Question 1

The aggregate demand curve shows a negative relationship between the price level and the quantity of aggregate output demanded.

Accepted Answer

This is the basic premise of the aggregate demand curve, which is a downward sloping curve representing the inverse relationship between the price level and quantity of aggregate output demanded in an economy. When the price level decreases, consumers and businesses in general are willing and able to demand more goods and services, leading to an increase in aggregate output demanded. Conversely, a higher price level tends to decrease aggregate output demanded.

Question 2

The higher the existing physical capital stock, the higher is aggregate demand.

Accepted Answer

Aggregate demand primarily depends on consumption, investment, government spending, and net exports, not directly on the existing physical capital stock. Higher physical capital stock can lead to increased productivity and potentially more investment, but it does not directly increase aggregate demand.

Question 3

In the income-expenditure model, if the price level increases, the wealth and interest rate effects will decrease planned expenditures.

Accepted Answer

This is because an increase in the price level means that households and businesses will have to spend more on goods and services, leaving them with less disposable income and reducing their ability to save and invest. As a result, both the wealth effect (the decrease in consumption due to a decrease in the value of assets) and the interest rate effect (the decrease in investment due to an increase in interest rates) will lower planned expenditures.

Question 4

An increase in Social Security benefits will likely increase consumption and shift the aggregate demand curve to the right.

Accepted Answer

An increase in Social Security benefits means that people will have more money to spend, which will lead to an increase in consumption. This increase in consumption will shift the aggregate demand curve to the right.

Question 5

Other things equal, in the income-expenditure model, a decrease in the price level will cause the planned aggregate expenditure curve to shift downward, resulting in a lower level of real GDP.

Accepted Answer

In the income-expenditure model, a decrease in the price level increases consumers' real wealth, which can lead to an increase in consumption. This would cause the planned aggregate expenditure curve to shift upward, potentially resulting in a higher level of real GDP.

Question 6

When the price level increases and people want to hold more money, interest rates decrease.

Accepted Answer

When the price level increases and people want to hold more money, there is an excess demand for money. This leads to an increase in interest rates, as people are willing to pay more to borrow money to meet their increased demand for it.

Question 7

An inflationary gap caused by a demand shock can be addressed by _____ to _____.

Accepted Answer

A demand shock causing an inflationary gap means that aggregate demand is exceeding aggregate supply, leading to higher prices and potentially inflation. To address this, the government can lower government spending, which can reduce overall aggregate demand and bring it back in line with aggregate supply. Lowering the aggregate price level can also help to reduce inflationary pressures caused by a demand shock. Raising government spending or lowering taxes would increase aggregate demand, exacerbating the inflationary gap. Raising taxes would also likely reduce consumer spending and aggregate demand, further worsening the gap.

Question 8

In 1979 and 1980, because of the interest rate and wealth effects, the economy was moving upward along the aggregate demand curve from right to left.

Accepted Answer

In 1979 and 1980, the economy was moving upward along the aggregate demand curve from left to right, not from right to left.

Question 9

If the price level increases by 20%, the purchasing power of $1,000 will increase to $1,200.

Accepted Answer

If the price level increases by 20%, the purchasing power of $1,000 will decrease to $833.33 (1,000/1.2).

Question 10

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (b) and the government does not intervene, the result will likely be a shift of:

Accepted Answer

If the economy is in equilibrium at Y1 and the government does not intervene, the economy will self-correct over time. This typically involves the short-run aggregate supply (SRAS) shifting to the right as wages and prices adjust downward, moving the economy back to its potential output.

Question 11

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (a) and the government decreases taxes, the result will likely be a(n):

Accepted Answer

If the government decreases taxes, it will increase disposable income which will lead to an increase in consumption. This will shift the aggregate demand curve to the right resulting in an increase in equilibrium output and prices. Therefore, the correct answer is an increase in aggregate demand. Option (A) is incorrect because a decrease in taxes will not lead to an increase in unemployment. Option (B) is incorrect because according to the AD-AS model, a decrease in taxes will increase aggregate demand which will lead to an increase in interest rates. Option (C) is incorrect because a decrease in taxes will lead to an increase in aggregate demand not a decrease.

Question 12

Using monetary policy to address a recessionary gap caused by a supply shock involves _____ to _____.

Accepted Answer

Increasing the money supply during a recessionary gap can help lower the unemployment rate by stimulating economic activity. This is because more money in the economy can lead to increased spending and investment, which can boost demand for goods and services, thereby encouraging businesses to hire more workers.

Question 13

In response to a negative supply shock, the government decreases taxes. The MOST likely result of the government's tax decrease is a(n) _____ in unemployment and a(n) _____ in the aggregate price level.

Accepted Answer

Decreasing taxes increases disposable income, which boosts consumer spending and demand, potentially decreasing unemployment. However, it can also lead to higher aggregate demand relative to supply, pushing up the aggregate price level.

Question 14

The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied.

Accepted Answer

This is a correct statement about the aggregate supply curve. It illustrates the relationship between the price level and the overall production levels of goods and services in an economy.

Question 15

If the price level decreases by 20%, the purchasing power of $1,000 will increase to $1,200.

Accepted Answer

If the price level decreases by 20%, the cost of goods and services will also decrease by 20%. So, with $1,000, one can buy goods and services which earlier cost $1,200 (1000/0.8). Thus, the purchasing power of $1,000 will increase to $1,200.

Question 16

Because of the multiplier effect, an increase in government spending of $200 billion will increase aggregate output by less than that amount.

Accepted Answer

The multiplier effect actually means that an increase in government spending of $200 billion is likely to increase aggregate output by more than that amount, as the initial spending leads to increased incomes and consumption, further boosting economic activity.

Question 17

Deflation was a problem in both the Great Depression and the recession of 1979-1982.

Accepted Answer

The Great Depression experienced deflation, but the recession of 1979-1982 was characterized by high inflation, not deflation.

Question 18

The aggregate demand curve shows that at higher price levels the quantity of aggregate output demanded will be less than at lower price levels.

Accepted Answer

This is the basic principle of the downward sloping aggregate demand curve, which assumes the inverse relationship between price level and quantity demanded.

Question 19

When the price level increases, people want to hold more money.

Accepted Answer

When the price level increases, the value of money decreases, which means people need more money to buy the same amount of goods and services. Therefore, they want to hold more money to maintain their purchasing power.

Question 20

The purchasing power of money increased during the oil crisis of 1979 because the aggregate price level increased but the growth rate of the money supply was faster than the increase in the price level.

Accepted Answer

The purchasing power of money decreased during the oil crisis of 1979 because the aggregate price level increased more rapidly than the growth rate of the money supply.

Quiz 12: Aggregate Demand and Aggregate Supply

The aggregate demand curve shows a negative relationship between the price level and the quantity of aggregate output demanded.

The higher the existing physical capital stock, the higher is aggregate demand.

In the income-expenditure model, if the price level increases, the wealth and interest rate effects will decrease planned expenditures.

An increase in Social Security benefits will likely increase consumption and shift the aggregate demand curve to the right.

Other things equal, in the income-expenditure model, a decrease in the price level will cause the planned aggregate expenditure curve to shift downward, resulting in a lower level of real GDP.

When the price level increases and people want to hold more money, interest rates decrease.

An inflationary gap caused by a demand shock can be addressed by _ to _.

In 1979 and 1980, because of the interest rate and wealth effects, the economy was moving upward along the aggregate demand curve from right to left.

If the price level increases by 20%, the purchasing power of $1,000 will increase to $1,200.

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (b) and the government does not intervene, the result will likely be a shift of:

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (a) and the government decreases taxes, the result will likely be a(n) :

Using monetary policy to address a recessionary gap caused by a supply shock involves _ to _.

In response to a negative supply shock, the government decreases taxes. The MOST likely result of the government's tax decrease is a(n) _ in unemployment and a(n) _ in the aggregate price level.

The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied.

If the price level decreases by 20%, the purchasing power of $1,000 will increase to $1,200.

Because of the multiplier effect, an increase in government spending of $200 billion will increase aggregate output by less than that amount.

Deflation was a problem in both the Great Depression and the recession of 1979-1982.

The aggregate demand curve shows that at higher price levels the quantity of aggregate output demanded will be less than at lower price levels.

When the price level increases, people want to hold more money.

The purchasing power of money increased during the oil crisis of 1979 because the aggregate price level increased but the growth rate of the money supply was faster than the increase in the price level.

Quiz 12: Aggregate Demand and Aggregate Supply

The aggregate demand curve shows a negative relationship between the price level and the quantity of aggregate output demanded.

The higher the existing physical capital stock, the higher is aggregate demand.

In the income-expenditure model, if the price level increases, the wealth and interest rate effects will decrease planned expenditures.

An increase in Social Security benefits will likely increase consumption and shift the aggregate demand curve to the right.

Other things equal, in the income-expenditure model, a decrease in the price level will cause the planned aggregate expenditure curve to shift downward, resulting in a lower level of real GDP.

When the price level increases and people want to hold more money, interest rates decrease.

An inflationary gap caused by a demand shock can be addressed by _____ to _____.

In 1979 and 1980, because of the interest rate and wealth effects, the economy was moving upward along the aggregate demand curve from right to left.

If the price level increases by 20%, the purchasing power of $1,000 will increase to $1,200.

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (b) and the government does not intervene, the result will likely be a shift of:

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a) and the government decreases taxes, the result will likely be a(n) :

Using monetary policy to address a recessionary gap caused by a supply shock involves _____ to _____.

In response to a negative supply shock, the government decreases taxes. The MOST likely result of the government's tax decrease is a(n) _____ in unemployment and a(n) _____ in the aggregate price level.

The aggregate supply curve shows the relationship between the aggregate price level and the quantity of aggregate output supplied.

If the price level decreases by 20%, the purchasing power of $1,000 will increase to $1,200.

Because of the multiplier effect, an increase in government spending of $200 billion will increase aggregate output by less than that amount.

Deflation was a problem in both the Great Depression and the recession of 1979-1982.

The aggregate demand curve shows that at higher price levels the quantity of aggregate output demanded will be less than at lower price levels.

When the price level increases, people want to hold more money.

The purchasing power of money increased during the oil crisis of 1979 because the aggregate price level increased but the growth rate of the money supply was faster than the increase in the price level.

An inflationary gap caused by a demand shock can be addressed by _ to _.

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (b) and the government does not intervene, the result will likely be a shift of:

Use the following to answer questions: Figure: Policy Alternatives -(Figure: Policy Alternatives) Refer to Figure: Policy Alternatives. If the economy is in equilibrium at Y₁ in panel (a) and the government decreases taxes, the result will likely be a(n) :

Using monetary policy to address a recessionary gap caused by a supply shock involves _ to _.

In response to a negative supply shock, the government decreases taxes. The MOST likely result of the government's tax decrease is a(n) _ in unemployment and a(n) _ in the aggregate price level.