Deck 33: Aggregate Demand and Aggregate Supply

Question 1

In the long run, the shift in aggregate demand is reflected fully in the inflation rate and not at all in the level of output.

Answer 1

False

Question 2

In the long run, it is the adjustment of expectations that shifts the short-run aggregate-supply curve that ensures the economy will reach equilibrium at the intersection of the aggregate-demand curve and the long-run aggregate-supply curve.

Answer 2

True

Question 3

While the short-run aggregate curve is vertical, the long run aggregate-supply curve is upward sloping.

Answer 3

False

Question 4

The aggregate-demand curve is downward-sloping because of Pigou's wealth effect, Keynes's interest-rate effect, Mundell-Fleming's exchange-rate effect and Veblen's envy effect.

Question 5

Investment spending averages about two-thirds of GDP, yet declines in investment account for only about one-seventh of the declines in GDP during recessions.

Question 6

The new classical misperceptions theory, based on the work of Milton Friedman and Robert Lucas, suggests that a lower price level causes misperceptions about relative prices, which induces suppliers to increase the quantity of goods and services supplied.

Question 7

The new Keynesian sticky-price theory suggests that an unexpected fall in the price level leaves some firms with higher-than-desired prices because of menu costs, causing sales to be depressed and inducing the firms to increase the quantity of goods and services they produce.

Question 8

The aggregate-demand curve slopes downward because when the price level falls: (1) consumers feel wealthier, causing them to demand more consumer goods; (2) interest rates fall, causing firms and households to demand more investment goods; and (3) the exchange rate depreciates, causing net export demand to increase.

Question 9

The position of the long-run aggregate-supply curve shows the quality of goods and services predicted by classical macroeconomic theory.

Question 10

The business cycle follows a regular and predictable pattern.

Question 11

The short-run aggregate curve's shape is affected by the economy's position in regards to full employment.

Question 12

According to Okun's law, if real GDP grows at an average rate of 3 per cent, the unemployment rate remains unchanged.

Question 13

Economic growth is:

A) bad for the economy as it reduces the standard of living
B) good for society to the extent that it allows everyone to enjoy a higher standard of living
C) bad for society as it allows producers to make more profit
D) bad for society because it creates more inequities
E) none of the above

Question 14

The combination of rising unemployment and rising price level is called stagflation.

Question 15

A short period of falling incomes and rising unemployment is called:

A) a business cycle
B) a boom
C) a recession
D) a depression

Question 16

A decrease in the price of imported raw materials owing to appreciation of the $A would shift the AS-curve to the right.

Question 17

The slope of the AD curve only reflects the total price demanded by consumers in the economy.

Question 18

An economy can produce more if it experiences:

A) advances in technology
B) an increase in labour
C) an increase in capital
D) all of the above
E) none of the above

Question 19

The long run aggregate supply curve is the summation of the short-run aggregate supply curves.

Question 20

In the long run, the quantity of goods and services supplied depends on the economy's labour, capital, technology and overall level of prices.

Question 21

If consumers change their saving and spending plans, there will be:

A) a movement along the aggregate-demand curve
B) no effect on the aggregate-demand curve
C) a shift of the aggregate-demand curve
D) a shift of the aggregate-supply curve

Question 22

Which of the following is a policy instrument?

A) Money supply
B) Government expenditure
C) Taxes
D) All of the above

Question 23

A prolonged period of falling incomes and rising unemployment is called:

A) a recession
B) a boom
C) a business cycle
D) a depression

Question 24

The aggregate-demand curve shows:

A) the quantity of goods and services that households want to buy at any price level
B) the quantity of goods and services that households, firms and government want to buy at any price level
C) the quantity of goods and services that households, firms and government want to buy at any income level
D) the quantity of goods and services that households want to buy at any income level

Question 25

Deteriorating economic conditions could be due to:

A) increases in investment spending
B) decreases in the national debt
C) decreases in spending on factories, housing and inventories
D) consumers buying too much on credit

Question 26

When firms cut back production:

A) they employ more people, so unemployment rises
B) they employ more people, so unemployment falls
C) they employ fewer people, so unemployment rises
D) they employ fewer people, so unemployment falls

Question 27

If the government decides to increase expenditure on public transportation, there will be:

A) a movement along the aggregate-demand curve
B) no effect on the aggregate-demand curve
C) a shift of the aggregate-supply curve
D) a shift of the aggregate-demand curve to the left
E) a shift of the aggregate-demand curve to the right

Question 28

The aggregate-supply curve shows:

A) the quantity of goods and services that firms produce and sell at any income level
B) the quantity of goods and services that firms produce and sell at any price level
C) the quantity of goods and services that firms purchase at any income level
D) the quantity of goods and services that firms purchase at any price level

Question 29

The wealth effect is also known as:

A) the Keynes effect
B) the Doppler effect
C) the Mundell-Fleming effect
D) the Pigou effect

Question 30

When the price level falls:

A) households try to increase their holdings of money
B) households try to reduce their holdings of money
C) households don't change their holdings of money
D) none of the above

Question 31

Which of the following is the correct representation of GDP (Y) in an open economy?

A) Y = C + I + G
B) Y = C + I + G + X - M
C) Y = C + I + G + T
D) Y = C + I + G - NX

Question 32

If the money supply increases, there will be:

A) a shift of the aggregate-demand curve
B) no effect on the aggregate-demand curve
C) a shift of the aggregate-supply curve
D) a movement along the aggregate-demand curve

Question 33

The classical dichotomy refers to the separation of:

A) monetary and fiscal variables
B) predictable and unpredictable variables
C) endogenous and exogenous variables
D) real and nominal variables

Question 34

The downward slope of the aggregate-demand curve shows that:

A) a fall in the price level reduces the overall quantity of goods and services demanded
B) a rise in the price level increases the overall quantity of goods and services demanded
C) a fall in the price level has no effect on the overall quantity of goods and services demanded
D) a fall in the price level increases the overall quantity of goods and services demanded

Question 35

Most economists believe that classical economic theory is a good description of the world:

A) in the short run, but not in the long run
B) in the long run, but not in the short run
C) in the short run and in the long run
D) in the nineteenth century, but not in the twentieth century

Question 36

The exchange-rate effect implies that when the price level increases:

A) net exports decrease
B) net exports increase
C) net exports do not change
D) any of the above is possible

Question 37

The wealth effect implies that:

A) when consumer wealth goes up, consumers spend more
B) when the price level decreases, consumer purchasing power goes up, and therefore consumers spend more
C) when consumers are wealthier, they spend more, and therefore the price level increases
D) when the price level decreases, consumers save more, and therefore become wealthier

Question 38

In a recession, real GDP falls and:

A) unemployment may rise or fall
B) unemployment falls
C) unemployment rises
D) unemployment is unaffected

Question 39

Most economists believe that in the short run:

A) real and nominal variables are highly interrelated
B) only real variables are highly interrelated
C) only nominal variables are highly interrelated
D) none of the above

Question 40

Okun's law looks at the relationship between:

A) inflation and unemployment
B) inflation and real GDP
C) incentives and productivity
D) real GDP fluctuations and unemployment

Question 41

The new Keynesian sticky-price theory states that in the short run:

A) the aggregate-supply curve is downward-sloping
B) the aggregate-supply curve is upward-sloping
C) the aggregate-supply curve is horizontal
D) the aggregate-supply curve is vertical

Question 42

Keynes's interest-rate effect implies that a lower price level:

A) reduces the interest rate and reduces the quantity of goods and services demanded
B) reduces the interest rate and increases the quantity of goods and services demanded
C) increases the interest rate and increases the quantity of goods and services demanded
D) increases the interest rate and reduces the quantity of goods and services demanded

Question 43

If resources become more productive:

A) neither the short-run aggregate curve nor the long-run supply curve shifts
B) the short-run aggregate-supply curve is not affected but the long-run aggregate curve shifts
C) the aggregate-demand curve shifts
D) both the short-run and the long-run aggregate-supply curves shift

Question 44

The upward slope of the aggregate-supply curve in the short run shows that:

A) a fall in the price level raises the overall quantity of goods and services supplied
B) an increase in the price level increases the overall quantity of goods and services demanded
C) a fall in the price level has no effect on the overall quantity of goods and services supplied
D) a fall in the price level reduces the overall quantity of goods and services supplied

Question 45

The Keynesian sticky-wage theory states that in the short run:

A) wages do not adjust to changes in prices; therefore, real wages change and suppliers adjust their output levels
B) wages adjust to changes in prices; therefore, real wages are unchanged and suppliers do not adjust their output levels
C) wages adjust instantaneously to changes in prices
D) none of the above is an implication of the Keynesian sticky-wage theory

Question 46

The long-run aggregate supply is called:

A) potential output
B) full-employment output
C) natural rate of output
D) all of the above

Question 47

Starting with AD₁ and AS₁ in the graph below, if resources become more productive:

A) equilibrium in the economy moves from point c to point b
B) equilibrium in the economy moves from point b to point c
C) equilibrium in the economy moves from point c to point d
D) equilibrium in the economy moves from point d to point c
E) equilibrium in the economy moves from point c to point a

Question 48

Starting with AD₁ and AS₁ in the graph below, if the world price of oil rises, then in the short run:

A) output stays the same and prices fall
B) output decreases and prices fall
C) output decreases and prices rise
D) output increases and prices rise
E) output stays the same and prices rise

Question 49

When factors (other than price level) that affect the quantity of goods and services supplied change:

A) the aggregate-supply curve shifts
B) the aggregate-supply curve is not affected
C) the aggregate supply becomes vertical
D) the aggregate-supply curve becomes horizontal
E) the aggregate-demand curve shifts

Question 50

The aggregate-supply curve is vertical in the long run because:

A) of the classical dichotomy and money neutrality
B) aggregate demand is downward-sloping
C) overall output goes up when prices go up
D) overall output goes down when prices go up

Question 51

If people's expectations about future price levels change:

A) the short-run aggregate-supply curve shifts
B) the short-run aggregate-supply curve is not affected
C) the short-run aggregate-supply curve becomes vertical
D) the short-run aggregate-supply curve becomes horizontal
E) all of the above are possible

Question 52

According to the new classical misperceptions theory, the upward slope of the short-run aggregate-supply curve results from:

A) misperceptions about the quantity of goods and services demanded
B) misperceptions about the ability of production
C) misperceptions about relative prices
D) none of the above

Question 53

A fall in the price level causes the aggregate supply to _____ in the short run.

A) fall
B) increase
C) fluctuate
D) keep constant

Question 54

The Pigou effect implies that:

A) when the price level decreases, consumer purchasing power goes up, and therefore consumers spend more
B) when consumers spend more, the price level increases
C) when consumer income increases, consumers spend more
D) when the price level decreases, consumers save more, and therefore become wealthier

Question 55

Mundell-Fleming's effect implies that a currency depreciation:

A) increases net exports and decreases the quantity of goods and services demanded
B) decreases net exports and increases the quantity of goods and services demanded
C) increases net exports and increases the quantity of goods and services demanded
D) decreases net exports and decreases the quantity of goods and services demanded

Question 56

Which of the following statements about aggregate demand is correct?

A) In the short run, shifts in aggregate demand do not affect the overall price level and output
B) In the short run, shifts in aggregate demand affect the overall price level but do not affect output
C) In the long run, shifts in aggregate demand cause fluctuations in output
D) In the long run, shifts in aggregate demand affect the overall price level but do not affect output

Question 57

Which of the following statements about aggregate supply is correct?

A) Shifts in aggregate supply can cause stagflation
B) Shifts in aggregate supply can cause a fall in output and a rise in prices
C) Shifts in aggregate supply can cause a recession
D) All of the above

Question 58

Keynes attempted to explain:

A) short-run economic fluctuations and advocated policies to increase aggregate supply
B) short-run economic fluctuations and advocated policies to increase aggregate demand
C) long-run economic growth and advocated policies to increase aggregate demand
D) long-run economic growth and advocated policies to increase aggregate supply

Question 59

When production costs rise, in the short run:

A) the aggregate-supply curve shifts down to the right
B) the aggregate-demand curve shifts down to the left
C) the aggregate-demand curve shifts up to the right
D) the aggregate-supply curve shifts up to the left
E) both the aggregate-demand curve and the aggregate-supply curve shift to the left

Question 60

Starting with AD₁ and AS₁ in the graph below, if taxes increase, then in the short run:

A) output stays the same and prices fall
B) output increases and prices rise
C) output increases and prices fall
D) output decreases and prices rise
E) output decreases and prices fall

Question 61

If there is an excess demand situation in the economy at the current price level, then the:

A) price level will remain the same
B) economy must be operating on the flat section of the AS curve
C) price level will increase
D) price level will definitely decrease

Question 62

Explain three alternative reasons why a fall in the price level increases the quantity of goods and services demanded.

Question 63

Applying the aggregate demand/aggregate supply model, and assuming there is a small amount of cyclical unemployment, describe the impact on GDP and prices of each of the following events:
a. A decrease in investment
b. A reduction in benefit payments
c. An increase in labour productivity
d. A decrease in export receipts
e. Interest rates decrease
f. Money supply decreases
g. A decrease in crude oil prices
h. A fall in the level of consumer confidence

Question 64

Which of the following conditions persist forever?

A) Misperceptions
B) Sticky wages
C) Sticky prices
D) None of the above

Question 65

Stagflation is said to occur when the economy experiences both:

A) inflation and growth
B) deflation and recession
C) inflation and recession
D) deflation and growth

Question 66

Which of the following variables is not held constant along a given aggregate demand curve?

A) The price level
B) Real income
C) Tax rates
D) Expectations about inflation

Question 67

Which of the following explanations for the upward slope of the short-run aggregate-supply curve is correct?

A) Misperceptions
B) Sticky wages
C) Sticky prices
D) All of the above

Question 68

When an increase in the minimum wage raises the natural rate of unemployment:

A) the short-run aggregate-supply curve shifts to the right, and the long-run aggregate-supply curve shifts to the left
B) the short-run aggregate-supply curve shifts to the left, and the long-run aggregate-supply curve shifts to the right
C) both short-run and long-run aggregate-supply curves shift to the left
D) both short-run and long-run aggregate-supply curves shift to the right

Question 69

When each firm is producing its capacity and there is full employment, this shows:

A) an inflationary gap
B) a deflationary gap
C) the long run AS curve
D) all of these

Question 70

The components of aggregate demand are:

A) consumption, investment, government and exports
B) consumption, investment, government and imports
C) consumption, investment, government and net exports
D) consumption, investment, and net exports, since only private expenditures are included

Question 71

The new classical misperceptions theory states that:

A) changes in the relative price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve
B) changes in the overall price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve
C) changes in the overall price can temporarily mislead consumers, and lead to an upward-sloping aggregate-supply curve
D) changes in the relative price can temporarily mislead suppliers, and lead to an upward-sloping aggregate-supply curve

Question 72

A significant 'shock' to the economy such as the oil price hikes of the 1970s can be represented by:

A) a left shift of the AS curve
B) a right shift of the AD curve
C) a left shift of the AD curve
D) a right shift of the AS curve

Question 73

Suppose the manager of a firm sees that the firm's output is selling at a price 5 per cent higher than she expected. Explain why she might decide to increase the firm's production in this case. Suppose that inflation actually accounts for the overall price level being 5 per cent higher than the manager expected. Is her decision to increase production correct? Explain how such behaviour can result in an upward-sloping aggregate-supply curve.

Question 74

We can use the aggregate demand and supply model to think about the long run as well as the short run. Using this framework, show the effects of (1) long-run growth in the money supply, and (2) long-run growth in GDP. Show that if the economy is growing, then the price level might fall over time even if the money supply is growing.

Question 75

If there is an increase in both the price level and employment, which of the following could possibly explain this?

A) Price level fall
B) Interest rate fall
C) Productivity increase
D) All of the above

Question 76

Pigou's wealth effect suggests that when the price level falls, consumers feel wealthier and so increase their spending. Another implication of falling prices, however, is that the real value of dollar-denominated debts will increase. For example, if you owe $100, the real value of your debt goes up, and you are worse off. If someone owes you $100, then falling prices make you better off. Now suppose that on average those who borrow money tend to spend a larger fraction of their income than do those who lend money. Will spending rise or fall as a result of a fall in the price level?

Question 77

Which statement is correct?

A) A movement along the AD curve results from a price change
B) The AS curve will shift leftwards if the labour force decreases
C) If there is excess aggregate demand at the current price level, the price level will rise
D) The long-run AS curve shows each firm is producing at its capacity and there is full employment

Question 78

What are three alternative explanations for the upward slope of the short-run aggregate-supply curve? Do these explanations also apply in the long run?

Question 79

Which of the following is the possible cause of recession?

A) Staging the Cricket world cup 2014-15
B) A decline in the world economy
C) A boom in the stock market
D) None of the above

Question 80

When an increase in the economy's capital stock increases productivity:

A) the short-run aggregate-supply curve shifts to the right, and the long-run aggregate-supply curve shifts to the left
B) the short-run aggregate-supply curve shifts to the left, and the long-run aggregate-supply curve shifts to the right
C) both short-run and long-run aggregate-supply curves shift to the left
D) both short-run and long-run aggregate-supply curves shift to the right