Deck 14: Aggregate Demand and Aggregate Supply

Question 1

The ______ effect does NOT explain the downward slope of an aggregate demand curve.

A) real wealth
B) interest rate
C) substitution
D) foreign trade

Answer 1

C

Question 2

The _____ effect and the _____ effect can help explain the downward slope of the aggregate demand curve.

A) interest rate; substitution
B) substitution; real wealth
C) interest rate; foreign trade
D) foreign trade; substitution

Answer 2

C

Question 3

An economy's _____ is measured along the vertical axis of an aggregate demand curve.

A) real gross domestic product
B) overall price level
C) interest rate
D) overall income level

Answer 3

B

Question 4

Aggregate demand includes the demand for all goods and services in an economy EXCEPT the goods and service that are:

A) purchased by the government.
B) purchased by firms.
C) exported to other countries.
D) imported from other countries.

Question 5

According to the interest rate effect, a higher price level implies a _____ demand for money, which leads to a _____ interest rate and a lower planned investment spending.

A) higher; higher
B) higher; lower
C) lower; higher
D) lower; lower

Question 6

According to the interest rate effect, when all else is equal, a lower price level implies a _____ demand for money, which leads to a _____ interest rate.

A) lower; higher
B) lower; lower
C) higher; lower
D) higher; higher

Question 7

According to the foreign trade effect, when all else is equal, when the price level in a country increases, its exports _____, and its imports:

A) increase; increase.
B) decrease; increase.
C) increase; decrease.
D) decrease; decrease.

Question 8

According to the real wealth effect, a higher _____ implies a _____ value of wealth and consumption spending.

A) interest rate; higher
B) price level; higher
C) interest rate; lower
D) price level; lower

Question 9

Which of the following will decrease aggregate demand, thereby shifting the curve left?

A) Government spending on interest payments increases.
B) The personal income tax increases.
C) The government's discretionary spending increases.
D) The money supply increases.

Question 10

Which of the following will increase aggregate demand, thereby shifting the curve right?

A) Government spending on interest payments decreases.
B) The government's discretionary spending decreases.
C) The personal income tax decreases.
D) Consumers' future income decreases.

Question 11

When all else is equal, an increase in the overall price level leads to an increase in:

A) exports.
B) real wealth.
C) interest rate.
D) investment spending.

Question 12

Suppose that the United States signs a new trade treaty that increases its exports to the rest of the world relative to imports. This policy will:

A) shift the aggregate demand curve to the right.
B) lead to a movement along the aggregate demand curve.
C) shift the aggregate demand curve to the left.
D) have no effect on the aggregate demand curve.

Question 13

Suppose that the U.S government decreases its mandatory spending on goods and services. This policy will:

A) shift the aggregate demand curve to the right.
B) shift the aggregate demand curve to the left.
C) lead to a movement along the aggregate demand curve.
D) have no effect on the aggregate demand curve.

Question 14

The total investment spending in an economy decreases as a result of an increase in the interest rate, which is driven by an increase in the overall price level. This will be represented as a:

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

Question 15

An increase in the overall price level in the economy leads to all of the following EXCEPT:

A) a decrease in consumption spending.
B) a decrease in the interest rate.
C) a decrease in its exports.
D) an increase in its imports.

Question 16

A decrease in the overall price level in the economy leads to all of the following EXCEPT:

A) an increase in consumption spending.
B) an increase in the interest rate.
C) an increase in its exports.
D) a decrease in its imports.

Question 17

Which of the following will decrease aggregate demand, thereby shifting the curve left?

A) The interest rate increases.
B) Consumers' expectations of future income increase.
C) Government spending increases.
D) Foreign countries increase their imports of domestic goods.

Question 18

Which one of the following is NOT a category of government spending?

A) discretionary spending
B) mandatory spending
C) net exports
D) net interest payments

Question 19

An increase in the overall price level _____ the interest rate, which leads to a decrease in investment spending and _____ the aggregate demand curve.

A) increases; a shift in
B) increases; a movement along
C) decreases; a shift in
D) decreases; a movement along

Question 20

What is the difference between a market demand curve and the aggregate demand curve? In this context, explain why the substitution effect does not apply in the case of an aggregate demand curve.

Question 21

In an economy that has no leakages except savings, the government injects $200 of new spending into the economy, and the total spending in the economy increases by $1,000. The spending multiplier in the economy is _____, and the marginal propensity to consume is:

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

Question 22

In an economy that has no leakages except savings, the government injects $200 of new spending into the economy, and the total spending in the economy increases by $400. The marginal propensity to consume is:

A) 0.7.
B) 0.5.
C) 0.3.
D) 0.1.

Question 23

If the marginal propensity to consume for an economy is 0.8 and the overall income in the economy increases by $1,000, then the total saving in the economy will increase by:

A) $800.
B) $600.
C) $400.
D) $200.

Question 24

If the overall income in an economy increases by $2,000 and consumption spending increases by $1,600 as a result, then the marginal propensity to consume for the economy is:

A) 0.2.
B) 0.4.
C) 0.6.
D) 0.8.

Question 25

When the total income of an economy is $1,000, the consumption spending is $800. If the total income increases to $1,500, then consumption spending increases to $1,100. The marginal propensity to consume for the economy is:

A) 0.6.
B) 0.7.
C) 0.8.
D) 0.9.

Question 26

When the total income of an economy is $1,000, the consumption spending is $900. If the total income increases to $1,500, then consumption spending increases to $1,300. Assuming that the only leakage in the economy is saving, the spending multiplier for the economy is:

A) 3.
B) 4.
C) 5.
D) 6.

Question 27

In an economy where the only leakage economy is saving, the marginal propensity to consume for the economy is 0.8. If government spending in the economy increases by $200, then the overall spending in the economy will _____ by:

A) increase; $800.
B) decrease; $800.
C) increase; $1,000.
D) decrease; $1,000.

Question 28

China injects $100 into the U.S. economy by purchasing new software, and the marginal propensity to consume for the U.S. economy is 0.5. Assuming that there are no leakages except savings, the total increase in spending in U.S. economy will be:

A) $50.
B) $100.
C) $150.
D) $200.

Question 29

If the marginal propensity to consume for an economy is 0.8, then the marginal propensity to save for the economy is _____. Assuming that there are no leakages except savings, the spending multiplier for the economy is:

A) 0.5; 5.
B) 5; 0.5.
C) 0.2; 5.
D) 5; 0.2.

Question 30

Which of the following does NOT represent a leakage out of the multiplier process?

A) income tax
B) savings
C) imports
D) consumer spending

Question 31

The greater the _____ and the smaller the _____, the greater the multiplier effect will be in an economy.

A) MPC; MPS
B) MPS; MPC
C) tax rate; MPC
D) imports; MPC

Question 32

If the marginal propensity to save for an economy is 0.2, then the marginal propensity to consume for the economy is:

A) 0.5.
B) 0.6.
C) 0.7.
D) 0.8.

Question 33

If an economy has no other leakages except savings and the spending multiplier in the economy is 5, then the marginal propensity to consume for the economy is:

A) 0.8.
B) 0.6.
C) 0.4.
D) 0.2.

Question 34

China injects $100 into the United States by purchasing new software. If the spending multiplier for the U.S. is 5, then the total increase in spending will be:

A) $10.
B) $20.
C) $250.
D) $500.

Question 35

When the government of a country injects $100 into an economy by purchasing new military equipment, the total spending in the economy increases by $500. The marginal propensity to save for the economy is:

A) 0.2.
B) 0.4.
C) 0.6.
D) 0.8.

Question 36

The marginal propensity to consume for an economy is 0.8. When the government injects $200 into the economy by purchasing military equipment, the total spending in the economy increases by $800. Given this scenario, which of the following statements is true for the economy?

A) The marginal propensity to save is 0.5.
B) Savings are the only source of leakages.
C) The spending multiplier is 5.
D) The spending multiplier is less than 5.

Question 37

The marginal propensity to consume for an economy is 0.8. When the government injects $200 into the economy by purchasing military equipment, the total spending in the economy increases by $1,000. Given this scenario, which of the following statements is FALSE for the economy?

A) The marginal propensity to save is 0.2.
B) Savings are not the only source of leakage.
C) The spending multiplier is 5.
D) The spending multiplier is more than 5.

Question 38

Country A and Country B are identical in every respect except that Country B has a higher income tax rate than Country A. In both countries, the government increases spending by $100. In which country will the overall GDP increase more? Explain how you arrive at the answer.

Question 39

According to John Maynard Keynes, which one of the following is true about the supply decisions of firms in the short run?

A) Firms are able to supply more output only at a higher price level.
B) Firms are unable to supply more output at any price level.
C) Firms are able to supply any level of output at a given price level.
D) Firms are unable to supply more output at a lower price level.

Question 40

The real wage of workers increases when the nominal wage _____ by 5% and the overall price level _____.

A) increases; increases by 10%
B) decreases; decreases by 5%
C) increases; increases by 5%
D) decreases; decreases by 10%

Question 41

If the nominal wage of workers increases by 10% and the real wage of workers remains unchanged, then the overall price level must have:

A) increased by 10%.
B) decreased by 10%.
C) increased by more than 10%.
D) decreased by less than 10%.

Question 42

If the nominal wage of workers decreases by 5% and the real wage of workers increases by 5%, then the overall price level must have:

A) increased by 5%.
B) decreased by 5%.
C) increased by more than 5%.
D) decreased by more than 5%.

Question 43

If the overall price level in the economy is rising and at the same time workers are able to buy more goods and services, then the _____ wage of workers must be _____ the rise in the price level.

A) nominal; falling at faster rate than
B) real; falling at a rate faster than
C) nominal; rising at a rate faster than
D) nominal; rising at the same rate as

Question 44

If the overall price level in the economy increases by 10% and the workers in the economy are able to afford the same amount of goods as before the price change, then which of the following statements is true?

A) The nominal wage of workers has decreased by 10%.
B) The real wage of workers has increased by 10%.
C) The nominal wage of workers has remained constant.
D) The real wage of workers has remained constant.

Question 45

The upward-sloping range of the short-run aggregate supply curve results from the stickiness of which of the following variables?

A) nominal wage
B) real wage
C) nominal interest rate
D) price level

Question 46

In the upward-sloping range of the short-run aggregate supply curve, the nominal wage is _____, which implies that the real wage is:

A) flexible; flexible.
B) sticky; flexible.
C) flexible; sticky.
D) sticky; sticky.

Question 47

Which of the following variables is measured along the horizontal axis of the short-run aggregate supply curve?

A) nominal wage
B) real wage
C) nominal GDP
D) real GDP

Question 48

Which of the following variables is measured along the vertical axis of the short-run aggregate supply curve?

A) GDP
B) interest rate
C) price level
D) nominal wage

Question 49

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply _____ output at _____ price level.

A) more; a higher
B) more; a lower
C) less; a higher
D) more; the same

Question 50

When _____ wages are sticky, _____ in the price level leads to a decrease in the profit earned by businesses.

A) real; a decrease
B) nominal; a decrease
C) real; an increase
D) nominal; an increase

Question 51

When _____ wages are sticky, an increase in the price level leads to _____ in the profit earned by businesses.

A) real; a decrease
B) nominal; a decrease
C) real; an increase
D) nominal; an increase

Question 52

In the upward-sloping range of the short-run aggregate supply curve, firms are willing to supply more output when the overall price level increases because:

A) nominal wages are sticky, so an increase in the price level increases the profit earned by firms.
B) real wages are sticky, so an increase in the price level increases the profits earned by firms.
C) firms can employ better technology at a higher price level and produce more output.
D) more workers are willing to work at a higher price level, so firms can produce more output.

Question 53

If the nominal wage is sticky, then a decrease in the overall price level leads to _____ in the real wage firms have to pay. The firms respond by hiring _____ workers.

A) an increase; more
B) a decrease; more
C) an increase; fewer
D) a decrease; fewer

Question 54

If the real wage is sticky, then the short-run aggregate supply curve will be:

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

Question 55

The short-run aggregate supply curve is perfectly inelastic in the classical range because:

A) large amounts of unused labor and other inputs can be obtained at no additional cost.
B) nominal wages are sticky, so firms can supply additional output at higher price.
C) input and output prices change at the same rate, so there is no incentive to produce extra output.
D) a higher price leads to lower demand, so there is no incentive to produce extra output.

Question 56

Which one of the following will decrease aggregate supply, thereby shifting the curve left?

A) Nominal wages decrease as a result of an increased labor supply.
B) The productivity of workers decreases as a result of an epidemic.
C) A new government policy decreases business taxes.
D) The price of oil, which is a major input into most production activities, decreases.

Question 57

Which one of the following will increase aggregate supply, thereby shifting the curve right?

A) Nominal wages increase as a result of a decreased labor supply.
B) The productivity of workers increases as a result of technological improvements.
C) A new government policy increases business taxes.
D) The price of oil, which is a major input into most production activities, increases.

Question 58

If an economy is going through a severe recession (or depression), then the short-run aggregate supply curve will likely be:

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

Question 59

The short-run aggregate supply curve is:

A) upward sloping in the classical range.
B) downward sloping in the Keynesian range.
C) vertical in the Keynesian range.
D) vertical in the classical range.

Question 60

Which one of the following would constitute a negative supply shock?

A) The supply of money in the economy decreases.
B) Discretionary government spending decreases.
C) The price of oil increases as a result of conflict or war.
D) The federal income tax increases.

Question 61

Which one of the following would constitute a positive supply shock?

A) The supply of money in the economy increases.
B) Discretionary government spending increases.
C) The price of oil decreases as a result of conflict or war.
D) The federal income tax decreases.

Question 62

The short-run aggregate supply curve is upward sloping because the nominal wages are sticky. What is the difference between real and nominal wages? Why does stickiness in nominal wages lead to the upward-sloping short-run aggregate supply curve? Would the short-run aggregate supply curve be upward sloping when the real wage is sticky?

Question 63

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the federal income tax will lead to:

A) an increase in the equilibrium price.
B) a decrease in the equilibrium price.
C) an increase in the equilibrium output.
D) a decrease in equilibrium output.

Question 64

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the money supply will lead to:

A) an increase in the equilibrium price.
B) a decrease in equilibrium price.
C) an increase in equilibrium output.
D) a decrease in equilibrium output.

Question 65

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then an increase in the government's discretionary spending will lead to:

A) an increase in the equilibrium price.
B) a decrease in the equilibrium price.
C) an increase in the equilibrium output.
D) a decrease in the equilibrium output.

Question 66

If the short-run macroeconomic equilibrium occurs in the Keynesian range of the short-run aggregate supply curve, then a decrease in the income tax rate will lead to:

A) an increase in the equilibrium price.
B) a decrease in the equilibrium price.
C) an increase in the equilibrium output.
D) a decrease in the equilibrium output.

Question 67

When all else is equal, if an increase in government spending leads to an increase in equilibrium output and no change in equilibrium price, then we can conclude that the economy must be operating on the:

A) classical range of the short-run aggregate supply curve.
B) Keynesian range of the short-run aggregate supply curve.
C) upward-sloping range of the short-run aggregate supply curve.
D) long-run aggregate supply curve.

Question 68

When all else is equal, if an increase in federal income tax leads to a decrease in equilibrium output and no change in the equilibrium price, then we can conclude that the economy must be operating on the:

A) classical range of the short-run aggregate supply curve.
B) Keynesian range of the short-run aggregate supply curve.
C) upward-sloping range of the short-run aggregate supply curve.
D) long-run aggregate supply curve.

Question 69

If an economy is operating on the Keynesian range of the short-run aggregate supply curve, which of the following will lead to a decrease in the equilibrium output?

A) Consumers' expectations about future income increase.
B) The money supply increases.
C) The federal income tax increases.
D) Government spending increases.

Question 70

When an economy is operating on the classical range on the short-run aggregate supply curve, a decrease in _____ will NOT lead to a decrease in equilibrium price.

A) money supply
B) income taxes
C) discretionary government spending
D) exports to foreign countries

Question 71

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve, then an increase in input prices will lead to _____ in output and _____ in the price level.

A) an increase; an increase
B) a decrease; a decrease
C) an increase; a decrease
D) a decrease; an increase

Question 72

If the short-run macroeconomic equilibrium occurs in the classical range of the short-run aggregate supply curve, then an increase in money supply will _____ output and will _____ the price level.

A) not change; decrease
B) increase; not change
C) not change; increase
D) decrease; not change

Question 73

If the short-run macroeconomic equilibrium occurs in the classical range of the short-run aggregate supply curve, then a decrease in income tax will _____ output and will _____ the price level.

A) not change; decrease
B) increase; not change
C) not change; increase
D) decrease; not change

Question 74

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve, then an increase in government spending will lead to:

A) an increase in output.
B) a decrease in output.
C) no change in price.
D) a decrease in price.

Question 75

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve and the Federal Reserve increases the money supply, then which of the following will be true in the long run?

A) The nominal wage of workers will be lower compared to what it was in the short run.
B) Output will be higher compared to what it was in the short run.
C) The nominal wage of workers will be higher compared to what it was in the short run.
D) The price level will be lower compared to what it was in the short run.

Question 76

If the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve and government increases personal income tax, then which of the following will be true in the long run?

A) The nominal wage of workers will be lower compared to what it was in the short run.
B) Output will be lower compared to what it was in the short run.
C) The nominal wage of workers will be higher compared to what it was in the short run.
D) The price level will be higher compared to what it was in the short run.

Question 77

Suppose that a short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. From this point, the government cuts the personal income tax rate. Compared to what it was in the short run, the nominal wage in the long run will be ____, and the price level will be:

A) lower; lower.
B) higher; lower.
C) lower; higher.
D) higher; higher.

Question 78

The long-run aggregate supply curve is vertical because, in the long run:

A) nominal wages are sticky and therefore output cannot respond to change in price.
B) the price level cannot change and therefore firms have no incentive to increase output.
C) the real wage is constant and therefore firms have no incentive to change output.
D) the real wage is zero and therefore no additional labor is available to produce extra output.

Question 79

Suppose that the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. If government spending increases, then in the short run, the _____ will fall. However, in the long run, the _____ wage will rise.

A) nominal wage; real
B) output; real
C) real wage; nominal
D) price level; nominal

Question 80

Suppose that the short-run macroeconomic equilibrium occurs in the upward-sloping range of the short-run aggregate supply curve. If the government increases the federal income tax, then in the short run, _____ will fall. However, in the long run, the _____ will return to the level that it was prior to the imposition of the tax.

A) the price level and output; output
B) output and nominal wages; price level
C) the real wage and output; nominal wage
D) the nominal wage and the price level; real wage