Question 1

In which case can we be sure aggregate demand shifts left overall?

Accepted Answer

When people want to save more for retirement, they spend less, which decreases aggregate demand. If the Fed decreases the money supply, it typically leads to higher interest rates, further discouraging spending and investment, thus also decreasing aggregate demand. Both actions combined ensure a leftward shift in aggregate demand.

Question 2

Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they consume have fallen by the same percentage. They may infer that the reward to working is temporarily

Accepted Answer

If workers see their nominal wages fall but do not immediately realize that prices have also fallen, they may perceive their real income (or the reward for working) as being lower than it actually is. This perception might lead them to supply a smaller quantity of labor, thinking they are getting less value for their work.

Question 3

Scenario 33-1
Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets.
-Refer to Scenario 33-1. What would the change in the exchange rate make happen to U.S. net exports and U.S. aggregate demand?

Accepted Answer

The increase in demand for U.S. assets would appreciate the U.S. dollar, making U.S. goods more expensive abroad and foreign goods cheaper in the U.S. This would decrease U.S. net exports, which by itself would decrease U.S. aggregate demand.

Question 4

The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by 5% while firms were expecting it to rise by 2%, then some firms with high menu costs will have

Accepted Answer

Firms with high menu costs may not adjust their prices immediately, resulting in lower than desired prices when the actual price level is higher than expected, leading to an increase in the quantity of goods and services supplied.

Question 5

Scenario 33-1
Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets.
-Refer to Scenario 33-1. What would the change in the interest rate created by foreigners wanting to buy more U.S. assets do to investment spending in the United States?

Accepted Answer

The answer of Scenario 33-1
Suppose that political instability in other...

Question 6

Which of the following shifts the long-run aggregate supply curve to the left?

Accepted Answer

An increase in the price of imported natural resources and an increase in trade restrictions can both reduce a country's productive capacity, shifting the long-run aggregate supply curve to the left.

Question 7

If U.S. speculators gained greater confidence in foreign economies so that they wanted to move more of their wealth into foreign countries, the dollar would

Accepted Answer

If U.S. speculators move wealth abroad, demand for foreign currency increases, causing the dollar to depreciate. A weaker dollar makes U.S. exports cheaper, boosting aggregate demand.

Question 8

Scenario 33-1
Suppose that political instability in other countries makes people fear for the value of their assets in these countries so that they desire to purchase more U.S assets.
-Refer to Scenario 33-1. What would happen to the dollar?

Accepted Answer

When there is an increased demand for U.S. assets, more foreign currency is exchanged for dollars to make these purchases, leading to an appreciation of the dollar in foreign exchange markets. This appreciation makes U.S. goods more expensive compared to foreign goods.

Question 9

Which of the following would shift the long-run aggregate supply curve right?

Accepted Answer

The long-run aggregate supply curve shifts right with an increase in the productive capacity of the economy, such as an increase in the capital stock. Changes in the price level or money supply do not affect the long-run aggregate supply.

Question 10

In countries that have high minimum wages and require a lengthy and costly process to get permission to open a business,

Accepted Answer

Reducing the minimum wage can increase employment by making it less costly for businesses to hire workers, potentially increasing output. Reducing the time and cost to open a business can encourage more business formation and competition, also potentially increasing output. Both actions can shift the long-run aggregate supply curve to the right, indicating an increase in the potential output of the economy.

Question 11

The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is

Accepted Answer

The sticky-wage theory suggests that wages do not adjust immediately to changes in economic conditions. Therefore, if the price level rises more than expected, firms find their products more profitable (since prices are higher but wages have not yet adjusted), leading them to increase production, which in turn increases employment and output.

Question 12

The price level rises in the short run if

Accepted Answer

The price level rises in the short run if aggregate demand shifts right (increasing demand for goods and services at the same price levels) or aggregate supply shifts left (decreasing the supply of goods and services at the same price levels), both of which lead to higher prices.

Question 13

An increase in the expected price level shifts

Accepted Answer

An increase in the expected price level makes producers expect higher prices for their products in the future, which can lead to a decrease in the supply of goods and services in the short run as they may hold off selling in anticipation of higher prices. However, the long-run aggregate supply curve is not affected by changes in the price level as it is determined by factors like technology, capital, and labor, which are not influenced by price expectations.

Question 14

People had been expecting the price level to be 120 but it turns out to be 122. In response Robinson Tire Company increases the number of workers it employs. What could explain this?

Accepted Answer

Both sticky price theory and sticky wage theory can explain this situation. Sticky price theory suggests that prices of goods do not adjust immediately to changes in economic conditions, so if Robinson Tire Company had set its prices expecting a price level of 120, an actual price level of 122 could mean higher than expected real revenues, encouraging the company to produce more and thus hire more workers. Sticky wage theory suggests that wages do not adjust quickly to changes in the labor market. If wages were set based on the expected price level of 120, and the actual price level is 122, the real wage is lower than anticipated, making labor cheaper for the company and potentially leading to increased hiring.

Question 15

Figure 33-1 
-Refer to Figure 33-1. The natural level of output occurs at

Accepted Answer

The natural level of output is the level of output at which the economy's resources are fully employed. Without seeing Figure 33-1, the correct answer typically refers to the point where aggregate demand intersects long-term aggregate supply at full employment, which is often denoted in a way similar to option B.

Question 16

Suppose that foreigners had reduced confidence in U.S. financial institutions and believed that privately issued U.S. bonds were more likely to be defaulted on. U.S. net exports would

Accepted Answer

If foreigners lose confidence in U.S. financial institutions, they may reduce their investment in U.S. bonds, leading to a depreciation of the U.S. dollar. This makes U.S. goods cheaper for foreigners, potentially increasing U.S. net exports and thereby increasing aggregate demand.

Question 17

Which of the following is not a determinant of the long-run level of real GDP?

Accepted Answer

The long-run level of real GDP is determined by factors such as the amount of capital used by firms, the available stock of human capital, and the available technology, which are all related to the economy's productive capacity. The price level, on the other hand, is not a determinant of the long-run level of real GDP; it affects the economy in the short run through demand-side factors.

Question 18

Other things the same, if technology increases, then in the long run

Accepted Answer

An increase in technology typically makes production more efficient, leading to an increase in output. As production costs decrease due to the efficiency gains, prices tend to lower as well.

Question 19

The classical dichotomy and monetary neutrality are represented graphically by

Accepted Answer

The classical dichotomy and monetary neutrality suggest that changes in the money supply do not affect real variables in the long run, which is represented graphically by a vertical long-run aggregate-supply curve. This indicates that the economy's output is determined by factors other than the price level in the long run.

Question 20

According to the misperceptions theory of short-run aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what it produce had

Accepted Answer

The misperceptions theory suggests that if a firm expects lower inflation than what actually occurs, it may mistakenly believe that the real price of its products has increased relative to others. This could lead the firm to increase production, thinking it can sell its goods at relatively higher prices.

Quiz 33: Aggregate Demand and Aggregate Supply