Deck 15: Aggregate Demand and Aggregate Supply

Question 1

Due to the multiplier effect,a decrease in investment spending

A) is greater than the resulting decrease in GDP
B) has a minimal impact on the economy
C) causes the money supply to increase
D) leads to an even larger decrease in output
E) results in increased autonomous consumption

Answer 1

leads to an even larger decrease in output

Question 2

The aggregate demand curve

A) is a horizontal line if the economy is perfectly competitive
B) depicts the economy's equilibrium output level at each possible price level
C) depicts the economy's equilibrium output at each possible interest rate
D) shifts whenever the price level changes
E) can slope upward if the Fed changes the money supply

Answer 2

depicts the economy's equilibrium output level at each possible price level

Question 3

Refer to Figure 15-1.Assume the economy is in equilibrium at $7 trillion.If the changes in all three graphs were caused by the same event,what was that event?

A) An increase in nominal income
B) An increase in the price level
C) An increase in the interest rate
D) An increase in taxes
E) An increase in real income.

Answer 3

An increase in the price level

Question 4

In the aggregate demand-aggregate supply model,an increase in the price level will

A) increase money demand,raise the interest rate,reduce aggregate expenditure,and decrease equilibrium real GDP
B) decrease money demand,lower the interest rate,increase aggregate expenditure,and increase real GDP
C) increase the money supply,lower the interest rate,increase aggregate expenditure,and increase real GDP
D) decrease the money supply,raise the interest rate,reduce aggregate expenditure,and decrease real GDP
E) not change money supply,money demand or the interest rate,but will shift the aggregate demand curve to the right

Question 5

A decrease in the price level will reduce business confidence and cause a decrease in equilibrium GDP.

Question 6

Equilibrium real GDP is

A) independent of the price level
B) determined solely in the loanable funds market
C) controlled by the Fed
D) directly related to the interest rate
E) the level of output at which total spending equals total output for a given price level

Question 7

Which of the following would lead to an upward movement along the aggregate demand curve?

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

Question 8

The aggregate demand curve tells us the equilibrium level of real GDP corresponding to any price level.

Question 9

The aggregate demand curve

A) represents the relationship between prices and quantities of all goods produced in an economy
B) is derived from equilibrium conditions in the labor and money markets
C) gives the equilibrium level of real GDP corresponding to a given price level
D) is the sum of an economy's individual demand curves
E) plots the interest rate as a function of output

Question 10

Which of the following would lead to a rightward shift of the money demand curve?

A) A decrease in the price level
B) A decrease in output
C) An open market sale of bonds by the Fed
D) An increase in the price level
E) An open market purchase of bonds by the Fed.

Question 11

An increase in the price level will increase the interest rate,which will decrease investment spending and shift aggregate demand to the left.

Question 12

A movement along the AD curve down and to the right is caused by

A) a rightward shift of the money demand curve
B) falling consumer confidence
C) a decreasing price level
D) expansionary open market transactions by the Fed
E) a stable price level and increases in consumption,investment,or government spending

Question 13

The aggregate demand curve identifies the level of aggregate production corresponding to a change in the price level.

Question 14

As there is a movement upward and leftward along the AD curve,

A) aggregate expenditure decreases
B) the price level remains constant
C) equilibrium GDP increases
D) aggregate expenditure increases
E) the interest rate falls

Question 15

Which of the following will cause a movement along the aggregate demand curve?

A) A decrease in the price level
B) An increase in government purchases
C) A decrease in taxes
D) An increase in investment spending
E) An increase in the interest rate.

Question 16

A decrease in the price level leads to which of the following sequences?

A) The money demand curve shifts leftward,the interest rate drops,the aggregate expenditure line shifts upward,and there is movement downward along the aggregate demand curve.
B) The money demand curve shifts rightward,the interest rate increases,the aggregate expenditure line shifts downward,and there is movement upward along the aggregate demand curve.
C) The money demand curve shifts leftward,the interest rate drops,the aggregate expenditure line shifts downward,and there is movement upward along the aggregate demand curve.
D) The money demand curve shifts rightward,the interest rate increases,the aggregate expenditure line shifts upward,and there is movement downward along the aggregate demand curve.
E) The money demand curve shifts leftward,the interest rate drops,the aggregate expenditure line shifts upward,and there is movement upward along the aggregate demand curve.

Question 17

An increase in the price level

A) increases investment spending,thereby shifting the AD curve to the left
B) does not shift the AD curve
C) causes the government's budget deficit to fall
D) increases investment spending,thereby shifting the AD curve to the right
E) shifts the AS curve outward

Question 18

An increase in the price level will lead to which of the following sequences?

A) The money demand curve shifts leftward,the interest rate drops,the aggregate expenditure line shifts upward,and there is movement downward along the aggregate demand curve.
B) The money demand curve shifts rightward,the interest rate increases,the aggregate expenditure line shifts downward,and there is movement upward along the aggregate demand curve.
C) The money demand curve shifts leftward,the interest rate drops,the aggregate expenditure line shifts downward,and there is movement upward along the aggregate demand curve.
D) The money demand curve shifts rightward,the interest rate increases,the aggregate expenditure line shifts upward,and there is movement downward along the aggregate demand curve.
E) the money demand curve shifts leftward,the interest rate drops,the aggregate expenditure line shifts upward,and there is movement upward along the aggregate demand curve.

Question 19

Which of the following is an accurate description of the aggregate demand curve?

A) It is the sum of all individual demand curves for all products
B) It shows all price levels at which firms' unit costs equal their percent markups.
C) It is the curve decided upon by the voters.
D) It shows the relationship between firms' unit costs and their percentage markups.
E) It shows the equilibrium level of GDP associated with price level.

Question 20

The AD curve is derived by adding up demand curves for all goods and services.

Question 21

Wages often respond slowly to changes in output.

Question 22

In the short run,the price level will rise whenever there is an economy-wide decrease in unit costs.

Question 23

If the money demand curve shifts rightward,the AD curve also shifts rightward.

Question 24

The AD curve shifts rightward if taxes decrease.

Question 25

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

A) An increase in the price level
B) A decrease in the price level
C) An increase in government purchases
D) An increase in taxes
E) An increase in the interest rate.

Question 26

If the Fed sells bonds in an open market operation,which of the following is most likely to occur?

A) The equilibrium level of GDP decreases
B) The money supply increases
C) The interest rate falls
D) The aggregate expenditure line shifts upward
E) The open market operation is said to be expansionary.

Question 27

The equilibrium price level

A) determines by how much the AD curve shifts
B) is inversely related to the nominal wage rate
C) is influenced by the pricing behavior of all the firms in the economy
D) is unaffected by changes in resource costs
E) is the same thing as the interest rate

Question 28

If a change in investment spending is due to a change in the price level,then the aggregate demand curve will shift.

Question 29

If autonomous consumption decreases,which of the following combinations of events would be most likely to occur?

A) An upward shift of the aggregate expenditure line,a rightward shift of the money demand curve,and a leftward shift of the aggregate demand curve
B) A downward shift of the aggregate expenditure line,a leftward shift of the money demand curve,and a leftward shift of the aggregate demand curve
C) A downward shift of the aggregate expenditure line,a leftward shift of the money demand curve,and a rightward shift of the aggregate demand curve
D) A downward shift of the aggregate expenditure line,a rightward shift of the money demand curve,and a rightward shift of the aggregate demand curve
E) An upward shift of the aggregate expenditure line,a rightward shift of the money demand curve,and a rightward shift of the aggregate demand curve.

Question 30

Refer to Figure 15-3.Which of the following most likely caused the shifts from AE₁ to AE₂,and from AD₁ to AD₂?

A) A decrease in the money supply
B) An increase in government purchases
C) An increase in investment spending
D) An increase in autonomous consumption
E) An increase in taxes.

Question 31

Refer to Figure 15-2.If the economy is initially at equilibrium at $7 trillion,what is the least likely cause of the shift of the aggregate expenditure line from AE₁ to AE₂,and the shift of the aggregate demand curve from AD₁ to AD₂?

A) An increase in government purchases
B) A decrease in taxes
C) An increase in autonomous consumption
D) An increase in the money supply
E) A decrease in the price level.

Question 32

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

A) Increases in government purchases,investment spending,autonomous consumption,taxes,or the money supply
B) Increases in government purchases,investment spending,autonomous consumption,or the money supply
C) Decreases in government purchases,investment spending,autonomous consumption,taxes,or the money supply
D) Increases in government purchases,investment spending,autonomous consumption or taxes
E) Decreases in government purchases or investment spending,and increases in autonomous consumption,taxes,or the money supply.

Question 33

If the government announces a big tax cut,which of the following combinations of events would be most likely to occur?

A) An upward shift of the aggregate expenditure line,a rightward shift of the money demand curve,and a rightward shift of the aggregate demand curve
B) A downward shift of the aggregate expenditure line,a leftward shift of the money demand curve,and a leftward shift of the aggregate demand curve
C) An upward shift of the aggregate expenditure line,a leftward shift of the money demand curve,and a rightward shift of the aggregate demand curve
D) A downward shift of the aggregate expenditure line,a rightward shift of the money demand curve,and a rightward shift of the aggregate demand curve
E) An upward shift of the aggregate expenditure line,a rightward shift of the money demand curve,and a leftward shift of the aggregate demand curve.

Question 34

Refer to Figure 15-3.Which of the following most likely caused the shifts from AE₁ to AE₂,and from AD₁ to AD₂?

A) A decrease in the money supply
B) An increase in government purchases
C) An increase in investment spending
D) A decrease in autonomous consumption
E) A decrease in taxes.

Question 35

]Which of the following would not cause the AD curve to shift?

A) A change in the money supply
B) The public's expectations of a fall in the interest rate
C) A change in aggregate expenditure caused by a change in the price level
D) A change in fiscal policy
E) A change in autonomous consumption spending.

Question 36

If a variable other than the price level changes,the AD curve shifts.

Question 37

If the Fed conducts an open market purchase of bonds,which of the following will happen?

A) The interest rate will decrease,the aggregate expenditure line will shift upward,and the aggregate demand curve will shift leftward.
B) The interest rate will increase,the aggregate expenditure line will shift upward,and the aggregate demand curve will shift rightward.
C) The interest rate will decrease,the aggregate expenditure line will shift upward,and the aggregate demand curve will shift rightward.
D) The interest rate will decrease,the aggregate expenditure line will shift downward,and the aggregate demand curve will shift rightward.
E) The interest rate will increase,the aggregate expenditure line will shift downward,and the aggregate demand curve will shift leftward.

Question 38

If the government announces a new increase in spending with no change in taxes,which of the following would most likely occur?

A) No change in the aggregate demand curve as well as no movement along it
B) A leftward shift of the aggregate demand curve
C) An upward movement along the aggregate demand curve
D) A rightward shift of the aggregate demand curve
E) A downward movement along the aggregate demand curve.

Question 39

If the government announces a cut in the capital gains tax and it is expected that investment spending will increase as a result,which of the following are also likely?

A) An upward shift in the aggregate expenditure line,a rightward shift of the money demand curve,and a leftward shift of the aggregate demand curve
B) A downward shift in the aggregate expenditure line,a rightward shift of the money demand curve,and a rightward shift of the aggregate demand curve
C) An upward shift in the aggregate expenditure line,a leftward shift of the money demand curve,and a rightward shift of the aggregate demand curve
D) A downward shift in the aggregate expenditure line,a leftward shift of the money demand curve,and a leftward shift of the aggregate demand curve
E) An upward shift in the aggregate expenditure line,a rightward shift of the money demand curve,and a rightward shift of the aggregate demand curve.

Question 40

A spending shock

A) causes unemployment and inflation to change in the same direction
B) results in a movement along the AD curve
C) shifts the AS curve
D) first affects the economy through the money market
E) causes equilibrium GDP to change at each price level

Question 41

The average percentage markup in the economy is

A) relatively stable,but the price level may not be
B) relatively stable,causing the price level to also be relatively stable
C) relatively unstable,despite which the price level remains relatively stable
D) relatively unstable,causing the price level to also be relatively unstable
E) determined by the unit costs of production.

Question 42

In the short run,an increase in real GDP will

A) increase unit costs and increase the price level
B) increase unit costs and decrease the price level
C) decrease unit costs and decrease the price level
D) decrease unit costs and increase the price level
E) have no effect on unit costs or the price level

Question 43

A movement down and to the left along the aggregate supply curve will occur when

A) firms' average markup is stable and a decrease in real GDP causes unit costs to fall
B) world oil prices fall,thus decreasing the price level
C) a change in fiscal policy causes aggregate expenditure to increase
D) firms decide to produce less than before at each price level
E) an increase in real GDP causes the price level to fall

Question 44

If the cost per unit of output for a particular product is $10 and the product sells for $20,what is the percentage markup over cost per unit?

A) 200 percent
B) 10 percent
C) 100 percent
D) 20 percent
E) 50 percent.

Question 45

The aggregate supply curve is

A) vertical in the short run
B) horizontal in the short run
C) the sum of all of the supply curves of individual firms in the economy
D) downward sloping in the short run
E) upward sloping in the short run

Question 46

If the unit cost of output for a computer is $2,000 and if firms' average markup is 10 percent,what is the total cost to the consumer?

A) $2,000
B) $2,010
C) $2,020
D) $2,200
E) $20.

Question 47

An industry's typical percentage markup

A) should be expected to fluctuate wildly from year to year
B) equals 1 - (average cost per unit/average revenue per unit)
C) is determined by collusion
D) is of price concern for the macroeconomy
E) is relatively low if there is fierce competition among firms.

Question 48

Which of the following is not a reason why wages respond slowly to changes in output?

A) Many labor contracts specify wages for up to three years.
B) The process of wage setting in large corporations is slow moving.
C) Frequent wage changes can reduce worker morale and reduce productivity.
D) Firms benefit from having a reputation of paying stable wages.
E) The labor supply and demand curves move rapidly to clear labor markets.

Question 49

In the short run,the price level

A) will decrease if unit costs and markups both increase throughout the economy
B) will remain stable if unit costs increase throughout the economy
C) is unimportant in macroeconomics
D) will increase if unit costs increase throughout the economy
E) is determined by the Fed.

Question 50

If the cost per unit of output for a particular product is $50 and the product sells for $55,what is the percentage markup over cost per unit?

A) 200 percent
B) 10 percent
C) 100 percent
D) 20 percent
E) 50 percent.

Question 51

The average percentage markup in the economy

A) is greater,the more competitive are market conditions
B) is greater,the less competitive are market conditions
C) is unaffected by the competitive conditions of the economy
D) tends to be highly unstable from year to year
E) tends to be stable from year to year,ensuring that the price level is stable from year to year

Question 52

The average percentage markup in the economy

A) is of special interest in microeconomics
B) fluctuates greatly from year to year
C) depends on competitive conditions in the economy
D) depends on the level of GDP
E) increases as the interest rate increases

Question 53

Refer to Figure 15-4.If the economy is currently at point X,an increase in output will

A) move the economy to point A
B) move the economy to point B
C) shift the aggregate supply curve up to curve AS2
D) shift the aggregate supply curve down to curve AS3
E) have no effect on the price level and there will be no movement away from point X.

Question 54

The aggregate supply curve is found by summing up the supply curves for all the different products in the economy.

Question 55

An increase in output will tend to

A) increase productivity in the economy as a whole
B) reduce prices of non-labor inputs and other commodities in limited supply in the short run
C) increase real wage rates
D) increase nominal wage rates
E) decrease the price level.

Question 56

If it costs $8 to produce a certain product and the product sells for $9,then

A) the markup is approximately 11.1 percent
B) the market for this product must be monopolistic
C) the markup is $1
D) firms in this industry should shut down to minimize their losses
E) the revenue gained from the last unit produced is $1

Question 57

Which of the following most accurately describes the aggregate supply curve?

A) It shows the price level associated with firms' unit costs and markups for any level of GDP.
B) It is the sum of all individual firms' supply curves.
C) It is determined by the federal government.
D) It shows firms' unit costs for each level of GDP.
E) It shows the equilibrium level of GDP corresponding to each price level.

Question 58

The aggregate supply curve

A) indicates the markup at which firms are willing to supply a given level of output
B) is derived from equilibrium conditions in the money market
C) has a positive slope because an increase in real GDP causes an increase in the cost of resources
D) is found by summing up the supply curves of all the firms in an economy
E) illustrates how a change in the price level affects total output

Question 59

As output increases,a typical firm's unit costs

A) decrease because the firm buys its inputs in large quantities
B) increase because the supply of inputs increases
C) remain constant
D) increase due to the increasing scarcity of resources
E) decrease as firms take advantage of diseconomies of scale.

Question 60

Nominal wages react slowly to changes in output for the following reasons,except one.Which is the exception?

A) The nominal wage may be fixed and independent of output because of labor contracts that last up to three years.
B) The real wage remains constant despite changes in output.
C) Firms with a reputation for paying stable nominal wages will find it easier to attract new workers.
D) Changing the nominal wage can be costly to firms.
E) Nominal wages may be set by slow-moving corporate bureaucracies.

Question 61

The only requirement for short-run equilibrium is that the economy must be on the aggregate supply curve.

Question 62

If a change in real GDP causes the price level to change,there will be a movement along the aggregate supply curve.

Question 63

A demand shock

A) is any event that causes the aggregate demand curve to shift
B) is usually caused by a change in the price level
C) is usually caused by a change in real GDP
D) can be traced back to a shift in the economy's production possibilities frontier
E) is generally a good thing for the economy

Question 64

Refer to Figure 15-6.If the price level is currently at 140,what would we expect to occur in the short run?

A) The price level will remain at 140 and businesses will cut production to $5.5 trillion.
B) The price level will remain at 140 and the extra $2 trillion in real GDP will be saved for future use.
C) The aggregate supply curve will shift upward until it intersects the aggregate demand curve at a price level of 140 and real GDP of $5.5 trillion.
D) The aggregate demand curve will shift right until it intersects the aggregate supply curve at a price level of 140 and real GDP of $7.5 trillion.
E) Inventories will accumulate and businesses will cut production until equilibrium is reached at a price level of 120 and real GDP of $6.5 trillion.

Question 65

Which of the following will shift the aggregate supply curve upward?

A) A decrease in world oil prices
B) Bad weather,which increases farmers' costs per unit of output
C) Increases in consumer spending
D) An increase in the price level
E) Technological changes that improve worker productivity.

Question 66

If Congress voted to eliminate the minimum wage,which of the following would most likely occur?

A) Decrease in unit costs and an upward shift of the aggregate supply curve
B) Decrease in unit costs and an upward movement along the aggregate supply curve
C) Decrease in unit costs and a downward shift of the aggregate supply curve
D) Increase in unit costs and an upward shift of the aggregate supply curve
E) Increase in unit costs and an upward movement along the aggregate supply curve.

Question 67

If a war interrupted oil production,which of the following would most likely happen in the short run?

A) Unit costs would decrease and there would be an upward movement along the aggregate supply curve.
B) Unit costs would increase and the aggregate supply curve would shift upward.
C) Unit costs would increase and the aggregate supply curve would shift downward.
D) Unit costs would decrease and the aggregate supply curve would shift upward.
E) Unit costs would increase and there would be movement along the aggregate supply curve.

Question 68

A negative demand shock would lead to a decline in both the price level and output in the short run.

Question 69

If the economy is on the aggregate supply curve but to the right of the aggregate demand curve,which of the following will be the first market force to lead the economy toward an equilibrium?

A) At the current output level,prices will be too low and firms will increase their prices.
B) At the current price level,output will be too low,inventories will diminish,and firms will increase their production.
C) At the current output level,prices will be too low and firms will lower their prices.
D) At the current price level,output will be too high and so prices will drop so that output will drop.
E) At the current price level,output will be too high,inventories will pile up and firms will cut back on their production.

Question 70

Refer to Figure 15-6.Short-run macroeconomic equilibrium occurs at a price level of

A) 120 and real GDP of $5.5 trillion
B) 140 and real GDP of $5.5 trillion
C) 120 and real GDP of $6.5 trillion
D) 120 and real GDP of $7.5 trillion
E) 140 and real GDP of $7.5 trillion.

Question 71

In the short run,a decrease in government purchases would

A) decrease real GDP because of the multiplier effect and price level changes,but be offset somewhat by decreases in the interest rate
B) decrease real GDP because of the increases in the price level and increases in the interest rate
C) decrease real GDP because of the multiplier effect and increase in the interest rate,but be offset somewhat by decreases in the price level
D) decrease real GDP because of the multiplier effect,but be offset somewhat by decreases in the price level and the interest rate
E) not change output because of the multiplier effect;price level and interest rate changes completely cancel each other out.

Question 72

A negative demand shock decreases the price level in the short run.

Question 73

Refer to Figure 15-5.Assuming that the economy starts at point X,a decrease in world oil prices would

A) move the economy to point A
B) move the economy to point B
C) shift the aggregate supply curve upward to curve E
D) shift the aggregate supply curve downward to curve F
E) have no impact since the model only shows the relationship between the overall price level and real GDP.

Question 74

A supply shock

A) is usually caused by a change in the money supply
B) is any event that causes the aggregate supply curve to shift
C) is any event caused by a change in the price level
D) is usually good news for the economy
E) always leads to an increase in the interest rate

Question 75

All of the following are examples of demand shocks,except one.Which is the exception?

A) A spontaneous decrease in money demand
B) A tax increase
C) A contraction of the money supply by the Fed
D) An increase in the price level
E) A reduction in government spending.

Question 76

Refer to Figure 15-7.If the economy is currently at a price level of 120 and real GDP is $6.5 trillion,an increase in government purchases will,in the short run,

A) shift the aggregate demand curve rightward,increasing both the price level and real GDP
B) shift the aggregate demand curve leftward,decreasing both the price level and real GDP
C) shift the aggregate supply curve upward,increasing the price level and decreasing real GDP
D) shift the aggregate supply curve downward,decreasing the price level and increasing real GDP
E) have no effect on aggregate demand because of crowding out

Question 77

If output increases,which of the following would occur?

A) Prices of non-labor inputs,input requirements per unit of output,and unit costs would all increase,and the economy would move downward along the aggregate supply curve.
B) Prices of non-labor inputs,input requirements per unit of output,and unit costs would all decrease,and the economy would move downward along the aggregate supply curve.
C) Prices of non-labor inputs,input requirements per unit of output,and unit costs would all decrease,and the economy would move upward along the aggregate supply curve.
D) Prices of non-labor inputs,input requirements per unit of output,and unit costs would all increase,and the economy would move upward along the aggregate supply curve.
E) Prices of non-labor inputs and input requirements per unit of output would increase,unit costs would decrease,and the economy would move downward along the aggregate supply curve.

Question 78

The aggregate supply curve would shift downward if

A) unit costs increase due to an increase in output
B) the wage rate increases
C) good weather increases crop yields
D) an increase in real GDP causes the price level to decrease
E) an oil embargo causes world oil prices to rise

Question 79

If a new insect invasion devastates crops all across the United States,which of the following would most likely occur in the short run?

A) Unit costs would decrease and the economy would move upward along the aggregate supply curve.
B) Unit costs would increase and the aggregate supply curve would shift downward.
C) Unit costs would increase and there would be movement along the aggregate supply curve.
D) Unit costs would decrease and the aggregate supply curve would shift upward.
E) Unit costs would increase and the aggregate supply curve would shift upward.

Question 80

A short-run decrease in real GDP will

A) increase the price of non-labor inputs,increase input requirements per unit of output,and increase the price level
B) increase the price of non-labor inputs,decrease input requirements per unit of output,and decrease the price level
C) decrease the price of non-labor inputs,decrease input requirements per unit of output,and decrease the price level
D) increase the price of non-labor inputs,decrease input requirements per unit of output,and increase the price level
E) decrease the price of non-labor inputs,increase input requirements per unit of output,and increase the price level