Question 1

Shifts in ______ can push the economy out of long-run equilibrium.
A) the AD curve only
B) the AS curve only
C) either the AD curve or the AS curve
D) the PAE line only

Accepted Answer

Shifts in either the AD curve or the AS curve can push the economy out of long-run equilibrium. The AD curve can shift due to changes in consumption, investment, government spending, or net exports. The AS curve can shift due to changes in input prices, productivity, or government regulations. Both of these shifts can lead to inflation or recession in the short run, and the economy can only return to long-run equilibrium through adjustments in prices and wages. The PAE line is a component of the AD curve and is not the sole factor that can push the economy out of equilibrium.

Question 2

Shifts in ______ can return the economy to long-run equilibrium.
A) the AD curve only
B) the AS curve only
C) either the AD curve or the AS curve
D) the PAE line only

Accepted Answer

Both AD and AS curves can bring the economy back to its long-run equilibrium. A shift in the AD curve can affect output levels and price levels in the short run, but in the long run, changes in AD only lead to changes in price levels. Meanwhile, shifts in the AS curve can impact both output levels and price levels in the short run and in the long run. Therefore, changes in either curve can bring the economy back to its long-run equilibrium. The PAE line is not a recognized economic concept or tool.

Question 3

A demand shock is a change in planned spending that is:
A) caused by changes in output.
B) caused by changes in the inflation rate.
C) caused by changes in output and changes in the real interest rate.
D) not caused by changes in output or changes in the inflation rate.

Accepted Answer

A demand shock is a change in planned spending that is not caused by changes in output or changes in the inflation rate. This can be caused by changes in consumer or business confidence, shifts in government policy, changes in international trade, or other factors that affect spending patterns independent of changes in output or inflation.

Question 4

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______.
A) falls; fall; the income-expenditure multiplier
B) falls; rise; the income-expenditure multiplier
C) rises; rise; the wealth effect
D) rises; fall; the wealth effect

Accepted Answer

When the inflation rate increases, the purchasing power of consumers decreases. As a result, the autonomous consumption (A) and investment (I) may fall. By the income-expenditure multiplier effect, the fall in A and I will reduce the aggregate output (Y) by a greater amount than the initial decline in A and I. Hence, both PAE and Y fall due to the increase in inflation rate.

Question 5

Changes in planned spending not caused by changes in output or the inflation rate will shift the:
A) aggregate supply curve.
B) Keynesian cross.
C) potential output line.
D) aggregate demand curve.

Accepted Answer

Changes in planned spending that are not caused by changes in output or inflation rate will shift the aggregate demand curve. This is because the aggregate demand curve represents the total amount of goods and services that people are willing to buy at different price levels, and changes in planned spending will affect this total demand.

Question 6

The aggregate demand curve shifts when there are changes in:
A) the inflation rate.
B) planned spending that are not caused by changes in output or the inflation rate.
C) planned spending that are caused only by changes in output or the inflation rate.
D) real GDP.

Accepted Answer

The aggregate demand curve shifts when there are changes in planned spending that are not caused by changes in output or the inflation rate. This includes factors such as changes in consumer confidence, government policies, and global economic conditions.

Question 7

Changes in planned spending that shift the aggregate demand curve are those:
A) caused by changes in output.
B) caused by changes in the inflation rate.
C) caused by changes in output and changes in the real interest rate.
D) not caused by changes in output or changes in the inflation rate.

Accepted Answer

Changes in planned spending that shift the aggregate demand curve are not caused by changes in output or changes in the inflation rate. These changes are typically caused by factors such as changes in consumer confidence, government spending, or monetary policy.

Question 8

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.
A) planned consumption and investment; government spending
B) planned consumption and investment; net exports
C) net exports; planned consumption and investment
D) net exports; government spending

Accepted Answer

The answer of An increase in the interest rate directly...

Question 9

When the inflation rate decreases, PAE ______, which in turn causes Y to ______ because of ______.
A) rises; rise; the income-expenditure multiplier
B) rises; fall; the income-expenditure multiplier
C) falls; rise; the wealth effect
D) falls; fall; the wealth effect

Accepted Answer

The answer of When the inflation rate decreases, PAE ______,...

Question 10

A positive demand shock will shift the ______ curve to the ______.
A) AD; left
B) AD; right
C) AS; left
D) AS; right

Accepted Answer

A positive demand shock increases consumer and/or government spending, causing an increase in the aggregate demand (AD) for goods and services. This leads to a rightward shift of the AD curve, representing an increase in both price level and output level. Option A is incorrect because a leftward shift in AD represents a decrease in demand due to a negative demand shock. Options C and D are incorrect because shifts in the aggregate supply (AS) curve are caused by changes in production costs and technology, not changes in demand.

Question 11

The economy is in long-run equilibrium:
A) when the AD and AS curves intersect at potential output Y*.
B) when the AD and AS curves intersect, regardless of the level of output.
C) when the AD and AS curves become vertical.
D) only when the business cycle is eliminated.

Accepted Answer

Long-run equilibrium occurs when the AD and AS curves intersect at potential output Y*, which is the level of output at which the economy can produce without causing inflation or deflation. It represents a stable state of the economy in the long run, as there are no pressures on prices or output to change. Choices B, C, and D are incorrect because they do not accurately describe long-run equilibrium. In choice B, the level of output at which the AD and AS curves intersect is not necessarily at potential output, which is required for long-run equilibrium. In choice C, vertical AS curves would suggest that the economy is rigid and cannot adjust to changes in demand or supply, which is not the case in a long-run equilibrium. Finally, in choice D, the elimination of the business cycle is not a necessary condition for long-run equilibrium, as it is a temporary phenomenon that can occur within the broader long-run equilibrium trend.

Question 12

A negative demand shock will shift the ______ curve to the ______.
A) AD; left
B) AD; right
C) AS; left
D) AS; right

Accepted Answer

A negative demand shock, such as a decrease in consumer spending or investment, will shift the aggregate demand (AD) curve to the left. This is because there is less demand for goods and services, leading to a decrease in prices and output.

Question 13

If the interest rate in the U.S. falls, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will fall.
A) more; demand for
B) more; supply of
C) less; demand for
D) less; supply of

Accepted Answer

The answer of If the interest rate in the U.S....

Question 14

The AD curve slopes downward because an increase in ______ causes ______ to fall, which in turn causes real GDP to fall.
A) the inflation rate; planned spending
B) planned spending; the inflation rate
C) real GDP; planned spending
D) real GDP; the unemployment rate

Accepted Answer

The answer of The AD curve slopes downward because an...

Question 15

When the interest rate in the U.S. falls, U.S. financial assets:
A) become more attractive to foreign buyers.
B) become less attractive to both foreign and domestic buyers.
C) become more attractive to both foreign and domestic buyers.
D) become less attractive to domestic buyers and more attractive to foreign buyers.

Accepted Answer

The answer of When the interest rate in the U.S....

Question 16

The AD curve ______ because, holding all else constant, an increase in ______ causes C, I^P and NX to fall. A) slopes downward; real GDP B) slopes downward; the inflation rate C) slopes upward; real GDP D) is horizontal; the inflation rate

Accepted Answer

The AD curve slopes downward because an increase in the inflation rate leads to higher interest rates, which reduces consumption (C), planned investment (I^P), and net exports (NX).

Question 17

When the interest rate in the U.S. rises, U.S. financial assets:
A) become less attractive to foreign buyers.
B) become more attractive to both foreign and domestic buyers.
C) become less attractive to both foreign and domestic buyers.
D) become less attractive to domestic buyers and more attractive to foreign buyers.

Accepted Answer

The answer of When the interest rate in the U.S....

Question 18

If the interest rate in the U.S. rises, U.S. financial assets become ______ attractive to buyers and the ______ U.S. dollars will rise.
A) more; demand for
B) more; supply of
C) less; demand for
D) less; supply of

Accepted Answer

The answer of If the interest rate in the U.S....

Question 19

The aggregate demand curve shows the relationship between planned spending and the ______.
A) nominal interest rate
B) real interest rate
C) unemployment rate
D) inflation rate

Accepted Answer

The answer of The aggregate demand curve shows the relationship...

Question 20

The economy is in short-run equilibrium:
A) when the AD and AS curves intersect at potential output Y*.
B) when the AD and AS curves intersect at a level of real GDP that is above or below Y*.
C) when the AD and AS curves become vertical.
D) at the peak of the business cycle.

Accepted Answer

The answer of The economy is in short-run equilibrium:
A) when...

Quiz 13: Spending and Output in the Short Run

Shifts in ______ can push the economy out of long-run equilibrium.

Shifts in ______ can return the economy to long-run equilibrium.

A demand shock is a change in planned spending that is:

When the inflation rate increases, PAE , which in turn causes Y to because of __.

Changes in planned spending not caused by changes in output or the inflation rate will shift the:

The aggregate demand curve shifts when there are changes in:

Changes in planned spending that shift the aggregate demand curve are those:

An increase in the interest rate directly affects , but also has an indirect effect on because of its effect on exchange rates.

When the inflation rate decreases, PAE , which in turn causes Y to because of __.

A positive demand shock will shift the curve to the .

The economy is in long-run equilibrium:

A negative demand shock will shift the curve to the .

If the interest rate in the U.S. falls, U.S. financial assets become attractive to buyers and the U.S. dollars will fall.

The AD curve slopes downward because an increase in causes to fall, which in turn causes real GDP to fall.

When the interest rate in the U.S. falls, U.S. financial assets:

The AD curve because, holding all else constant, an increase in causes C, I^P and NX to fall.

When the interest rate in the U.S. rises, U.S. financial assets:

If the interest rate in the U.S. rises, U.S. financial assets become attractive to buyers and the U.S. dollars will rise.

The aggregate demand curve shows the relationship between planned spending and the ______.

The economy is in short-run equilibrium: