Question 1

Shifts in ______ can push the economy out of long-run equilibrium.
A)the AD curve only
B)the AS curve only
C)either the AD curve or the AS curve
D)the PAE line only

Accepted Answer

Shifts in either the Aggregate Demand (AD) curve or the Aggregate Supply (AS) curve can disrupt the long-run equilibrium of the economy by changing the overall level of prices and output.

Question 2

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.
A)planned consumption and investment; government spending
B)planned consumption and investment; net exports
C)net exports; planned consumption and investment
D)net exports; government spending

Accepted Answer

An increase in the interest rate directly affects planned consumption and investment by making borrowing more expensive, which can reduce spending. Indirectly, higher interest rates can lead to an appreciation of the currency, making exports more expensive and imports cheaper, thus affecting net exports.

Question 3

A negative demand shock will shift the ______ curve to the ______.
A)AD; left
B)AD; right
C)AS; left
D)AS; right

Accepted Answer

A negative demand shock decreases overall demand in the economy, causing the Aggregate Demand (AD) curve to shift to the left.

Question 4

A positive demand shock will shift the ______ curve to the ______.
A)AD; left
B)AD; right
C)AS; left
D)AS; right

Accepted Answer

A positive demand shock increases aggregate demand, shifting the AD curve to the right.

Question 5

The economy is in short-run equilibrium:
A)when the AD and AS curves intersect at potential output Y*.
B)when the AD and AS curves intersect at a level of real GDP that is above or below Y*.
C)when the AD and AS curves become vertical.
D)at the peak of the business cycle.

Accepted Answer

In the short-run equilibrium, the aggregate demand (AD) and aggregate supply (AS) curves intersect at a level of real GDP that can be above or below the potential output (Y*), reflecting either an inflationary or recessionary gap.

Question 6

A sudden increase in household wealth is an example of a ______ demand shock, which shifts the AD curve to the ______.
A)negative; left
B)positive; left
C)negative; right
D)positive; right

Accepted Answer

A sudden increase in household wealth is a positive demand shock because it increases consumer spending, which shifts the aggregate demand (AD) curve to the right.

Question 7

The AD curve ______ because, holding all else constant, an increase in ______ causes C, I^{P and NX to fall.} A)slopes downward; real GDP B)slopes downward; the inflation rate C)slopes upward; real GDP D)is horizontal; the inflation rate

Accepted Answer

The AD curve slopes downward because, holding all else constant, an increase in the inflation rate leads to higher interest rates, which causes consumption (C), investment (I^P), and net exports (NX) to fall.

Question 8

The aggregate demand curve shows the relationship between planned spending and the:
A)nominal interest rate.
B)real interest rate.
C)unemployment rate.
D)inflation rate.

Accepted Answer

The aggregate demand curve shows the relationship between planned spending and the inflation rate.

Question 9

The aggregate demand curve shifts when there are changes in:
A)the inflation rate.
B)planned spending that are not caused by changes in output or the inflation rate.
C)planned spending that are caused only by changes in output or the inflation rate.
D)real GDP.

Accepted Answer

The aggregate demand curve shifts when there are changes in planned spending that are not caused by changes in output or the inflation rate, such as changes in fiscal policy, monetary policy, or other external factors.

Question 10

When the interest rate in the U.S.falls, U.S.financial assets:
A)become more attractive to foreign buyers.
B)become less attractive to both foreign and domestic buyers.
C)become more attractive to both foreign and domestic buyers.
D)become less attractive to domestic buyers and more attractive to foreign buyers.

Accepted Answer

When interest rates fall, the return on U.S. financial assets decreases, making them less attractive to both foreign and domestic buyers seeking higher returns.

Question 11

Changes in planned spending not caused by changes in output or the inflation rate will shift the:
A)aggregate supply curve.
B)Keynesian cross.
C)potential output line.
D)aggregate demand curve.

Accepted Answer

Changes in planned spending that are not due to changes in output or the inflation rate will shift the aggregate demand curve, as these changes affect the overall demand for goods and services in the economy.

Question 12

When the inflation rate decreases, PAE ______, which in turn causes Y to ______ because of ______.
A)rises; rise; the income-expenditure multiplier
B)rises; fall; the income-expenditure multiplier
C)falls; rise; the wealth effect
D)falls; fall; the wealth effect

Accepted Answer

When the inflation rate decreases, the purchasing power of money increases, which leads to an increase in aggregate expenditure (PAE). This increase in PAE, in turn, causes real output (Y) to rise because of the income-expenditure multiplier.

Question 13

If the interest rate in the U.S.rises, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will rise.
A)more; demand for
B)more; supply of
C)less; demand for
D)less; supply of

Accepted Answer

When U.S. interest rates rise, U.S. financial assets offer higher returns, making them more attractive to buyers. This increased attractiveness leads to a higher demand for U.S. dollars as investors exchange their currency for dollars to purchase these assets.

Question 14

If the interest rate in the U.S.falls, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will fall.
A)more; demand for
B)more; supply of
C)less; demand for
D)less; supply of

Accepted Answer

When U.S. interest rates fall, U.S. financial assets become less attractive to buyers because they offer lower returns. Consequently, the demand for U.S. dollars decreases as investors seek higher returns elsewhere.

Question 15

Changes in planned spending that shift the aggregate demand curve are those:
A)caused by changes in output.
B)caused by changes in the inflation rate.
C)caused by changes in output and changes in the real interest rate.
D)not caused by changes in output or changes in the inflation rate.

Accepted Answer

Changes in planned spending that shift the aggregate demand curve are those not caused by changes in output or changes in the inflation rate, as these factors are endogenous to the model and do not shift the curve.

Question 16

Shifts in ______ can return the economy to long-run equilibrium.
A)the AD curve only
B)the AS curve only
C)either the AD curve or the AS curve
D)the PAE line only

Accepted Answer

Both the Aggregate Demand (AD) curve and the Aggregate Supply (AS) curve can shift to return the economy to long-run equilibrium by adjusting output and price levels.

Question 17

A demand shock is a change in planned spending that is:
A)caused by changes in output.
B)caused by changes in the inflation rate.
C)caused by changes in output and changes in the real interest rate.
D)not caused by changes in output or changes in the inflation rate.

Accepted Answer

A demand shock refers to a sudden event that increases or decreases demand for goods or services in the economy, not directly caused by changes in output or inflation rate.

Question 18

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______.
A)falls; fall; the income-expenditure multiplier
B)falls; rise; the income-expenditure multiplier
C)rises; rise; the wealth effect
D)rises; fall; the wealth effect

Accepted Answer

When the inflation rate increases, Planned Aggregate Expenditure (PAE) falls because higher prices reduce the purchasing power of consumers, leading to lower consumption and investment. This decrease in PAE causes output (Y) to fall due to the income-expenditure multiplier effect, where a change in spending leads to a larger change in output.

Question 19

The AD curve slopes downward because an increase in ______ causes ______ to fall, which in turn causes real GDP to fall.
A)the inflation rate; planned spending
B)planned spending; the inflation rate
C)real GDP; planned spending
D)real GDP; the unemployment rate

Accepted Answer

The AD (Aggregate Demand) curve slopes downward because an increase in the inflation rate causes planned spending to fall, which in turn causes real GDP to fall. This is due to the real balance effect, interest rate effect, and net export effect.

Question 20

When the interest rate in the U.S.rises, U.S.financial assets:
A)become less attractive to foreign buyers.
B)become more attractive to both foreign and domestic buyers.
C)become less attractive to both foreign and domestic buyers.
D)become less attractive to domestic buyers and more attractive to foreign buyers.

Accepted Answer

When interest rates rise in the U.S., U.S. financial assets typically offer higher returns, making them more attractive to both foreign and domestic buyers seeking better investment opportunities.

Quiz 13: Aggregate Demand, Aggregate Supply, and Business Cycles

Shifts in ______ can push the economy out of long-run equilibrium.

An increase in the interest rate directly affects , but also has an indirect effect on because of its effect on exchange rates.

A negative demand shock will shift the curve to the .

A positive demand shock will shift the curve to the .

The economy is in short-run equilibrium:

A sudden increase in household wealth is an example of a demand shock, which shifts the AD curve to the .

The AD curve because, holding all else constant, an increase in causes C, I^{P and NX to fall.}

The aggregate demand curve shows the relationship between planned spending and the:

The aggregate demand curve shifts when there are changes in:

When the interest rate in the U.S.falls, U.S.financial assets:

Changes in planned spending not caused by changes in output or the inflation rate will shift the:

When the inflation rate decreases, PAE , which in turn causes Y to because of __.

If the interest rate in the U.S.rises, U.S.financial assets become attractive to buyers and the U.S.dollars will rise.

If the interest rate in the U.S.falls, U.S.financial assets become attractive to buyers and the U.S.dollars will fall.

Changes in planned spending that shift the aggregate demand curve are those:

Shifts in ______ can return the economy to long-run equilibrium.

A demand shock is a change in planned spending that is:

When the inflation rate increases, PAE , which in turn causes Y to because of __.

The AD curve slopes downward because an increase in causes to fall, which in turn causes real GDP to fall.

When the interest rate in the U.S.rises, U.S.financial assets:

Quiz 13: Aggregate Demand, Aggregate Supply, and Business Cycles

Shifts in ______ can push the economy out of long-run equilibrium.

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.

A negative demand shock will shift the ______ curve to the ______.

A positive demand shock will shift the ______ curve to the ______.