Deck 7: Aggregate Demand and Aggregate Supply

Question 1

Potential output is

A) the level of real GDP that exists when the economy is experiencing only cyclical and structural unemployment.
B) the level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.
C) the level of real GDP that exists when the actual rate of unemployment is zero.
D) the level of real GDP that exists when the economy is experiencing only frictional and cyclical unemployment.

Answer 1

the level of real GDP that exists when the quantity of labor supplied is equal to the quantity of labor demanded.

Question 2

Aggregate demand is the total value of real GDP that

A) all sectors of the economy are willing to purchase at various average price levels, all other things unchanged.
B) all sectors of the economy are willing to sell at various average price levels, all other things unchanged.
C) consumers are willing to purchase at various average price levels, all other things unchanged.
D) consumers are willing to purchase at various national income levels, all other things unchanged.

Answer 2

all sectors of the economy are willing to purchase at various average price levels, all other things unchanged.

Question 3

According to the wealth effect, if the average price level rises, the value of consumers'

A) real wealth, nominal wealth, and consumption spending fall.
B) nominal wealth and consumption spending fall.
C) real wealth and consumption spending fall.
D) nominal wealth and saving fall.

Answer 3

real wealth and consumption spending fall.

Question 4

When an economy fails to produce at its potential,
I. there may be actions that the government or the central bank can take to push the economy toward its potential.
II. the unemployment rate is below its natural rate.
III. the average price level is likely to rise.

A) I, II, and III
B) I and II only
C) I and III only
D) I only

Question 5

A movement along the aggregate demand curve is called a

A) change in aggregate demand.
B) change in the aggregate quantity of good and services demanded.
C) determinant of aggregate demand.
D) revealed expenditure on aggregate demand.

Question 6

The economy's potential output corresponds to the level of

A) natural employment.
B) frictional unemployment.
C) structural unemployment.
D) cyclical unemployment.

Question 7

When the Great Depression reached its trough in 1933, real GDP had fallen by ________ since the depression began in 1929.

A) 5%
B) 10%
C) 30%
D) 50%

Question 8

What are the four sources of aggregate demand?

A) Consumption, private investment, taxes, and expenditures
B) Consumption, private investment, wage increases, and government expenditures
C) Consumption, private investment, expenditures, and net exports
D) Consumption, private investment, government purchases, and net exports

Question 9

The interest rate effect suggests that the negative slope of the aggregate demand curve results because changes in the price level affect

A) domestic purchases of foreign goods.
B) the demand for money by households and firms.
C) the real purchasing power of household wealth.
D) the level of income.

Question 10

The aggregate demand curve slopes downward
I. for the same reasons that an ordinary demand curve does.
II. in part because when the price level falls, the real wealth of the public falls, and this induces people to change their consumption.
III. because as the price level falls, the net export component of aggregate demand increases.

A) I, II, and III
B) II and III
C) II only
D) III only

Question 11

A change in the aggregate quantities of goods and services demanded at each price level is called a

A) change in aggregate demand.
B) change in the aggregate quantity of goods and services demanded.
C) determinant of aggregate demand.
D) revealed expenditure on aggregate demand.

Question 12

All else constant, a lower price level

A) increases imports and decreases exports, resulting in a downward movement along the economy's aggregate demand curve.
B) decreases imports and increases exports, resulting in an upward movement along the economy's aggregate demand curve.
C) increases imports and decreases exports, resulting in an upward movement along the economy's aggregate demand curve.
D) decreases imports and increases exports, resulting in a downward movement along the economy's aggregate demand curve.

Question 13

According to the international trade effect, holding everything else unchanged,

A) an increase in net exports shifts the aggregate demand curve to the right.
B) an increase in the domestic price level reduces net exports leading to a movement along the aggregate demand curve.
C) an increase in the exchange rate shifts the aggregate demand curve to the right.
D) an increase in the price level of foreign goods reduces imports leading to a movement along the domestic economy's aggregate demand curve.

Question 14

What is the difference between a change in aggregate demand and a change in aggregate quantity of real GDP demanded?

A) A change in aggregate demand is represented by a movement along the aggregate demand curve in response to a price change while a change in aggregate quantity of real GDP demanded is represented by a shift of the aggregate supply curve in response to a change in a component of aggregate demand.
B) A change in aggregate demand is represented by a shift of the aggregate demand curve in response to a change in the actual price level while a change in aggregate quantity of real GDP demanded is represented by a movement along the aggregate demand curve in response to a change in the expected price level.
C) A change in aggregate demand is represented by a shift of the aggregate demand curve in response to a change in a component of aggregate demand while a change in aggregate quantity of real GDP demanded is represented by a movement along the aggregate demand curve in response to a change in the price level.
D) There is no difference between the two terms.

Question 15

Aggregate demand is defined as

A) the demand for goods and services generated by all sectors in the economy, holding price level constant.
B) the relationship between the total quantity of goods and services demanded and the price level, all other determinants of spending unchanged.
C) the relationship between the total quantity of goods and services demanded and the supply of factors of production, all other determinants of production unchanged.
D) the relationship between the total quantity of goods and services demanded and the income level, all other determinants of spending unchanged.

Question 16

Which of the following will not cause a change in aggregate demand?

A) An increase in consumer wealth
B) An increase in the amount of investment demanded by firms at each price level
C) An increase in an economy's price level
D) An increase in the price level of a foreign economy

Question 17

Which of the following is false about potential output?

A) It is the level of output an economy can achieve when labor is employed at its natural level.
B) It is the long run output level that guarantees price stability.
C) It is also called the natural level of real GDP.
D) If a country is producing its potential output, then it is producing at a point on its production possibilities frontier.

Question 18

What is the interest rate effect that explains why the aggregate demand curve slopes downward?

A) It refers to the effect of changes in the price level on quantity of investment demanded which in turn affects interest rates.
B) It refers to the effect of interest rates on borrowing which in turn affects consumption spending.
C) It refers to the effect of changes in the price level on interest rates which in turn affects the quantity of investment demanded.
D) It refers to the shifts in aggregate demand when interest rates change.

Question 19

A change in the price level, all other things unchanged, causes

A) a movement along the aggregate demand curve.
B) a shift of the aggregate demand curve.
C) both a movement along the aggregate demand curve and a shift in the curve.
D) no change in the value of assets held in the form of money.

Question 20

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is the

A) aggregate demand curve.
B) average price level.
C) circular flow model.
D) GDP curve.

Question 21

All other things unchanged, an increase in government spending will

A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) make the aggregate demand curve flatter.
D) make the aggregate demand curve steeper.

Question 22

How will a recession in the economies of our foreign trading partners affect U.S. aggregate demand?

A) It will have no effect on our aggregate demand.
B) U.S. aggregate demand will increase.
C) U.S. aggregate demand will decrease.
D) It depends on whether the U.S. offers financial aid to these countries.

Question 23

All other things unchanged, an increase in personal income tax rates will

A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) make the aggregate demand curve flatter.
D) make the aggregate demand curve steeper.

Question 24

The multiplier is given by

A) the ratio of the initial change in a component of aggregate demand to the change in the quantity of real GDP demanded at each price level.
B) the ratio of the change in the quantity of real GDP demanded at each price level to the initial change in a component of aggregate demand that produced it.
C) the amount by which the quantity of real GDP demanded at each price level changes in response to an initial change in a component of aggregate demand.
D) the percentage change between the initial change in a component of aggregate demand and the final change in the quantity of real GDP demanded at each price level.

Question 25

Figure 7-1
Refer to Figure 7-1. What could have caused a movement from point A to point D?

A) Technological advancement
B) An increase in the inflation rate
C) An increase in household wealth
D) A recession in foreign countries

Question 26

Suppose the U.S. government decides to increase its imports from Turkey. All other things unchanged,

A) U.S. aggregate demand increases and Turkey's aggregate demand decreases.
B) U.S. aggregate demand decreases and Turkey's aggregate demand increases.
C) U.S. aggregate demand and Turkey's aggregate demand increase.
D) U.S. aggregate demand is not affected but Turkey's aggregate demand increases.

Question 27

Which of the following best explains the multiplier effect as a result of a $100 million increase in government spending on highways?

A) To fund the government spending, more money must be printed. The resulting increase in money supply lowers interest rates which in turn stimulates consumption and investment spending.
B) The initial change in spending will cause an increase in real GDP and it also becomes income to someone else. As a result, the government's tax revenue increases which in turn allows the government to further increase its spending.
C) The government spending creates a demand for domestically produced goods and services which in turn increases income and higher incomes will lead to increased consumption.
D) The initial change in government spending creates a supply of jobs and stimulates production of domestically produced goods and services. The resulting increases in wages and investment demand leads to increased real GDP.

Question 28

All other things unchanged, a higher exchange rate

A) reduces net exports and aggregate demand.
B) reduces net exports and increases aggregate demand.
C) increases net exports and aggregate demand.
D) increases net exports and reduces aggregate demand.

Question 29

Suppose households become more future-oriented and decide to save more at each income level. All other things unchanged, this will

A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) not affect aggregate but rather aggregate supply because firms will now produce less.
D) shift both the aggregate demand curve and the aggregate supply curve to the left.

Question 30

Figure 7-1
Refer to Figure 7-1. A movement from point B to point E on could be due to

A) an increase in consumer confidence.
B) an increase in the market interest rate.
C) an increase in personal income taxes.
D) a decrease in transfer payments.

Question 31

Figure 7-1
Refer to Figure 7-1. A movement from point A to point B

A) is a change in aggregate demand resulting from a lower price level.
B) is a change in aggregate quantity demanded resulting from a lower price level.
C) could be due to an increase in investment demand.
D) occurs because aggregate output supplied has increased.

Question 32

What happens in the domestic economy when there is a decrease in foreign prices, all other things unchanged?

A) Net exports and aggregate demand fall.
B) Net exports fall and aggregate demand increases.
C) Net exports and aggregate demand increase.
D) Net exports rise and aggregate demand falls.

Question 33

Suppose the U.S. experiences a recession while foreign countries that trade with the U.S. prosper. How will this affect the U.S.?

A) U.S. imports and its aggregate demand will decrease.
B) U.S. net exports and its aggregate demand will decrease.
C) U.S. exports and its aggregate demand will decrease.
D) U.S. exports and its aggregate demand will increase.

Question 34

All other things unchanged, a lower exchange rate

A) increases exports, imports, and aggregate demand.
B) decreases exports, imports, and aggregate demand.
C) increases exports, decreases imports, increases net exports and aggregate demand.
D) decreases exports, increases imports, decreases net exports and aggregate demand.

Question 35

Figure 7-1
Refer to Figure 7-1. What could have caused the aggregate demand curve to shift to the right from AD₁ to AD₂?

A) An increase in exports
B) An increase in imports
C) A decrease in defense spending
D) An increase in the domestic price level

Question 36

What happens in the domestic economy when there is an increase in foreign prices, all other things unchanged?

A) Net exports and aggregate demand fall.
B) Net exports fall and aggregate demand increases.
C) Net exports and aggregate demand increase.
D) Net exports rise and aggregate demand falls.

Question 37

Changes in aggregate demand can be caused by changes in
I. wages.
II. raw materials costs.
III. government spending.
IV. government regulations that increase the cost of doing business.

A) I, II, III, and IV
B) I and III only
C) I, III, and IV
D) III only

Question 38

All other things unchanged, an increase in exports relative to imports will

A) cause a movement upward along a given aggregate demand curve.
B) cause a movement downward along a given aggregate demand curve.
C) shift the aggregate demand curve to the right.
D) shift the aggregate demand curve to the left.

Question 39

Suppose an economy's exports increase and its imports decrease. All other things unchanged, this results in

A) a decrease in net exports which will shift the aggregate demand curve to the right.
B) an increase in net exports which will shift the aggregate demand curve to the right.
C) a decrease in net exports which will shift the aggregate supply curve to the left.
D) an increase in net exports which will shift the aggregate supply curve to the right.

Question 40

Figure 7-1
Refer to Figure 7-1. What could have caused a movement from point D to point A?

A) An increase in the economy's general price level
B) A decrease in investment demand due to lower expected sales
C) A decrease in capital gains taxes
D) An increase in money supply that lowers interest rate

Question 41

In the long run, the price level is determined by

A) aggregate demand.
B) aggregate supply.
C) the government.
D) consumers and firms.

Question 42

The short run in macroeconomic analysis is a period

A) in which wages and some other prices do not respond to changes in economic conditions.
B) in which full wage and price flexibility and market adjustment have been achieved.
C) of less than 12 months.
D) in which all macroeconomic variables are fixed.

Question 43

The long run in macroeconomic analysis is a period

A) in which wages and some other prices are sticky.
B) in which full wage and price flexibility and market adjustment have been achieved.
C) greater than 12 months.
D) in which the capital stock is held constant.

Question 44

The long-run aggregate supply curve

A) relates the level of nominal output produced by firms to the implicit price deflator.
B) relates the level of output produced by firms to the price level in the long run.
C) is vertical because there is one price level and an infinite number of outputs.
D) is determined by the real output demanded by economic agents in an economy.

Question 45

In the long run, an increase in aggregate demand, all other things unchanged, will cause the price level to

A) increase and potential output to increase.
B) decrease and potential output to decrease.
C) increase and potential output to remain stable.
D) decrease and potential output to remain stable.

Question 46

Suppose that an increase in government purchases of $100 million caused the aggregate demand curve to shift to the right by $350 million at each price level. What is the value of the multiplier?

A) 2.5
B) 3.5
C) 0.285
D) $250 million

Question 47

Wage and price stickiness

A) gives rise to a vertical long-run aggregate supply curve.
B) gives rise to a vertical short-run aggregate supply curve.
C) creates a surplus or a shortage of real GDP.
D) prevents the economy from producing its potential level of real GDP.

Question 48

Which of the following best explains why cities want business conventions, political conventions, and major sports events to be held in their town?

A) Because these activities will boost tourism and attract people who will create a demand for the city's goods and services.
B) Because this initial change in spending generated by these activities begins the multiplier process so that the final increase in the city's real GDP demanded is much larger than the initial spending on these activities alone would cause.
C) Because federal and state spending in these cities will increase, thus initiating the multiplier process.
D) Because these activities create jobs and boost spending, which in turn increases the city's tax revenues from income and sales.

Question 49

Suppose that government spending on defense rises by $50 billion. What happens to the aggregate demand curve if the multiplier is greater than 1?

A) It shifts right by $50 billion at each price level.
B) It shifts right by more than $50 billion at each price level.
C) It shifts right by less than $50 billion at each price level.
D) The aggregate demand does not shift; the aggregate supply curve shifts right by $50 billion at each price level.

Question 50

Figure 7-2
Refer to Figure 7-2. The potential output in this economy is

A) $6,000 billion at a price level of 1.08.
B) $7,000 billion at a price level of 1.12.
C) $7, 100 billion at a price level of 1.16.
D) $7,056 billion at a price level of 1.08.

Question 51

The long-run aggregate supply curve is vertical at

A) potential output.
B) the actual level of real output.
C) the actual level of nominal output.
D) 100% employment of the labor force.

Question 52

A decrease in aggregate demand, all other things unchanged, in the long run will generate

A) an increase in potential output and no change in the price level.
B) a decrease in potential output and no change in the price level.
C) no change in potential output and an increase in the price level.
D) no change in potential output and a decrease in the price level.

Question 53

In a graph that shows the aggregate supply and aggregate demand curves, what are the variables on the axes of the graph?

A) The price level measured by the implicit price deflator is on the horizontal axis and real GDP is on the vertical axis.
B) The price level measured by the consumer price index is on the vertical axis and real GDP is on the horizontal axis.
C) The price level measured by the implicit price deflator is on the vertical axis and real GDP is on the horizontal axis.
D) The price level measured by the implicit price deflator is on the vertical axis and employment is on the horizontal axis.

Question 54

Suppose net exports decreases by $100 million due to a slump in foreign economies. If the the value of the multiplier is 2, what happens to the domestic aggregate demand curve?

A) Since less will be produced, the aggregate demand does not shift. The aggregate supply curve shifts to the left by $100 million at each price level.
B) It shifts to the left by $50 million at each price level.
C) It shifts to the left by $100 million at each price level.
D) It shifts to the left by $200 million at each price level.

Question 55

Suppose investment rises by $50 billion at each price level. If the value of the multiplier is 1.5, what is the amount of change in real GDP demanded at each price level?

A) $50 billion
B) $75 billion
C) $125 billion
D) $150 billion

Question 56

In the long run, a decrease in aggregate demand, all other things unchanged, will cause the price level to

A) increase and potential output to increase.
B) decrease and potential output to decrease.
C) increase and potential output to remain stable.
D) decrease and potential output to remain stable.

Question 57

An increase in aggregate demand, all other things unchanged, in the long run will generate

A) an increase in potential output and no change in the price level.
B) a decrease in potential output and no change in the price level.
C) no change in potential output and an increase in the price level.
D) no change in potential output and a decrease in the price level.

Question 58

Which of the following statements is true of the economy in the long run? In the long run,
I. real GDP eventually moves to potential output because all wages and prices are assumed to be flexible.
II. the economy can achieve its natural level of employment and potential output at any price level.
III. there is no cyclical unemployment.

A) I only
B) I and II only
C) I and III only
D) I, II, and III

Question 59

What do economists mean by the term "sticky wage"?

A) It refers to the reluctance by employers to decrease nominal wages during an inflationary period.
B) It refers to a wage that is slow to adjust to its equilibrium level, creating sustained periods of shortage or surplus in the labor market.
C) It refers to a breakdown in wage negotiations between employers and employee unions.
D) It refers to a union negotiated wage.

Question 60

In the long run, the output level is determined by

A) aggregate demand.
B) long-run aggregate supply.
C) the government.
D) household income.

Question 61

Which of the following will decrease the short-run aggregate supply?

A) An increase in wages
B) An increase in the labor force
C) A decrease in net exports
D) A decrease in the personal income tax rates

Question 62

Which of the following will increase the short-run aggregate supply?

A) An increase in wages
B) A decrease in the price of capital
C) An increase in government spending on education
D) An increase in consumption spending

Question 63

All of the following are held constant along a short-run aggregate supply curve except

A) factor prices.
B) output prices.
C) nominal wages.
D) capital stock.

Question 64

Which of the following will decrease the aggregate quantity of output supplied?

A) A decrease in wages
B) A decrease in the labor force
C) A decrease in net exports
D) A decrease in the price level

Question 65

Figure 7-2
Refer to Figure 7-2. Based on the figure, we can conclude that

A) in the short run, the economy will always achieve full-employment equilibrium.
B) in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level.
C) flexible wages and prices are irrelevant since the LRAS curve is vertical.
D) in the long run, the aggregate demand curve determines the potential output level.

Question 66

Figure 7-2
Refer to Figure 7-2. If the real GDP is $7,000 billion and the implicit price deflator is 1.16, what is the value of nominal GDP?

A) $6,034 billion
B) $8,120 billion
C) $9,120 billion
D) cannot be determined from the information given

Question 67

A movement along the short-run aggregate supply curve in response to a change in the price level is called a

A) determinant of aggregate supply.
B) revealed cost on aggregate supply.
C) change in aggregate supply.
D) change in the aggregate quantity of goods and services supplied.

Question 68

The intersection of the economy's aggregate demand and long-run aggregate supply curves
I. determines its equilibrium real GDP in both the long run and the short run.
II. determines its equilibrium price level in both the long run and the short run.
III. occurs at the economy's potential output.

A) I, II, and III
B) I and III only
C) II and III only
D) III only

Question 69

All of the following statements are true about the short-run aggregate supply curve except

A) it is a graphical representation of the relationship between production and the price level.
B) it is a result of the stickiness or inflexibility of some prices and wages.
C) it is upward-sloping.
D) it is drawn holding price level constant.

Question 70

Which of the following will increase the aggregate quantity of output supplied?

A) An increase in input prices
B) An increase in the average price level
C) A technological advancement
D) An increase in net exports

Question 71

What is the difference between a change in aggregate supply and a change in aggregate output supplied?

A) A change in aggregate supply is represented by a movement along the aggregate supply curve in response to a price change, while a change in aggregate output supplied is represented by a shift of the aggregate supply curve in response to a change in a determinant of aggregate supply other than the price level.
B) A change in aggregate supply is represented by a shift of the aggregate supply curve in response to a change in the actual price level, while a change in aggregate output supplied is represented by a movement along the aggregate supply curve in response to a change in the expected price level.
C) A change in aggregate supply is represented by a shift of the aggregate supply curve in response to a change in a determinant of aggregate supply other than the price level, while a change in aggregate output supplied is represented by a movement along the aggregate supply curve in response to a change in the price level.
D) There is no difference between the two terms.

Question 72

Suppose the price of an important natural resource such as oil falls. What will be the effect on the short-run aggregate supply curve?

A) There will be movement to the left, along the aggregate supply curve.
B) The aggregate supply curve will shift to the left.
C) There will be movement to the right, along the aggregate supply curve.
D) The aggregate supply curve will shift to the right.

Question 73

Figure 7-2
Refer to Figure 7-2. Changes in aggregate demand from AD₁ to either AD₂ or AD₃

A) will change nominal GDP but will not change real GDP in the long run.
B) will change real GDP but will not change nominal GDP in the long run.
C) will change the potential level of real GDP.
D) will change the price level and real GDP.

Question 74

Figure 7-2
Refer to Figure 7-2. If the real GDP is $7,000 billion and the implicit price deflator is 1.12, what is the value of nominal GDP?

A) $6,250 billion
B) $7,840 billion
C) $9,000 billion
D) cannot be determined from the information given

Question 75

The short-run aggregate supply shows the amount of real GDP that will be

A) made available at various price levels.
B) purchased at various price levels.
C) purchased at various national income levels.
D) made available at various national income levels.

Question 76

The rise and fall of real GDP over the course of the business cycle suggests that

A) the economy is always at full employment.
B) the economy may not always be in long-run equilibrium.
C) the economy is always at its potential output level.
D) wage and price stickiness ensures that the economy moves from a peak to a trough.

Question 77

An economic analysis of the short run is useful to explain

A) how deviations of real GDP from potential output can and do occur.
B) how deviations of nominal GDP from potential output can and do occur.
C) why the long-run aggregate supply curve is vertical.
D) how an economy's maximum output is determined.

Question 78

Suppose that product prices start rising but nominal wages do not. In that case,

A) real wages will fall and firms will want to produce more because doing so will be profitable.
B) real wages will rise and firms will want to produce more because doing so will be profitable.
C) there will be a surplus of goods and services produced.
D) there will be a shortage of goods and services produced.

Question 79

A change in the aggregate quantity of goods and services supplied at every price level is called a

A) change in short-run aggregate supply.
B) change in long-run aggregate supply.
C) change in short-run aggregate quantity of output supplied.
D) determinant of short-run aggregate supply.

Question 80

Figure 7-2
Refer to Figure 7-2. If the real GDP is $7,000 billion and the implicit price deflator is 1.08, what is the value of nominal GDP?

A) $6,481 billion
B) $7,000 billion
C) $7,560 billion
D) cannot be determined from the information given