Deck 8: Macroeconomic Equilibrium: Aggregate Demand and Supply

Question 1

Identify the correct statement.

A) Investment is positively related to the interest rate.
B) Investment spending in an economy is stimulated by new production technology.
C) Investment is positively related to excess capacity.
D) Investment spending is positively related to the cost of capital goods.
E) Investment is negatively related to the rate of government spending.

Answer 1

Investment spending in an economy is stimulated by new production technology.

Question 2

_____ represents the relation between total expenditures, or total spending, and the price level.

A) Gross National Product
B) Inflation
C) Real Gross Domestic Product
D) Aggregate supply
E) Aggregate demand

Answer 2

Aggregate demand

Question 3

Other things equal, a decrease in government spending:

A) increases the slope of the aggregate demand curve.
B) increases the domestic interest rate.
C) decreases aggregate expenditures.
D) shifts the aggregate demand curve to the right.
E) increases the equilibrium level of GDP.

Answer 3

decreases aggregate expenditures.

Question 4

Which of the following is not a component of the aggregate expenditures of a country?

A) Investment
B) Government spending
C) Net exports
D) Consumption
E) Transfer payments

Question 5

Which of the following is true of the disposable income of the households?

A) An increase in the average price level lowers the disposable income of the households.
B) Disposable income refers to the purchasing power of nominal income.
C) An increase in direct taxes will lower the disposable income of the households.
D) A decrease in government transfers will increase the disposable income of the households.
E) Disposable income refers to the net private transfers of the household sector.

Question 6

Identify the correct statement.

A) As domestic income rises, imports rise and net exports fall.
B) As foreign income rises, net exports fall.
C) As domestic income falls, imports rise and net exports fall.
D) As domestic income rises, imports fall and net exports rise.
E) As foreign income falls, net exports rise.

Question 7

Business cycles are linked to the interaction between:

A) the foreign exchange rate and the balance of payments account.
B) the aggregate demand and aggregate supply curves.
C) the demand and supply curves for a particular good.
D) the substitution and the wealth effect.
E) the long-run aggregate supply curve and the aggregate resource curve.

Question 8

Which of the following is true of the aggregate demand curve?

A) The aggregate demand curve shows the various levels of expenditures in the economy at alternative price levels.
B) The aggregate demand curve implies a positive relationship between inflation and unemployment.
C) The aggregate demand curve is identical to the income consumption curve.
D) The aggregate demand curve has the same slope as the aggregate supply curve.
E) The aggregate demand curve relates relative prices to the quantity demanded of a particular good.

Question 9

If the exchange rate is defined as the price of the foreign currency in terms of the domestic currency, an increase in the exchange rate:

A) increases domestic demand for foreign goods.
B) makes domestic goods cheaper in the foreign markets.
C) lowers net exports.
D) lowers aggregate expenditure on domestic goods.
E) increases the domestic country's external debt burden.

Question 10

Which of the following economic changes will decrease household expenditures?

A) Population growth
B) Lower income taxes
C) An appreciation of the domestic currency
D) Increased consumer confidence
E) A higher domestic price level

Question 11

Which of the following will cause net exports to rise?

A) A depreciation of the domestic currency
B) A fall in foreign income
C) Higher foreign tariffs on domestic goods
D) Inflation in domestic economy
E) A depreciation of the foreign currency

Question 12

Other things held constant, when the general price level changes:

A) we move along the aggregate demand curve.
B) we shift the aggregate demand curve to the right.
C) we shift the aggregate demand curve to the left.
D) we shift the aggregate supply curve to the right.

Question 13

Which of the following is an impact of an increase in the general price level?

A) An increase in aggregate demand for goods and services
B) A decrease in aggregate supply of goods and services
C) An increase in the price of the financial assets
D) A decrease in supply of bonds and other assets
E) An increase in interest rates

Question 14

A lower domestic price level tends to:

A) reduce aggregate expenditures and lower the aggregate quantity of goods and services supplied.
B) reduce aggregate expenditures and lower aggregate demand.
C) reduce aggregate expenditures and raise aggregate demand.
D) increase aggregate expenditures and raise the aggregate quantity of goods and services demanded.
E) increase aggregate expenditure on foreign goods and lower net exports.

Question 15

Other things equal, investment spending will increase when:

A) interest rates are lowered.
B) firms operate under full capacity.
C) corporate taxes are increased.
D) capacity utilization is low.
E) the cost of capital rises.

Question 16

Which of the following is an incorrect statement?

A) Macroeconomic equilibrium occurs at the intersection of the aggregate demand and aggregate supply curves.
B) The aggregate supply curve indicates a positive relationship between the price level and GDP.
C) Other things equal, a downward shift of the aggregate demand curve implies that the economy is entering a contractionary phase.
D) Aggregate demand and aggregate supply determine the equilibrium price and quantity of any given good.
E) The aggregate demand curve indicates a negative relationship between the price level and GDP.

Question 17

The wealth effect and the interest rate effect are changes in the price level that:

A) bring about a movement along the aggregate demand curve.
B) lead to a shift of the demand curve for a particular good.
C) result in a shift of the aggregate supply curve.
D) help explain the vertical shape of the long-run aggregate supply curve.
E) cause a movement along the aggregate supply curve.

Question 18

Aggregate demand represents the _____ at alternative price levels.

A) total spending in the economy
B) total saving in the economy
C) total money demand in the economy
D) total output of the economy
E) total money supply in the economy

Question 19

Which of the following is most likely to lead to an economic contraction?

A) A decrease in the average price level
B) An increase in aggregate supply
C) A decrease in aggregate demand
D) A decrease in taxes
E) An increase in transaction demand for money

Question 20

Lower interest rates on business loans usually result in a(n):

A) decrease in aggregate demand.
B) decrease in aggregate supply.
C) decrease in investment spending.
D) increase in government spending.
E) increase in aggregate expenditures.

Question 21

A decrease in the price level will result in:

A) a downward shift of the AD curve.
B) an upward shift of the AD curve.
C) a movement up the AD curve.
D) a steeper slope of the AD curve.
E) a movement down the AD curve.

Question 22

The _____ is the change in the purchasing power of assets that causes spending to change when the price level changes.

A) purchasing power effect
B) interest rate effect
C) substitution effect
D) income effect
E) real-balance effect

Question 23

Which of the following is most likely to lead to an inward shift of the aggregate demand curve?

A) A decrease in the prices of raw materials
B) A decline in foreign price levels
C) A decline in the domestic price level
D) An optimistic expectation about the economy's performance in the near future
E) A decrease in foreign income

Question 24

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

A) A higher domestic price level
B) Higher raw materials prices
C) Higher rates of tax
D) Technological advances
E) Expansionary government policy

Question 25

Which of the following accounts for a movement along a given AD curve?

A) The substitution effect
B) The tax rate effect
C) The real-balance effect
D) The foreign aid effect
E) The government spending effect

Question 26

If foreign income falls, there will be _____.

A) an increase in foreign spending
B) a rise in domestic aggregate demand
C) no change in either domestic net exports or aggregate demand
D) a decline in the domestic price level
E) a decrease in domestic aggregate demand

Question 27

Suppose a representative household holds a bond that is expected to pay a real return of $100 one year from now. However, over the next year, the inflation rate rises 15 percent more than was originally anticipated. As a consequence:

A) the real value of household wealth will increase.
B) consumption spending will increase, and aggregate demand will rise.
C) the purchasing power of money will rise.
D) savings will fall and aggregate expenditures will rise.
E) the aggregate expenditure in the economy will decrease.

Question 28

The wealth effect, the interest rate effect, and the international trade effect account for the:

A) positive slope of the short-run aggregate supply curve.
B) the shape of the long-run aggregate supply curve.
C) positive slope of the aggregate demand curve.
D) negative slope of the aggregate demand curve.
E) negative slope of the short-run aggregate supply curve.

Question 29

Other things remaining unchanged, the flatter the aggregate supply curve:

A) the greater the expansionary effect of an increase in aggregate demand.
B) the smaller the inflationary effect of an increase in aggregate demand.
C) the greater the recessionary effect of a decrease in aggregate demand.
D) the greater the expansionary effect of a decrease in aggregate demand.
E) the smaller the recessionary effect of an increase in aggregate demand.

Question 30

Pessimistic consumer expectations and decreased government spending are both associated with:

A) a downward movement along the aggregate demand curve.
B) an upward movement along the aggregate demand curve.
C) a leftward shift of the aggregate demand curve.
D) a rightward shift of the aggregate demand curve.
E) a steeper slope of the aggregate demand curve.

Question 31

The AD curve will shift to the right if:

A) people become pessimistic about the future of the economy.
B) there is a decrease in foreign income.
C) the government decreases spending.
D) the domestic price level decreases.
E) the foreign price level increases.

Question 32

Identify the correct statement about the aggregate supply curve.

A) The aggregate supply curve is irrelevant for determining macroeconomic equilibrium.
B) The aggregate supply curve shows the various quantities of a particular good that is produced in the economy.
C) The aggregate supply curve shows an inverse relationship between price level and employment.
D) The aggregate supply curve shifts inward with an increase in consumer spending, investment, government spending, and net exports.
E) The aggregate supply curve relates total output in the economy to alternative price levels.

Question 33

The table given below reports the inflation rate in the U.S. and Canada for two years.

Refer to Table 8.1. Assume the exchange rate is fixed at 1.4 CAD (Canadian dollars) = 1 USD (United States dollars). Between year 1 and year 2, what happens to the U.S. aggregate demand curve?

A) There is a movement to the right along the AD curve.
B) The AD curve shifts to the right.
C) The AD curve becomes relatively elastic.
D) The AD curve shifts to the left.
E) There is a movement to the left along the AD curve.

Question 34

Assuming a fixed exchange rate, a decrease in U.S. prices relative to European prices will:

A) decrease European exports to the United States.
B) increase U.S. imports from Europe.
C) decrease aggregate spending in the U.S.
D) not affect U.S. exports or imports.
E) raise the purchasing power of U.S. consumers.

Question 35

The table given below reports the inflation rate in the U.S. and Canada for two years.

Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = 1 USD and that price changes for lumber are identical to the inflation rate for each country. If Canadian lumber is sold in year 1 for 5,500 CAD, what is the price of that lumber in year 2, given that exchange rates do not change?

A) 5,500 CAD
B) 7,977 CAD
C) 5,698 CAD
D) 7,700 CAD
E) 9,700 CAD

Question 36

An increase in aggregate demand due to higher foreign income will cause:

A) domestic equilibrium GDP to increase.
B) domestic equilibrium GDP to decrease.
C) domestic prices to fall.
D) foreign prices to fall.
E) foreign equilibrium GDP to fall.

Question 37

As the general price level in the country of Norweinshire rose, the average interest rate in the economy increased, thereby lowering aggregate expenditure. This relationship between price level, interest rate, and aggregate expenditure is referred to as the:

A) total price effect.
B) interest rate effect.
C) wealth effect.
D) real-balance effect.
E) income effect.

Question 38

Which of the following illustrates an optimistic expectation of the people about the economy?

A) A movement to the right along the aggregate demand curve
B) A rightward shift of the aggregate demand curve
C) A leftward shift of the aggregate demand curve
D) A movement to the left along the aggregate demand curve
E) A flatter slope of the aggregate demand curve

Question 39

The table given below reports the inflation rate in the U.S. and Canada for two years.

Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = $1 and that price changes for salmon are identical to the inflation rate in each country. If U.S. importers pay 10,000 CAD for a trailer of Canadian salmon in year 1, what is the approximate price of that salmon in year 2, given that exchange rates do not change?

A) $10,360
B) $14,504
C) $7,400
D) $7,143
E) $10,000

Question 40

The change in aggregate expenditures resulting from a movement in the domestic price level, which in turn changes the price of domestic goods in relation to foreign goods, is known as the:

A) international trade effect.
B) multilateral equilibrium condition.
C) international exchange rate effect.
D) magnified international pricing effect.
E) international deficit effect.

Question 41

The steepness of the aggregate supply curve depends on the:

A) rate of inflation in the economy.
B) change in relative prices of commodities.
C) substitutability of the inputs used in producing various goods and services.
D) ability of the producers to respond to price-level changes in the short run.
E) the market rate of interest.

Question 42

As the level of real GDP increases, the short-run aggregate supply curve:

A) shifts to the right.
B) shifts to the left.
C) becomes flatter.
D) becomes steeper.
E) becomes horizontal to the real GDP axis.

Question 43

The table given below reports the average hourly wage received by laborers and the price index for two years.?

Refer to Table 8.2. The data in the table suggests that in year 2:

A) aggregate supply remains constant.
B) aggregate demand decreases.
C) aggregate supply decreases.
D) aggregate demand increases.
E) aggregate supply increases

Question 44

Which of the following could lead to a decline in aggregate supply in the U.S.?

A) The discovery of new mineral deposits in Arizona
B) Higher real wage rates in the U.S.
C) Lower personal income in France
D) Cutbacks in government borrowing
E) Rapid depreciation of the Swiss franc

Question 45

Which of the following explains the effect of prices on profits in the short-run?

A) The direct relationship between aggregate quantity demanded and national output.
B) The direct relationship between aggregate quantity supplied and the price level.
C) The inverse relationship between aggregate quantity demanded and national output.
D) The inverse relationship between aggregate quantity supplied and profits.
E) The inverse relationship between aggregate quantity supplied and national output.

Question 46

Which of the following is not held constant in the short run when determining the aggregate supply curve?

A) Interest rates
B) Rent
C) Wages
D) Profit
E) Price level

Question 47

Consider the following statement: "If the government attempts to raise employment through increased fiscal spending, all it will end up doing is increasing the price level." The statement rests on the assumption that:

A) the aggregate demand curve is a horizontal line.
B) the aggregate supply curve is a vertical line.
C) the aggregate supply curve is upward-sloping.
D) the aggregate supply curve is downward-sloping.
E) the aggregate supply curve is a horizontal line.

Question 48

The long-run aggregate supply increases as:

A) new production technology is introduced.
B) the quality of labor declines.
C) the average price level increases.
D) natural resources become depleted.
E) the minimum wage rate increases.

Question 49

What happens to aggregate supply when production costs adjust completely to price increases?

A) Both equilibrium output and prices increase
B) Only prices rise; equilibrium output remains fixed
C) Only equilibrium output rises; equilibrium prices remain fixed
D) Equilibrium output falls while prices rise
E) Both equilibrium output and prices remain fixed

Question 50

The degree of responsiveness of aggregate output to a price change declines as the:

A) rate of savings increases.
B) economy approaches its maximum potential output.
C) level of real GDP declines over time.
D) the price elasticity of imports declines.
E) the excess capacity of all the firms in the economy increases over time.

Question 51

The long-run aggregate supply of an economy at the potential level of real GDP is graphically represented by:

A) a horizontal line.
B) an upward-sloping curve.
C) a downward-sloping curve.
D) a vertical line.
E) a backward bending curve.

Question 52

Which of the following statements is true about the economy in the long run?

A) Equilibrium output is below potential GDP and the rate of unemployment exceeds the natural rate.
B) Production costs are close to zero in the long run.
C) The rate of unemployment is zero in the long run.
D) The aggregate demand curve plays no role in determining the equilibrium level of real GDP.
E) The aggregate supply curve is a horizontal line.

Question 53

If the national output cannot be increased unless the productive capacity or potential GDP increases, the aggregate supply curve is:

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

Question 54

Given that energy is an input in production, the development of a cheaper source of energy will result in:

A) a lower price level and a lower amount of production.
B) a higher price level and a higher amount of production.
C) a lower amount of production at every price level.
D) a higher amount of production at every price level.
E) a lower profit at every price level.

Question 55

The positive slope of the AS curve is a _____ phenomena, when the _____ are held constant.

A) long-run; business profits
B) short-run; government expenditures
C) short-run; costs of production
D) long-run; commodity prices
E) long-run; aggregate expenditures

Question 56

In the long-run, if the economy is operating at the full employment level, the equilibrium level of real GDP is determined solely by the:

A) level of unemployment in the economy.
B) rate of inflation in the economy.
C) real interest rate in the economy.
D) aggregate supply curve of the economy.
E) aggregate demand curve of the economy.

Question 57

The short-run aggregate supply curve will shift to the left if:

A) there is a significant increase in worker productivity.
B) workers on fixed-wage contracts expect higher inflation.
C) the price of raw materials decreases.
D) the price of capital goods rises.
E) wages fall in anticipation of higher prices.

Question 58

In the short-run, an increase in the average price level in the economy will cause:

A) demand for a good to increase but total production to decline.
B) profits to rise and thus, total production to increase.
C) interest rates to fall and thus, total production to decline.
D) input costs to fall and thus, total production to rise.
E) input costs to fall and thus, total production to decline.

Question 59

Which of the following is true of the aggregate supply curve?

A) It shows the inverse relationship between prices and national output.
B) It shows the positive relationship between the price level and the supply of all goods produced in the economy.
C) It shows the amount of real GDP consumed at different price levels.
D) It is a negatively sloped curve that shows the relationship between the price level and the cost of production of firms in the economy.
E) It shows the positive relationship between price and quantity supplied of an individual good.

Question 60

Firms' profits or production do not increase in the long run because:

A) some factors of production are fixed in the long run.
B) all the factors of production are variable in the long run.
C) changes in factor costs completely offset any change in the price level.
D) there exists an excess capacity in the economy in the long run.
E) factor costs remain fixed in the long run.

Question 61

Each of the panels given below represents the short-run equilibrium in the U.S. economy. The Aggregate Demand and Aggregate Supply curves in each panel responds to various economic changes.?Figure 8.1

Refer to Figure 8.1. Which of the graphs in the figure best describes the impact of an effective oil embargo that raises the price of gasoline?

A) Panel A
B) Panel B
C) Panel C
D) Panel D
E) Panel E

Question 62

Identify the correct statement.

A) Aggregate demand alone determines equilibrium price and output.
B) Aggregate supply alone determines equilibrium price and output.
C) Aggregate demand and aggregate supply determine equilibrium price and output.
D) Aggregate demand shows the positive relationship between price level and real GDP.
E) Aggregate supply shows the negative relationship between price level and real GDP.

Question 63

In the 1970s the international price of crude oil rocketed because:

A) the demand for crude oil fell short of its supply.
B) a new source of natural gas was discovered.
C) the demand for automobiles increased drastically.
D) the supply of oil was restricted by the oil exporting countries.
E) of the appreciation of dollar in the international market.

Question 64

To determine short-run equilibrium in the economy, we use an aggregate supply curve that is:

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

Question 65

A simultaneous increase in inflation and decrease in economic growth in a country can be associated with:

A) a decrease in aggregate demand with no change in aggregate supply.
B) an increase in aggregate demand and aggregate supply.
C) an increase in aggregate supply with no change in aggregate demand.
D) a decrease in aggregate supply and aggregate demand.
E) a decrease in aggregate supply with no change in aggregate demand.

Question 66

The movement of the vertical _____ curve to the _____ reflects the increase in potential output on account of the development of new technologies, and increase in the quantity and quality of resources.

A) long-run aggregate supply; right
B) short-run aggregate supply; right
C) short-run aggregate demand; left
D) long-run aggregate demand curve; left
E) long-run aggregate supply; left

Question 67

Each of the panels given below represents the short-run equilibrium in the U.S. economy. The Aggregate Demand and Aggregate Supply curves in each panel responds to various economic changes.?Figure 8.1

Refer to Figure 8.1. Which of the graphs in the figure best describes the impact of lower real income in Germany on U.S. equilibrium real GDP and the U.S. equilibrium price level?

A) Panel A
B) Panel B
C) Panel C
D) Panel D
E) Panel E

Question 68

Other things equal, an increase in aggregate spending tends to be associated with:

A) cost-push inflation.
B) an economic depression.
C) a lower level of equilibrium real GDP.
D) demand-pull inflation.
E) an increase in the quality of goods and services produced.

Question 69

Suppose in Country X, anticipating high inflation in the economy, wages of workers are increased in the beginning of a financial year. However, prices remain unchanged during the year. Everything else remaining constant, which of the following will be observed in this economy?

A) The cost of labor, that is the real wage will decline
B) The current profits of the firm will rise
C) Aggregate supply in the economy will increase
D) Annual production in the economy will remain unaffected
E) The aggregate supply curve will move to the left

Question 70

Each of the panels given below represents the short-run equilibrium in the U.S. economy. The Aggregate Demand and Aggregate Supply curves in each panel responds to various economic changes.?Figure 8.1

Refer to Figure 8.1. Which of the graphs in the figure best describes the impact of a generalized more optimistic view of the future by consumers?

A) Panel A
B) Panel B
C) Panel C
D) Panel D
E) Panel E

Question 71

The intersection of the aggregate demand and the aggregate supply curve defines the equilibrium level of _____ and the price level.

A) real interest rate
B) nominal interest rate
C) nominal GDP
D) real GDP
E) unemployment

Question 72

Which of the following is true of cost-push inflation?

A) Cost-push inflation is associated with an economic expansion.
B) Cost-push inflation is rarely experienced in developed economies.
C) Cost-push inflation is caused by a decrease in aggregate supply.
D) Cost-push inflation is identical to demand-pull inflation.
E) Cost-push inflation is the result of increased consumer spending.

Question 73

Assume that the AD curve is held constant and short-run aggregate supply decreases. The result is a(n):

A) increase in both equilibrium real GDP and the price level.
B) decrease in equilibrium real GDP and an increase in the price level.
C) decrease in both equilibrium real GDP and the price level.
D) decrease in equilibrium real GDP, while the price level remains fixed.
E) increase in the price level, while equilibrium real GDP remains fixed.

Question 74

Assume that the aggregate demand increases while the short-run aggregate supply decreases. The result is a(n):

A) increase in both equilibrium real GDP and the price level.
B) decrease in equilibrium real GDP and an increase in the price level.
C) decrease in both equilibrium real GDP and the price level.
D) decrease in equilibrium real GDP, while the price level remains fixed.
E) increase in the price level, while the change in equilibrium real GDP is ambiguous.

Question 75

A simultaneous increase in both unemployment and inflation is most likely to be the result of a(n):

A) increase in long-run aggregate supply.
B) increase in short-run aggregate supply.
C) decrease in the aggregate demand.
D) simultaneous outward shift of the aggregate demand and supply curves.
E) decrease in the short-run aggregate supply.

Question 76

Other things equal, an increase in aggregate demand will result in:

A) an economic expansion.
B) higher unemployment and a lower equilibrium price level.
C) an economic recession.
D) a decrease in equilibrium real GDP and an increase in the equilibrium price level.
E) a decrease in the overall economic welfare.

Question 77

The degree to which _____ declines during a recession or increases during an expansion depends on the amount by which the AD and/or AS curves shift.

A) real GDP
B) government tax revenue
C) the money supply
D) real interest rate
E) the consumer price index

Question 78

Aggregate demand-aggregate supply analysis shows that in the long run the effect of increased aggregate spending on real GDP is:

A) negative.
B) close to infinity.
C) indeterminate.
D) zero.
E) positive.

Question 79

The figure given below represents the long-run equilibrium in the aggregate demand and aggregate supply model.?Figure 8.2

Refer to Figure 8.2. The combination of rising prices and falling output is known as stagflation. This phenomenon is represented by which of the following shifts?

A)
B)
C)
D)
E) The combination of

Question 80

Other things equal, an increase in aggregate supply will cause:

A) a decrease in equilibrium real GDP and a decrease in the equilibrium price level.
B) an economic contraction.
C) an increase in equilibrium real GDP and an increase in the equilibrium price level.
D) cost-push inflation.
E) a reduction in unemployment and a decline in inflation.