Question 1

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Accepted Answer

This is a central tenet of Keynesian economics, which emphasizes the role of government intervention in managing the economy and stabilizing business cycles through policies that increase spending and stimulate economic growth.

Question 2

Stagflation results from continued decreases in aggregate demand.

Accepted Answer

Stagflation is a condition of both inflation and stagnant economic growth, typically caused by a decrease in aggregate supply. It is not caused by decreases in aggregate demand alone.

Question 3

If aggregate demand shifts right,then eventually price level expectations rise.This increase in price level expectations causes the aggregate demand curve to shift to the left back to its original position.

Accepted Answer

If aggregate demand shifts right, it would cause an increase in prices in the short run, but in the long run, prices would adjust and return to their original level. This means that the aggregate demand curve would not shift back to its original position, but rather reach a new equilibrium at a higher price level. Therefore, the statement is false.

Question 4

The recession of 2008-2009 was in many ways the worst macroeconomic event in more than half a century.

Accepted Answer

The recession of 2008-2009 was the worst macroeconomic event since the Great Depression of the 1930s. It resulted in a sharp decline in economic activity, widespread job losses, and a significant drop in the value of assets such as homes and stocks.

Question 5

Increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Accepted Answer

When firms become uncertain and pessimistic about the future of the economy, they are less likely to invest in new projects, which reduces their demand for goods and services. This reduction in investment spending shifts the aggregate-demand curve to the left, as there is less demand for output at any given price level.

Question 6

Increased optimism about the future leads to rising prices and falling unemployment in the short run.

Accepted Answer

When people are more optimistic about the future, they tend to spend more money, leading to an increase in demand and prices. This increase in demand also leads to an increase in production, which requires more workers, leading to a decrease in unemployment. However, this effect may only be temporary in the short run, and long-term changes in the economy may eventually impact prices and unemployment.

Question 7

If aggregate demand shifts right,then eventually price level expectations rise.The increase in price level expectations causes the short-run aggregate-supply curve to shift to the left.

Accepted Answer

This is due to the fact that an increase in aggregate demand causes an increase in prices in the short run. When firms see these higher prices, they will increase production, but eventually their costs will rise, causing them to reduce output, hence shifting the short-run aggregate supply curve to the left.

Question 8

If aggregate demand and aggregate supply both shift right,we can be sure that the price level is higher in the short run.

Accepted Answer

When both aggregate demand and aggregate supply shift right, the effect on the price level is uncertain without knowing the magnitude of the shifts. If the supply increase is larger than the demand increase, the price level could actually decrease.

Question 9

An increase in the actual price level does not shift the short-run aggregate supply curve,but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Accepted Answer

An increase in the actual price level affects the quantity of goods and services supplied in the short run but does not shift the short-run aggregate supply (SRAS) curve itself. However, if producers expect higher prices in the future, they might adjust their production plans, which can shift the SRAS curve to the left as they anticipate higher costs or demand higher prices for their products.

Question 10

Increased output and prices in the United States in the early 1940s were mostly the result of increased government expenditures.

Accepted Answer

The United States government significantly increased its spending during World War II, which led to increased output and prices in the early 1940s.

Question 11

During World War II government expenditures increased almost five-fold and output almost doubled.

Accepted Answer

During World War II, government expenditures increased almost five-fold and output almost doubled due to increased demand for war materials and the mobilization of resources for the war effort.

Question 12

Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.

Accepted Answer

Policymakers can use monetary and fiscal policies to boost aggregate demand during a recession or slow down aggregate demand during an overheated economy, thus reducing the severity of economic fluctuations.

Question 13

The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the classical dichotomy.

Accepted Answer

The primary purpose of the aggregate demand and aggregate supply model is to explain the behavior of the overall economy, including the determination of output, employment, and price levels, rather than to demonstrate the classical dichotomy. The classical dichotomy refers to the separation of real and nominal variables in classical economic theory.

Question 14

In response to a decrease in output,the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in short-run aggregate supply.

Accepted Answer

If the decrease in output was caused by a decrease in aggregate demand, prices and output would both decrease in the short run. On the other hand, if the decrease in output was caused by a decrease in short-run aggregate supply, prices would increase while output would decrease in the short run. Therefore, the assertion that the economy would revert to its original level of prices and output regardless of the cause of the decrease in output is false.

Question 15

Economists mostly agree that the Great Depression was principally caused by factors that shifted short-run aggregate supply left.

Accepted Answer

Economists mostly agree that the Great Depression was caused by a combination of factors, including monetary contraction, banking crises, and declines in consumer and investor confidence, which affected both aggregate demand and aggregate supply, rather than being primarily due to shifts in short-run aggregate supply.

Question 16

If the central bank increased the money supply in response to a decrease in short-run aggregate supply,unemployment would return towards its natural rate,but prices would rise even more.

Accepted Answer

Increasing the money supply may stimulate demand and help to reduce unemployment in the short-run, but it may also lead to inflation and further increases in prices. Therefore, while it may help to stabilize the economy in the short-run, it may not be a sustainable solution in the long-run.

Question 17

The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate demand to the left.

Accepted Answer

The recession of 2008-2009, also known as the Great Recession, was indeed associated with a fall in housing prices. This led to a decrease in consumer wealth, which in turn shifted aggregate demand to the left.

Question 18

In the long-run,an increase in aggregate demand increases the price level,but not real GDP.

Accepted Answer

In the long-run, an economy's output is determined by its supply-side factors (such as labor, capital, and technology), not by the level of aggregate demand. Thus, while an increase in aggregate demand can lead to higher prices (inflation), it does not increase the economy's capacity to produce goods and services, leaving real GDP unchanged in the long run.

Question 19

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP can be caused by both changes in aggregate demand and changes in aggregate supply. A positive supply shock, such as a decrease in the cost of production, can increase aggregate supply and result in an increase in real GDP, while a negative supply shock, such as an increase in oil prices or natural disasters, can decrease aggregate supply and result in a decrease in real GDP.

Question 20

An increase in the expected price level shifts the short-run aggregate supply curve to the right.

Accepted Answer

An increase in the expected price level would actually shift the short-run aggregate supply curve to the left, since firms would expect to receive higher prices for their goods and services and would be willing to produce less at any given price level.

Quiz 33: Aggregate Demand and Aggregate Supply