Question 1

Which of the following is most likely to cause an increase in aggregate demand?
A)a decrease in interest rates
B)a decrease in national income
C)an increase in imports
D)a decrease in defense spending by the federal government

Accepted Answer

A decrease in interest rates would stimulate borrowing and investment, which would increase consumer and business spending, leading to an increase in aggregate demand.

Question 2

Which of the following is most likely to cause an increase in aggregate demand?
A)an increase in interest rates
B)a decrease in national income
C)an increase in imports
D)an increase in defense spending by the federal government

Accepted Answer

An increase in defense spending by the federal government directly increases government spending, which is a component of aggregate demand.

Question 3

Which of the following is likely to lead to a decrease in aggregate demand?
A)an increase in interest rates
B)an increase in wealth
C)an increase in national income
D)an increase in government spending on goods and services.

Accepted Answer

An increase in interest rates will discourage borrowing and investment, which will lead to a decrease in consumer and business spending, resulting in a decrease in aggregate demand. The other choices would likely lead to an increase in aggregate demand.

Question 4

Which of the following is likely to lead to a decrease in aggregate demand?
A)a decrease in interest rates
B)an increase in income
C)an increase in imports
D)an increase in government spending on goods and services.

Accepted Answer

An increase in imports means that consumers are purchasing more foreign goods and services, which reduces the demand for domestic goods and services and therefore leads to a decrease in aggregate demand.

Question 5

What is measured on the vertical axis of the aggregate supply curve?
A)real output
B)the overall price level as captured by a price index
C)a goods relative price
D)the quantity per time period of a particular good

Accepted Answer

The vertical axis of the aggregate supply curve measures the overall price level as captured by a price index. This is because aggregate supply represents the total amount of goods and services that firms are willing and able to produce at a given price level. As the price level increases, firms are incentivized to produce more output to earn greater profits, leading to a greater quantity supplied. Conversely, as the price level decreases, firms may reduce production due to lower profitability, leading to a lower quantity supplied. Thus, the overall price level is a critical factor in determining the aggregate supply of the economy.

Question 6

Starting from long-run equilibrium, an increase in aggregate demand will cause an increase in which of the following?
A)the price level
B)expectations
C)real wages
D)unemployment

Accepted Answer

An increase in aggregate demand will cause an increase in the price level as there is higher demand for goods and services than supply in the market, leading to upward pressure on prices. Expectations may also increase, but it is not a direct result of the increase in aggregate demand. Real wages would only increase if there is an increase in productivity, which is not necessarily implied by an increase in aggregate demand. Unemployment could potentially decrease if firms increase production to meet the higher demand, but it is not a direct result of the increase in aggregate demand.

Question 7

Starting from long-run equilibrium, an increase in aggregate demand will cause
A)a decrease in production in the short run.
B)an increase in employment in the short run.
C)a decrease in the price level.
D)downward pressure on wage rate.

Accepted Answer

An increase in aggregate demand will lead to an increase in output and employment in the short run, causing the economy to temporarily move away from the long-run equilibrium. This is because firms will need to increase production to meet the higher demand, leading to an increase in employment. However, in the long run, as wages and prices adjust, the economy will return to the original long-run equilibrium with a higher price level but the same level of output and employment. Therefore, choice B is the correct answer.

Question 8

Ceteris paribus, the relationship between the overall price level and the quantity of real GDP supplied in the short run is which of the following?
A)direct
B)indirect
C)inverse
D)circuitous

Accepted Answer

The relationship between the overall price level and the quantity of real GDP supplied in the short run is direct, meaning as the price level increases, the quantity of real GDP supplied also increases, and vice versa. This is because higher prices can lead to higher profits, encouraging firms to increase production.

Question 9

If the input prices are fixed or slow to change, firms respond to higher output prices by offering more for sale in which of the following?
A)the market period
B)the short run
C)the long run
D)the very long run

Accepted Answer

In the short run, the input prices are fixed or slow to change, so firms can respond to higher output prices by increasing their production and offering more for sale in the market. In the market period, all inputs are fixed, so firms cannot increase production, and in the long run, all inputs are variable, so firms can adjust their production levels based on changes in input and output prices. The very long run is a theoretical concept and not applicable in the real world.

Question 10

In the AD/AS framework, the natural level of real output is determined by the quantity and quality of the factors of production, which include all of the following except
A)capital stock.
B)natural resources.
C)money supply.
D)the labor force.

Accepted Answer

The natural level of real output is determined by the quantity and quality of factors of production, including capital stock, natural resources, and the labor force. The money supply is not a factor of production, so C is the correct answer.

Question 11

A rise in aggregate demand causes which of the following?
A)a lowering of the level of output prices relative to input prices
B)a cutback in production
C)moderate layoffs
D)an initial fall in inventories

Accepted Answer

An increase in aggregate demand typically leads to an initial fall in inventories as firms sell more goods than they anticipated, prompting them to increase production to replenish their stocks.

Question 12

A drop in aggregate demand causes which of the following?
A)output prices to fall relative to input prices
B)a drop in unemployment
C)substantial new hires
D)an initial fall in inventories

Accepted Answer

The answer of A drop in aggregate demand causes which...

Question 13

When the price level changes for a given supply of nominal money balances, the supply of real balances changes. This effect is called the
A)wealth effect.
B)constant nominal income effect.
C)substitution of foreign goods effect.
D)investment effect.

Accepted Answer

The wealth effect describes how a change in the price level affects consumer wealth and spending. When the price level changes, the real value or purchasing power of money balances changes, which in turn affects consumption and demand.

Question 14

Changes in the price level necessarily cause the quantity demanded to change in the opposite direction to maintain the level of income. This effect is called which of the following?
A)the wealth effect
B)the constant-nominal-income effect
C)the substitution-of-foreign-goods effect
D)the investment effect

Accepted Answer

The effect described is known as the constant-nominal-income effect, which suggests that changes in the price level lead to changes in the quantity demanded in the opposite direction to maintain the consumer's nominal income constant. The wealth effect refers to the impact of changes in asset prices on consumption, while the substitution-of-foreign-goods effect relates to the change in the demand for domestic goods due to changes in the relative prices of foreign goods. The investment effect pertains to the impact of changes in interest rates on investment spending.

Question 15

Changes in the domestic price level cause consumers to purchase more of relatively cheaper foreign goods or less of relatively more expensive foreign goods. This effect is called which of the following?
A)the wealth effect
B)the constant-nominal-income effect
C)the substitution-of-foreign-goods effect
D)the investment effect

Accepted Answer

The effect described in the question is known as the substitution-of-foreign-goods effect, as changes in the domestic price level can lead consumers to substitute relatively cheaper foreign goods for more expensive domestic goods. The other options listed (wealth effect, constant-nominal-income effect, and investment effect) describe different economic concepts and do not capture the specific effect described in the question.

Question 16

Which of the following will not shift the aggregate demand curve?
A)changes in income
B)changes in wealth
C)changes in expected future prices
D)changes in the overall price level

Accepted Answer

Changes in the overall price level will not shift the aggregate demand curve because the price level is already accounted for in the aggregate demand curve. The aggregate demand curve represents the demand for goods and services at various price levels, so a change in the overall price level would result in a movement along the curve rather than a shift of the curve. Changes in income, wealth, and expected future prices can shift the aggregate demand curve.

Question 17

The largest component of spending is which of the following?
A)consumption
B)investment
C)government purchases
D)net exports

Accepted Answer

Consumption is typically the largest component of spending in most economies, as it represents the amount of money spent by households on goods and services. Investment, government purchases, and net exports are also important components of spending, but they typically make up a smaller percentage of overall spending.

Question 18

In recent years, the foreign sector has been
A)a surplus sector.
B)a deficit sector.
C)both a surplus and a deficit sector.
D)unimportant in the flows of funds for the United States.

Accepted Answer

The foreign sector has been a surplus sector in recent years because the United States has been importing more goods and services than it has been exporting.

Question 19

As a component of aggregate demand, government spending
A)includes government purchases of goods and services, transfers, and interest on the national debt.
B)is the largest component.
C)is the most volatile component of aggregate demand.
D)includes only government purchases of goods and services.

Accepted Answer

Government spending as a component of aggregate demand specifically includes only government purchases of goods and services, not transfers or interest payments on the national debt.

Question 20

In the short run, if aggregate demand decreases,
A)output increases while prices fall.
B)only prices fall.
C)prices rise.
D)both output and the price level fall.

Accepted Answer

If aggregate demand decreases in the short run, both output and the price level fall. This is because in the short run, firms cannot easily adjust their output levels, and so a decrease in demand results in a decrease in output. At the same time, with less demand for goods and services, firms may need to lower their prices in order to find buyers for their products, which also leads to a fall in the price level.

Quiz 22: Aggregate Demand and Aggregate Supply

Which of the following is most likely to cause an increase in aggregate demand?

Which of the following is most likely to cause an increase in aggregate demand?

Which of the following is likely to lead to a decrease in aggregate demand?

Which of the following is likely to lead to a decrease in aggregate demand?

What is measured on the vertical axis of the aggregate supply curve?

Starting from long-run equilibrium, an increase in aggregate demand will cause an increase in which of the following?

Starting from long-run equilibrium, an increase in aggregate demand will cause

Ceteris paribus, the relationship between the overall price level and the quantity of real GDP supplied in the short run is which of the following?

If the input prices are fixed or slow to change, firms respond to higher output prices by offering more for sale in which of the following?

In the AD/AS framework, the natural level of real output is determined by the quantity and quality of the factors of production, which include all of the following except

A rise in aggregate demand causes which of the following?

A drop in aggregate demand causes which of the following?

When the price level changes for a given supply of nominal money balances, the supply of real balances changes. This effect is called the

Changes in the price level necessarily cause the quantity demanded to change in the opposite direction to maintain the level of income. This effect is called which of the following?

Changes in the domestic price level cause consumers to purchase more of relatively cheaper foreign goods or less of relatively more expensive foreign goods. This effect is called which of the following?

Which of the following will not shift the aggregate demand curve?

The largest component of spending is which of the following?

In recent years, the foreign sector has been

As a component of aggregate demand, government spending

In the short run, if aggregate demand decreases,