Question 1

With cost-push inflation in the short run, there will be
A)an increase in real GDP.
B)a leftward shift in the aggregate demand curve.
C)a decrease in real GDP.
D)a decrease in unemployment.

Accepted Answer

Cost-push inflation occurs when production costs increase, leading to a decrease in aggregate supply. This results in higher prices and a decrease in real GDP in the short run.

Question 2

The economy experiences an increase in the price level and an increase in real domestic output.Which is a likely explanation?
A)Interest rates have increased.
B)Business taxes have increased.
C)Wage rates have fallen.
D)Net exports have increased.

Accepted Answer

The answer of The economy experiences an increase in the...

Question 3

The economy experiences a decrease in the price level and an increase in real domestic output.Which is a likely explanation?
A)Consumer incomes and the quantity of labor have decreased.
B)Business costs and wage rates have decreased.
C)The prices of imported resources have increased.
D)National income abroad has increased.

Accepted Answer

A decrease in the price level and an increase in real domestic output suggests a shift in the aggregate supply curve to the right. This can occur due to a decrease in business costs and wage rates, making it more profitable for businesses to produce more. Option A suggests a decrease in consumer incomes which would shift the aggregate demand curve to the left, resulting in a decrease in both price level and real output. Option C suggests an increase in costs for businesses which would shift the aggregate supply curve to the left, resulting in an increase in price level and a decrease in real output. Option D does not provide any explanation for the observed phenomenon.

Question 4

Wage contracts, efficiency wages, and the minimum wage are explanations for why
A)competition results in price wars.
B)wages tend to be inflexible downward.
C)the aggregate demand curve slopes downward.
D)there is little support for the existence of a real-balances effect.

Accepted Answer

Wage contracts, efficiency wages, and the minimum wage contribute to wage rigidity, making it difficult for wages to decrease even when economic conditions worsen.

Question 5

In the mid-1970s, changes in oil prices greatly affected U.S.inflation.When oil prices rose, the U.S.experienced
A)cost-push inflation and rising output.
B)demand-pull inflation and rising output.
C)cost-push inflation and falling output.
D)demand-pull inflation and falling output.

Accepted Answer

In the mid-1970s, the U.S. experienced cost-push inflation due to rising oil prices, which increased production costs and led to higher prices, while output fell due to the economic strain.

Question 6

Which of the following is not a reason why the stimulus package that the government implemented during the Great Recession of 2007-09 did not have as strong an impact on GDP and unemployment as expected?
A)Households had very high debt levels.
B)Consumers raised their saving rates.
C)The stimulus package caused prices to fall in many sectors.
D)The effects of the stimulus package were diffuse and spread thinly among many sectors.

Accepted Answer

The stimulus package did not cause prices to fall; rather, high household debt and increased saving rates reduced consumer spending, and the effects were spread thinly across sectors, limiting its impact.

Question 7

The economy experiences an increase in the price level and a decrease in real domestic output.Which of the following is a likely explanation?
A)Productivity has increased.
B)Input prices have increased.
C)There has been an increase in government spending.
D)Government regulations have been reduced.

Accepted Answer

An increase in the price level could be caused by input prices increasing, which would decrease real domestic output as it would make it more expensive to produce goods and services. The other choices do not necessarily fit this scenario.

Question 8

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to
A)a wealth effect.
B)a multiplier effect.
C)an increase in aggregate supply.
D)a price level that is inflexible downward.Difficulty: 02 Medium

Accepted Answer

Collective bargaining agreements that prohibit wage cuts make it difficult for prices to decrease, leading to price level inflexibility downward.

Question 9

The U.S.economy was able to achieve full employment with relative price level stability between 1996 and 2000 because
A)aggregate demand increased.
B)aggregate supply decreased.
C)aggregate demand increased and aggregate supply increased.
D)aggregate demand decreased and aggregate supply increased.

Accepted Answer

During this period, both aggregate demand and aggregate supply increased. The rise in aggregate demand stimulated economic growth and employment, while the increase in aggregate supply helped keep inflation (price levels) stable. This combination allowed for full employment without causing significant inflation, which is a rare and desirable economic situation.

Question 10

Deflation refers to a situation where
A)the price level falls; it could be caused by a shift of AD to the left.
B)the price level falls; it could be caused by a decrease in aggregate supply.
C)the rate of inflation falls; it could be caused by a shift of AS to the right.
D)the rate of inflation rises; it could be caused by a decrease in aggregate demand.

Accepted Answer

Deflation is characterized by a decrease in the general price level of goods and services, often due to a leftward shift in aggregate demand (AD).

Question 11

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when
A)AD decreases but not when AD increases.
B)AD increases but not when AD decreases.
C)AS increases but not when AS decreases.
D)AD shifts but not when AS shifts.

Accepted Answer

The ratchet effect describes a situation where prices and wages are flexible upwards when aggregate demand (AD) increases, but they are sticky downwards when AD decreases, meaning they do not easily fall back to previous levels.

Question 12

An increase in the price level reduces the real value of financial assets with fixed money values, and, as a result, the holders of these assets decrease their spending.

Accepted Answer

An increase in the price level erodes the purchasing power of money, reducing the real value of financial assets with fixed nominal values, leading asset holders to feel poorer and potentially decrease their spending.

Question 13

Menu costs will
A)increase the amount of training of workers.
B)result in price wars between businesses.
C)increase the legal minimum wage.
D)make prices inflexible downwarD.Learning Objective: 32-06 Describe how the AD-AS model explains periods of demand-pull inflation, cost-push inflation, and recession.

Accepted Answer

Menu costs refer to the costs associated with changing prices. These costs can make businesses reluctant to lower prices, thus making prices inflexible downward.

Question 14

Disinflation refers to a situation where
A)the price level falls, but the rate inflation does not.
B)the price level rises, but the rate of inflation does not.
C)the rate of inflation falls, but the price level does not.
D)the rate of inflation rises, but the price level does not.

Accepted Answer

Disinflation is a decrease in the rate of inflation, meaning prices are still rising but at a slower pace.

Question 15

A decrease in aggregate supply means
A)both the real domestic output and the price level will decrease.
B)the real domestic output will increase and rises in the price level will become smaller.
C)the real domestic output will decrease and the price level will rise.
D)both the real domestic output and rises in the price level will become greater.

Accepted Answer

A decrease in aggregate supply means that businesses are producing less than before, which leads to a decrease in the real domestic output. With fewer goods and services available, the price level will rise due to the increased demand for remaining products. Therefore, the correct answer is C, which indicates that the real domestic output will decrease, and the price level will rise.

Question 16

Aggregate demand decreases and real output falls but the price level remains the same.Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?
A)the multiplier effect
B)the wealth effect
C)fear of price wars
D)business taxes

Accepted Answer

Fear of price wars can lead firms to keep prices stable even when demand decreases, as they avoid reducing prices to prevent triggering competitive price cuts from rivals.

Question 17

The aggregate demand curve shows that when the price level rises, the quantity of real output demanded decreases.

Accepted Answer

This is because as prices increase, consumers will have to pay more for goods and services, reducing their purchasing power and leading to a decrease in demand.

Question 18

Government actions that were taken in order to stimulate the economy during the Great Recession of 2007-09 included the following, except
A)a significant reduction of interest rates to nearly zero.
B)a large increase in transfer payments.
C)an increase in the deficit spending of the government.
D)a sharp increase in the natural rate of unemployment.

Accepted Answer

During the Great Recession, the government took actions such as reducing interest rates, increasing transfer payments, and increasing deficit spending to stimulate the economy. However, a sharp increase in the natural rate of unemployment was not a government action; it is a long-term economic condition not directly manipulated by short-term policy measures.

Question 19

The real-balance and interest-rate effects help explain why aggregate demand might shift to the right or to the left.

Accepted Answer

The real-balance and interest-rate effects help explain why the aggregate demand curve slopes downward, not why it shifts. Shifts in aggregate demand are caused by factors such as changes in consumer confidence, fiscal policy, and foreign exchange rates.

Question 20

Cost-push inflation is characterized by a(n)
A)increase in aggregate supply and a decrease in aggregate demand.
B)increase in aggregate demand and no change in aggregate supply.
C)decrease in aggregate supply and no change in aggregate demand.
D)decrease in both aggregate supply and aggregate demand.

Accepted Answer

Cost-push inflation occurs when the overall price level rises due to an increase in the cost of production, leading to a decrease in aggregate supply while aggregate demand remains unchanged.

Quiz 32: Aggregate Demand and Aggregate Supply

With cost-push inflation in the short run, there will be

The economy experiences an increase in the price level and an increase in real domestic output.Which is a likely explanation?

The economy experiences a decrease in the price level and an increase in real domestic output.Which is a likely explanation?

Wage contracts, efficiency wages, and the minimum wage are explanations for why

In the mid-1970s, changes in oil prices greatly affected U.S.inflation.When oil prices rose, the U.S.experienced

Which of the following is not a reason why the stimulus package that the government implemented during the Great Recession of 2007-09 did not have as strong an impact on GDP and unemployment as expected?

The economy experiences an increase in the price level and a decrease in real domestic output.Which of the following is a likely explanation?

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to

The U.S.economy was able to achieve full employment with relative price level stability between 1996 and 2000 because

Deflation refers to a situation where

The so-called ratchet effect refers to the characteristic in the economy where product prices, wages, and per-unit production cost are flexible when

An increase in the price level reduces the real value of financial assets with fixed money values, and, as a result, the holders of these assets decrease their spending.

Menu costs will

Disinflation refers to a situation where

A decrease in aggregate supply means

Aggregate demand decreases and real output falls but the price level remains the same.Which of the following factors most likely contributes to downward price inflexibility in the immediate short run?

The aggregate demand curve shows that when the price level rises, the quantity of real output demanded decreases.

Government actions that were taken in order to stimulate the economy during the Great Recession of 2007-09 included the following, except

The real-balance and interest-rate effects help explain why aggregate demand might shift to the right or to the left.

Cost-push inflation is characterized by a(n)