Question 1

Ben N. Jerry prefers to keep his $10,000 retirement savings buried in the backyard. After an increase in the price level, Ben reduces the amount of goods and services he wants to purchase. Ben's rationalization, that now his retirement savings won't buy as much, is consistent with which explanation of the aggregate demand curve's negative slope?

Accepted Answer

The wealth effect states that as the price level increases, the real value of assets (like retirement savings) decreases, leading to a decrease in consumer spending and a shift in the aggregate demand curve to the left. This is consistent with Ben's decision to reduce his purchases due to the reduced purchasing power of his retirement savings.

Question 2

For individuals who are holding money or fixed dollar value assets, inflation has the effect of:

Accepted Answer

Inflation reduces the purchasing power of money, meaning that the same amount of money can buy fewer goods and services due to the increase in prices. Therefore, individuals who are holding money or fixed dollar value assets will experience a reduction in their ability to purchase goods and services with those dollars.

Question 3

Which of the following will decrease aggregate demand?

Accepted Answer

If exports fall faster than imports, it means that there is a larger outflow of money from the domestic economy. This, in turn, reduces the available income and thus decreases the aggregate demand.

Question 4

Holding all other things constant, when the price level falls, interest rates:

Accepted Answer

When the price level falls, the real value of money increases, leading to lower interest rates. Lower interest rates make borrowing cheaper, encouraging both firms to invest in new plants and equipment and households to borrow more for homebuilding.

Question 5

As the price level decreases, other things being equal,

Accepted Answer

As the price level decreases, the purchasing power of money increases, leading to an increase in the quantity of real GDP demanded. This is represented by a movement along the aggregate demand curve, not a shift of the curve itself.

Question 6

According to the interest rate effect, as the price level increases, households and firms' holdings of money ____, interest rates ____, investments ____, and the quantity RGDP demanded ____.

Accepted Answer

The interest rate effect explains that as the price level increases, households and firms need more money for transactions, which increases demand for money. As a result, interest rates rise, leading to decreased investment and ultimately a decrease in the quantity of real GDP demanded.

Question 7

If your wages are indexed so that they automatically adjust for inflation, in a period of continued high inflation, the cost of the goods and services you buy ____ and your nominal income ____.

Accepted Answer

In a period of continued high inflation, the cost of goods and services increases, and if wages are indexed to inflation, nominal income also increases to compensate for the higher prices.

Question 8

As the price level increases, the quantity of RGDP demanded in the economy ____, and when the price level decreases, the quantity of RGDP demanded in the economy ____.

Accepted Answer

As the price level increases, the quantity of Real Gross Domestic Product (RGDP) demanded decreases because goods and services become more expensive, leading to lower consumption. Conversely, when the price level decreases, the quantity of RGDP demanded increases as goods and services become cheaper, encouraging more consumption.

Question 9

The interest rate effect suggests that the negative slope of the aggregate demand curve results at least in part because changes in the price level affect:

Accepted Answer

The interest rate effect implies that as the price level rises, people need more money for transactions, leading to higher interest rates, which reduces investment and consumption, thus decreasing aggregate demand.

Question 10

Which of the following expenditures would be counted as consumption in GDP accounts?

Accepted Answer

Mary's purchase of a new home computer for personal use is considered consumption and is therefore included in GDP accounts.

Answer: B, C, D 
 The purchases by Mark, Leslie, and Juan are all made for business purposes and are therefore considered investment spending rather than consumption. They would be included in GDP as part of gross private domestic investment (GPDI) instead of personal consumption expenditures (PCE).

Question 11

During the 1970s, U.S. prices generally rose faster than prices in other parts of the world. Which of the following changes would the open economy effect predict took place in response to these price level changes?

Accepted Answer

The open economy effect predicts that as prices rise in one country, other countries become relatively cheaper, leading to an increase in imports and a decrease in domestic production. Therefore, Americans would reduce the fraction of purchases they made from domestic producers of goods and services, since foreign prices became relatively lower. Choice A is incorrect because as foreign prices become relatively cheaper, Americans would increase their proportion of foreign goods bought. Choice B is incorrect because higher interest rates would actually encourage more investment. Choice C is incorrect because the feeling of being less wealthy would not directly affect the demand for goods and services.

Question 12

If consumption in the United States was 68 percent of GDP, investment was 19 percent, government purchases were 13 percent, exports were 14 percent, and imports were 14 percent, net exports were equal to ____ percent of GDP.

Accepted Answer

Net exports are calculated as exports minus imports. In this case, exports (14 percent) minus imports (14 percent) equals 0 percent, indicating that net exports were equal to 0 percent of GDP.

Question 13

In the analysis of the interest rate effect, when the price level changes, the quantity of money households and firms' want to hold changes in the ______ direction as interest rates, while investment changes in the _____ as the quantity RGDP demanded.

Accepted Answer

The quantity of money households and firms want to hold changes in the same direction as interest rates, while investment changes in the opposite direction as the quantity of RGDP demanded.

Question 14

In an open economy, as the price level increases, a(n) ____ in demand in the quantity of domestic goods results in a(n) ____ in the quantity of RGDP demanded.

Accepted Answer

In an open economy, an increase in the price level leads to a decrease in demand for domestic goods due to increased imports. As a result, the quantity of RGDP demanded also decreases.

Question 15

Holding all other things constant, when the price level rises, interest rates:

Accepted Answer

When the price level rises, interest rates increase. This is because the demand for loans increases as people need more money to maintain their standard of living, while the supply of loanable funds decreases as people invest in other assets that offer a higher return. As a result, firms will want to borrow less for new plants and equipment, and households will want to borrow less for home building.

Question 16

In the analysis of the interest rate effect, when the price level changes, the quantity of money households and firms' want to hold and interest rates move in the ____ direction as the change in the price level, while investment and the quantity RGDP demanded move in the ____ direction as the change in the price level.

Accepted Answer

In the interest rate effect, when the price level increases, households and firms want to hold more money, which drives interest rates up. Higher interest rates reduce investment, leading to a decrease in the quantity of RGDP demanded. Thus, the quantity of money and interest rates move in the same direction as the change in the price level, while investment and the quantity of RGDP demanded move in the opposite direction.

Question 17

If you are living in a period of continued high inflation on a fixed income, the cost of the goods and services you buy ____ and your nominal income ____.

Accepted Answer

During periods of high inflation, the cost of goods and services increases, but if you are on a fixed income, your nominal income does not change, it remains the same.

Question 18

According to the interest rate effect, as the price level decreases, households and firms' holdings of money ____, interest rates ____, investments ____, and the quantity RGDP demanded ____.

Accepted Answer

According to the interest rate effect, as the price level decreases, households and firms will have more money, which leads to a decrease in interest rates. Decreased interest rates encourage more investment spending, which leads to an increase in RGDP demanded. Therefore, C is the correct answer as it shows that the price level decreasing leads to a decrease in holdings of money, a decrease in interest rates, an increase in investments, and an increase in the quantity RGDP demanded.

Question 19

Jason has been holding his retirement savings in a safe in his house. Currently the economy is experiencing a falling price level. He can conclude that:

Accepted Answer

When the price level falls, the real value or purchasing power of money increases because each unit of currency can buy more goods and services than before. Therefore, if Jason's retirement savings are held in cash, the real value of his savings increases as the price level falls.

Question 20

If private consumption in the United States was 69 percent of GDP, investment was 18 percent, government purchases were 18 percent, exports were 9 percent, and imports were 14 percent, net exports were equal to ____ percent of GDP.

Accepted Answer

Net exports are calculated as exports minus imports. In this case, 9% (exports) - 14% (imports) = -5%.

Quiz 14: Monopolistic Competition and Product Differentiation

For individuals who are holding money or fixed dollar value assets, inflation has the effect of:

Which of the following will decrease aggregate demand?

Holding all other things constant, when the price level falls, interest rates:

As the price level decreases, other things being equal,

According to the interest rate effect, as the price level increases, households and firms' holdings of money , interest rates , investments , and the quantity RGDP demanded .

If your wages are indexed so that they automatically adjust for inflation, in a period of continued high inflation, the cost of the goods and services you buy and your nominal income .

As the price level increases, the quantity of RGDP demanded in the economy , and when the price level decreases, the quantity of RGDP demanded in the economy .

The interest rate effect suggests that the negative slope of the aggregate demand curve results at least in part because changes in the price level affect:

Which of the following expenditures would be counted as consumption in GDP accounts?

During the 1970s, U.S. prices generally rose faster than prices in other parts of the world. Which of the following changes would the open economy effect predict took place in response to these price level changes?

If consumption in the United States was 68 percent of GDP, investment was 19 percent, government purchases were 13 percent, exports were 14 percent, and imports were 14 percent, net exports were equal to ____ percent of GDP.

In the analysis of the interest rate effect, when the price level changes, the quantity of money households and firms' want to hold changes in the __ direction as interest rates, while investment changes in the _ as the quantity RGDP demanded.

In an open economy, as the price level increases, a(n) in demand in the quantity of domestic goods results in a(n) in the quantity of RGDP demanded.

Holding all other things constant, when the price level rises, interest rates:

If you are living in a period of continued high inflation on a fixed income, the cost of the goods and services you buy and your nominal income .

According to the interest rate effect, as the price level decreases, households and firms' holdings of money , interest rates , investments , and the quantity RGDP demanded .

Jason has been holding his retirement savings in a safe in his house. Currently the economy is experiencing a falling price level. He can conclude that:

If private consumption in the United States was 69 percent of GDP, investment was 18 percent, government purchases were 18 percent, exports were 9 percent, and imports were 14 percent, net exports were equal to ____ percent of GDP.