Deck 14: Aggregate Demand and Supply

Question 1

Nominal wages are assumed fixed in the short run because:

A) workers have wages stated in their contracts.
B) of minimum wage laws.
C) workers are unaware of short-run changes in their real wages.
D) all of the above are true.
E) none of the above are true.

Answer 1

D

Question 2

The short-run aggregate supply curve is upward-sloping because:

A) the quantity of real output supplied is inversely related to aggregate supply.
B) nominal incomes are fixed.
C) of the conjunction between the incremental capital-output ratio and the interbank offer rate.
D) an increase in price will increase the supply of money.

Answer 2

B

Question 3

In the short run, an increase in the price level causes which of the following:

A) A rightward shift in the aggregate demand curve.
B) A leftward shift in the short-run aggregate supply curve.
C) A rightward shift in the short-run aggregate supply curve.
D) A movement upward along the short-run aggregate supply curve.

Answer 3

D

Question 4

In the long run, wages and prices are considered to be:

A) fixed.
B) sticky.
C) flexible.
D) unstable.

Question 5

An aggregate supply curve with a positive slope is associated with an economy in which:

A) input prices and final goods prices always change by the same amount.
B) firms expect output prices to be unaffected by changes in input prices.
C) nominal wages and salaries do not change much in the short run.
D) firms expect consumer demand to be unaffected by changes in prices of final goods.

Question 6

A short-run aggregate supply curve (SRAS) assumes:

A) the CPI is fixed.
B) each point on the SRAS is potential real GDP.
C) fixed or sticky nominal wages.
D) nominal wages vary directly with price changes.

Question 7

In the long run, an increase in aggregate demand causes the price level to ____ and the long-run aggregate supply curve to ____.

A) decrease; decrease
B) increase; increase
C) decrease; remain unchanged
D) increase; remain unchanged

Question 8

Which of the following explains why higher prices in the goods and services market measured by the CPI leads to an upward-sloping aggregate supply curve?

A) The higher prices will temporarily improve profit margins because the cost of wages and salaries are fixed in the short run.
B) The higher prices will reduce the purchasing power of the fixed quantity of money and, thereby, stimulate additional output.
C) The higher prices will expand the economy's resource base and, thereby, stimulate additional output.
D) The higher prices will improve technology and, thereby, stimulate additional output.

Question 9

The short-run aggregate supply curve (SRAS) is the amount of real GDP:

A) produced at various price levels.
B) produced at various savings rate levels.
C) purchased at various price levels.
D) purchased at various saving rate levels.

Question 10

In the short run, wages are assumed to be:

A) constant.
B) sticky.
C) inflexible.
D) all of the above are true.

Question 11

If nominal wages and salaries are fixed as firms change product prices, the short-run aggregate supply curve is:

A) vertical.
B) horizontal.
C) negatively sloped.
D) positively sloped.

Question 12

Which of the following causes a leftward shift in the short-run aggregate supply curve?

A) An increase of goods prices while nominal incomes are unchanged.
B) An increase in nominal incomes.
C) An increase of full-employment real GDP.
D) An increase of personal consumption expenditures while the price level is unchanged.
E) An increase of personal consumption expenditures while full-employment real GDP is unchanged.

Question 13

An explanation for why the short-run aggregate supply curve is upward-sloping is because:

A) the quantity of real output supplied is inversely related to the aggregate supply curve.
B) nominal incomes are fixed.
C) the capital-output ratio is fixed.
D) an increase in price will increase the marginal aggregate output.

Question 14

In the long run, a decrease in aggregate demand causes the price level to ____ and the long-run aggregate supply curve to ____.

A) decrease; decrease
B) increase; increase
C) decrease; remain unchanged
D) increase; remain unchanged

Question 15

In the short run, a price increase in the goods and services market measured by the CPI will:

A) increase the purchasing power of money.
B) improve producer profits and, thereby, induce suppliers to expand output.
C) increase resource prices, lower profits, and lead to a decline in output.
D) reduce the natural rate of unemployment.

Question 16

The long-run aggregate supply curve (LRAS) is:

A) a vertical curve that relates the level of real GDP produced to the price level in the long run.
B) an upward sloping curve that relates the level of real GDP produced to the price level in the long run.
C) an infinite curve that relates the level of real GDP produced to the price level in the long run.
D) none of the above are true.

Question 17

The adjustment of nominal incomes to changes in the price level (CPI) is fixed because of the:

A) volatility of investment spending.
B) existence of long-term contracts.
C) complete information possessed by workers.
D) all of the above.

Question 18

The long-run aggregate supply curve is:

A) upward sloping.
B) downward sloping.
C) vertical at full-employment real GDP.
D) horizontal at full-employment real GDP.

Question 19

One reason for the short-run aggregate supply curve (SRAS) is:

A) a fixed CPI market basket.
B) perfect knowledge of workers.
C) fixed-wage contracts.
D) the upward-sloping production function.

Question 20

The short-run aggregate supply curve is:

A) upward-sloping.
B) downward-sloping.
C) horizontal.
D) vertical.

Question 21

In the self-correcting AD-AS model, the economy's short-run equilibrium position is indicated by the intersection of which two curves?

A) Short-run aggregate supply and long-run aggregate supply.
B) Short-run aggregate supply and aggregate demand.
C) Long-run aggregate supply and aggregate demand.
D) Long-run aggregate demand and short-run personal consumption expenditures curve.
E) Short-run aggregate demand and long-run personal consumption expenditures curve.

Question 22

The full-employment level of real GDP is the level which can be produced with:

A) given technology and productive resources.
B) frictional and structural unemployment equal to zero.
C) cyclical unemployment equal to zero.
D) both a and b.
E) both a and c.

Question 23

Which of the following causes a leftward shift in the short-run aggregate supply curve?

A) An increase of goods prices while nominal incomes are unchanged.
B) An increase in nominal incomes (wages and salaries).
C) An increase of full-employment real GDP.
D) An increase of personal consumption expenditures while the price level is unchanged.
E) An increase of personal consumption expenditures while full-employment real GDP is unchanged.

Question 24

Which of the following would produce a rightward shift in the short-run aggregate supply curve?

A) An increase in consumption spending.
B) A decrease in investment.
C) A decrease in government spending.
D) A decrease in net exports.
E) None of the above.

Question 25

Economic growth is measured by the percentage change in:

A) potential nominal GDP.
B) structural unemployment.
C) the rule of 72.
D) potential real GDP (LRAS).

Question 26

Long-run full-employment equilibrium assumes:

A) a downward-sloping production function.
B) a downward-sloping long-run supply curve (LRAS).
C) the CPI index price level equals the equilibrium wage rate.
D) the CPI equals aggregate demand (AD) equals short-run aggregate supply (SRAS) equals long-run aggregate supply (LRAS).

Question 27

In the self-correcting AD-AS model, a point where the economy's long-run AS curve, short-run AS curve, and AD curve all intersect at a single point represents a point where:

A) real GDP is equal to its full-employment level.
B) the conditions of short-run equilibrium are fulfilled.
C) the conditions of long-run equilibrium are fulfilled.
D) all of the above.
E) a and c, but not b.

Question 28

If an economy is operating at short-run equilibrium below the level of real GDP, the self-correction model result is that:

A) unemployment increases.
B) unemployment falls.
C) cyclical unemployment increases.
D) frictional and structural unemployment increase.

Question 29

Economic growth is represented by a:

A) rightward shift of the rule of 72 curve.
B) movement along a production possibilities curve.
C) rightward shift in potential real GDP (LRAS).
D) leftward shift of the long-run aggregate supply curve (LRAS).

Question 30

In long-run full-employment equilibrium, which of the following is true ?

A) The CPI equals AD equals the peak of the production function curve.
B) The horizontal LRAS curve equals the intersection of the demand and supply curves in the labor market.
C) The CPI equals the aggregate production function at the equilibrium wage rates.
D) The CPI equals AD equals SRAS equals LRAS.

Question 31

The intersection between the long-run aggregate supply and aggregate demand curves determines the:

A) level of full-employment real GDP.
B) level of prices (CPI).
C) money supply.
D) marginal product.
E) both a and b.

Question 32

A decrease in nominal incomes cause a:

A) rightward shift in the short-run aggregate supply curve.
B) leftward shift in the short-run aggregate supply curve.
C) rightward shift in the long-run aggregate supply curve.
D) leftward shift in the long-run aggregate supply curve.

Question 33

Economic growth can be represented by a(n):

A) percentage change in real GDP.
B) rightward shift of the long-run aggregate supply curve (LRAS).
C) outward shift of a production possibilities curve.
D) all of the above.

Question 34

If both the price level and nominal incomes change by the same percentage:

A) real GDP will remain constant.
B) the aggregate supply curve will be upward-sloping.
C) profit margins will change in real terms.
D) the long-run aggregate supply curve will be horizontal.
E) both a and d.

Question 35

Long-run full-employment equilibrium assumes:

A) a downward-sloping production function.
B) a downward-sloping long-run supply curve (LRAS).
C) the CPI index price level equals the equilibrium wage rate.
D) the CPI equals aggregate demand (AD) equals short-run aggregate supply (SRAS) equals long-run aggregate supply (LRAS).

Question 36

Economic growth is represented by a:

A) leftward shift of a production possibilities curve.
B) rightward shift of the long-run aggregate supply curve (LRAS).
C) horizontal long-run aggregate supply curve (LRAS).
D) downward shift of an aggregate production function.

Question 37

In an economy where nominal incomes adjust equally to changes in the price level, we would expect the long-run aggregate supply curve to be:

A) vertical.
B) horizontal.
C) unit elastic.
D) negatively sloped.
E) positively sloped.

Question 38

The long-run aggregate supply curve is:

A) upward-sloping.
B) downward-sloping.
C) horizontal.
D) vertical.
E) none of the above.

Question 39

The long-run aggregate supply curve (LRAS) is represented by a(n) ____ curve with respect to the CPI.

A) horizontal
B) upward-sloping
C) downward-sloping
D) vertical

Question 40

The position of the long-run aggregate supply curve corresponds to the economy's:

A) full-employment real GDP.
B) maximum possible level of employment.
C) natural level of personal consumption expenditure.
D) maximum possible level of personal consumption expenditures.
E) maximum possible price level.

Question 41

Exhibit 14A-2  Macro AD-AS Model In Exhibit 14A-2, the long-run aggregate supply curve represents:

A) potential real GDP output for this economy.
B) that the economy is experiencing zero inflation.
C) that the economy is experiencing a recessionary gap.
D) the level of real GDP where the unemployment rate is zero.

Question 42

Beginning from a position of long-run equilibrium at the full-employment level of real GDP, the economy's short-run response to an increase in the aggregate demand curve would be:

A) a movement upward along the short-run aggregate supply curve.
B) a movement upward along the long-run aggregate supply curve.
C) a downward shift in the short-run aggregate supply curve.
D) a shift in both the aggregate demand curve and the short-run aggregate supply curve with a movement along the long-run aggregate supply curve.
E) no change, since the economy is already in equilibrium.

Question 43

Exhibit 14A-1  Aggregate demand and supply model Based on Exhibit 14A-1, when the aggregate demand curve shifts to the position AD₂ and the economy is operating at point E₂, the economy's position of long-run equilibrium corresponds to point:

A) E₁.
B) E₂.
C) E₃.
D) E₁ or E₃.

Question 44

Exhibit 14A-1  Aggregate demand and supply model Beginning in Exhibit 14A-1 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂ . The economy's path to a new long-run equilibrium is represented by a movement from:

A) E₃ to E₁ to E₂.
B) E₁ to E₃ to E₂.
C) E₂ to E₁ to E₂.
D) E₁ to E₂ to E₃.

Question 45

Which of the following would cause an increase (rightward shift) in the short-run aggregate supply curve (SRAS)?

A) An increase in the long-run aggregate supply curve (LRAS).
B) A decrease in the CPI.
C) An increase in the CPI.
D) A decrease in oil prices.

Question 46

Exhibit 14A-1  Aggregate demand and supply model As shown in Exhibit 14A-1 and assuming the aggregate demand curve shifts from AD₁ and AD₂ , the full-employment level of real GDP is:

A) $12 billion.
B) $8 billion.
C) $150 billion.
D) unable to be determined.

Question 47

Suppose that the economy is in a position of short-run equilibrium at a point where real GDP is below the full-employment level. Assuming no further change in aggregate demand and self-correction, the movement to a new long-run equilibrium includes a decrease in which of the following?

A) The unemployment rate.
B) The price level (CPI).
C) The level of nominal wages and salaries.
D) All of the above.

Question 48

Exhibit 14A-1  Aggregate demand and supply model As shown in Exhibit 14A-1, the economy's point of short-run equilibrium, given by the shift of the aggregate demand curve from AD₁ to AD₂ , is:

A) E₁.
B) E₂.
C) E₃.
D) unable to be determined.

Question 49

Exhibit 14A-1  Aggregate demand and supply model Beginning from short-run equilibrium at point E₂ in Exhibit 14A-1, the economy's movement to a new position of long-run equilibrium would best be described as:

A) a movement along the AD₂ curve with a shift in the SRAS₁ curve.
B) a movement along the SRAS₂ curve with a shift in the AD₂ curve.
C) a shift in the LRAS curve to an intersection at E₁.
D) no shift of any kind.

Question 50

Beginning from a position of long-run equilibrium at the full-employment level of real GDP, the economy's short-run response to a decrease in the aggregate demand curve would be a:

A) movement upward along the short-run aggregate supply curve.
B) movement upward along the long-run aggregate supply curve.
C) downward shift in the short-run aggregate supply curve.
D) movement downward along the short-run aggregate supply curve.

Question 51

Exhibit 14A-1  Aggregate demand and supply model Given the shift of the aggregate demand curve from AD₁ to AD₂ in Exhibit 14A-1, the real GDP and price level (CPI) in long-run equilibrium will be:

A) $8 billion and 150.
B) $12 billion and 200.
C) $8 billion and 250.
D) $8 billion and 200.

Question 52

Beginning from the full-employment level of real GDP, an increase in one of the components of the aggregate demand curve will increase the:

A) average level of prices (CPI).
B) unemployment rate.
C) natural level of real GDP.
D) level of investment spending.
E) level of government spending.

Question 53

Which of the following would cause a decrease (leftward shift) in the short-run aggregate supply curve (SRAS)?

A) An increase in oil prices.
B) An advance in technology.
C) An increase in the CPI.
D) An increase in the long-run aggregate supply curve (LRAS).

Question 54

Beginning from full-employment macro equilibrium, increase in government spending will cause real GDP to:

A) increase in the short run.
B) decline in the long run.
C) decline in the short run.
D) increase in the long run.

Question 55

Exhibit 14A-1  Aggregate demand and supply model Beginning from long-run equilibrium at point E₁ in Exhibit 14A-1, the aggregate demand curve shifts to AD₂ . The real GDP and price level (CPI) in short-run equilibrium will be:

A) $12 billion and 200.
B) $8 billion and 250.
C) $8 billion and 150.
D) $12 billion and 250.

Question 56

Along the short-run supply curve (SRAS), a decrease in the aggregate demand curve will decrease:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level but reduce real GDP.

Question 57

Exhibit 14A-2  Macro AD-AS Model In Exhibit 14A-2, the intersection of AD with SRAS indicates:

A) a short-run equilibrium.
B) a long-run equilibrium.
C) that the economy needs policies to reduce unemployment.
D) that the economy is at full employment.

Question 58

Along the short-run aggregate supply curve (SRAS), an increase (rightward shift) in the aggregate demand curve will increase:

A) both the price level and real GDP.
B) real GDP without raising the price level.
C) the price level without affecting real GDP.
D) the price level but reduce real GDP.

Question 59

Beginning from a position of long-run equilibrium, suppose there is an increase in the aggregate demand curve. After adjustment and comparing the economy's new long-run equilibrium with its original long-run position, the result would be an increase in:

A) real GDP.
B) the price level (CPI).
C) the unemployment rate.
D) a and b, but not c.

Question 60

A decrease in the aggregate demand curve along the LRAS curve, all other things unchanged, will generate ____ in potential real GDP and ____ in the price level.

A) an increase; no change
B) a decrease; no change
C) no change; an increase
D) no change; a decrease

Question 61

Exhibit 14A-6  Aggregate demand and supply model As shown in Exhibit 14A-6, the economy's point of short-run equilibrium, given by the shift of the aggregate demand curve from AD₁ to AD₂, is:

A) E₁.
B) E₂.
C) E₃.
D) unable to be determined.

Question 62

Exhibit 14A-4  Macro AD-AS Model In Exhibit 14A-4, the level of real GDP represented by Y_p:

A) would be associated with considerable unemployment.
B) indicates that the economy is experiencing zero inflation.
C) indicates that the economy is experiencing a recessionary gap.
D) is potential real GDP for this economy.

Question 63

Exhibit 14A-6  Aggregate demand and supply model Given the shift of the aggregate demand curve from AD₁ to AD₂ in Exhibit 14A-6, the real GDP and price level (CPI) in long-run equilibrium will be:

A) $10 billion and 200.
B) $4 billion and 150.
C) $10 billion and 150.
D) $10 billion and 100.

Question 64

Exhibit 14A-4  Macro AD-AS Model In Exhibit 14A-4, the self-correction argument is that in the long run competition:

A) from unemployed workers causes an increase in nominal wages and a leftward shift in SRAS.
B) from unemployed workers causes a rightward shift in SRAS.
C) among firms for workers increases nominal wages and this causes a leftward shift in SRAS.
D) among consumers causes an increase in the CPI and a rightward shift in SRAS.

Question 65

Exhibit 14A-3  Macro AD-AS Model In Exhibit 14A-3, the level of real GDP represented by Y_p:

A) is potential real GDP for this economy.
B) indicates that the economy is experiencing zero inflation.
C) indicates that the economy is experiencing a recessionary gap.
D) would be associated with considerable unemployment.

Question 66

Exhibit 14A-5  Macro AD-AS Model Given the shift of the aggregate demand curve from AD₁ to AD₂ in Exhibit 14A-5, the real GDP and price level (CPI) in long-run equilibrium will be:

A) P₂, Y₁.
B) P₃, Y_p.
C) P₂,Y_p.
D) P_1, Y_p.

Question 67

Exhibit 14A-6  Aggregate demand and supply model As shown in Exhibit 14A-6, and assuming the aggregate demand curve shifts from AD₁ to AD₂, the full-employment level of real GDP is:

A) $10 billion.
B) $4 billion.
C) $100 billion.
D) unable to be determined.

Question 68

Exhibit 14A-4  Macro AD-AS Model In Exhibit 14A-4, point P₂, Y₁ represents:

A) that the economy needs policies to reduce unemployment.
B) a long-run equilibrium.
C) a short-run equilibrium.
D) that the economy is at full employment.

Question 69

Exhibit 14A-3  Macro AD-AS Model In Exhibit 14A-3, the self-correction argument is that in the long run competition:

A) from unemployed workers causes an increase in nominal wages and a leftward shift in SRAS.
B) from unemployment workers causes a rightward shift in LRAS.
C) among firms for workers increases nominal wages and this causes a leftward shift in SRAS.
D) among consumers causes an increase in the CPI and a rightward shift in SRAS.

Question 70

Exhibit 14A-5  Macro AD-AS Model Beginning in Exhibit 14A-5 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂. The economy's path to a new long-run equilibrium is represented by a movement from:

A) E₁ to E₂ to E₃.
B) E₃ to E₂ to E₂.
C) E₁ to E₃ to E₂.
D) E₂ to E₁ to E₂.

Question 71

Exhibit 14A-2  Macro AD-AS Model In Exhibit 14A-2, the short-run equilibrium depicts an economy:

A) with an inflationary gap.
B) with a recessionary gap.
C) producing at full employment.
D) None of the above answers are correct.

Question 72

Exhibit 14A-6  Aggregate demand and supply model Beginning from long-run equilibrium at point E₁ in Exhibit 14A-6, the aggregate demand curve shifts to AD₂. The real GDP and price level (CPI) in short-run equilibrium will be:

A) $10 billion and 200.
B) $10 billion and 150.
C) $10 billion and 100.
D) $4 billion and 150.

Question 73

The short-run aggregate supply curve (SRAS) is based on the theory that wages are flexible.

Question 74

The long-run aggregate supply curve (LRAS) corresponds to full-employment real GDP with zero frictional and structural unemployment.

Question 75

Exhibit 14A-6  Aggregate demand and supply model Beginning in Exhibit 14A-6 from long-run equilibrium at point E₁, the aggregate demand curve shifts to AD₂. The economy's path to a new long-run equilibrium is represented by a movement from:

A) E₃ to E₁ to E₂.
B) E₁ to E₃ to E₂.
C) E₂ to E₁ to E₂.
D) E₁ to E₂ to E₃.

Question 76

Exhibit 14A-5  Macro AD-AS Model Economic growth is represented in Exhibit 14A-5 by a:

A) leftward shift in the long-run aggregate supply curve (LRAS).
B) inward shift of the production possibilities curve.
C) rightward shift in the long-run aggregate supply curve (LRAS).
D) movement along the long-run aggregate supply curve (LRAS).

Question 77

Exhibit 14A-3  Macro AD-AS Model In Exhibit 14A-3, the intersection of AD with SRAS indicates:

A) a short-run equilibrium.
B) a long-run equilibrium.
C) that the economy needs policies to reduce unemployment.
D) that the economy is at full employment.

Question 78

Exhibit 14A-3  Macro AD-AS Model In Exhibit 14A-3, the level of real GDP associated with Y₁:

A) is equal to potential real GDP.
B) is an inflationary gap real GDP.
C) is a long-run equilibrium.
D) is caused by flexible wages and prices.

Question 79

Exhibit 14A-6  Aggregate demand and supply model Beginning from a point of short-run equilibrium at point E₂ in Exhibit 14A-6, the economy's movement to a new position of long-run equilibrium from that point would best be described as:

A) a movement along the AD₂ curve caused by a shift in the SRAS₁ curve to SRAS₂.
B) a movement along the SRAS₂ curve with a shift in the AD₂ curve.
C) a shift in the LRAS curve to an intersection at E₃.
D) no shift of any kind.

Question 80

Exhibit 14A-6  Aggregate demand and supply model Based on Exhibit 14A-6, when the aggregate demand curve is in the position AD₁, the economy's position of long-run equilibrium corresponds to point:

A) E₁.
B) E₂.
C) E₃.
D) E₁ or E₂.