Question 1

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

Accepted Answer

Collective bargaining agreements that prohibit wage cuts for the duration of the contract create a situation where the price level is inflexible downward. This means that if there is a decrease in demand or an increase in supply, firms may not be able to lower wages to adjust to the new market conditions. This inflexibility can lead to inefficiencies and may result in a higher unemployment rate as firms are unable to adjust wages to align with market conditions.

Question 2

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

Accepted Answer

The U.S. economy was able to achieve full employment with relative price level stability between 1996 and 2000 because both aggregate demand and aggregate supply increased. This means that there was an increase in demand for goods and services, as well as an increase in the ability of the economy to produce those goods and services. As a result, unemployment decreased and prices remained stable.

Question 3

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

Accepted Answer

Menu costs make prices inflexible downward, meaning that a business may be reluctant to lower their prices due to the costs associated with changing their menus, price tags, or advertising materials. This can lead to stickier prices and less responsiveness to changes in demand or market conditions.

Question 4

A decrease in aggregate supply means:
A) Both the real domestic output and the price level would decrease
B) The real domestic output would increase and rises in the price level would become smaller
C) The real domestic output would decrease and the price level would rise
D) Both the real domestic output and rises in the price level would become greater

Accepted Answer

A decrease in aggregate supply means that there is a decrease in the total amount of goods and services produced in the economy. This would cause a decrease in real domestic output (GDP). Additionally, with a lower supply of goods and services, prices would rise due to increased demand. Therefore, the price level would rise along with the decrease in real domestic output.

Question 5

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 and a decrease in real domestic output suggest a decrease in aggregate supply. Input prices, such as labor and materials, are one of the main determinants of aggregate supply, and an increase in input prices would decrease aggregate supply, causing a decrease in real output and an increase in the price level.

Question 6

Deflation refers to a situation where:
A) Price level falls, and could be caused by a shift of AD to the left
B) Price level falls, and could be caused by a decrease in aggregate supply
C) The rate of inflation falls, and could be caused by a shift of AS to the right
D) The rate of inflation rises, and could be caused by an decrease in aggregate demand

Accepted Answer

Deflation occurs when the overall price level falls, which can often occur when aggregate demand shifts to the left. This decrease in demand results in producers reducing prices to entice consumers to buy their goods and services, causing a downward spiral in prices. While a decrease in aggregate supply can also lead to lower prices, it is not the primary cause of deflation as it does not impact overall demand. The other answer choices are incorrect as they describe situations that are the opposite of deflation.

Question 7

Refer to the graph above. The ratchet effect would suggest that: A) If AD₁ shifts to AD₂, the economy would move to point b B) If AD₁ shifts to AD₂, the economy would move to point c C) If AD₂ shifts to AD₁, the economy would move to point c D) If AD₂ shifts to AD₁, the economy would move to point b

Accepted Answer

The answer of  Refer to the graph above. The...

Question 8

Disinflation refers to a situation where:
A) Price level falls, but the rate inflation does not
B) 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, which means prices are still increasing but at a slower rate. Therefore, the price level does not fall, but the rate of inflation declines. Option A is incorrect as the price level falls along with the rate of inflation. Option B and D are not relevant to the definition of disinflation.

Question 9

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 are all factors that contribute to wage inflexibility downward.

Question 10

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 11

Refer to the graph above. A shift from AS₁ to AS₂ would be consistent with what economic event in U.S. history? A) Demand-pull inflation in the late 1960s B) Cost-push inflation in the mid-1970s C) Full-employment in the late 1990s D) Great Recession in 2007-2009

Accepted Answer

The shift from AS₁ to AS₂ represents an increase in the general price level, as indicated by the upward shift in the aggregate supply curve. This type of shift is consistent with cost-push inflation, which occurred in the mid-1970s due to rising energy prices and other supply shocks that pushed up production costs and reduced aggregate supply.

Question 12

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

When oil prices rose, it caused an increase in the cost of production for many industries. This, in turn, caused a decrease in the supply of goods and services, leading to a decrease in output. As a result, the U.S. experienced cost-push inflation and falling output during this period.

Question 13

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 business costs and wage rates would lead to a decrease in the price level and an increase in real domestic output, as businesses are able to produce more goods and services at a lower cost, leading to lower prices for consumers. Option A is unlikely as a decrease in consumer incomes and the quantity of labor would lead to a decrease in real domestic output, not an increase. Option C is also unlikely as an increase in the prices of imported resources would lead to an increase in business costs, which would lead to an increase in prices, not a decrease. Option D is also unlikely as an increase in national income abroad would not directly impact the domestic economy's price level or output.

Question 14

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

A sharp increase in the natural rate of unemployment was not a government action taken to stimulate the economy during the Great Recession. The other three options - reduction of interest rates, increase in transfer payments, and increase in deficit-spending - were all policies implemented to boost economic activity during the recession.

Question 15

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 is caused by a decrease in aggregate supply, which means that production costs have increased (for example, due to higher wages or raw material prices). This leads to a decrease in the quantity supplied at every price level. There is no change in aggregate demand since this type of inflation is caused by supply-side factors.

Question 16

Refer to the graph above. When output increases from Q₁ and the price level decreases from P₁, this change will: A) Be caused by a shift in the aggregate supply curve from AS₁ to AS₂ B) Be caused by a shift in the aggregate supply curve from AS₁ to AS₃ C) Result in a movement along the aggregate demand curve from e₁ to e₂ D) Result in a movement along the aggregate demand curve from e₃ to e₁

Accepted Answer

The answer of  Refer to the graph above. When...

Question 17

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 refers to the phenomenon where prices and wages do not decrease following a decrease in aggregate demand (AD), but they increase following an increase in AD. This is because firms are hesitant to decrease prices and wages due to the fear of damaging their reputation or causing morale issues among employees. However, they are more willing to increase prices and wages when AD increases. Therefore, the correct choice is B, as prices, wages, and per-unit production costs are flexible when AD increases but not when AD decreases.

Question 18

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

In the immediate short run, businesses may fear engaging in price wars to maintain market share, even with a decrease in demand. This fear of price wars and potential losses may cause businesses to maintain their current prices, leading to downward price inflexibility. The multiplier effect refers to the amplification of initial changes in spending, and the wealth effect relates changes in consumer spending to changes in their wealth. Business taxes may impact output and pricing decisions, but they are less likely to contribute to downward price inflexibility in the immediate short run.

Question 19

Refer to the graph above. If aggregate supply shifts from AS₁ to AS₂, then the price level will: A) Increase and real domestic output will increase B) Decrease and real domestic output will increase C) Increase and real domestic output will decrease D) Decrease and real domestic output will decrease

Accepted Answer

The answer of  Refer to the graph above. If...

Question 20

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 real GDP
D) A decrease in unemployment

Accepted Answer

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

Quiz 12: Aggregate Demand and Aggregate Supply

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 aggregate:

Menu costs will:

A decrease in aggregate supply means:

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

Deflation refers to a situation where:

Refer to the graph above. The ratchet effect would suggest that:

Disinflation refers to a situation where:

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

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

Refer to the graph above. A shift from AS₁ to AS₂ would be consistent with what economic event in U.S. history?

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

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

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

Cost-push inflation is characterized by a(n) :

Refer to the graph above. When output increases from Q₁ and the price level decreases from P₁, this change will:

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

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?

Refer to the graph above. If aggregate supply shifts from AS₁ to AS₂, then the price level will:

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