Deck 12: Macroeconomic Instability: Aggregate Demand and Aggregate Supply

Question 1

Stagflation is the result of a leftward shift in the economy's aggregate supply curve.

Answer 1

True

Question 2

An increase in aggregate demand will increase the economy's price level, but not the level of real output, if the aggregate supply curve is vertical.

Answer 2

True

Question 3

In the aggregate supply-aggregate demand model, an increase in the economy's price level reduces the size of the multiplier.

Answer 3

True

Question 4

To combat demand-pull inflation, government might reduce taxes for households in order to encourage additional consumption spending.

Question 5

According to John Maynard Keynes, the market economy automatically adjusts to ensure the full employment of its resources.

Question 6

Say's Law indicates that when something is produced, this process will create the income necessary to purchase that production.

Question 7

According to John Maynard Keynes, prices and wages are rather inflexible in a downward direction because powerful labor unions and corporations will resist wage and price reductions during an economic slump.

Question 8

To avoid a depression, John Maynard Keynes recommended that the government decrease spending and make less money available for loans.

Question 9

According to the interest-rate effect, a higher price level decreases interest rates, which, in turn, causes investment spending on equipment and factories to decrease.

Question 10

Suppose that a recession in Canada slows growth there, thus decreasing the demand for U.S. computers and automobiles. Therefore, the aggregate demand curve will shift leftward for the United States.

Question 11

According to the multiplier effect, changes in aggregate supply are magnified into larger changes in output and income.

Question 12

The MPS and MPC always add up to 1 because all consumer income that is not spent on goods and services must be saved.

Question 13

The formula for the multiplier is 1 / MPC or 1 / (1 - MPS).

Question 14

For the full multiplier effect to occur, the economy must be in the vertical region of its aggregate supply curve.

Question 15

An increase in the economy's price level will reduce the size of the spending multiplier.

Question 16

In the upward-sloping region of the aggregate supply curve, higher price levels provide an incentive for firms to produce additional real output.

Question 17

The aggregate supply curve would shift leftward if there is a decrease in resource prices, an increase in the availability of resources, or an increase in labor productivity.

Question 18

Demand-pull inflation would take place if the level of total spending rises in the economy and the aggregate supply curve is horizontal.

Question 19

To combat demand-pull inflation, policy makers could reduce the growth rate of the money supply or government spending.

Question 20

Aggregate demand policies are especially suited for combating stagflation.

Question 21

According to the wealth effect, a decrease in the average price level increases the purchasing power of people's cash and checking account balances, and therefore makes people richer so they will purchase more goods and services.

Question 22

Keynesian economic theory was the prevalent theory until the Great Depression of the 1930s, after which classical economics dominated.

Question 23

As the cost of resources increases, the aggregate demand curve shifts rightward and the aggregate supply curve shifts leftward.

Question 24

An increase in aggregate demand results from a decrease in taxes on households.

Question 25

Classical economists believed that wages and prices were flexible, so the government should not interfere with a country's economic affairs.

Question 26

According to John Maynard Keynes, a nation's level of economic activity depends primarily on the amount of international trade it generates.

Question 27

If the MPC = 0.82, then the MPS must be 0.18.

Question 28

Along the horizontal portion of the aggregate supply curve, the economy is assumed to be at full employment.

Question 29

One of the causes of the Great Depression was the dramatic drop in industrial production in the mid 1920's.

Question 30

Increased productivity growth puts a damper on inflation.

Question 31

According to the ______ economists, the market economy automatically adjusts to ensure the full employment of its resources.

A) recession
B) depression
C) classical
D) Keynesian

Question 32

All of the following were beliefs of the classical economists except

A) the market automatically adjusts to ensure the full employment of its resources
B) government should not interfere in affairs of the economy
C) prices and wages are relatively inflexible to changing economic events
D) spending levels are adequate to purchase the full-employment level of output

Question 33

According to Say's Law,

A) demand creates its own supply
B) supply creates its own demand
C) wages are flexible in an upward direction, but not in a downward direction
D) prices are flexible in an upward direction, but not in a downward direction

Question 34

According to Say's Law,

A) whatever is produced would create the income necessary to purchase that production
B) the government should intervene in the economy to combat a recession but not inflation
C) downward adjustments in wages would guarantee that everyone who wanted a job will have a job
D) to clear the market of any excess supply, firms would be willing to accept price reductions

Question 35

According to the classical economists, which of the following is impossible?

A) over-production
B) under-production
C) over-consumption
D) over-investment

Question 36

The economic event that discredited the conclusions of the classical economists was the

A) hyperinflation of the 1970s
B) stock market crash of 1987
C) disinflation of the 2000s
D) Great Depression of the 1930s

Question 37

According to Keynesian economics, a nation's level of economic activity primarily depends on the

A) total spending of consumers, business, and government
B) stock of the economy's capital goods
C) amount of saving that is channeled into net imports
D) extent of union activity in major industries

Question 38

According to John Maynard Keynes,

A) government policy makers should not intervene in the economy because a laissez-faire approach is best
B) the market economy is inherently unstable and the Great Depression was no accident
C) flexible wages and prices ensure that the economy will operate at full employment
D) the economy would never suffer from inadequate spending by consumers, businesses, and government

Question 39

To bring an economy out of a recession or depression, Keynes recommended that the government

A) provide ceilings on interest rates paid by consumers and business
B) increase spending and make more money available for loans
C) increase taxes to decrease consumption and increase saving
D) regulate the price and output levels of major corporations

Question 40

Keynes' analysis showed that ______ were necessary for full employment and economic growth.

A) inflexible prices
B) inflexible wages
C) high interest rates for consumers
D) high levels of aggregate demand

Question 41

The real wealth effect, interest rate effect, and foreign trade effect all explain why there is a(n)

A) inverse relationship between the price level and the aggregate quantity of goods demanded
B) direct relationship between the price level and the aggregate quantity of goods demanded
C) inverse relationship between the price level and the aggregate quantity of goods supplied
D) direct relationship between the price level and the aggregate quantity of goods supplied

Question 42

According to the ______ effect, as the price level declines, the purchasing power of financial assets increases and households purchase a greater quantity of goods and services.

A) foreign trade
B) multiplier
C) interest rate
D) real wealth

Question 43

According to the ______ effect, a lower price level decreases interest rates, which results in additional spending on investment goods and so increases the aggregate quantity of goods and services demanded.

A) money supply
B) interest rate
C) consumption
D) investment

Question 44

An upward movement along the aggregate demand curve is caused by a(n)

A) decrease in the economy's interest rate
B) increase in the economy's money supply
C) increase in the economy's price level
D) increase in households' consumption spending

Question 45

With stock prices rising, Americans who hold stocks suddenly become less concerned about saving for retirement and increase their current consumption. As a result, the

A) aggregate demand curve shifts leftward
B) aggregate demand curve shifts rightward
C) aggregate supply curve shifts leftward
D) aggregate supply curve shifts rightward

Question 46

Due to expectations of a future recession, companies do not think that they can sell all of their output and therefore purchase less equipment and machinery. As an immediate result, the

A) aggregate supply curve becomes vertical
B) aggregate supply curve becomes horizontal
C) aggregate demand curve shifts rightward
D) aggregate demand curve shifts leftward

Question 47

Because of dwindling political tensions with China, the U.S. government reduces its expenditures on missiles and jet aircraft. Therefore, the

A) aggregate supply curve shifts to the right
B) aggregate supply curve shifts to the left
C) aggregate demand curve shifts to the right
D) aggregate demand curve shifts to the left

Question 48

According to the multiplier effect, changes in aggregate demand result in ______ changes in national output.

A) smaller
B) larger
C) identical
D) no

Question 49

The size of the multiplier depends on the

A) interest rates charged on consumer credit and household mortgages
B) amount of money that is printed by the Federal Reserve System
C) spending and saving patterns of businesses and individuals
D) extent to which households expect future changes in personal taxes

Question 50

Suppose that the economy's marginal propensity to consume is 0.67. Assuming that prices are constant, a $200 million increase in investment spending would increase equilibrium real GDP by

A) $200 million
B) $450 million
C) $525 million
D) $600 million

Question 51

Suppose that the economy's marginal propensity to consume is 0.75. Assuming that prices are constant, a $175 million decrease in government purchases of goods and services would decrease equilibrium real GDP by

A) $500 million
B) $600 million
C) $700 million
D) $800 million

Question 52

Suppose that the economy's marginal propensity to save is 0.2. Assuming that prices are constant, a $30 million decrease in net exports would decrease equilibrium real GDP by

A) $60 million
B) $90 million
C) $120 million
D) $150 million

Question 53

The formula for the multiplier is

A) 1 / MPC
B) 1 / (1 - MPC)
C) 1 + MPC
D) 1 - MPC

Question 54

For the full multiplier effect to occur, there must be

A) some idle resources in the economy, which results in a constant price level
B) full employment in the economy, which results in rising prices
C) consumers in the economy who are not affected by changing interest rates
D) no businesses investment in the economy

Question 55

Rising prices in the economy tend to

A) increase the size of the multiplier
B) decrease the size of the multiplier
C) not change the size of the multiplier
D) have an unknown effect on the size of the multiplier

Question 56

When the economy is in a depression, the economy is operating on that portion of the aggregate supply curve that is

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

Question 57

Which of the following will cause the aggregate supply curve to shift to the right?

A) increases in wages and salaries paid to employees
B) increases in the prices of oil and natural gas
C) increases in taxes for businesses
D) new work rules that increase the productivity of labor

Question 58

Suppose that entrepreneurs develop new technologies that increase the economy's productivity. As a result, the aggregate supply curve would

A) shift to the right
B) shift to the left
C) become horizontal
D) become vertical

Question 59

Given an upward-sloping aggregate supply curve, an increase in aggregate demand results in a(n)

A) decrease in the price level and an increase in output
B) decrease in the price level and a decrease in output
C) increase in the price level and an increase in output
D) increase in the price level and a decrease in output

Question 60

A decrease in the aggregate supply curve generally results in a(n)

A) decrease in the price level and an increase in output
B) decrease in the price level and a decrease in output
C) increase in the price level and an increase in output
D) increase in the price level and a decrease in output

Question 61

Rising oil prices in the U.S. during the 1970s caused the economy's

A) aggregate supply curve to shift to the right
B) aggregate supply curve to shift to the left
C) aggregate demand curve to become vertical
D) aggregate demand curve to become horizontal

Question 62

An increase in aggregate demand will result in the greatest increase in the price level when the aggregate supply curve is

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

Question 63

Cost-push inflation forces policy makers to make a choice between

A) higher consumption and higher investment
B) lower interest rates and lower net exports
C) stable prices and high levels of aggregate output
D) personal taxes and business taxes

Question 64

Stagflation would be the result of a(n)

A) increase in the economy's aggregate demand curve
B) decrease in the economy's aggregate demand curve
C) decrease in the economy's aggregate supply curve
D) increase in the economy's aggregate supply curve

Question 65

Cost-push inflation would be the result of a(n)

A) increase in resource prices
B) decrease in business taxes
C) increase in consumer spending
D) increase in labor productivity

Question 66

An increase in aggregate demand will increase the economy's real output and price level if the aggregate supply curve is

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

Question 67

If the economy is in the horizontal region of its aggregate supply curve, an increase in aggregate demand will

A) decrease real output and decrease the price level
B) decrease real output and increase the price level
C) increase real output and increase the price level
D) increase real output but have no effect on the price level

Question 68

If the MPS = 0.1, then the multiplier is

A) 0.9
B) 1
C) 10
D) 100

Question 69

Figure 12.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 12.1. The shift from AS₀ to AS₁ could have been caused by

A) an increase in government spending
B) an increase in oil prices
C) an increase in the number of businesses
D) technological improvements

Question 70

Figure 12.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 12.1. The shift from AS₀ to AS₁ results in

A) stable prices
B) lower unemployment
C) higher real output
D) stagflation

Question 71

Figure 12.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 12.1. The type of inflation depicted is called

A) "cost-push" inflation
B) "demand-pull" inflation
C) "income-depleting" inflation
D) "too many goods" inflation

Question 72

Figure 12.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 12.1. The shift from AS₀ to AS₁ could have been caused by

A) increased stock prices that cause households to spend less and save more
B) increased unionization of workers that raises average wages
C) a recession in trading-partner countries, causing them to import less
D) busineeses cut their spending for new equipment during a recession

Question 73

Figure 12.1 Aggregate Supply and Aggregate Demand


-Refer to Figure 12.1. The shape of the aggregate supply curve AS₀ shows that the economy is initially operating in a range at which the economy is

A) in a severe recession
B) about to collapse
C) approaching full employment
D) experiencing high inflation

Question 74

The Information Age technology revolution is causing many businesses to add new capital and improve their productivity. Focusing just on this effect on businesses, the long-run economic impact would be to

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

Question 75

According to Keynes, which policy would be appropriate for an economy that is experiencing a wave of pessimism on the part of consumers and businesses?

A) increased taxes
B) make less money available for loans
C) do nothing and wait to see if it gets better on its own
D) increased government spending

Question 76

What initiated the early 1990's recession in the United States?

A) The U.S. started trading more with Canada and Mexico.
B) Farm production declined dramatically as a result of a drought.
C) A spike in oil prices due to the Iraqi invasion of Kuwait.
D) Consumers spent too much on durable goods and cut back on nondurables spending.

Question 77

During the late 1970's, what economic situation was the most pressing in the U.S.?

A) High inflation
B) Droughts causing declines in farm production
C) International trade crisis with Canada
D) High productivity growth causing lost jobs

Question 78

The low inflation of the late 1990s, coupled with strong growth in output and strong financial markets, can best be explained by

A) the U.S. adopting price control measures
B) exceptionally high interest rates
C) the enactment of new international trade restrictions
D) a technology boom that was causing productivity growth to increase