Deck 22: Aggregate Demand and Supply Analysis

Question 1

Everything else held constant,an increase in planned investment expenditure ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Answer 1

A

Question 2

By analyzing aggregate demand through its component parts,we can conclude that,everything else held constant,a decline in the inflation rate causes

A) an increase in real interest rates, a decline in investment spending, and a decline in aggregate output demand.
B) a decline in real interest rates, a decrease in investment spending, and an increase in aggregate output demand.
C) a decline in real interest rates, an increase in investment spending, and an increase in aggregate output demand.
D) an increase in real interest rates, a decline in investment spending, and a decline in aggregate output demand.

Answer 2

C

Question 3

Everything else held constant,when financial frictions increase,the real cost of borrowing ________ so that planned investment spending ________ at any given inflation rate.

A) increases; falls
B) decreases; falls
C) decreases; rises
D) increases; rises

Answer 3

A

Question 4

Everything else held constant,an autonomous monetary policy tightening ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 5

Everything else held constant,a balanced budget increase in government spending (that is,an increase in government spending that is matched by an identical increase in net taxes)will

A) increase aggregate demand, but not by as much as if just government spending increases.
B) increase aggregate demand by more than if just government spending increases.
C) not affect aggregate demand.
D) decrease aggregate demand.

Question 6

Everything else held constant,an increase in financial frictions ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 7

Everything else held constant,an autonomous monetary policy easing ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 8

Everything else held constant,a decrease in net exports ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 9

Everything else held constant,an increase in net taxes ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 10

Everything else held constant,a decrease in government spending ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 11

Everything else held constant,a decrease in planned investment expenditure ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 12

Everything else held constant,an increase in government spending ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 13

One way to derive aggregate demand is by looking at its four component parts,which are

A) consumer expenditures, planned investment spending, government spending, and net exports.
B) consumer expenditures, actual investment spending, government spending, and net exports.
C) consumer expenditures, planned investment spending, government spending, and gross exports.
D) consumer expenditures, planned investment spending, government spending, and taxes.

Question 14

Everything else held constant,aggregate demand increases when

A) net exports decrease.
B) taxes increase.
C) planned investment spending increases.
D) the money supply decreases.

Question 15

By looking at aggregate demand via its component parts,we can conclude that the aggregate demand curve is downward sloping because

A) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending.
B) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment spending.
C) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment spending.
D) a higher inflation rate causes the real interest rate to rise, and stimulates planned investment spending.

Question 16

Everything else held constant,a decrease in net taxes ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 17

Everything else held constant,aggregate demand increases when

A) taxes are cut.
B) government spending is reduced.
C) animal spirits decrease.
D) the money supply is reduced.

Question 18

Everything else held constant,an increase in net exports ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply

Question 19

The total quantity of an economy's final goods and services demanded at different inflation rates is

A) the aggregate supply curve.
B) the aggregate demand curve.
C) the Phillips curve.
D) the aggregate expenditure function.

Question 20

The aggregate demand curve is the total quantity of an economy's

A) intermediate goods demanded at different inflation rates.
B) intermediate goods demanded at a particular inflation rate.
C) final goods and services demanded at a particular inflation rate.
D) final goods and services demanded at different inflation rates.

Question 21

Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the inflation rate.Be sure to discuss two channels through which changes in inflation rates affect demand.

Question 22

The long-run aggregate supply curve shifts to the right when there is

A) an increase in the total amount of capital in the economy.
B) an increase in the available technology.
C) a decrease in the natural rate of unemployment..
D) A and B.
E) A, B, and C.

Question 23

Everything else held constant,if workers expect an increase in inflation,________ aggregate supply ________.

A) long-run; increases
B) long-run; decreases
C) short-run; decreases
D) short-run; increases

Question 24

Which of the following increases aggregate supply in the short-run,everything else held constant?

A) An increase in the price of crude oil.
B) A successful wage push by workers.
C) Expectations of a higher inflation.
D) A technological improvement that increases worker productivity.

Question 25

Which of the followings does not shift the short-run aggregate supply curve?

A) supply shocks.
B) persistent positive output gap.
C) changes in expected inflation.
D) an increase in output gap.

Question 26

The long-run rate of unemployment to which an economy always gravitates is the

A) normal rate of unemployment.
B) natural rate of unemployment.
C) neutral rate of unemployment.
D) inflationary rate of unemployment.

Question 27

The aggregate supply curve shows the relationship between

A) the level of inputs and aggregate output.
B) the inflation rate and the level of inputs.
C) the wage rate and the level of employment.
D) the inflation rate and the level of aggregate output supplied.

Question 28

Assuming the economy is starting at the natural rate of output and everything else held constant,the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run,but in the long-run the only effect is a rise in inflation.

A) a decrease; supply
B) a decrease; demand
C) an increase; supply
D) an increase; demand

Question 29

Everything else held constant,a change in workers' expectations about inflation will cause ________ to change.

A) aggregate demand
B) short-run aggregate supply
C) the production function
D) long-run aggregate supply

Question 30

The long-run aggregate supply curve is

A) a vertical line through the non-inflationary rate of output.
B) a vertical line through the current level of output.
C) a vertical line through the natural rate level of output.
D) a horizontal line through the current level of output.

Question 31

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant,the development of a new,more productive technology will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.

A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) no change; no change

Question 32

The long-run aggregate supply curve is a vertical line passing through

A) the natural rate of output.
B) the natural-rate price level.
C) the actual rate of unemployment.
D) the expected rate of inflation.

Question 33

Everything else held constant,which of the following does not cause aggregate demand to increase?

A) An increase in net exports
B) An increase in government spending
C) An increase in taxes
D) An increase in consumer optimism

Question 34

________ flexible wages and prices imply that the short-run aggregate supply curve is ________.

A) More; flatter
B) Less; steeper
C) less; vertical
D) More; steeper

Question 35

The fact that an economy always returns to the natural rate level of output is known as

A) the excess demand hypothesis.
B) the price-adjustment mechanism.
C) the self-correcting mechanism.
D) the natural rate of unemployment.

Question 36

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant,the development of a new,more productive technology will cause ________ in the unemployment rate in the long run and ________ in inflation in the short run.

A) an increase; an increase
B) a decrease; a decrease
C) no change; a decrease
D) no change; no change

Question 37

The aggregate supply curve is the total quantity of

A) raw materials offered for sale at different inflation rates.
B) final goods and services offered for sale at the current inflation rate.
C) final goods and services offered for sale at different inflation rates.
D) intermediate and final goods and service offered for sale at different inflation rates.

Question 38

The long-run aggregate supply curve shifts to the right when there is

A) a decrease in the total amount of capital in the economy.
B) a decrease in the total amount of labor supplied in the economy.
C) a decrease in the available technology.
D) a decline in the natural rate of unemployment.

Question 39

The short-run aggregate supply curve shifts to the right when

A) output gap is higher.
B) output gap is lower.
C) expected inflation is higher.
D) expected inflation is lower.

Question 40

Everything else held constant,when actual output exceeds the natural rate of output ________ aggregate supply ________.

A) short-run; decreases
B) short-run; increases
C) long-run; increases
D) long-run; decreases

Question 41

According to aggregate demand and supply analysis,the negative demand shock of 2000-2004 had the effect of

A) increasing aggregate output, lowering unemployment, and raising inflation.
B) decreasing aggregate output, raising unemployment, and raising inflation.
C) increasing aggregate output, lowering unemployment, and lowering inflation.
D) decreasing aggregate output, raising unemployment, and lowering inflation.

Question 42

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 43

Using the aggregate demand-aggregate supply model,explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.

Question 44

Everything else held constant,when output is ________ the natural rate level,wages will begin to ________,decreasing short-run aggregate supply.

A) above; fall
B) above; rise
C) below; fall
D) below; rise

Question 45

Suppose the economy is producing at the natural rate of output.Assuming a fixed natural rate of output and everything else held constant,the development of a new,more productive technology will cause ________ in the unemployment rate and ________ in the inflation in the long run.

A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) no change; no change

Question 46

Suppose the U.S.economy is producing at the natural rate of output. A depreciation of the U.S.dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run,everything else held constant.(Assume the depreciation causes no effects in the supply side of the economy.)

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 47

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 48

Everything else held constant,an increase in the cost of production ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) increases; supply
D) decreases; supply

Question 49

Suppose the U.S.economy is producing at the natural rate of output. An appreciation of the U.S.dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run,everything else held constant.(Assume the appreciation causes no effects in the supply side of the economy.)

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 50

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 51

Suppose the U.S.economy is producing at the natural rate of output. A depreciation of the U.S.dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant.(Assume the depreciation causes no effects in the supply side of the economy.)

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 52

Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 53

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 54

Everything else held constant,a decrease in the cost of production ________ aggregate ________.

A) increases; demand
B) decreases; demand
C) increases; supply
D) decreases; supply

Question 55

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 56

Everything else held constant,when output is ________ the natural rate level,wages will begin to ________,increasing short-run aggregate supply.

A) above; fall
B) above; rise
C) below; fall
D) below; rise

Question 57

Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem,suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) an increase; a decrease

Question 58

Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 59

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP the the short run and ________ in inflation in the short run,everything else held constant.

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 60

Suppose the U.S.economy is producing at the natural rate of output. An appreciation of the U.S.dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run,everything else held constant.(Assume the appreciation causes no effects in the supply side of the economy.)

A) an increase; an increase
B) a decrease; a decrease
C) no change; an increase
D) no change; a decrease

Question 61

In the long run,following a combination of a negative demand shock and a temporary negative supply shock,

A) both inflation and output return to the original long-run equilibrium values.
B) inflation is permanently increased, while output returns to potential output.
C) output returns to potential output, while inflation may be higher or lower than its initial value.
D) inflation is permanently reduced, while output returns to potential output.
E) None of the above.

Question 62

A decrease in the availability of raw materials that increases the price level is called a ________ shock

A) negative demand
B) positive demand
C) negative supply
D) positive supply

Question 63

According to aggregate demand and supply analysis,the favorable supply shock of 1995-1999 had the effect of

A) increasing aggregate output, lowering unemployment, and raising inflation.
B) decreasing aggregate output, raising unemployment, and raising inflation.
C) increasing aggregate output, lowering unemployment, and lowering inflation.
D) decreasing aggregate output, raising unemployment, and lowering inflation.

Question 64

According to aggregate demand and supply analysis,America's involvement in the Vietnam War had the effect of

A) increasing aggregate output, lowering unemployment, and raising the inflation.
B) decreasing aggregate output, lowering unemployment, and lowering the inflation.
C) increasing aggregate output, raising unemployment, and raising the inflation.
D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Question 65

The price of a barrel of oil doubled between 2007 and the middle of 2008.To make matters worse,a financial crisis hit the U.S.economy starting in August of 2007.Which of the following is true of the Chinese experience?

A) The worldwide decline in demand led to a collapse of Chinese exports.
B) Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly.
C) The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S.
D) All of the above.
E) None of the above.

Question 66

Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations,they do not see much need for activist policy to eliminate high unemployment."They" refers to proponents of

A) the natural rate hypothesis.
B) monetarism.
C) the Phillips curve model.
D) real business cycle theory.

Question 67

If workers demand and receive higher real wages (a successful wage push),the cost of production ________ and the short-run aggregate supply curve shifts ________.

A) rises; leftward
B) rises; rightward
C) falls; leftward
D) falls; rightward

Question 68

As of 2009,China's economy had recovered from the global recession that began in 2008.Use aggregate demand and aggregate supply analysis to explain why,and to explain the likely consequences for China of an increase in the growth rate of the global economy.

Question 69

According to aggregate demand and supply analysis,the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.

A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease

Question 70

Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.

Question 71

According to aggregate demand and supply analysis,the negative supply shocks of 1973-1975 and 1978-1980 had the effect of

A) increasing aggregate output, lowering unemployment, and raising the inflation.
B) decreasing aggregate output, raising unemployment, and raising the inflation.
C) increasing aggregate output, raising unemployment, and raising the inflation.
D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Question 72

A positive supply shock causes ________ to ________.

A) aggregate demand; increase
B) aggregate demand; decrease
C) short-run aggregate supply; decrease
D) short-run aggregate supply; increase

Question 73

Suppose the U.S.economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.

A) no change; an increase
B) no change; a decrease
C) an increase; an increase
D) a decrease; a decrease

Question 74

The Phillips curve indicates that when the labor market is ________,production costs will ________ and aggregate supply increases.

A) easy; rise
B) easy; fall
C) tight; fall
D) tight; rise

Question 75

Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant,this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.

A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) no change; no change

Question 76

A negative supply shock causes ________ to ________.

A) aggregate demand; increase
B) aggregate demand; decrease
C) short-run aggregate supply; decrease
D) short-run aggregate supply; increase

Question 77

This theory views shocks to tastes (workers' willingness to work,for example)and technology (productivity)as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.

A) The natural rate hypothesis
B) Hysteresis
C) Real business cycle theory
D) The Phillips curve model

Question 78

The price of a barrel of oil doubled between 2007 and the middle of 2008.To make matters worse,a financial crisis hit the U.S.economy starting in August of 2007.Which of the following is an appropriate description of the mechanism that would have ensued?

A) The increase in the price of oil would have immediately shifted the AS curve to the right.
B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right.
C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run.
D) All of the above.
E) None of the above.

Question 79

The price of a barrel of oil doubled between 2007 and the middle of 2008.To make matters worse,a financial crisis hit the U.S.economy starting in August of 2007.Which of the following is true of the United Kingdom's experience?

A) The increase in the price of oil immediately shifted the AS curve to the left.
B) The financial crisis did not take hold right away so the AD curve did not immediately shift.
C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate.
D) All of the above.
E) None of the above.

Question 80

A theory of aggregate economic fluctuations called real business cycle theory holds that

A) changes in the real money supply are the only demand shocks that affect the natural rate of output.
B) aggregate demand shocks do affect the natural rate of output.
C) aggregate supply shocks do affect the natural rate of output.
D) changes in net exports are the only demand shocks that affect the natural rate of output.