Deck 9: Aggregate Demand and Aggregate Supply

Question 1

A decrease in personal income taxes will lead to:

A) no change in aggregate demand.
B) a decrease in aggregate supply.
C) an increase in aggregate demand.
D) a decrease in aggregate demand.

Answer 1

an increase in aggregate demand.

Question 2

The "short run" in macroeconomics is a period in which prices

A) reflect the equilibrium price.
B) do not change or change very little.
C) change by a lot.
D) are determined by changes in the supply.

Answer 2

do not change or change very little.

Question 3

A decrease in government purchases shifts the _______ curve to the _______.

A) aggregate demand; right
B) aggregate supply; left
C) aggregate supply; right
D) aggregate demand; left

Answer 3

aggregate demand; left

Question 4

When output falls below full employment output, we expect that the:

A) wages and prices decrease as the short run aggregate supply curve shifts upward over time.
B) wages and prices decrease as short run aggregate supply curve shifts downward over time.
C) wages and prices increase as the long run aggregate supply curve shifts upward over time.
D) wages and prices decrease as the long run aggregate supply curve shifts downward over time.

Question 5

A leftward shift in the aggregate demand curve cannot be caused by:

A) an increase in taxes.
B) a decrease in the money supply.
C) a decrease in government spending.
D) a decrease in imports.

Question 6

Following Keynes' work in explaining the Great Depression, economists started to make a distinction between

A) nominal and real GDP.
B) recessions and booms.
C) positive and normative economics.
D) GDP in the short run and in the long run.

Question 7

Rank these three goods in the order of least sticky to most sticky: fresh fish, used cars, steel rods.

A) fresh fish, used cars, steel rods
B) steel rods, cars, fresh fish
C) steel rods, fresh fish, used cars
D) used cars, fresh fish, steel rods

Question 8

The economy moves from a short- run equilibrium to the long- run equilibrium through:

A) improvements in technology.
B) demand shocks.
C) adjustments in wages and prices.
D) supply shocks.

Question 9

In the short run, the formal or informal contracts between firms mean that changes in demand will be reflected primarily in changes in _______ .

A) future equilibrium price.
B) prices.
C) output.
D) future price.

Question 10

As the marginal propensity to consume decreases, the value of the multiplier

A) stays the same.
B) can increase or decrease.
C) increases.
D) decreases.

Question 11

Suppose an automobile maker producing a certain kind of car suddenly experiences an increase in the demand for the car. In the short run,

A) the demand for steel goes down and the price of steel goes down.
B) the demand for steel goes down but the price of steel stays the same.
C) the demand for steel goes up and the price of steel goes up very quickly.
D) the demand for steel goes up but the steel prices remain the same.

Question 12

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is autonomous consumption the largest?

A) Country C
B) Country B
C) Country A
D) All countries have the same autonomous consumption levels.

Question 13

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is the marginal propensity to consume the largest?

A) Country B
B) Country C
C) Country A
D) All countries have the same marginal propensity to consume.

Question 14

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions:
According to the application, a recession caused by a decrease in aggregate supply occurred in:

A) 1981
B) 1929
C) 1979
D) All of the above were caused by a decrease in aggregate supply.

Question 15

An increase in the price level results in a decline in aggregate demand because people's "net worth" decreases and will spend less. This effect is called the:

A) interest rate effect.
B) income effect.
C) wealth effect.
D) trade effect.

Question 16

If the marginal propensity to consume is 0.5, a decrease in consumption by $100 will shift the aggregate demand curve horizontally to the left by

A) $400.
B) $100.5.
C) $200.
D) $100.

Question 17

Recall Application 1, "Measuring Price Stickiness in Consumer Markets," to answer the following questions:
According to the application, Bils and Klenow found that between 1995- 1997, prices in more than half of the 350 goods that they were studying showed frequent price changes. This finding was contrary to Kashyap's finding because:

A) custom auction prices.
B) the economy during that time was in a recession.
C) unemployment rates during that time were rising.
D) the inflation during that period was low.

Question 18

According to the international effect explanation of the downward slope of the AD curve, a higher price level in the U.S. economy causes:

A) U.S. imports and U.S. exports to increase.
B) U.S. imports to decrease and U.S. exports to increase.
C) U.S. imports and U.S. exports to decrease.
D) US imports to increase and U.S. exports to decrease.

Question 19

Recall Application 3, "How the U.S. Economy has Coped with Oil Price Fluctuations," to answer the following questions:
According to the application, surge in the price of oil was caused by the increase in the demand for oil by fast growing countries such as:

A) Mexico and Iceland.
B) the U.S. and Japan.
C) Japan and China.
D) India and China.

Question 20

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
If the government spending increases by 10, in which of these countries would the shift of the AD curve be the largest?

A) Country B
B) Country C
C) Country A
D) All countries have the same shifts in the aggregate demand.

Question 21

In the long- run, the amount of output that the economy can produce will depend on:

A) the price level.
B) the supply of labor and capital.
C) the money supply.
D) the nominal interest rate.

Question 22

_______ is a curve that shows the relationship between the price level and the quantity of real GDP demanded.

A) The aggregate supply curve
B) The market demand curve
C) The product demand curve
D) The aggregate demand curve

Question 23

The relationship between the level of prices and the total quantity of goods and services that firms supply in the short- run is:

A) positive.
B) negative.
C) marginally decreasing.
D) similar in the long run and in the short run due to the existence of sticky prices.

Question 24

If the marginal propensity to consume is 0.8, the value of the marginal propensity to save is:

A) 5.
B) 0.8.
C) 1.25.
D) 0.2.

Question 25

Which of the following will not cause the price level to increase in the long- run?

A) a decrease in income taxes
B) an increase in government spending
C) a decrease in the money supply
D) a decrease in the interest rates

Question 26

Recall Application 1, "Measuring Price Stickiness in Consumer Markets," to answer the following questions:
According to the application, during periods of high inflation, catalog prices tend to show

A) more stickiness.
B) no change in stickiness.
C) stickiness equal to the level of inflation.
D) less stickiness.

Question 27

If the economy is in equilibrium at full employment, a decrease in aggregate demand will:

A) increase both the price level and the level of output in the long run.
B) decrease both the price level and the level of output in the long run.
C) decrease the price level and leave the level of output unchanged in the long run.
D) increase the price level and leave the level of output unchanged in the long run.

Question 28

The international effect explanation of the downward slope of the AD operates through which component of aggregate demand?

A) consumption
B) net exports
C) investment
D) government purchases.

Question 29

When the economy is in a boom, the intersection between the:

A) short run AS and the AD occurs at an output level lower than potential output.
B) long run AS and the AD occurs at an output level higher than potential output.
C) short run AS and the AD occurs at an output level higher than potential output.
D) long run AS and the AD occurs at an output level lower than potential output.

Question 30

Which of the following are the factors that affect the short- run aggregate supply curve?

A) input prices
B) taxes and subsidies
C) the state of technology
D) All of the above can affect the SRAS curve.

Question 31

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions:
According to the application, a recession is likely to be caused by a decrease in aggregate supply if:

A) prices change but output does not change in the long run.
B) both prices and output do not change in the long run.
C) both prices and output change in the long run.
D) prices do not change but output changes in the long run.

Question 32

Recall Application 3, "How the U.S. Economy has Coped with Oil Price Fluctuations," to answer the following questions:
According to the application, when the price of oil increases, the aggregate supply curve shifts up because:

A) oil is a by- product of the production processes in the economy.
B) oil is a complement to the production of most goods and services.
C) oil is an input to the production processes in the economy.
D) oil is a major source of export revenues in the economy.

Question 33

When the economy is in a recession, the intersection between the:

A) long run AS and the AD occurs at an output level lower than potential output.
B) long run AS and the AD occurs at an output level higher than potential output.
C) short run AS and the AD occurs at an output level higher than potential output.
D) short run AS and the AD occurs at an output level lower than potential output.

Question 34

Figure 9.5
Refer to Figure 9.5. Suppose the economy is a point B. A large in the price of crude oil leads to a shift from _______ to _______.

A) increase; AS¹; AS⁰
B) increase; AS¹; AS²
C) decrease; AS²; AS¹
D) increase; AS²; AS¹

Question 35

Can the aggregate demand curve slope upwards?

A) Yes, always.
B) No.
C) Yes, if the economy experiences inflation.
D) Yes, if the aggregate supply curve is downward sloping.

Question 36

A large reduction in oil prices will cause:

A) a rightward shift in the aggregate supply curve.
B) a rightward shift in the aggregate demand curve.
C) a leftward shift in the aggregate demand curve.
D) a leftward shift in the aggregate supply curve.

Question 37

Figure 9.1
Refer to Figure 9.1. A reduction in government spending causes:

A) the aggregate demand curve to shift from AD₁ to AD₂.
B) the economy to move from Point A to Point B, but will not shift the aggregate demand curve.
C) the aggregate demand curve to shift from AD₁ to AD₀.
D) neither a shift of the aggregate demand curve nor a change in real GDP.

Question 38

Custom prices are also known as:

A) flexible prices.
B) auction prices.
C) equilibrium prices.
D) sticky prices.

Question 39

The aggregate demand curve shows a(n) _______ relationship between the _______.

A) positive; price level and real GDP
B) positive; interest rate and investment
C) negative; level of real GDP and investment
D) negative; price level and real GDP

Question 40

Recall Application 1, "Measuring Price Stickiness in Consumer Markets," to answer the following questions:
According to the application, which of the following goods showed considerable price stickiness?

A) fishing rod and fly
B) shoes
C) binoculars
D) All the goods above showed price stickiness.

Question 41

In the long run, the aggregate supply curve is:

A) downward sloping.
B) horizontal at the full employment level of GDP.
C) upward sloping.
D) vertical at the full employment level of GDP.

Question 42

The four components of the aggregate demand curve are:

A) consumption, inventories, government purchases and net exports.
B) consumption, inventories, government spending and exports.
C) land, labor, capital, and technology.
D) consumption, investment, government purchases and net exports.

Question 43

In the long run, an increase in the money supply will cause prices:

A) to increase.
B) not to change.
C) to decrease.
D) to fluctuate up and then down.

Question 44

Because the long run aggregate supply curve is vertical at the full employment level of GDP, then this would imply that the long run aggregate supply curve:

A) decreases as the price level increases.
B) is independent of changes in the price level.
C) shifts to the right when the price level increases.
D) increases as the price level increases.

Question 45

Figure 9.2
Refer to Figure 9.2. Suppose the economy is at Point A, an increase in the price level causes a movement to Point:

A) E.
B) C.
C) D.
D) B.

Question 46

In the short run, the primary determinant of output of firms is the:

A) level of demand.
B) future price.
C) availability of inputs.
D) level of prices.

Question 47

When output exceeds the full employment level of output, we expect that the

A) wages and prices increase as the long- run aggregate supply curve shifts upward over time.
B) wages and prices increase as the short- run aggregate supply curve shifts upward over time.
C) wages and prices decrease as the short- run aggregate supply curve shifts downward over time.
D) wages and prices increase as the long- run aggregate supply curve shifts downward over time.

Question 48

Recall Application 3, "How the U.S. Economy has Coped with Oil Price Fluctuations," to answer the following questions:
According to the application, oil prices in 2008 shot up as high as per barrel.

A) $110
B) $60
C) $190
D) $145

Question 49

In the short run, an increase in the money supply will cause output:

A) to remain the same.
B) to decrease.
C) to become zero.
D) to increase.

Question 50

Which of the following will cause output to increase in the long- run?

A) a decrease in the money supply
B) a decrease in government spending
C) an increase in income taxes
D) None of the above will increase output in the long run.

Question 51

The aggregate demand curve slopes downward because at a higher price level:

A) the purchasing power of consumers' assets declines and consumption increases.
B) the purchasing power of consumers' wealth declines and consumption decreases.
C) producers can get more for what they produce, and they increase production.
D) the purchasing power of consumers' wealth increases and consumption increases.

Question 52

The aggregate demand curve shifts to the left if:

A) the government decreases taxes.
B) household consumption falls.
C) the government increases spending.
D) the supply of money rises.

Question 53

Recall Application 1, "Measuring Price Stickiness in Consumer Markets," to answer the following questions:
Based on what you learned from the application, coin- operated laundry prices behave as:

A) auction prices.
B) flexible prices
C) custom prices.
D) custom auction prices.

Question 54

Suppose there are three economies with 3 different consumption functions: Country A: C = 100 + 0.8Y Country B: C = 200 + 0.75 Y
Country C: C = 75 + 0.9Y
In which of these countries is the multiplier the largest?

A) Country A
B) Country C
C) Country B
D) All countries have the same multipliers.

Question 55

Compared to the long run aggregate supply curve, the short- run aggregate supply curve is relatively:

A) more vertical.
B) less elastic.
C) steeper.
D) flatter.

Question 56

Rank these three wage rates in the order of least sticky to most sticky: minimum wage workers, nurses, movie stars.

A) minimum wage workers, movie stars, nurses
B) movie stars, minimum wage workers, nurses
C) minimum wage workers, nurses, movie stars
D) movie stars, nurses, minimum wage workers

Question 57

The curve that depicts aggregate demand slopes downward because:

A) as the overall price level (P) falls, real GDP (y) falls.
B) as the overall price level (P) rises, real GDP (y) does not change.
C) as the overall price level (P) rises, real GDP (y) rises.
D) as the overall price level (P) rises, real GDP (y) falls.

Question 58

Figure 9.4
Refer to Figure 9.4. An increase in aggregate supply is represented by:

A) a movement from Point C to Point A along AS₁.
B) a shift from AS₁ to AS₂.
C) a movement from Point B to Point A along AS₁.
D) a shift from AS₁ to AS₀.

Question 59

Steel rod prices are an example of:

A) custom prices.
B) regulated prices.
C) auction prices.
D) personal prices.

Question 60

The aggregate demand curve:

A) slopes upward.
B) slopes downward.
C) is horizontal.
D) may slope upward or downward.

Question 61

If the economy is in equilibrium at full employment, a decrease in aggregate demand will:

A) decrease both the price level and the level of output in the short run.
B) decrease the price level and leave the level of output unchanged in the short run.
C) increase both the price level and the level of output in the short run.
D) increase the price level and leave the level of output unchanged in the short run.

Question 62

The aggregate supply curve depicts the relationship between:

A) the unemployment rate and the total quantity of goods and services that firms supply.
B) the cost of inputs and the total quantity of goods and services that firms supply.
C) the cost of labor and the total quantity of goods and services that firms supply.
D) the level of prices and the total quantity of goods and services that firms supply.

Question 63

Figure 9.3
Refer to Figure 9.3. Suppose the economy is at Point A, an increase in the price level moves the economy in the short run to Point:

A) B.
B) D.
C) E.
D) C.

Question 64

In the short run, the aggregate supply curve is relatively flat because at any point in time:

A) firms are assumed to supply all the output demanded with relatively small changes in prices.
B) the labor costs faced by firms are slower to adjust than final prices.
C) technology advances faster than production costs.
D) firms can not face increases in the output demanded without experiencing small reductions in profits.

Question 65

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions:
According to the application, a recession can be caused by:

A) a decrease in aggregate demand or an increase in aggregate supply.
B) a decrease in ether aggregate demand or aggregate supply.
C) an increase in aggregate demand or a decrease in aggregate supply.
D) an increase in either aggregate demand or aggregate supply.

Question 66

If the consumption function is C = 200 + 0.8Y and there is a $10 million increase in investment spending, then the aggregate demand curve will shift horizontally to the right by:

A) $8 million.
B) $12.5 million.
C) $2 million.
D) $50 million.

Question 67

Figure 9.4
Refer to Figure 9.4. The flooding in the Midwest during the summer of 1993 destroyed a large portion of the agricultural crop in the United States. This caused:

A) the economy to move from Point B to Point A along AS₁.
B) the aggregate supply curve to shift from AS₁ to AS₂.
C) the economy to move from Point C to Point B along AS₁.
D) the aggregate supply curve to shift from AS₁ to AS₀.

Question 68

If the marginal propensity to consume is 0.2, the value of the marginal propensity to save is:

A) 2.
B) 5.
C) 1.25.
D) 0.8.

Question 69

The aggregate demand curve would shift to the left if:

A) the cost of energy was to decrease.
B) taxes were increased.
C) the money supply was increased.
D) government spending was increased.

Question 70

The _______ is one reason why the aggregate demand curve is downward sloping.

A) paradox of thrift
B) natural rate of unemployment
C) wealth effect
D) presence of sticky prices

Question 71

Sticky prices cause an economic coordination problem for the economy because:

A) they are likely to cause the CPI to understate the actual increase in the cost of living.
B) they increase the transaction costs in open market auctions.
C) they confuse the signal system that brings together consumers and producers.
D) they confuse the system of custom prices.

Question 72

If prices are slow to adjust, then it is possible that:

A) some markets will not be in equilibrium.
B) there will be a demand surplus.
C) there will be a supply shortage.
D) all of the above are true.

Question 73

According to the international effect explanation of the downward slope of the AD curve, a lower price level in the U.S. economy causes:

A) U.S. imports and U.S. exports to decrease.
B) U.S. imports and U.S. exports to increase.
C) U.S. imports to increase and U.S. exports to decrease.
D) U.S. imports to decrease and U.S. exports to increase.

Question 74

In the consumption function C = Ca + bY, the term b represents:

A) the marginal propensity to consume.
B) the multiplier effect.
C) the autonomous consumption spending.
D) the marginal propensity to save.

Question 75

In the long- run, an increase in the money supply will cause output:

A) to remain the same.
B) to increase.
C) to fluctuate up and down.
D) to decrease.

Question 76

Figure 9.2
Refer to Figure 9.2. Suppose the economy is at Point A, a decrease in taxes causes a movement to Point:

A) B.
B) D.
C) C.
D) E.

Question 77

Figure 9.4
Refer to Figure 9.4. A decrease in aggregate supply is represented by:

A) a movement from Point B to Point A along AS₁.
B) a shift from AS₁ to AS₂.
C) a movement from Point A to Point B along AS₁.
D) a shift from AS₁ to AS₀.

Question 78

Which of the following will cause the price level to increase in the long- run?

A) a decrease in government spending
B) an increase in income taxes
C) a decrease in the money supply
D) an increase in the interest rates

Question 79

An example of a good/service that has custom prices is

A) labor.
B) gasoline.
C) steel rods.
D) oil.

Question 80

If the marginal propensity to consume is 0.5, an increase in consumption by $200 will shift the aggregate demand curve horizontally to the right by

A) $200.
B) $400.
C) $100.
D) $200.5.