the:

A) relationship between prices and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports).
B) relationship between prices and the natural rate of unemployment.
C) relationship between the real wage rate and the quantity of labor supplied by households.
D) quantity of goods and services producers will supply at different price levels.

Question 54

The pre-Keynesian or classical economic theory viewed the long-run aggregate supply curve for the economy to be:

A) horizontal at the full-employment level of real GDP.
B) positively sloped at the full-employment level of real GDP.
C) vertical at the full-employment level of real GDP.
D) backward bending at the full-employment level of real GDP.

Question 55

Assuming prices and wages are fully flexible, the aggregate supply curve will be:

A) upward sloping, but not vertical.
B) vertical.
C) horizontal.
D) downward sloping.

Question 56

Exhibit 10-4 Aggregate supply and demand curves

In Exhibit 10-4 which of the following is not consistent with a shift in the aggregate demand curve from AD₁ to AD₂?

A) a decrease in consumer spending
B) an increase in investment
C) an increase in government spending
D) an increase in net exports

Question 57

In the horizontal segment of the aggregate supply curve, when GDP:

A) increases, the price level rises.
B) decreases, the price level falls.
C) increases, the price level does not change.
D) increases, the price level falls.

Question 58

If aggregate demand increases in the intermediate range of the aggregate supply curve then the:

A) price level rises and real GDP falls.
B) price level rises and real GDP rises.
C) price level falls and real GDP falls.
D) price level falls and real GDP rises.

Question 59

Discuss the three ranges of the aggregate supply (AS) curve. What could cause the AS curve to shift to the left? What impact would a leftward shift of the AS curve have on the economy?

Question 60

Given aggregate demand, a decrease in aggregate supply creates:

A) a higher price level and a higher GDP level.
B) a lower price level and a higher GDP level.
C) cost-push inflation.
D) demand-pull inflation.

Question 61

Other things constant, an increase in resource prices will:

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

Question 62

Along the Keynesian range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

A) both the price level and real GDP.
B) only real GDP.
C) only the price level.
D) real GDP and reduce the price level.

Question 63

Exhibit 10-6 Aggregate supply curve

In Exhibit 10-6, where the GDP = $1,200 billion,

A) everyone willing to work at the current wage is employed.
B) the economy has reached full employment.
C) GDP can increase to $1,100 billion without triggering an increase in the price level.
D) no further increases in the price level can generate more real GDP.

Question 64

Along the intermediate range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

A) both the price level and real GDP.
B) only real GDP.
C) only the price level.
D) real GDP and reduce the price level.

Question 65

Exhibit 10-6 Aggregate supply curve

In Exhibit 10-6, the economy's employment potential is fully exhausted at:

A) GDP = $1,000 billion.
B) GDP = $1,100 billion.
C) GDP = $1,200 billion.
D) the employment potential is never fully exhausted.

Question 66

Which of the following will most likely cause an increase in the aggregate supply curve?

A) a reduction in the general level of prices
B) an increase in the general level of prices
C) an improvement in technology that substantially reduces the cost of generating energy
D) an increase in taxes that makes it more expensive for Americans to import crude oil

Question 67

Exhibit 10-4 Aggregate supply and demand curves

As the economy moves to the right from E₁ to E₂ in Exhibit 10-4 along the upward-sloping aggregate supply curve the:

A) unemployment rate rises.
B) unemployment rate falls.
C) inflation rate falls.
D) full employment GDP is realized.

Question 68

How will an increase in the world price of crude oil influence the economy of an oil-importing country such as the United States?

A) Aggregate supply will decrease, leading to a decrease in real GDP.
B) Aggregate supply will increase, leading to an increase in real GDP.
C) Aggregate supply will increase, leading to an increase in prices and smaller GDP.
D) A change in the price of an imported good will not affect the domestic economy of an oil-importing country.

Question 69

Exhibit 10-4 Aggregate supply and demand curves

In Exhibit 10-4, point E₂ represents:

A) real GDP above full-employment GDP.
B) real GDP that equals full-employment GDP.
C) a depression.
D) real GDP below full-employment GDP.

Question 70

Which of the following would cause a rightward shift in the aggregate supply curve?

A) larger-than-expected wage increases
B) lower oil prices
C) increased investment spending
D) greater government regulation

Question 71

Exhibit 10-7 Aggregate supply and demand curves

In Exhibit 10-7, the aggregate demand and supply curves reflect an economy in which:

A) full employment is at $1,000 billion GDP.
B) excess aggregate supply is created when there is a shift from AD₁ to AD₂.
C) excess aggregate demand forces prices up to P = 120.
D) excess aggregate demand causes prices to stabilize at P = 110.

Question 72

The effect of an increase in aggregate supply is a(n):

A) increase in the general level of prices and a decrease in real output.
B) increase in the general level of prices and an increase in real output.
C) decrease in the general level of prices and a decrease in real output.
D) decrease in the general level of prices and an increase in real output.

Question 73

Exhibit 10-6 Aggregate supply curve

In Exhibit 10-6, when the economy moves from a GDP of $1,000 billion to a GDP of $1,100 billion,

A) higher wages will lower the cost of producing goods.
B) real GDP and employment both increase, but only under conditions of constant prices.
C) real GDP increases and employment decreases, but only under conditions of price level increases.
D) real GDP and employment both increase, but only under conditions of price level increases.

Question 74

Along the classical or vertical range of the aggregate supply curve, an increase in the aggregate demand curve will increase:

A) both the price level and real GDP.
B) only real GDP.
C) only the price level.
D) real GDP and reduce the price level.

Question 75

Exhibit 10-8 Aggregate demand and supply

In Exhibit 10-8, if aggregate demand shifts from AD₁ to AD₃,

A) real GDP will increase from $3.0 to $4.0, and the price level will increase from 100 to 140.
B) real GDP will increase from $3.0 to $7.0, and the price level will increase from 100 to 140.
C) real GDP will increase from $3.0 to $4.0, and the price level does not change.
D) real GDP will increase from $3.0 to $7.0, and the price level will increase from 100 to 120.

Question 76

The full employment level of real GDP can be represented on an aggregate supply and demand diagram as a(n):

A) vertical line.
B) upward-sloping line.
C) horizontal line.
D) downward-sloping line.

Question 77

Exhibit 10-8 Aggregate demand and supply

In Exhibit 10-8, if aggregate demand shifts from AD₁ to AD₂,

A) real GDP will increase from $3.0 to $7.0, and the price level will remain the same.
B) real GDP will increase from $3.0 to $4.0, and the price level will remain the same.
C) real GDP and the price level will both remain the same.
D) real GDP will increase from $3.0 to $4.0, and the price level will increase from 100 to 140.

Question 78

Exhibit 10-7 Aggregate supply and demand curves

In Exhibit 10-7, if aggregate demand increases from AD₁ to AD₂,

A) output and prices will increase.
B) output and prices will decrease.
C) output alone will increase.
D) prices alone will increase.

Question 79

Suppose the economy is on the intermediate range of the aggregate supply curve. Which of the following would reduce both real GDP and the price level?

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

Question 80

Exhibit 10-6 Aggregate supply curve

In Exhibit 10-6, the aggregate supply curve becomes vertical at GDP = $1,200 because:

A) there are no more workers available at any wage rate to increase real GDP.
B) the price level remains constant.
C) the only workers available would demand higher wage rates.
D) the economy is experiencing low employment and low production.