Question 1

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 2

The price system always works instantaneously.

Accepted Answer

The price system does not always work instantaneously as there can be delays in information transmission, production, and distribution, as well as other factors that can affect the supply and demand of goods and services.

Question 3

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 create commitments between buyers and sellers that make it difficult to change prices, particularly in the short term. Therefore, changes in demand are more likely to be met with changes in output rather than changes in prices.

Question 4

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 companies' 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 article states that the prices tracked in the retail catalogs were typically fixed for a year or more, despite the catalogs being reissued every six months.

Question 5

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 6

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. This represents the total amount of goods and services that consumers, businesses, governments, and foreigners are willing to purchase at a given price level.

A) Supply and demand refers to the relationship between the quantity of a good or service that producers are willing to sell and the quantity that consumers are willing to buy at various prices. 
C) Consumer demand refers only to the amount of goods and services that consumers are willing to buy at various prices. 
D) GDP demand is not a commonly used term in economics. GDP refers to the total value of goods and services produced within a country's borders during a specific time period.

Question 7

What are the two types of prices in an economy?

Accepted Answer

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

Question 8

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 is downward sloping, which means that as the price level increases, the quantity of real GDP demanded decreases, and vice versa. This relationship between price level and quantity of real GDP demanded is based on the idea that at lower price levels, individuals and firms are more likely to spend or invest, leading to higher aggregate demand, and at higher price levels, individuals and firms are less likely to spend or invest, leading to lower aggregate demand.

Question 9

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 due to the real value of money increasing when the price level falls is known as the wealth effect. Individuals feel wealthier as their money can purchase more goods and services, leading to increased spending.

Question 10

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, also known as the market system, is a mechanism in which prices act as signals for producers and consumers in the market to adjust their behavior. As consumers demand more of a particular good or service, the price will rise, signaling to producers to increase supply. On the other hand, if there is less demand for a product, the price will fall, indicating to producers to either reduce production or look for alternative products to produce. In this way, the price system helps to balance supply and demand and allocate resources efficiently.

Question 11

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, it is assumed that some factors of production (such as capital) are fixed, and therefore the level of output is determined by demand. Prices may not change significantly in the short run as firms may have some contractual agreements in place, but these do not fix prices completely. The demand curve may also slope downward in the short run, indicating that quantity demanded responds somewhat to changes in price. Therefore, choices A, B, and D are incorrect.

Question 12

Prices of industrial products and wages tend to be the most "flexible."

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 13

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

With the shift towards pizza, there will be an increase in demand for pizza and a decrease in demand for tacos. This will lead to an increase in pizza prices due to the increased demand and a decrease in taco prices due to the decreased demand.

Question 14

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, which is the combination of individual demands of all consumers in an economy. Aggregate supply refers to the total amount of goods and services that firms are willing to produce and supply at a given price level. Market demand and supply refer to the demand and supply of a particular good or service in a specific market.

Question 15

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

Accepted Answer

Wages are typically the largest cost for businesses, especially those that rely heavily on labor. Other costs such as rent, utilities, and materials may also be significant, but wages tend to make up the largest portion of expenses.

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 companies' 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 concept of sticky prices, as economist Anil Kashyap of the University of Chicago tracked the prices of selected goods from catalogs that were reissued every six months. Sticky prices refer to the tendency of prices to be slow to adjust to changes in supply and demand conditions in the short run.

Question 17

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 18

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...

Question 19

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 companies' 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 don't change very much, implying that the aggregate supply curve is relatively flat.

Accepted Answer

In the short run, prices tend to be sticky or don't change very much, which is consistent with the idea that the aggregate supply curve is relatively flat during this period. This allows for changes in aggregate demand to have a larger effect on output than on prices.

Question 20

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 total demand for goods and services in an economy at a given price level. In other words, it represents the relationship between the price level and the quantity of real GDP demanded. Option A refers to the supply of a single good, while option B and C refer to the relationship between price and quantity for a single good, which is not the same as aggregate demand.

Quiz 9: Aggregate Demand and Aggregate Supply

As the price level , the purchasing power of money .

The price system always works instantaneously.

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

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

What are the two types of prices in an economy?

The aggregate demand curve is

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

The short run in macroeconomics is the period in which

Prices of industrial products and wages tend to be the most "flexible."

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.

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

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

Aggregate demand refers to the relationship between