Question 1

The relationship between the level of prices and the total demand for all goods and services is known as
A)aggregate supply.
B)market supply.
C)aggregate demand.
D)market demand.

Accepted Answer

The relationship between the level of prices and the total demand for all goods and services is known as aggregate demand. This is because it represents the total amount of goods and services that consumers are willing to purchase at different price levels in the economy.

Question 2

Prices of industrial products and wages tend to be the most ʺflexible.ʺ

Accepted Answer

Prices of industrial products and wages are often considered less flexible due to factors like contracts, regulations, and negotiation processes that can delay adjustments to changing market conditions.

Question 3

Aggregate demand refers to the relationship between
A)prices and the quantity of a good supplied.
B)the price level and the quantity of real GDP supplied.
C)prices and the quantity of a good demanded.
D)the price level and the quantity of real GDP demanded.

Accepted Answer

Aggregate demand refers to the relationship between the price level and the quantity of real GDP demanded. It shows the total demand for goods and services in an economy at different price levels. It is important because it helps economists and policymakers to understand how changes in price levels can affect overall economic activity.

Question 4

The short run in macroeconomics is the period in which
A)prices change significantly.
B)no contracts or agreements exist to fix prices.
C)demand determines output.
D)the demand curve is vertical.

Accepted Answer

In the short run, the level of output is primarily determined by the level of demand. This is because most firms have a fixed amount of capital and labor that they cannot easily adjust in the short run, so they can only increase output by using their existing resources more efficiently. In contrast, prices may not change significantly in the short run, and there may still be contracts or agreements to fix prices. The demand curve may also slope downwards in the short run rather than being completely vertical, as consumers may respond to changes in output by adjusting their consumption patterns.

Question 5

Suppose consumer tastes and preferences shift from tacos to pizzas. In the short run, these changing tastes will result in pizza restaurants _______ pizza prices and _______ taco restaurants taco prices.
A)increasing; decreasing
B)decreasing; increasing
C)decreasing; decreasing
D)increasing; increasing

Accepted Answer

As the demand for pizzas increases and the demand for tacos decreases due to the change in consumer preferences, the pizza restaurants will have the opportunity to increase their prices as they experience an increase in demand. On the other hand, the taco restaurants will experience a decrease in demand and should decrease their prices to try to maintain their customer base. Therefore, pizza prices will increase and taco prices will decrease in the short run.

Question 6

For most firms, the biggest cost of doing business is wages.

Accepted Answer

Wages are a significant cost for most firms, as they typically have a large workforce that requires payment. Other costs, such as materials and equipment, may also be substantial, but wages are typically the largest expense.

Question 7

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s).
Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. Kashyap tracked the prices from the companiesʹ catalogs which
were reissued every six months.
-Even though the catalogs listed in the Application were reissued every six months, the prices which were tracked in these retail catalogs
A)were typically fixed for a year or more.
B)changed every month.
C)tended to fall during periods of high inflation.
D)were not listed due to low rates of inflation.

Accepted Answer

The passage states that Economist Anil Kashyap tracked the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. from catalogs which were reissued every six months. However, it doesn't indicate that prices changed every six months. It's more likely that prices were fixed for a year or more since the catalogs were only reissued every six months.

Question 8

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s).
Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. Kashyap tracked the prices from the companiesʹ catalogs which
were reissued every six months.
-This Application examines the concept of
A)the wealth effect.
B)sticky prices.
C)consumer spending habits.
D)stagflation.

Accepted Answer

The application examines the behavior of prices in retail catalogs and how they are sticky, meaning they don't change frequently or quickly. Therefore, the concept being examined is sticky prices. None of the other choices relate to the topic discussed in the application.

Question 9

Suppose consumer tastes and preferences shift from pizza to tacos. In the short run case, these changing tastes will result in pizza restaurants _______ pizza prices and taco restaurants _______ taco prices.
A)increasing; decreasing
B)decreasing; increasing
C)decreasing; decreasing
D)increasing; increasing

Accepted Answer

As consumer preferences shift from pizza to tacos, demand for pizza decreases, leading pizza restaurants to lower prices to attract customers. Conversely, demand for tacos increases, prompting taco restaurants to raise prices due to higher demand.

Question 10

What are the two types of prices in an economy?

Accepted Answer

The answer of What are the two types of prices...

Question 11

As the price level _______ , the purchasing power of money _______.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; stays the same

Accepted Answer

As the price level increases, each unit of currency buys fewer goods and services, thus the purchasing power of money decreases.

Question 12

Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts.

Accepted Answer

Formal and informal contracts may contain obligations to maintain output levels or to avoid changing prices frequently. As a result, when there is a change in demand, firms are more likely to adjust their output levels rather than their prices to maintain their contractual obligations. This can help ensure stability and consistency in the market.

Question 13

The increase in spending that occurs because the real value of money increases when the price level falls is known as the
A)interest rate effect.
B)international trade effect.
C)price effect.
D)wealth effect.

Accepted Answer

The increase in spending that occurs when the real value of money increases due to a fall in the price level is known as the wealth effect. As the price level falls, people feel wealthier with the same amount of money and are more likely to spend it.

Question 14

The price system always works instantaneously.

Accepted Answer

The price system can take time to adjust and reflect changes in supply and demand. It may also be influenced by various external factors such as government policies, natural disasters, and technological advancements.

Question 15

The aggregate demand curve is
A)downward sloping.
B)upward sloping.
C)a vertical line at potential output.
D)a horizontal line at the current price level.

Accepted Answer

The aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded in the economy. It is downward sloping because as the price level decreases, ceteris paribus, consumers can afford to buy more, causing an increase in quantity demanded of goods and services. Conversely, as the price level increases, consumers have less purchasing power, leading to a decrease in quantity demanded.

Question 16

Recall the Application about the behavior of prices in retail catalogs to answer the following question(s).
Economist Anil Kashyap of the University of Chicago examined the prices of 12 selected goods from L.L.
Bean, REI, and The Orvis Company, Inc. Kashyap tracked the prices from the companiesʹ catalogs which
were reissued every six months.
-According to this Application, the prices which were tracked in the retail catalogs exemplified the macroeconomic concept of the short run, a period of time in which
A)price changes are significant because the aggregate supply curve is vertical.
B)prices never change because the aggregate demand curve is vertical.
C)prices change frequently because of changes in aggregate supply.
D)prices donʹt change very much, implying that aggregate supply is relatively flat.

Accepted Answer

In the short run, prices tend not to change much, indicating that the aggregate supply curve is relatively flat, meaning firms are not adjusting prices frequently in response to changes in demand.

Question 17

What is the total demand for goods and services in an entire economy called?
A)supply and demand
B)aggregate demand
C)consumer demand
D)GDP demand

Accepted Answer

The total demand for goods and services in an entire economy is called aggregate demand. It represents the total amount of spending on goods and services by households, businesses, governments, and foreign buyers in a particular period.

Question 18

The price system works in an economy on a day-to-day basis to match the desires of consumers with the output from producers.

Accepted Answer

The price system uses the forces of supply and demand to allocate resources efficiently, match consumer wants with producer output, and determine the prices of goods and services in a market economy.

Question 19

Suppose that demand for a product falls, but prices are sticky. What is likely to happen to prices and output in that market, in the short run?

Accepted Answer

The answer of Suppose that demand for a product falls,...

Question 20

What are some reasons why coordination of economic affairs through the price system may not work perfectly?

Accepted Answer

The answer of What are some reasons why coordination of...

Quiz 14: Aggregate Demand and Aggregate Supply

The relationship between the level of prices and the total demand for all goods and services is known as

Prices of industrial products and wages tend to be the most ʺflexible.ʺ

Aggregate demand refers to the relationship between

The short run in macroeconomics is the period in which

Suppose consumer tastes and preferences shift from tacos to pizzas. In the short run, these changing tastes will result in pizza restaurants _ pizza prices and _ taco restaurants taco prices.

For most firms, the biggest cost of doing business is wages.

Suppose consumer tastes and preferences shift from pizza to tacos. In the short run case, these changing tastes will result in pizza restaurants _ pizza prices and taco restaurants _ taco prices.

What are the two types of prices in an economy?

As the price level _ , the purchasing power of money _.

Changes in demand will often be met with changes in output rather than changes in prices because of formal and informal contracts.

The increase in spending that occurs because the real value of money increases when the price level falls is known as the

The price system always works instantaneously.

The aggregate demand curve is

What is the total demand for goods and services in an entire economy called?

The price system works in an economy on a day-to-day basis to match the desires of consumers with the output from producers.

Suppose that demand for a product falls, but prices are sticky. What is likely to happen to prices and output in that market, in the short run?

What are some reasons why coordination of economic affairs through the price system may not work perfectly?