Question 1

A decrease in personal income taxes will lead to:
A) no change in aggregate demand.
B) a decrease in aggregate supply.
C) an increase in aggregate demand.
D) a decrease in aggregate demand.

Accepted Answer

A decrease in personal income taxes will increase disposable income of consumers, which will increase their spending. This increased spending will lead to an increase in aggregate demand.

Question 2

The "short run" in macroeconomics is a period in which prices
A) reflect the equilibrium price.
B) do not change or change very little.
C) change by a lot.
D) are determined by changes in the supply.

Accepted Answer

In the short run in macroeconomics, prices do not change or change very little because the factors affecting prices, such as supply and demand, are assumed to be relatively constant in the short run.

Question 3

A decrease in government purchases shifts the _______ curve to the _______.
A) aggregate demand; right
B) aggregate supply; left
C) aggregate supply; right
D) aggregate demand; left

Accepted Answer

A decrease in government purchases would lead to a decrease in aggregate demand since there will be less spending in the economy. This would shift the aggregate demand curve to the left.

Question 4

When output falls below full employment output, we expect that the:
A) wages and prices decrease as the short run aggregate supply curve shifts upward over time.
B) wages and prices decrease as short run aggregate supply curve shifts downward over time.
C) wages and prices increase as the long run aggregate supply curve shifts upward over time.
D) wages and prices decrease as the long run aggregate supply curve shifts downward over time.

Accepted Answer

When output falls below full employment output, there is a surplus of goods in the economy, leading to downward pressure on prices. As a result, the short run aggregate supply curve (SRAS) shifts downward over time as firms adjust their prices and output levels. In the short run, wages may also decrease as firms reduce their production and lay off workers. Therefore, choice B is the best answer.

Question 5

A leftward shift in the aggregate demand curve cannot be caused by:
A) an increase in taxes.
B) a decrease in the money supply.
C) a decrease in government spending.
D) a decrease in imports.

Accepted Answer

A leftward shift in the aggregate demand curve means a decrease in overall demand for goods and services. A decrease in imports, option D, would actually increase overall demand since domestic consumers would be purchasing more domestic goods and less foreign goods. Therefore, a leftward shift in the aggregate demand curve cannot be caused by a decrease in imports.

Question 6

Following Keynes' work in explaining the Great Depression, economists started to make a distinction between
A) nominal and real GDP.
B) recessions and booms.
C) positive and normative economics.
D) GDP in the short run and in the long run.

Accepted Answer

Keynes' work emphasized the importance of analyzing the economy in the short run and the long run, leading to a distinction between GDP in the short run (affected by factors like aggregate demand) and GDP in the long run (affected by factors like productivity and potential output). This can be seen as a distinction between two different views of the business cycle and economic growth.

Question 7

Rank these three goods in the order of least sticky to most sticky: fresh fish, used cars, steel rods.
A) fresh fish, used cars, steel rods
B) steel rods, cars, fresh fish
C) steel rods, fresh fish, used cars
D) used cars, fresh fish, steel rods

Accepted Answer

Fresh fish is the least sticky due to its perishable nature and quick turnover. Used cars have moderate stickiness due to varying demand and supply conditions. Steel rods are the most sticky as they are durable goods with stable demand and supply.

Question 8

The economy moves from a short- run equilibrium to the long- run equilibrium through:
A) improvements in technology.
B) demand shocks.
C) adjustments in wages and prices.
D) supply shocks.

Accepted Answer

Adjustments in wages and prices allow the economy to reach the long-run equilibrium where the aggregate supply curve intersects with the aggregate demand curve at potential GDP. Improvements in technology and supply/demand shocks can affect the short-run equilibrium, but do not necessarily lead to a shift to the long-run equilibrium.

Question 9

In the short run, the formal or informal contracts between firms mean that changes in demand will be reflected primarily in changes in _______ .
A) future equilibrium price.
B) prices.
C) output.
D) future price.

Accepted Answer

In the short run, firms are constrained by their existing contracts and cannot easily adjust their prices. Therefore, changes in demand will typically be reflected in changes in output. Firms may also adjust prices in the long run once their contracts have expired, but in the short run, output is the primary variable that can be adjusted.

Question 10

As the marginal propensity to consume decreases, the value of the multiplier
A) stays the same.
B) can increase or decrease.
C) increases.
D) decreases.

Accepted Answer

The multiplier is the ratio of the change in output to the initial change in spending. As the marginal propensity to consume decreases, this means that for each additional dollar earned, less will be spent and more will be saved. Therefore, the initial change in spending will have a smaller effect on output, resulting in a smaller multiplier. Thus, as the marginal propensity to consume decreases, the value of the multiplier decreases.

Question 11

Suppose an automobile maker producing a certain kind of car suddenly experiences an increase in the demand for the car. In the short run,
A) the demand for steel goes down and the price of steel goes down.
B) the demand for steel goes down but the price of steel stays the same.
C) the demand for steel goes up and the price of steel goes up very quickly.
D) the demand for steel goes up but the steel prices remain the same.

Accepted Answer

In the short run, the auto maker is likely to increase production without being able to significantly increase their acquisition of new resources. This means they will likely need to use existing resources, including steel, more intensively. Therefore, the demand for steel is likely to go up, but the steel prices may not increase immediately due to existing contracts or inventory. In the long run, however, the steel prices may increase as the demand for steel increases.

Question 12

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is autonomous consumption the largest?
A) Country C
B) Country B
C) Country A
D) All countries have the same autonomous consumption levels.

Accepted Answer

Country B has the largest autonomous consumption at 200, compared to Country A's 100 and Country C's 75.

Question 13

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is the marginal propensity to consume the largest?
A) Country B
B) Country C
C) Country A
D) All countries have the same marginal propensity to consume.

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that is spent on consumption. It can be calculated as the change in consumption divided by the change in income. In this case, the MPC for Country A is 0.8, for Country B it is 0.75, and for Country C it is 0.9. Therefore, the largest MPC is in Country C, where for every additional dollar of income, consumers will spend 90 cents on consumption.

Question 14

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions:
-According to the application, a recession caused by a decrease in aggregate supply occurred in:
A) 1981
B) 1929
C) 1979
D) All of the above were caused by a decrease in aggregate supply.

Accepted Answer

The application states that the 1979 recession was caused by a decrease in aggregate supply, while the other two (1981 and 1929) were caused by a decrease in aggregate demand. Therefore, the best choice is C.

Question 15

An increase in the price level results in a decline in aggregate demand because people's "net worth" decreases and will spend less. This effect is called the:
A) interest rate effect.
B) income effect.
C) wealth effect.
D) trade effect.

Accepted Answer

The wealth effect states that as the price level increases, the purchasing power of people's existing wealth declines, leading to a decrease in their consumption spending. Therefore, the correct answer is C, the wealth effect. The interest rate effect refers to changes in investment spending due to changes in interest rates. The income effect is the change in consumption patterns due to changes in income levels. The trade effect refers to changes in net exports due to changes in the price level.

Question 16

If the marginal propensity to consume is 0.5, a decrease in consumption by $100 will shift the aggregate demand curve horizontally to the left by
A) $400.
B) $100.5.
C) $200.
D) $100.

Accepted Answer

The marginal propensity to consume (MPC) is the fraction of additional income that is used for consumption. If the MPC is 0.5, then a decrease in consumption of $100 means that income has decreased by $200 (since 0.5 * $200 = $100). This decrease in income will shift the aggregate demand curve horizontally to the left by the same amount, which is $200. Therefore, the correct answer is C.

Question 17

Recall Application 1, "Measuring Price Stickiness in Consumer Markets," to answer the following questions:
-According to the application, Bils and Klenow found that between 1995- 1997, prices in more than half of the 350 goods that they were studying showed frequent price changes. This finding was contrary to Kashyap's finding because:
A) custom auction prices.
B) the economy during that time was in a recession.
C) unemployment rates during that time were rising.
D) the inflation during that period was low.

Accepted Answer

Kashyap's finding was that prices in consumer markets were sticky and changed infrequently, but Bils and Klenow found that more than half the prices they studied changed frequently. This contradicts Kashyap's finding and suggests that prices in consumer markets may not be as sticky as previously thought. The other choices (custom auction prices, recession, rising unemployment rates) are not relevant to the explanation of why Bils and Klenow's finding contradicts Kashyap's.

Question 18

According to the international effect explanation of the downward slope of the AD curve, a higher price level in the U.S. economy causes:
A) U.S. imports and U.S. exports to increase.
B) U.S. imports to decrease and U.S. exports to increase.
C) U.S. imports and U.S. exports to decrease.
D) US imports to increase and U.S. exports to decrease.

Accepted Answer

According to the international effect explanation, a higher price level in the U.S. economy will make U.S. goods relatively more expensive compared to goods produced in other countries. This will cause U.S. exports to decrease as foreign consumers will switch to cheaper imports from other countries. At the same time, imports into the U.S. will be relatively cheaper, leading to an increase in imports. Therefore, the correct choice is D.

Question 19

Recall Application 3, "How the U.S. Economy has Coped with Oil Price Fluctuations," to answer the following questions:
-According to the application, surge in the price of oil was caused by the increase in the demand for oil by fast growing countries such as:
A) Mexico and Iceland.
B) the U.S. and Japan.
C) Japan and China.
D) India and China.

Accepted Answer

The application states that the surge in the price of oil was caused by the increase in the demand for oil by fast-growing countries such as India and China.

Question 20

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
If the government spending increases by 10, in which of these countries would the shift of the AD curve be the largest?
A) Country B
B) Country C
C) Country A
D) All countries have the same shifts in the aggregate demand.

Accepted Answer

We can use the formula AD = C + I + G to find the AD curve after the increase in government spending. Assuming investment and net exports remain constant, the change in AD will depend on the change in consumption (C).

For Country A: AD = 100 + 0.8Y + I + G. The change in AD will be 0.8 times the increase in G, which is 8.

For Country B: AD = 200 + 0.75Y + I + G. The change in AD will be 0.75 times the increase in G, which is 7.5.

For Country C: AD = 75 + 0.9Y + I + G. The change in AD will be 0.9 times the increase in G, which is 9.

Therefore, Country C will have the largest shift in the AD curve.

Quiz 9: Aggregate Demand and Aggregate Supply

A decrease in personal income taxes will lead to:

The "short run" in macroeconomics is a period in which prices

A decrease in government purchases shifts the _ curve to the _.

When output falls below full employment output, we expect that the:

A leftward shift in the aggregate demand curve cannot be caused by:

Following Keynes' work in explaining the Great Depression, economists started to make a distinction between

Rank these three goods in the order of least sticky to most sticky: fresh fish, used cars, steel rods.

The economy moves from a short- run equilibrium to the long- run equilibrium through:

In the short run, the formal or informal contracts between firms mean that changes in demand will be reflected primarily in changes in _______ .

As the marginal propensity to consume decreases, the value of the multiplier

Suppose an automobile maker producing a certain kind of car suddenly experiences an increase in the demand for the car. In the short run,

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y Country C: C = 75 + 0.9Y In which of these countries is autonomous consumption the largest?

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y Country C: C = 75 + 0.9Y In which of these countries is the marginal propensity to consume the largest?

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions: -According to the application, a recession caused by a decrease in aggregate supply occurred in:

An increase in the price level results in a decline in aggregate demand because people's "net worth" decreases and will spend less. This effect is called the:

If the marginal propensity to consume is 0.5, a decrease in consumption by $100 will shift the aggregate demand curve horizontally to the left by

According to the international effect explanation of the downward slope of the AD curve, a higher price level in the U.S. economy causes:

Recall Application 3, "How the U.S. Economy has Coped with Oil Price Fluctuations," to answer the following questions: -According to the application, surge in the price of oil was caused by the increase in the demand for oil by fast growing countries such as:

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y Country C: C = 75 + 0.9Y If the government spending increases by 10, in which of these countries would the shift of the AD curve be the largest?