Deck 15: Aggregate Demand and Aggregate Supply Analysis

Question 1

The experience of recessions in Australia has shown that

A) cyclical unemployment has been non-existent.
B) unemployment continues to rise after a recession ends.
C) unemployment falls about 12 months after a recession begins.
D) unemployment rises on average about 5 percentage points 12 months after a recession begins.

Answer 1

B

Question 2

What happens during the contraction phase of the business cycle?

A) Production increases
B) Unemployment increases
C) Income increases
D) Employment increases

Answer 2

B

Question 3

An 'economic contraction' can cause the unemployment rate to ________ and the inflation rate to ________.

A) fall or rise; rise
B) rise; fall or rise
C) fall; rise
D) fall; fall

Answer 3

B

Question 4

The experience of recessions in Australia has shown that the unemployment rate

A) rises for about six months after the recession has finished.
B) rises for at least one year after the recession has finished.
C) falls within one year of a recession finishing.
D) falls within six months of a recession finishing.

Question 5

Because a company such as Boeing produces expensive durable goods (aircraft),the demand for their goods

A) is likely to increase during recession.
B) declines when incomes in the economy are rising.
C) is consistently high, regardless of the state of the economy.
D) tends to follow the business cycle.

Question 6

A 'recession' is often defined as

A) two consecutive quarters experiencing a decline in the economic growth rate.
B) two consecutive quarters of declining nominal GDP.
C) a significant decline in activity visible in industrial production, employment, real income, and wholesale/retail trade lasting more than a few months.
D) a significant decline in inflation and unemployment lasting more than a few months.

Question 7

During an expansion,how do inflation and unemployment typically change?

A) Inflation and unemployment both rise
B) Inflation and unemployment both fall
C) Inflation falls and unemployment rises
D) Inflation rises and unemployment falls

Question 8

How is the 'inflation rate' defined?

A) The percentage decrease in the price level between time periods.
B) The percentage change in the price level between time periods.
C) The dollar increase in prices between time periods.
D) The percentage change in real GDP during a year.

Question 9

What happens when a recession ends?

A) Firms increase the amount of borrowing
B) Households decrease spending on durable goods
C) The household sector decreases spending substantially
D) Interest rates decrease

Question 10

Total motor vehicle sales in Australia

A) have slowly decreased over time.
B) decline by a greater percentage than does GDP during an economic contraction.
C) decline by a smaller percentage than does GDP during an economic contraction.
D) remain constant during business cycles.

Question 11

The beginning of an economic contraction coincides with a/an ________ while during an economic expansion ________.

A) decrease in government spending; investment increases
B) decrease in investment; investment increases
C) decrease in government spending; government spending increases
D) increase in government spending; investment decreases

Question 12

Which of the following goods would usually see the largest decline in demand during a recession?

A) Cars
B) Food
C) Clothing
D) Hair cuts

Question 13

A 'technical recession' is defined as

A) one year of negative economic growth.
B) six months of negative economic growth.
C) a contraction in the economic growth rate from 5 per cent to 3 per cent.
D) a period of rising prices.

Question 14

During the expansion phase of the business cycle,

A) production increases.
B) employment decreases.
C) income decreases.
D) unemployment increases.

Question 15

A period of expansion in the business cycle ends when

A) real GDP is equal to potential GDP.
B) the business cycle reaches its peak.
C) the business cycle reaches its trough.
D) real GDP is less than potential GDP.

Question 16

Which of the following is not a phase in the business cycle?

A) Shutdown
B) Trough
C) Peak
D) Expansion

Question 17

Which of the following explains why the rate of unemployment continues to rise once a recession is over?

A) Discouraged workers leave the labour force.
B) Wages rise faster than productivity increases so firms are reluctant to hire workers.
C) Firms are operating below capacity for some time after the recession is finished.
D) The unemployment rate does not continue to rise after a recession is over.

Question 18

A(n)________ comes to an end with a business cycle ________.

A) recession; peak
B) recession; trough
C) expansion; trough
D) expansion; phase

Question 19

An 'economic contraction' begins with a/an ________ in spending by firms on capital goods and a/an ________ in spending on durable goods by households.

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

Question 20

As the economy nears the end of an expansion,interest rates usually ________ and wages rise more ________ than prices.

A) rise; rapidly
B) rise; slowly
C) fall; rapidly
D) fall; slowly

Question 21

As a proportion of GDP,the Australian economy produced fewer services in the 2000s than it did in the 1950s,which has contributed to an increase in economic stability over time.

Question 22

What does the short-run aggregate supply curve show?

A) The relationship between the price level and the quantity of real GDP supplied
B) The relationship between the unemployment rate and real GDP
C) The desired level of national expenditure at different price levels
D) The relationship between labour supplied and the average wage rate

Question 23

Which of the following is a true statement about the length of recessions and expansions in the Australian economy?

A) After 1950, the length of expansions equalled the length of recessions.
B) After 1950, the length of expansions was much less than the length of recessions.
C) After 1950, the length of expansions was much longer than the length of recessions.
D) After 1950, the length of expansions was brief and almost non-existent.

Question 24

Explain why the Australian economy has generally been more stable since the 1950s than before that time.
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Question 25

The 'long boom' in Australia referred to the general period of strong economic growth that occurred between _______.

A) 1928 and 1931
B) the late 1950s to the late 1980s
C) the late 1940s to the early 1970s
D) 1991 and 2007

Question 26

A decrease in the price level results in a(n)________ in the quantity of real GDP demanded because a lower price level ________ consumption,investment and net exports.

A) decrease; increases
B) increase; increases
C) decrease; decreases
D) increase; decreases

Question 27

The aggregate demand curve shows the relationship between the ________ and ________.

A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP demanded
D) price level; quantity of real GDP demanded

Question 28

A period of economic expansion ends with a business cycle trough.

Question 29

The lengths of the recession and expansion phases and which sectors of the economy are most affected will rarely be the same in any two business cycles.

Question 30

Suppose you are an advisor to the federal government.You are asked to look at macroeconomic data to evaluate whether the economy has entered an economic contraction this year.Which data do you look at? How does the economy behave at the onset of an economic contraction?
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Question 31

Explain what happens to inflation and unemployment during the business cycle.
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Question 32

What type of consumer good is most affected by the business cycle-durable goods or non-durable goods? Why?
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Question 33

Which of the following experiences in the Australian economy led to an increase in the unemployment rate and the inflation rate?

A) The world oil shock of 1974
B) The policy of high interest rates in the late 1980s
C) The introduction of the Goods and Services Tax (GST) in 2000
D) The introduction of unemployment benefit payments in 1944

Question 34

What do the 'aggregate demand' and 'aggregate supply' models help explain?

A) Long-run economic growth
B) Short-run fluctuations in real GDP and the price level
C) Price fluctuations in an individual market
D) Output fluctuations in an individual market

Question 35

Which of the following would not be considered a positive addition to household wealth?

A) The equity that homeowners have in their own homes
B) 1000 shares in Qantas Airlines
C) A credit card balance
D) The balance in a savings account

Question 36

The rate of inflation does not necessarily increase during the expansion phase of the business cycle.

Question 37

The wealth effect occurs when the price level falls,causing the

A) real value of household wealth to fall.
B) nominal value of household wealth to fall.
C) nominal value of household wealth to rise.
D) real value of household wealth to rise.

Question 38

Which of the following is not a reason why the Australian economy has generally been more stable since 1950 than before that time?

A) Goods have become a larger fraction of GDP and services have become a smaller fraction of GDP.
B) The government has actively pursued economic policy to combat recessions and prolong expansions.
C) Unemployment benefits and other government programs curtail the decline in spending that occurs during a recession.
D) Services have become a larger fraction of GDP and goods have become a smaller fraction of GDP.

Question 39

Outline the phases of the business cycle,and explain why business cycles have generally become less severe in Australia since the 1950s.
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Question 40

What does the slope of the aggregate demand curve indicate?

A) That a decrease in the price level leads to a higher level of aggregate spending.
B) That a decrease in the price level leads to a higher level of aggregate supply.
C) That a decrease in the price level leads to a lower level of aggregate spending.
D) That an increase in the price level leads to a higher level of aggregate spending.

Question 41

What is the result of a decrease in the price level?

A) This will shift the aggregate demand curve to the left.
B) This will shift the aggregate demand curve to the right.
C) This will move the economy down along a stationary aggregate demand curve.
D) This will move the economy up along a stationary aggregate demand curve.

Question 42

Which of the following is one of the explanations as to why the aggregate demand curve slopes downward?

A) Increases in the price level lower the interest rate and decrease consumption spending.
B) Increases in the price level lower the interest rate and decrease investment spending.
C) Increases in Australia's price level relative to the price level in other countries lowers net exports.
D) Increases in the price level raise real wealth and lowers consumption spending.

Question 43

What is the result of an increase in the price level?

A) This will shift the aggregate demand curve to the left.
B) This will shift the aggregate demand curve to the right.
C) This will move the economy down along a stationary aggregate demand curve.
D) This will move the economy up along a stationary aggregate demand curve.

Question 44

When the price level in Australia rises relative to the price level of other countries,ceteris paribus,________ will rise,________ will fall,and ________ will fall.

A) imports; exports; net exports
B) exports; imports; net exports
C) net exports; exports; imports
D) net exports; imports; exports

Question 45

How does an increase in the price level in Australia relative to the price level of other countries affect the aggregate demand curve,ceteris paribus?

A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.

Question 46

The interest-rate effect is described as an increase in the price level which:

A) raises the interest rate, thereby reducing government spending.
B) lowers the interest rate, thereby reducing government spending.
C) raises the interest rate, thereby reducing investment and consumption spending.
D) lowers the interest rate, thereby reducing investment and consumption spending.

Question 47

How do changes in income tax policies affect aggregate demand?

A) Higher taxes increase disposable income, consumption and aggregate demand.
B) Higher taxes reduce disposable income, consumption and aggregate demand.
C) Higher taxes increase corporate investment and aggregate demand.
D) Higher taxes increase aggregate supply and thus increase aggregate demand as well.

Question 48

The Australian federal government lowered personal income taxes numerous times throughout the 2000s.Explain how this policy affected the aggregate demand curve.
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Question 49

List and explain the three reasons the aggregate demand curve slopes downward.
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Question 50

The aggregate demand curve shows the relationship between the price level and the quantity of real GDP demanded by households and firms,excluding government spending.

Question 51

Spending on the national defence force is categorised as government purchases.How do increases in spending on defence affect the aggregate demand curve?

A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.

Question 52

The international-trade effect states that,ceteris paribus,an increase in the price level will

A) increase net exports.
B) decrease net exports.
C) increase exports.
D) decrease imports.

Question 53

If the Australian dollar increases in value relative to other currencies,how does this affect the aggregate demand curve,ceteris paribus?

A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.

Question 54

The impact of a natural disaster on consumers in the economy can make them very pessimistic about their future incomes.How would an increase in pessimism affect the aggregate demand curve?

A) This will move the economy up along a stationary aggregate demand curve.
B) This will move the economy down along a stationary aggregate demand curve.
C) This will shift the aggregate demand curve to the left.
D) This will shift the aggregate demand curve to the right.

Question 55

An increase in disposable income will shift the aggregate demand curve to the right.

Question 56

The wide-spread recessions of 2007-2009 caused a reduction in German exports and reduction in net exports for Germany,shifting the German aggregate demand curve.Which of the following factors would also cause a reduction in Germany's net exports and shift Germany's aggregate demand curve?

A) Real GDP in Germany increasing faster than real GDP in other countries
B) A decrease in the exchange rate of the Euro relative to other currencies
C) A decrease in the price level in Germany
D) An increase in the price level in Germany

Question 57

If Australia's economic growth rate is slower relative to other countries' economic growth rates,this will

A) move the economy up along a stationary aggregate demand curve.
B) move the economy down along a stationary aggregate demand curve.
C) shift the aggregate demand curve to the left.
D) shift the aggregate demand curve to the right.

Question 58

The result of lower personal income taxes is

A) a decrease in aggregate demand.
B) a decrease in disposable income.
C) an increase in aggregate demand.
D) an increase in transfer payments.

Question 59

When the price level rises,the interest rate effect states that wealth levels fall for all consumers as they have to withdraw more funds from banks to pay for their goods and services.

Question 60

Which of the following will shift the aggregate demand curve to the left,ceteris paribus?

A) An increase in interest rates
B) An increase in disposable income
C) An increase in expected profits for firms
D) An increase in net exports

Question 61

What is the slope of the long-run aggregate supply curve?

A) Negative slope
B) Steep but positive slope
C) Vertical slope
D) Flat slope

Question 62

Which of the following is true of the short-run aggregate supply curve?

A) It has a negative slope
B) It has a vertical slope
C) It has a positive slope
D) It has a horizontal slope

Question 63

The distinction between the short-run and long-run aggregate supply curve is necessary because in the long run

A) technology is fixed, but in the short run it changes.
B) changes in the price level do not affect the level of real GDP but do in the short run.
C) the aggregate supply curve is horizontal, but in the short run it is upward sloping.
D) the price level is constant, but in the short run it fluctuates.

Question 64

If more workers leave Australia to seek out better opportunities in another country than new workers arriving into Australia,then this will

A) shift the short-run aggregate supply curve of Australia to the left.
B) shift the short-run aggregate supply curve of Australia to the right.
C) move the Australian economy up along a stationary short-run aggregate supply curve.
D) move the Australian economy down along a stationary short-run aggregate supply curve.

Question 65

What is another term for 'potential GDP'?

A) Realised GDP
B) Unemployment GDP
C) Full-employment GDP
D) Balanced-budget GDP

Question 66

What is the result if the economy receives an influx of new workers from immigration?

A) The long-run aggregate supply curve will shift to the left.
B) The long-run aggregate supply curve will shift to the right.
C) The economy will move up along the long-run aggregate supply curve.
D) The economy will move down along the long-run aggregate supply curve.

Question 67

During economic contractions,the Reserve Bank of Australia often reduces interest rates.Explain how this policy affects the aggregate demand curve.
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Question 68

Explain how each of the following events would affect the aggregate demand curve.
a.Lower interest rates
b.A decrease in net exports
c.A decrease in the price level
d.Slower income growth in other countries
e.A decrease in imports
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Question 69

Changes in the price level

A) increase the level of aggregate supply in the long run.
B) decrease the level of aggregate supply in the long run.
C) do not affect the level of aggregate supply in the long run.
D) increase the level of aggregate supply in the long run only at very high levels of output.

Question 70

What happens if technological change occurs in the economy?

A) The long-run aggregate supply curve will shift to the left.
B) The long-run aggregate supply curve will shift to the right.
C) The economy will move up along the long-run aggregate supply curve.
D) The economy will move down along the long-run aggregate supply curve.

Question 71

The short-run aggregate supply curve has a ________ slope because as prices of ________ rise,prices of ________ rise more slowly.

A) positive; final goods and services; inputs
B) vertical; final goods and services; inputs
C) positive; inputs; final goods and services
D) vertical; inputs; final goods and services

Question 72

What is the level of real GDP called in the long run?

A) Frictional GDP
B) Short-run GDP
C) Potential GDP
D) Low capacity GDP

Question 73

Which of the following is true of a long-run aggregate supply curve?

A) It is downward sloping when prices are falling and upward sloping when prices are rising.
B) It is upward sloping due to the effects of changes in the price level on production.
C) It is the same as the short-run aggregate supply curve at full-employment equilibrium.
D) It is vertical at the full employment level of output.

Question 74

Suppose a developing country receives more machinery and capital equipment as foreign entrepreneurs increase the amount of investment in the economy.As a result,the

A) long-run aggregate supply curve will shift to the right.
B) long-run aggregate supply curve will shift to the left.
C) economy will move up along the long-run aggregate supply curve.
D) economy will move down along the long-run aggregate supply curve.

Question 75

What effect does a change in expectations by households and firms have on the aggregate demand curve?
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Question 76

The level of long-run aggregate supply is not affected by changes in ________.

A) technology
B) the capital stock
C) the price level
D) the size of the labour force

Question 77

What is the result of an increase in the price level?

A) It will shift the short-run aggregate supply curve to the left.
B) It will shift the short-run aggregate supply curve to the right.
C) It will move the economy down along a stationary short-run aggregate supply curve.
D) It will move the economy up along a stationary short-run aggregate supply curve.

Question 78

If potential GDP is equal to $1 800 billion,what does the long-run aggregate supply curve look like?

A) It is a horizontal line at $1 800 billion of GDP.
B) It is a vertical line at $1 800 billion of GDP.
C) It is a vertical line at a level of GDP below $1800 billion GDP.
D) It is a vertical line at a level of GDP above $1800 billion.

Question 79

The long-run aggregate supply curve shows the relationship between the ________ and ________.

A) inflation rate; quantity of real GDP demanded
B) real interest rate; quantity of real GDP supplied
C) nominal interest rate; quantity of real GDP supplied
D) price level; quantity of real GDP supplied

Question 80

Which of the following is not a reason why the wages of workers and the prices of inputs rise more slowly than the prices of final goods and services?

A) Contracts make prices and wages 'sticky'.
B) Firms are often slow to adjust wages.
C) Menu costs make some prices sticky.
D) Unions are successful in pushing up wages.