Deck 22: Aggregate Demand and Aggregate Supply

Question 1

A curve showing an inverse relationship between the overall price level and the quantity of real output that will be demanded at various price levels, ceteris paribus, is called the

A)long-run aggregate supply curve.
B)short-run aggregate supply curve.
C)aggregate supply curve.
D)aggregate demand curve.

Answer 1

D

Question 2

Ceteris paribus, increases in government spending __________ aggregate demand.

A)increase
B)decrease
C)have no affect on
D)None of the above is correct.

Answer 2

A

Question 3

When a price index moves up or down, which of the following is true?

A)There is no substitution effect.
B)Relative prices do not change.
C)Overall prices do change.
D)All of the above are correct.

Answer 3

D

Question 4

The change in the domestic price level that causes consumers to substitute into or out of relatively cheaper or relatively more expensive imported goods is called

A)the substitution-of-foreign-goods effect.
B)the wealth effect or real-balances effect.
C)the constant nominal income effect.
D)long-run equilibrium.

Question 5

__________explains why price level decreases for a given supply of nominal money balances cause an increase in the quantity of aggregate demand.

A)The substitution-of-foreign-goods effect
B)The wealth effect or real-balances effect
C)The real income effect
D)Long-run equilibrium

Question 6

When the price level changes, the quantity demanded must change in the opposite direction to maintain the same level of non-inflation-adjusted income. This is called

A)the substitution-of-foreign-goods effect.
B)the wealth effect or real-balances effect.
C)the constant nominal income effect.
D)long-run equilibrium.

Question 7

The difference between nominal and real GDP is which of the following?

A)Real GDP has been adjusted for price changes.
B)Nominal GDP refers to last year's GDP, whereas real GDP is for the current fiscal year.
C)Real GDP is adjusted for depreciation whereas nominal GDP is not.
D)Nominal GDP has been adjusted for price changes.

Question 8

In measuring the health of the economy, economists are most interested in which of the following?

A)nominal GDP
B)real GDP
C)growth with inflation
D)quality of people's lives

Question 9

An increase in aggregate demand will initially tend to lead firms to

A)increase production.
B)decrease employment.
C)cut prices.
D)All of the above are correct.

Question 10

An increase in aggregate demand will initially tend to lead firms to

A)decrease production.
B)increase employment.
C)cut prices.
D)All of the above

Question 11

Aggregate demand is

A)the quantity of real goods and services that will be demanded at various price levels.
B)a curve showing the positive relationship between the overall price level and the quantity of real GDP.
C)in the short run illustrated with an upward sloping curve.
D)the quantity of real output supplied at various price levels.

Question 12

Aggregate demand changes in response to which factors of the following factors?

A)changes in input prices
B)changes in the number of firms in an industry
C)changes in taxes on businesses
D)changes in monetary and fiscal policy

Question 13

Which of the following is not a cause of a change in aggregate demand?

A)changes in personal income taxes
B)changes in government spending
C)changes in expected inflation
D)higher oil prices

Question 14

An increase in personal income tax rates

A)decreases consumption expenditures.
B)increases corporate tax rates.
C)increases expected profitability of an investment.
D)increases aggregate demand.

Question 15

An increase in personal income tax rates

A)decreases consumption expenditures.
B)increases consumption expenditures.
C)increases investment.
D)increases government spending.

Question 16

The major catalyst behind aggregate demand fluctuations is

A)monetary and fiscal policy.
B)changes in the labor force.
C)overall liquidity of the financial system.
D)changes in stock prices.

Question 17

Consumption demand does not include purchases of which of the following?

A)stocks and bonds
B)durable goods
C)nondurable goods
D)services

Question 18

Consumer spending is directly (positively) related to which of the following?

A)wealth and income
B)the interest rate
C)the unemployment rate
D)apprehensions about the job market

Question 19

Gross investment demand by households and firms is directly (positively) related to which of the following?

A)income
B)the interest rate
C)the unemployment rate
D)apprehensions about the job market

Question 20

Which of these are excluded from the aggregate expenditures of the government sector?

A)expenditures for roads and bridges
B)spending on unemployment benefits
C)national defense spending
D)spending on K-12 education

Question 21

Transfers are excluded from aggregate demand because they

A)do not represent purchasing power.
B)merely shift purchasing from one group to another.
C)are not easy to register in accounting.
D)only add to confusion.

Question 22

Net exports are __________ related to the exchange rate.

A)(positively) directly
B)weakly
C)not
D)inversely

Question 23

The substitution effect means consumers substitute good A for Good B if Good A is

A)relatively more expensive.
B)of higher quality.
C)more closely aligned with the natural level of real output.
D)relatively cheaper.

Question 24

Ceteris paribus, increases in personal income tax rates __________ consumption expenditures.

A)increase
B)decrease
C)have no affect on
D)None of the above is correct.

Question 25

Ceteris paribus, increases in corporate tax rates __________ the expected profitability of investment.

A)increase
B)decrease
C)have no affect on
D)None of the above

Question 26

Which of the following phrases best describes the wealth effect?

A)When the overall price level increases, ceteris paribus, domestic goods and services become relatively more expensive and foreign goods become relatively cheaper.
B)When income or wealth increase, consumption is likely to decrease.
C)If the price level increases while the nominal money supply remains constant, the supply of real money balances decreases and spending units experience a loss of purchasing power.
D)When the price level rises, the quantity demanded of real GDP must fall in accordance with the constant nominal income constraint. In short, less is demanded at higher prices because the funds run out sooner.

Question 27

Which of the following is most likely to cause an increase in aggregate demand?

A)an increase in interest rates
B)a decrease in national income
C)an increase in exports
D)a decrease in defense spending by the federal government

Question 28

Which of the following is likely to lead to a decrease in aggregate demand?

A)a decrease in interest rates
B)a decrease in national income
C)an increase in national income
D)an increase in government spending on goods and services.

Question 29

In the short run, if aggregate demand increases, what happens to output prices relative to input prices?

A)They rise.
B)They decline or stay the same.
C)They may rise or decline.
D)They do not change.

Question 30

_________ tells us the price a firm must receive to induce it to produce various levels of output during a specified time period.

A)Supply
B)Demand
C)Projected costs
D)Projected revenues

Question 31

Anything that alters the price of outputs relative to the price of inputs

A)will alter the quantity produced by the firm.
B)will alter the quality produced by the firm.
C)will alter the nominal income effect.
D)will have no effect whatsoever on output.

Question 32

The curve graphically depicting the relationship between the overall price level and the quantity of real GDP supplied at various price levels, ceteris paribus, is called the

A)long-run aggregate demand curve.
B)short-run curve.
C)aggregate supply curve.
D)aggregate demand curve.

Question 33

The vertical curve through the natural rate of output to which the economy will return in the long run, regardless of the price level, is called the

A)long-run aggregate supply curve.
B)short-run aggregate supply curve.
C)aggregate supply curve.
D)aggregate demand curve.

Question 34

The American Recovery and Reinvestment Act of 2009

A)provided a $787 billion stimulus package to bailout the economy.
B)included spending initiatives and tax cuts..
C)is expected to increase the deficit.
D)All of the above are true.

Question 35

A curve showing the direct relationship between the overall price level and the level of real output supplied, ceteris paribus, in response to changes in the demand before full adjustment of relative prices has taken place is called the

A)long-run aggregate supply curve.
B)short-run aggregate supply curve.
C)aggregate supply curve.
D)aggregate demand curve.

Question 36

The economy is in long-run equilibrium when

A)an optimal mix is reached.
B)input prices have fully adjusted to changes in output prices.
C)few input and output prices have adjusted.
D)change is the leading characteristic of the production factors.

Question 37

Which of the following is false?

A)In long-run equilibrium, all prices, including wages, have fully adjusted to changes in aggregate demand or aggregate supply.
B)The real wage is the nominal wage divided by the overall price level.
C)The aggregate supply curve is always upward sloping.
D)The aggregate demand curve is always downward sloping.

Question 38

When all prices (including wages) have fully adjusted to previous shifts in aggregate supply or demand and the flow of spending, saving, borrowing, and lending will continue until something else changes, this is called

A)the substitution-of-foreign-goods effect.
B)the wealth effect or real-balances effect.
C)the constant nominal income effect.
D)long-run equilibrium.

Question 39

The real wage is

A)the nominal wage adjusted for changes in the price level.
B)the nominal wage inflated by the price level.
C)the average wage of the average worker.
D)the employment deflator.

Question 40

With the economy in long-run equilibrium, if the Fed moves unexpectedly to raise aggregate demand by increasing the reserves of depository institutions through substantial open market purchases, what happens in the short-run?

A)Interest rates will fall.
B)Inventories will decline unexpectedly.
C)There will be upward pressure on output prices.
D)All of the above are correct.

Question 41

With short-run aggregate supply,

A)input prices are fixed or slower to change than output prices.
B)output prices are fixed or slower to change than input prices.
C)input prices are variable and change quickly.
D)output prices are not a consideration.

Question 42

If the actual price level for goods and services turns out to be higher than expected, workers will

A)find their purchasing power is higher than expected.
B)realize higher real wages.
C)seek higher nominal wages.
D)ask for wage decreases to keep their employment.

Question 43

In the AD/AS framework, an unexpected increase in the money supply and a resulting increase in aggregate demand, causes nominal wages

A)to remain unchanged.
B)to decrease.
C)to start to rise, but at a slower rate than prices.
D)to fluctuate wildly.

Question 44

If government policymakers are shortsighted and use monetary or fiscal policy to increase aggregate demand, then they will

A)encourage growth with little inflation in the long run.
B)tend to focus on short-run benefits while ignoring the possibility of accelerating inflation in the long run.
C)be careful to guard against long-run inflation.
D)All of the above are correct.

Question 45

If the economy is in short-run equilibrium but not in long-run equilibrium, what forces cause the economy to return to long-run equilibrium?

A)Input prices change, causing the short-run aggregate supply curve to shift.
B)The long-run aggregate supply curve shifts until long-run equilibrium is restored.
C)The aggregate demand curve shifts, causing price changes that restore long-run equilibrium.
D)None of the above is correct.

Question 46

Which of the following phrases best explains the short-run aggregate supply curve's upward slope?

A)Actual prices equal expected prices.
B)Expected prices are higher than actual prices.
C)Output prices increase faster than input prices.
D)The real balances effect ensures a positive slope.

Question 47

The long-run aggregate supply curve will shift leftward when

A)consumption spending, investment spending, government purchases, or net exports decrease.
B)price expectations are revised upward.
C)actual prices in the economy as a whole increase.
D)the economy's natural output level falls.

Question 48

In a long-run equilibrium of aggregate demand and aggregate supply,

A)output prices are consistent and sustainable relative to input prices.
B)actual values are equal to expected values.
C)wages and salaries are high enough relative to the cost of living to make work worthwhile.
D)All of the above are correct.

Question 49

Sustained increases in the overall price level due to high levels of aggregate demand are called which of the following?

A)booming aggregate demand
B)demand-pull inflation
C)cost-push inflation
D)stagflation

Question 50

Which of the following statements best characterizes the original tradeoff discovered by W. Phillips in 1957?

A)When the unemployment rate was very low, the rate of increase in employment was very high.
B) When the unemployment rate was very high, the rate of increase in overall prices was very high.
C) When the unemployment rate was very low, the rate of increase in wages was very high.
D) When the unemployment rate was very low, the rate of increase in wages was very low.

Question 51

Which of the following is true?

A) The Phillips curve trade-off holds in the long run but not necessarily in the short run because of randomness in markets.
B) A.W. Phillips' original work related changes in unemployment and changes in prices; later economists demonstrated that there was also a trade-off between changes in prices and changes in unemployment.
C) In the short run, there is a trade-off between inflation and unemployment even if the change in aggregate demand is expected.
D) Although a trade-off exists in the short run, in the long run, the Phillips curve is vertical.

Question 52

The relationship between the price level and the quantity of real output demanded is which of the following?

A)Direct (positive)
B)Indirect
C)Circuitous
D)Inverse (negative)

Question 53

The two factors that make up nominal GDP are which of the following?

A)aggregate supply and demand
B)the overall price level and real GDP
C)fiscal and monetary policy
D)transfer payments and taxes

Question 54

The two factors that make up nominal GDP are which of the following?

A)the monetary base and bank reserves
B)the overall price level and real GDP
C)bank loans plus the value of stock
D)Both a and c are correct.

Question 55

Which of these are excluded from the aggregate expenditures of the government sector?

A)salaries of defense personnel
B)police cars
C)social security payments
D)computers bought by the defense department

Question 56

One reason demand curves for individual products are downward sloping is because of the

A)wealth or real-balances effect.
B)substitution effect.
C)substitution-of-foreign-goods effect.
D)constant-nominal-income effect.

Question 57

Monetary and fiscal policy

A)are always affected by aggregate demand.
B)have no influence on aggregate demand.
C)can and do cause fluctuations in aggregate demand.
D)can affect consumption but not investment.

Question 58

Monetary and fiscal policy

A)are controlled by the Federal Reserve.
B)are controlled by the U.S. Treasury.
C)can and do cause fluctuations in aggregate demand.
D)do not affect output.

Question 59

In a case of demand-pull inflation,

A)prices rise.
B)prices stabilize.
C)prices fall.
D)unemployment rises.

Question 60

Which of the following phrases is most closely associated with investment demand?

A)It is the largest component of aggregate demand.
B)It is the most volatile component of aggregate demand.
C)It is largely determined by government fiscal policy.
D)It includes intended purchases of goods and services.

Question 61

Which of the following is most likely to cause an increase in aggregate demand?

A)a decrease in interest rates
B)a decrease in national income
C)an increase in imports
D)a decrease in defense spending by the federal government

Question 62

Which of the following is most likely to cause an increase in aggregate demand?

A)an increase in interest rates
B)a decrease in national income
C)an increase in imports
D)an increase in defense spending by the federal government

Question 63

Which of the following is likely to lead to a decrease in aggregate demand?

A)an increase in interest rates
B)an increase in wealth
C)an increase in national income
D)an increase in government spending on goods and services.

Question 64

Which of the following is likely to lead to a decrease in aggregate demand?

A)a decrease in interest rates
B)an increase in income
C)an increase in imports
D)an increase in government spending on goods and services.

Question 65

What is measured on the vertical axis of the aggregate supply curve?

A)real output
B)the overall price level as captured by a price index
C)a goods relative price
D)the quantity per time period of a particular good

Question 66

Starting from long-run equilibrium, an increase in aggregate demand will cause an increase in which of the following?

A)the price level
B)expectations
C)real wages
D)unemployment

Question 67

Starting from long-run equilibrium, an increase in aggregate demand will cause

A)a decrease in production in the short run.
B)an increase in employment in the short run.
C)a decrease in the price level.
D)downward pressure on wage rate.

Question 68

Ceteris paribus, the relationship between the overall price level and the quantity of real GDP supplied in the short run is which of the following?

A)direct
B)indirect
C)inverse
D)circuitous

Question 69

If the input prices are fixed or slow to change, firms respond to higher output prices by offering more for sale in which of the following?

A)the market period
B)the short run
C)the long run
D)the very long run

Question 70

In the AD/AS framework, the natural level of real output is determined by the quantity and quality of the factors of production, which include all of the following except

A)capital stock.
B)natural resources.
C)money supply.
D)the labor force.

Question 71

A rise in aggregate demand causes which of the following?

A)a lowering of the level of output prices relative to input prices
B)a cutback in production
C)moderate layoffs
D)an initial fall in inventories

Question 72

A drop in aggregate demand causes which of the following?

A)output prices to fall relative to input prices
B)a drop in unemployment
C)substantial new hires
D)an initial fall in inventories

Question 73

When the price level changes for a given supply of nominal money balances, the supply of real balances changes. This effect is called the

A)wealth effect.
B)constant nominal income effect.
C)substitution of foreign goods effect.
D)investment effect.

Question 74

Changes in the price level necessarily cause the quantity demanded to change in the opposite direction to maintain the level of income. This effect is called which of the following?

A)the wealth effect
B)the constant-nominal-income effect
C)the substitution-of-foreign-goods effect
D)the investment effect

Question 75

Changes in the domestic price level cause consumers to purchase more of relatively cheaper foreign goods or less of relatively more expensive foreign goods. This effect is called which of the following?

A)the wealth effect
B)the constant-nominal-income effect
C)the substitution-of-foreign-goods effect
D)the investment effect

Question 76

Which of the following will not shift the aggregate demand curve?

A)changes in income
B)changes in wealth
C)changes in expected future prices
D)changes in the overall price level

Question 77

The largest component of spending is which of the following?

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

Question 78

In recent years, the foreign sector has been

A)a surplus sector.
B)a deficit sector.
C)both a surplus and a deficit sector.
D)unimportant in the flows of funds for the United States.

Question 79

As a component of aggregate demand, government spending

A)includes government purchases of goods and services, transfers, and interest on the national debt.
B)is the largest component.
C)is the most volatile component of aggregate demand.
D)includes only government purchases of goods and services.

Question 80

In the short run, if aggregate demand decreases,

A)output increases while prices fall.
B)only prices fall.
C)prices rise.
D)both output and the price level fall.