Question 1

The real-balance effect explains a shift in aggregate demand, while the wealth effect explains a
movement along the AD curve.

Accepted Answer

The real-balance effect explains a movement along the aggregate demand (AD) curve due to changes in the purchasing power of money when the price level changes, while shifts in the AD curve can be caused by factors other than the real-balance effect, such as changes in consumer confidence, fiscal policy, or investment spending. The wealth effect, which is related to the real-balance effect, also contributes to movements along the AD curve by changing the amount of consumption based on changes in consumers' real wealth.

Question 2

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

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 3

Accepted Answer

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Question 4

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 5

Accepted Answer

A shift in the aggregate supply curve from A 11eb912e_9e86_3269_b576_0d6427f901b9_TB8601_11 would result in a change in both the price level and output. This is because the aggregate supply curve shows the relationship between the price level and the quantity of goods and services that firms are willing and able to supply. A shift in the aggregate supply curve means there has been a change in the factors that affect production, such as changes in input prices, technology, or regulations, resulting in either an increase or decrease in the quantity supplied at every given price level. As a result, the new intersection of the aggregate supply and aggregate demand curves would lead to a change in both the equilibrium price level and the equilibrium level of real GDP.

Question 6

Accepted Answer

The term "cost-push inflation" refers to a situation where the increase in the cost of production (such as wages, raw material prices, etc.) leads to an increase in the overall price level of goods and services in the economy. This kind of inflation was seen in the early 1970s, as rising oil prices and other input costs led to higher prices across the economy.

Question 7

Depreciation of the dollar relative to foreign currencies will tend to increase net exports and thus
aggregate demand of the U.S. economy.

Accepted Answer

When the dollar depreciates relative to foreign currencies, foreign goods become more expensive for Americans while U.S. goods become cheaper for foreigners. This tends to increase exports and decrease imports, which leads to an increase in net exports and aggregate demand.

Question 8

The shape of the short-run aggregate supply curve indicates that as the general price level rises,
output will expand but not by much when the economy reaches full employment.

Accepted Answer

The short-run aggregate supply curve is upward sloping, indicating that as the general price level rises, output will expand. However, as the economy approaches full employment, the curve becomes steeper, reflecting that output increases by smaller amounts due to capacity constraints.

Question 9

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

When the price level increases, the real value of financial assets with fixed money values (such as bonds) decreases. This means that the purchasing power of these assets is reduced, and as a result, their holders may decrease their spending.

Question 10

The long-run aggregate supply curve is upward sloping.

Accepted Answer

The long-run aggregate supply curve is vertical, indicating that in the long run, the total output of an economy is not affected by the level of prices.

Question 11

If the stock market crashes, the so-called reverse wealth effect will cause consumer spending to
decrease.

Accepted Answer

When the stock market crashes, people feel less wealthy as the value of their investments decreases. As a result, they may be less likely to spend money, causing a decrease in consumer spending. This phenomenon is known as the reverse wealth effect.

Question 12

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

Accepted Answer

When oil prices rise, the cost of production for many goods and services increases, leading to higher prices for consumers. This is known as cost-push inflation. Additionally, higher oil prices can lead to decreased economic activity, as consumers and businesses have less money to spend on other things. This can lead to falling output, or a decrease in the total amount of goods and services produced in the economy. Therefore, the correct answer is C.

Question 13

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

Accepted Answer

This is a basic tenet of aggregate demand theory. When the price level increases, the purchasing power of consumers and businesses decreases, leading to a decrease in demand for goods and services, and therefore a decrease in the quantity of real output demanded.

Question 14

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

Accepted Answer

Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to a price level that is inﬂexible downward. This means that wages cannot be reduced even if there is a decrease in demand for labor or a decrease in the overall economic activity, which could result in higher unemployment or other negative effects on the economy. This can lead to an increase in prices and a decrease in competitiveness, which can be harmful to the economy in the long run.

Question 15

A change in business taxes and regulation can affect production costs and aggregate supply.

Accepted Answer

Business taxes and regulations can increase or decrease production costs, which would in turn affect the quantity of goods and services that businesses are willing to supply at different price levels, thus affecting aggregate supply.

Question 16

A decrease in personal and business taxes will cause government spending and aggregate demand
to decrease.

Accepted Answer

A decrease in personal and business taxes will leave individuals and businesses with more disposable income, which can result in increased spending and investment. This increase in demand can lead to economic growth and possibly higher employment. However, it can also result in inflationary pressures, which the government may have to counteract with higher interest rates, thereby decreasing aggregate demand. In any case, the decrease in taxes will not directly cause government spending to decrease.

Question 17

Deﬂation refers to a situation where

Accepted Answer

Deflation is characterized by a decrease in the general price level of goods and services, which can occur when aggregate demand (AD) decreases, shifting the AD curve to the left.

Question 18

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?

Accepted Answer

The stimulus package causing prices to fall in many sectors would actually be a positive effect on the economy as it would increase the purchasing power of consumers and businesses, leading to an increase in overall spending and economic growth. Therefore, this cannot be a reason why the stimulus package did not have a strong impact on GDP and unemployment.

Question 19

An increase in real interest rates will increase investment and aggregate demand.

Accepted Answer

An increase in real interest rates will actually decrease investment and aggregate demand, as it makes borrowing more expensive for firms and individuals.

Question 20

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

Accepted Answer

The government actions taken during the Great Recession of 2007-09 did not include a sharp increase in the natural rate of unemployment. In fact, the government was working to decrease unemployment by implementing policies such as the American Recovery and Reinvestment Act, which provided funding for infrastructure projects and job training programs. The other options, A, B and C, are all accurate actions that were taken to stimulate the economy during this period.

Quiz 12: Aggregate Demand and Aggregate Supply

The real-balance effect explains a shift in aggregate demand, while the wealth effect explains a movement along the AD curve.

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

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

Depreciation of the dollar relative to foreign currencies will tend to increase net exports and thus aggregate demand of the U.S. economy.

The shape of the short-run aggregate supply curve indicates that as the general price level rises, output will expand but not by much when the economy reaches full employment.

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.

The long-run aggregate supply curve is upward sloping.

If the stock market crashes, the so-called reverse wealth effect will cause consumer spending to decrease.

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

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

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

A change in business taxes and regulation can affect production costs and aggregate supply.

A decrease in personal and business taxes will cause government spending and aggregate demand to decrease.

Deﬂation refers to a situation where

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?

An increase in real interest rates will increase investment and aggregate demand.

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