Question 1

The interest rate effect occurs because a change in interest rates causes a change in the price level.

Accepted Answer

The interest rate effect affects the level of aggregate demand, which, in turn, leads to changes in output and prices. However, it doesn't cause a direct change in the price level.

Question 2

As the dollar depreciates,foreign goods become more expensive for Americans to purchase.

Accepted Answer

A currency depreciation makes imports more expensive in the domestic market. As the value of the domestic currency decreases, it takes more of that currency to buy the same amount of foreign currency, making imported products relatively more expensive.

Question 3

A change in the money supply can affect one or more of the components of spending and therefore shift the short-run aggregate supply (SRAS)curve.

Accepted Answer

A change in the money supply primarily affects the aggregate demand (AD) curve because it influences spending, investment, and consumption levels. The short-run aggregate supply (SRAS) curve is typically affected by changes in production costs, such as wages and raw materials prices, not directly by the money supply.

Question 4

The interest rate effect,the real balance effect,and the international trade effect all begin with a change in the price level.

Accepted Answer

All three effects - interest rate effect, real balance effect, and international trade effect - are triggered by a change in the price level.

Question 5

Only a change in the price level can cause a movement from one point to another point along a given aggregate demand curve.

Accepted Answer

A movement along an aggregate demand curve is caused by changes in the price level, while a shift in the aggregate demand curve is caused by other factors such as changes in consumer confidence, government policies, or changes in the money supply.

Question 6

If velocity is rising,an increase in one spending component can occur without requiring other spending components to decline.

Accepted Answer

Velocity refers to the rate at which money circulates in the economy, so an increase in velocity means that money is changing hands more frequently. In this scenario, it is possible for one spending component to increase without necessarily requiring a decrease in other spending components, as the increased circulation of money could potentially support increased spending across multiple areas.

Question 7

The short-run aggregate supply curve slopes upward as a result of the real balance effect,the interest rate effect,and the international trade effect.

Accepted Answer

The short-run aggregate supply curve slopes upward primarily due to factors like wage stickiness, misperceptions about relative prices, and short-term adjustments in production. The real balance effect, the interest rate effect, and the international trade effect are reasons why the aggregate demand curve slopes downward, not the supply curve.

Question 8

Unusually good weather that improves crop production and a major oil discovery are both examples of a beneficial supply shock.

Accepted Answer

A supply shock is an unexpected event that affects the supply of goods or services in the market. A beneficial supply shock results in an increase in the supply of goods or services, leading to lower prices and higher output. Unusually good weather that improves crop production and a major oil discovery both increase the supply of goods, which is beneficial for the economy. Therefore, both are examples of a beneficial supply shock.

Question 9

When the dollar appreciates,U.S.net exports fall and aggregate demand decreases.

Accepted Answer

When the dollar appreciates, it becomes relatively more expensive compared to foreign currencies. This makes U.S. goods more expensive for foreign buyers, reducing demand for exports and causing a decline in net exports. The decrease in net exports leads to a contraction in aggregate demand, which can cause a decrease in overall economic activity. Therefore, the statement is true.

Question 10

In short-run equilibrium,the quantities supplied and demanded of Real GDP can be less than or greater than Natural Real GDP.

Accepted Answer

In the short-run, the economy can be operating below or above its potential output, which is represented by the Natural Real GDP. Therefore, it is possible that the quantities of Real GDP supplied and demanded are less than or greater than the Natural Real GDP in short-run equilibrium.

Question 11

The aggregate demand (AD)curve is the graphical representation of production in the short run.

Accepted Answer

The aggregate demand (AD) curve is the graphical representation of the total demand for goods and services in an economy at different price levels. It shows the relationship between the price level and the total quantity of goods and services demanded by households, firms, and the government. It does not directly represent production in the short run.

Question 12

The level of Real GDP that the economy produces in long-run equilibrium is Natural Real GDP.

Accepted Answer

Natural Real GDP is also known as potential GDP or full-employment GDP, which is the maximum output an economy can produce without causing inflationary pressures or resource constraints in the long run. Therefore, the level of Real GDP that the economy produces in long-run equilibrium is equal to Natural Real GDP.

Question 13

When foreign real national income rises,domestic Real GDP rises,ceteris paribus.

Accepted Answer

This is because foreign income increases demand for domestic goods and services, leading to an increase in domestic production and thus Real GDP, assuming other factors remain constant.

Question 14

If businesses are optimistic about future sales,the short-run aggregate supply curve will shift leftward.

Accepted Answer

If businesses are optimistic about future sales, they are likely to increase production, which would shift the short-run aggregate supply curve to the right, not leftward.

Question 15

When wage rates rise the short-run aggregate supply curve shifts to the right.

Accepted Answer

When wage rates rise, it increases the cost of production for businesses, leading to a decrease in short-run aggregate supply. As a result, the short-run aggregate supply curve shifts to the left.

Question 16

Some of the factors that can shift the short-run aggregate supply curve can also cause a shift in the long-run aggregate supply curve.

Accepted Answer

Some factors, such as changes in technology, can affect both the short-run and long-run aggregate supply curves. Other factors, such as changes in resource prices, may only affect the short-run aggregate supply curve.

Question 17

As interest rates drop,households tend to borrow more and businesses tend to borrow less.

Accepted Answer

As interest rates drop, both households and businesses are generally encouraged to borrow more due to the lower cost of borrowing.

Question 18

An adverse supply shock results in an increase in the price level and an increase in Real GDP.

Accepted Answer

An adverse supply shock typically results in a decrease in Real GDP and an increase in the price level, as producers face higher input costs which they pass on to consumers through higher prices.

Question 19

An aggregate demand (AD)curve shows the

Accepted Answer

An aggregate demand (AD) curve shows the different levels of real output (Real GDP) that people are willing and able to buy at different price levels, ceteris paribus. It takes into account the overall demand for goods and services in an economy, including the effects of changes in consumer confidence, government spending, and monetary policy. The aggregate demand curve is downward sloping, as a higher price level decreases the overall level of real output demanded in the economy.

Question 20

The level of Real GDP and the price level always have a direct relationship.

Accepted Answer

The level of Real GDP and the price level do not always have a direct relationship. In some cases, they may have an inverse relationship, such as during a period of deflation or if productivity increases while prices remain stagnant.

Quiz 8: Production and Costs