Deck 10: Dynamic Change, Economic Fluctuations, and the Ad--As Model

Question 1

What would be the effect of a decrease in the real interest rate and an increase in the expected inflation rate?

A) Both changes would decrease aggregate demand.
B) Both changes would increase aggregate demand.
C) Both changes would increase short-run aggregate supply.
D) Both changes would increase long-run aggregate supply.

Answer 1

Both changes would increase aggregate demand.

Question 2

If a reduction in stock prices reduces the real wealth of Americans, the

A) aggregate demand curve will shift to the left.
B) long-run aggregate supply will shift to the left.
C) general price level will increase.
D) aggregate demand curve will shift to the right.

Answer 2

aggregate demand curve will shift to the left.

Question 3

If a country's currency appreciates, which of the following will most likely happen?

A) Net exports will fall and aggregate demand will increase.
B) Net exports will rise and aggregate demand will  increase.
C) Net exports will fall and aggregate demand will  decrease.
D) Net exports will rise and aggregate demand will  decrease.

Answer 3

Net exports will fall and aggregate demand will  decrease.

Question 4

Within the AD/AS model, if consumers and investors become more optimistic about the future direction of the economy,

A) aggregate demand will decrease.
B) aggregate demand will increase.
C) long-run aggregate supply will increase.
D) long-run aggregate supply will decrease.

Question 5

Which of the following will most likely increase aggregate demand?

A) a decrease in stock market prices
B) a lower real interest rate
C) a decrease in the expected inflation rate
D) a decrease in real GDP

Question 6

If a country's currency depreciates, which of the following will most likely happen?

A) Net exports will fall and aggregate demand will increase.
B) Net exports will rise and aggregate demand will  increase.
C) Net exports will fall and aggregate demand will  decrease.
D) Net exports will rise and aggregate demand will  decrease.

Question 7

If the consumer sentiment index turns down sharply over a period of several months, which of the following is most likely to occur in the near future?

A) an increase in aggregate demand and expansion in real output
B) a reduction in aggregate demand and a contraction in real output
C) a reduction in aggregate demand and expansion in real output
D) an increase in aggregate demand and a contraction in real output

Question 8

Which one of the following factors will most likely cause an increase in aggregate demand?

A) an increase in the expected inflation rate
B) an increase in the real interest rate
C) a decrease in net exports due to falling incomes abroad
D) a technological development that decreases the cost of producing computer chips

Question 9

An increase in the consumer sentiment index indicates that consumers are

A) becoming more optimistic about their future income and employment prospects.
B) becoming less optimistic about their future income and employment prospects.
C) expecting the inflation rate to rise in the near future.
D) expecting the inflation rate to fall in the near future.

Question 10

Within the framework of the AD/AS model, if consumers and investors become more pessimistic about the future direction of the economy, this will lead to

A) an increase in aggregate demand.
B) a decrease in aggregate demand.
C) an increase in long-run aggregate supply (LRAS shifts to the right).
D) a reduction in the natural rate of unemployment.

Question 11

Which of the following would be most likely to cause an increase in current aggregate demand in the United States?

A) increased fear that the U.S. economy was going into a recession
B) an increase in the real interest rate
C) a reduction in the expected rate of inflation
D) rapid growth of real income in Canada and Western Europe

Question 12

Other things constant, an increase in the real interest rate will

A) cause consumers to reduce their purchases of durable items like appliances and automobiles.
B) induce businesses to increase their level of investment.
C) make borrowing money more attractive.
D) increase the natural rate of unemployment.

Question 13

A currency appreciation will be most likely to

A) reduce net exports and therefore increase aggregate demand.
B) raise net exports and therefore decrease aggregate demand.
C) reduce net exports and therefore decrease aggregate demand.
D) raise net exports and therefore increase aggregate demand.

Question 14

When the U.S. dollar appreciates,

A) U.S. exports rise.
B) U.S. imports decline.
C) aggregate demand shifts leftward.
D) aggregate demand shifts rightward.

Question 15

Which of the following will lead to an increase in aggregate demand in the United States?

A) a higher price level
B) an increase in the real interest rate
C) an increase in wealth due to a substantial appreciation in the value of stocks
D) a decrease in real income in Japan and Western Europe

Question 16

Which of the following factors would increase aggregate demand in the goods and services market?

A) an decrease in stock prices
B) an increase in the real interest rate
C) a decrease in real incomes abroad
D) increased optimism on the part of consumers and businesses

Question 17

If Asian economies suffer a serious economic slump, U.S. net exports will

A) increase and AD will shift rightward.
B) increase and AD will shift leftward.
C) decrease and AD will shift leftward.
D) decrease and AD will shift rightward.

Question 18

Which of the following would be most likely to cause a reduction in current aggregate demand in the United States?

A) increased fear of a recession
B) an increase in the expected rate of inflation
C) a sharp increase in the value of stocks owned by Americans
D) a rapid increase in the growth of income in Canada, Mexico, and Western Europe

Question 19

A recession abroad would

A) increase U.S. net exports and increase aggregate demand.
B) increase U.S. net exports and increase aggregate supply.
C) reduce U.S. net exports and reduce aggregate demand.
D) reduce U.S. net exports and increase aggregate demand.

Question 20

Other things constant, a reduction in the real interest rate will

A) cause consumers to cut back on their purchases of durable items like automobiles.
B) induce businesses to increase their level of investment.
C) increase the natural rate of unemployment.
D) increase the actual rate of unemployment.

Question 21

Which of the following will lead to a decrease in aggregate demand in the United States?

A) a higher price level
B) a decrease in the real interest rate
C) rapid growth in real income in Japan and Western Europe
D) an increase in the exchange rate value of the dollar

Question 22

Which of the following will most likely increase long-run aggregate supply?

A) an increase in the rate of investment
B) an increase in resource prices
C) an increase in the minimum wage
D) an increase in the expected inflation rate

Question 23

Which of the following shifts both short-run and long-run aggregate supply to the left?

A) a decrease in the actual rate of inflation
B) a decrease in the expected rate of inflation
C) a decrease in the capital stock
D) a drought in the Midwest agricultural areas.

Question 24

If an improvement in the quality of education in the United States increases the productivity of labor, this will

A) increase aggregate demand and decrease aggregate supply.
B) increase short-run aggregate supply and reduce aggregate demand.
C) decrease aggregate demand and increase short-run aggregate supply.
D) increase both long-run and short-run aggregate supply.

Question 25

How would aggregate demand change if foreign incomes increase and the exchange rate value of the dollar increases?

A) Neither change would affect aggregate demand.
B) The increase in income would decrease aggregate demand; the increase in the exchange rate would increase aggregate demand.
C) The increase in income would increase aggregate demand; the increase in the exchange rate would decrease aggregate demand.
D) Both changes would decrease aggregate demand.

Question 26

An increase in the exchange rate value of the U.S. dollar, relative to the Japanese yen, will cause U.S. imports from Japan to

A) increase and exports to Japan to decrease.
B) increase and exports to Japan to increase.
C) decrease and exports to Japan to decrease.
D) decrease and exports to Japan to increase.

Question 27

A supply shock is a surprise occurrence that

A) shifts the long-run aggregate supply curve to the right.
B) either increases or decreases short-run aggregate supply and output.
C) temporarily increases aggregate demand.
D) temporarily reduces aggregate demand.

Question 28

If European economies experience strong economic growth, U.S. net exports will

A) increase and AD will shift rightward.
B) increase and AD will shift leftward.
C) decrease and AD will shift leftward.
D) decrease and AD will shift rightward.

Question 29

Which of the following would be most likely to cause a reduction in current aggregate demand in the United States?

A) Increased business optimism about the future.
B) The economies of key trading partners fall into a recession.
C) A sharp increase in the value of stocks owned by Americans.
D) An increase in the expected rate of inflation.

Question 30

Which of the following shifts short-run, but not long-run aggregate supply to the right?

A) a decrease in the actual rate of inflation
B) a decrease in the expected rate of inflation
C) a decrease in the capital stock
D) a drought in the Midwest agricultural areas.

Question 31

Which of the following will most likely cause an increase in the long-run aggregate supply curve?

A) a reduction in the general level of prices
B) an increase in the general level of prices
C) an improvement in technology that substantially reduces the cost of generating energy
D) an increase in taxes that makes it more expensive for Americans to import crude oil

Question 32

Other things constant, an increase in resource prices will

A) increase aggregate demand.
B) decrease aggregate demand.
C) decrease short-run aggregate supply.
D) increase short-run aggregate supply.

Question 33

In the aggregate demand/aggregate supply model, an increase in a country's sustainable potential output is represented by

A) an increase in aggregate demand.
B) a decrease in aggregate demand.
C) an increase in long-run aggregate supply.
D) an increase in the general level of prices.

Question 34

If the exchange rate value of the dollar depreciates relative to other currencies, we would expect

A) U.S. exports to decrease.
B) U.S. exports to increase.
C) U.S. imports to increase.
D) aggregate demand in the United States to decrease.

Question 35

Which of the following will most likely increase short-run aggregate supply?

A) unfavorable weather conditions in the nation's agricultural areas
B) an increase in income tax rates
C) an increase in the expected inflation rate
D) a reduction in resource prices

Question 36

An improvement in technology would shift which of the following curve(s)?

A) aggregate demand and short-run aggregate supply
B) only the short-run aggregate supply
C) only the aggregate demand
D) short-run and long-run aggregate supply

Question 37

If Europe and Japan experience rapid growth in their incomes, other things constant, this will cause

A) a decrease in the exports of the United States.
B) an increase in the exports of the United States.
C) a decrease in the national income of the United States.
D) a decrease in aggregate demand in the United States.

Question 38

Which of the following is the best example of a supply shock?

A) an increase in the availability of capital and machinery due to normal changes in business investment
B) a decrease in the productivity of the labor force due to a decline in the average educational level of workers
C) a decline in agricultural output due to a summer drought
D) an increase in output as a result of an expansion in employment

Question 39

Which of the following will cause an increase in aggregate demand within the AS/AD model?

A) a decrease in prices
B) a decrease in the real interest rate
C) a decrease in consumer optimism as measured by the consumer sentiment index
D) a decrease in foreign incomes abroad

Question 40

If business decision makers expect that the inflation rate will increase in the near future,

A) long-run aggregate supply will increase.
B) long-run aggregate supply will decrease.
C) short-run aggregate supply will increase.
D) short-run aggregate supply will decrease.

Question 41

When an economy is in a recession,

A) strong demand for investment funds will push interest rates upward.
B) strong demand for resources will push the prices of resources upward.
C) the real interest rate will tend to rise.
D) the unemployment rate will rise above its natural rate.

Question 42

Within the AD/AS model, which one of the following adjustments will cause the economy to return to its long-run capacity when output is temporarily greater than the economy's long-run potential?

A) Lower wage rates and resource prices reduce short-run aggregate supply.
B) Lower interest rates increase aggregate demand and, thereby, stimulate output.
C) Higher wage rates and resource prices reduce short-run aggregate supply.
D) A decrease in prices reduces aggregate demand.

Question 43

An abnormally large grain crop due to highly favorable weather conditions in the Midwest is an example of

A) a technological improvement that will increase long-run aggregate supply.
B) a supply shock that will increase short-run aggregate supply.
C) an unexpected development that will reduce the natural rate of unemployment.
D) an unexpected development that will lead to excess supply and widespread unemployment.

Question 44

When an economy is experiencing an economic boom and operating beyond its long-run capacity,

A) strong demand for investment funds will push interest rates upward.
B) weak demand for resources will push the prices of resources downward.
C) weak demand for investment funds will cause the real interest rate to decline.
D) the unemployment rate will be greater than its natural rate.

Question 45

Which of the following adjustments will most likely occur when output exceeds the economy's long-run capacity?

A) Prices will decline, bringing actual output into balance with its potential.
B) The natural rate of unemployment will increase and, thereby, restore equilibrium.
C) Higher resource prices and costs will reduce short-run aggregate supply until output falls to the economy's long-run capacity.
D) Lower interest rates will increase the economy's long-run capacity and restore equilibrium.

Question 46

Within the AD/AS model, if consumers increase their savings and cut back on their spending, the

A) natural rate of unemployment will increase.
B) real interest rate will decrease and, thereby, cushion the reduction in consumption spending.
C) real interest rate will increase because of the higher rate of saving.
D) long-run aggregate supply will decrease to restore equilibrium.

Question 47

Suppose the economy is initially in long-run equilibrium and then it experiences a supply shock in the form of sharply higher energy prices. Which of the following is true?

A) The short-run aggregate supply curve shifts leftward and the long-run supply curve shifts rightward.
B) The short-run aggregate supply curve shifts rightward and there is a movement along the aggregate demand curve.
C) The short-run aggregate supply curve does not shift and the long-run aggregate supply curve shifts rightward.
D) The short-run aggregate supply curve shifts rightward but the long-run aggregate supply curve does not shift.
E) The short-run aggregate supply curve shifts leftward and there is a movement along the aggregate demand curve.

Question 48

Which of the following is most likely to throw an economy into a recession?

A) a reduction in the real interest rate
B) an unanticipated increase in short-run aggregate supply
C) an unanticipated increase in aggregate demand
D) an unanticipated reduction in aggregate demand

Question 49

Which of the following will most likely cause an increase (shift to the right) in both the long-run and short-run aggregate supply curves?

A) an increase in the national debt
B) an increase in income tax rates
C) a decrease in the economy's rate of investment and capital formation
D) a technological improvement in robotics that substantially increases labor productivity

Question 50

Within the AD/AS model, if an unanticipated reduction in aggregate demand results in less than the full-employment rate of output,

A) the natural rate of unemployment will increase.
B) long-run aggregate supply will increase.
C) lower resource prices and declining interest rates will direct the economy back to full employment.
D) higher resource prices and rising interest rates will direct the economy back to full employment.

Question 51

If the economy is operating at an output level beyond its full-employment capacity, which of the following would most likely direct the economy back to long-run equilibrium?

A) improvements in technology
B) a decrease in the real rate of interest
C) an increase in resource prices
D) a decrease in resource prices

Question 52

A large grain crop resulting from favorable weather conditions would shift which of the following curves?

A) only aggregate demand
B) aggregate demand and short-run aggregate supply
C) only short-run aggregate supply
D) only long-run aggregate supply

Question 53

When an economy is temporarily operating at an output that is beyond its full-employment rate,

A) excess supply in resource markets will eventually lead to lower resource prices, which will decrease costs and direct the economy toward full employment.
B) excess demand in resource markets will lead to higher resource prices, which will increase costs and direct the economy toward full employment.
C) lower wages and prices will quickly restore full employment.
D) only restrictive fiscal policy will direct the economy back to full employment.

Question 54

Which of the following will most likely occur as the result of an unanticipated increase in aggregate demand that pushes output beyond long-run capacity?

A) an increase in the natural rate of unemployment
B) an increase in the real interest rate
C) a decrease in the real interest rate
D) a decrease in the general level of prices

Question 55

The stability of consumption over the business cycle and the ability of changes in the real interest rate to redirect aggregate demand indicate that

A) government policy can improve the performance of the economy.
B) market economies are inherently unstable.
C) a market economy has a self-correcting mechanism that will help guide it toward full employment.
D) recessions will be lengthy, and high rates of unemployment will persist for a period of time even after the economy recovers.

Question 56

When the output of an economy exceeds the economy's full-employment capacity,

A) aggregate supply will increase until the economy can produce the output at the existing price level.
B) the actual rate of unemployment will be less than the natural rate.
C) wage rates and resource prices will tend to fall.
D) interest rates will decline and help direct the economy back to full employment.

Question 57

If an unanticipated reduction in aggregate demand throws a market economy into a recession,

A) market forces will cause the economy to spiral downward and a lengthy period of depressed conditions is the expected result.
B) lower real resource prices and interest rates will act as a stabilizing force and direct the economy back to its full employment potential.
C) higher real resource prices and interest rates will help to direct a market economy back to its full employment potential.
D) the natural rate of unemployment will rise until it is once again equal to the actual rate of unemployment.

Question 58

If an unanticipated decrease in aggregate demand results in an output below the economy's long-run capacity, long-run equilibrium will eventually be restored by

A) an increase in the rate of inflation.
B) lower resource prices and lower real interest rates.
C) higher resource prices and higher real interest rates.
D) a decrease in the natural rate of unemployment.

Question 59

When output is greater than the economy's long-run capacity, which of the following is most likely to occur?

A) a reduction in the general level of prices
B) an abnormally high rate of unemployment
C) increases in real interest rates and real resource prices
D) a reduction in imports

Question 60

If an economy operates at a short-run equilibrium output that exceeds its long-run capacity, which of the following will be most likely to direct the economy toward full employment?

A) Improvements in technology will shift the LRAS curve to the right.
B) Resource prices will increase, causing the SRAS curve to shift to the left.
C) The unemployment rate will increase, causing the economy's aggregate supply curve to shift to the right.
D) Interest rates will decline, shifting the aggregate demand curve to the right.

Question 61

A rise in the price of oil would be most likely to cause which of the following in the United States?

A) an economic boom
B) an economic slowdown or recession
C) a decrease in the general level of prices
D) an increase in aggregate demand

Question 62

Which of the following was a contributing factor to the instability of 2002 to 2008?

A) ideal weather from 2002 to 2006, followed by a severe drought in 2007 and 2008
B) falling housing prices leading to an expansion, followed by rising housing prices leading to a  sharp economic downturn
C) an increase in housing prices leading to an expansion, followed by a collapse in housing prices and a sharp economic downturn
D) falling stock prices leading to an expansion, followed by rising stock prices leading to a  sharp economic downturn

Question 63

Suppose the economy is in long-run equilibrium. In a short span of time, there is a large influx of skilled immigrants, a major new discovery of oil, and a major new technological advance in electricity production. In the short run, we would expect

A) the price level to rise and real GDP to fall.
B) the price level to fall and real GDP to rise.
C) the price level and real GDP both to stay the same.
D) All of the above are possible.

Question 64

What impact did the change in housing prices during 2002 to 2005 have within the framework of the AD/AS model?

A) Declining housing prices reduced aggregate demand shifting AD leftward.
B) Rising housing prices increased aggregate demand shifting AD rightward.
C) Rising housing prices led to increased construction shifting LRAS leftward.
D) Declining housing prices caused SRAS to shift leftward.

Question 65

During an economic expansion, housing and stock prices generally

A) fall, leading to a reduction in aggregate demand.
B) fall, leading to an increase in aggregate demand.
C) rise, leading to a reduction in aggregate demand.
D) rise, leading to an increase in aggregate demand.

Question 66

If a market economy has a self-correcting mechanism, when output is lower than potential or full-employment output,

A) changes will occur that will automatically guide the economy back to full employment.
B) resource prices will increase.
C) prolonged unemployment such as was experienced during the Great Depression will occur.
D) the economy will fall into a more severe recession.

Question 67

If a market economy was in a recession, which of the following would help direct it back toward the full employment rate of output?

A) an increase in the rate of inflation
B) lower resource prices and lower real interest rates
C) higher resource prices and higher real interest rates
D) a decrease in the natural rate of unemployment

Question 68

With regard to the business cycle, most modern economists believe that

A) once a recession starts, market forces are incapable of preventing the economy from plunging deeper and deeper into a depression.
B) market economies will experience lengthy periods of recession pretty much regardless of what policy makers do.
C) the economy's self-corrective mechanism will quickly restore full employment regardless of the choices made by policy makers.
D) lower real interest rates and reductions in real resource prices will help direct an economy out of recession.

Question 69

Which of the following contributed to the sharp economic downturn during 2008?

A) rising housing and stock prices
B) falling housing and stock prices
C) rising housing prices but falling stock prices
D) falling housing prices but rising stock prices

Question 70

Which of the following contributed to the crisis of 2008?

A) a doubling of the price of imported oil during 2007-2008
B) a sharp increase in the price of housing during 2008
C) inclement weather in 2008
D) falling resource prices and a reduction in the cost of production

Question 71

When an economy is in a recession,

A) strong demand for investment funds will push interest rates upward.
B) strong demand for resources will push the prices of resources upward.
C) the real interest rate will tend to rise.
D) the unemployment rate will rise above its natural rate.

Question 72

The economic boom between 2002 and 2006 was primarily a result of

A) a reduction in stock prices along with rising oil prices.
B) a sharp reduction in the real price of resources and wages.
C) an increase in both housing and stock prices.
D) an increase in both resource prices and interest rates.

Question 73

Which of the following would reduce the ability of the self-correcting mechanism to direct an economy out of a recession quickly?

A) a decrease in the real rate of interest
B) resource prices that are inflexible in a downward direction
C) an increase in aggregate demand
D) a low level of savings

Question 74

During the crisis of 2008 housing prices ________ and stock prices ________. (Fill in the blank)

A) rose sharply; fell sharply
B) fell sharply; rose sharply
C) fell sharply; fell sharply
D) rose sharply; rose sharply

Question 75

What impact did the soaring oil prices of 2007 and the first half of 2008 have on the economy?

A) They increased SRAS, causing real output and employment to increase.
B) They reduced SRAS, causing real output and employment to increase.
C) They increased SRAS, causing real output and employment to decline.
D) They reduced SRAS, causing real output and employment to decline.

Question 76

During an economic contraction, housing and stock prices generally

A) fall, leading to a reduction in aggregate demand.
B) fall, leading to an increase in aggregate demand.
C) rise, leading to a reduction in aggregate demand.
D) rise, leading to an increase in aggregate demand.

Question 77

Suppose this year's inflation rate is 4 percent, which is greater than the 2 percent everyone expected. Which of the following is true?

A) real GDP will increase
B) the unemployment rate will probably rise
C) potential output will remain the same
D) the short-run aggregate supply curve will shift to the right
E) there will be a leftward movement along a given short-run aggregate supply curve

Question 78

If the general level of prices is higher than business decision makers anticipated when they entered into long-term contracts for raw materials and other resources, which of the following is most likely to occur?

A) a recession
B) output less than the economy's long-run potential
C) a sharp reduction in imports
D) an unemployment rate that is less than the economy's natural rate of unemployment

Question 79

If the general level of prices is lower than business decision makers anticipated when they entered into long-term contracts for raw materials and other resources, which of the following is most likely to occur?

A) An economic boom.
B) Highly attractive profit margins.
C) An actual rate of unemployment that is greater than the natural rate of unemployment
D) A sharp increase in imports.

Question 80

When an economy is experiencing an economic boom and operating beyond its long-run capacity,

A) strong demand for investment funds will push interest rates upward.
B) weak demand for resources will push the prices of resources downward.
C) weak demand for investment funds will cause the real interest rate to decline.
D) the unemployment rate will be greater than its natural rate.