Question 1

A shift of the AD-curve to the right could be caused by
A)a decrease in taxes
B)a decrease in government transfer payments
C)an increase in money demand
D)a decrease in defense spending
E)both A and C

Accepted Answer

A decrease in taxes increases disposable income, leading to higher consumption and investment, thus shifting the AD-curve to the right.

Question 2

In the classical supply curve case, monetary expansion will
A)increase P, lower i, and leave Y unchanged
B)increase Y, lower i, and leave P unchanged
C)leave Y and i unchanged but increase P
D)leave Y, i, and P unchanged
E)increase Y, i, and P

Accepted Answer

The answer of In the classical supply curve case, monetary...

Question 3

The AD-curve has a negative slope since
A)firms will produce less if they have to lower their prices
B)lower prices mean higher real wages so firms can no longer afford to produce as many goods and services
C)a decrease in the price level increases real money balances, leading to lower interest rates and increased spending
D)lower prices drive up the demand for goods since buyers fear future market shortages
E)lower prices increase consumer confidence, which encourages spending

Accepted Answer

A decrease in the price level increases real money balances, which typically leads to lower interest rates. Lower interest rates make borrowing cheaper, encouraging both consumers and businesses to spend more, which in turn increases the demand for goods and services. This mechanism explains why the aggregate demand (AD) curve has a negative slope: as the price level falls, the quantity of goods and services demanded increases.

Question 4

In an AD-AS diagram with an upward-sloping AS-curve, if a tax decrease is combined with money expansion,
A)output will remain relatively unaffected but interest rates will decrease
B)output will remain relatively unaffected but interest rates will definitely increase
C)aggregate demand, the price level, and output will all decrease
D)aggregate demand, the price level, and output will all increase
E)the price level will increase but we can't say what will happen to output or interest rates

Accepted Answer

A tax decrease and money expansion both serve to increase aggregate demand. In an AD-AS diagram, this shift in aggregate demand to the right results in a higher price level and increased output.

Question 5

Expansionary monetary policy will increase nominal GDP
A)in the Keynesian case
B)in the classical case
C)in the medium run
D)all of the above
E)only A and C

Accepted Answer

Expansionary monetary policy, which involves increasing the money supply and lowering interest rates, can increase nominal GDP in various economic frameworks and over different time horizons. This includes the Keynesian case, where increased spending leads to higher output and employment; the classical case, where it might primarily affect prices in the long run; and in the medium run, as the economy adjusts to new levels of spending and prices.

Question 6

Assume investment is very interest sensitive and wages always adjust immediately to maintain an equilibrium in the labor market.Which of the following would be most effective in significantly increasing the level of output?
A)expansionary fiscal policy
B)expansionary monetary policy
C)increased government spending accompanied by monetary expansion
D)an increase in government transfer payments
E)none of the above policies would succeed in significantly increasing the level of output

Accepted Answer

The answer of Assume investment is very interest sensitive and...

Question 7

If output is at its full-employment level, then
A)the actual unemployment rate is zero
B)the natural rate of unemployment is zero
C)there are no frictions in the labor market since wages have reached their market-clearing level
D)there is still some positive level of unemployment due to frictions in the labor market
E)nobody who is currently employed is looking for a new job

Accepted Answer

Even when output is at its full-employment level, there may still be some level of unemployment due to frictions in the labor market such as workers needing time to search for and match with new jobs, or structural mismatches between available jobs and the skills of the workforce. This level of unemployment is known as the natural rate of unemployment, which is typically not zero. Thus, choice D is the best answer. Choices A, B, and E are incorrect because they assume that the actual unemployment rate is zero or that there is no frictional unemployment at full employment, which is not always the case. Choice C is incorrect because the market-clearing level of wages does not necessarily eliminate all frictions in the labor market.

Question 8

An increase in aggregate demand can be caused by
A)an increase in government expenditures
B)an increase in nominal money supply
C)a decrease in taxes
D)an increase in business and consumer confidence
E)all of the above

Accepted Answer

An increase in government expenditures (A), an increase in nominal money supply (B), a decrease in taxes (C), and an increase in business and consumer confidence (D) all can lead to an increase in aggregate demand. Therefore, the best choice is E, which includes all of the options listed.

Question 9

In the medium run, if government purchases are decreased and nominal money supply is increased, then we can expect that
A)aggregate demand will decrease and aggregate supply will increase, leaving the level of output the same
B)output, prices, and interest rates will all increase
C)output and prices will decrease, while interest rates will increase
D)interest rates will decrease, while output and prices may increase, decrease, or remain the same
E)none of the above

Accepted Answer

Decreasing government purchases will decrease aggregate demand, while increasing nominal money supply will increase it. This will lead to a decrease in interest rates, but the effect on output and prices is ambiguous and depends on the relative magnitudes of the changes in demand and supply. Therefore, Choice D is the best option as it accounts for the change in interest rates and the ambiguous effect on output and prices.

Question 10

In an AD-AS diagram with an upward-sloping AS-curve, an increase in money supply will
A)increase output and the price level but not affect the interest rate
B)increase output, the price level, and the interest rate
C)increase output and the price level but lower the interest rate
D)decrease the interest rate, increase the price level, but leave output unchanged
E)increase the price level but leave output and the interest rate unchanged

Accepted Answer

In an upward-sloping AS-curve, an increase in money supply will shift the AD-curve to the right, leading to an increase in output and the price level. However, as the output level rises, the demand for loanable funds increases causing the interest rates to drop. Therefore, answer choice C is the correct option.

Question 11

In a normal AD-AS diagram with an upward-sloping AS-curve, if the government wanted to maintain a fixed level of output, it would need to respond to a decrease in money supply by
A)decreasing government expenditures
B)increasing government spending
C)urging the Fed to sell bonds in the open market
D)increasing income taxes
E)decreasing taxes and government spending by the same amount

Accepted Answer

A decrease in money supply would cause a leftward shift in the AD-curve, resulting in a decrease in output level. To maintain the output level fixed, the government would need to increase its spending to shift the AD-curve back to its original position.

Question 12

A decrease in nominal money supply will be reflected in
A)a shift of the AD-curve to the right
B)a shift of the AD-curve to the left
C)movement along the AD-curve from right to left
D)movement along the AD-curve from left to right
E)a shift of the AS-curve to the left

Accepted Answer

A decrease in nominal money supply will lead to a decrease in aggregate demand as individuals and firms will have less money to spend. This decrease in spending will lead to a leftward shift in the AD-curve. Therefore, the correct choice is B, a shift of the AD-curve to the left.

Question 13

To maintain a fixed level of aggregate demand, a central bank would have to respond to a tax increase by
A)increasing reserve requirements for banks
B)restricting money supply
C)buying bonds in the open market
D)selling bonds in the open market
E)both A and B

Accepted Answer

To maintain a fixed level of aggregate demand in the face of a tax increase, a central bank would likely buy bonds in the open market. This action, known as an open market purchase, injects money into the economy, lowering interest rates and stimulating borrowing and spending, which can help offset the contractionary effect of the tax increase.

Question 14

In which of the following cases is expansionary fiscal policy LEAST effective in increasing output?
A)if wages adjust rapidly to maintain equilibrium in the labor market
B)if wages do not change much even when there is high unemployment
C)if it is combined with expansionary monetary policy
D)if we have a Keynesian AS-curve
E)if the Fed is trying hard to keep interest rates from rising

Accepted Answer

If wages adjust rapidly to maintain equilibrium in the labor market, firms will not be willing to hire additional workers at higher wages caused by expansionary fiscal policy, which will make it less effective in increasing output.

Question 15

A shift of the AD-curve to the left can be caused by
A)a decrease in taxes
B)an increase in business and consumer confidence
C)an increase in nominal money supply
D)a decrease in government transfer payments
E)a decrease in money demand

Accepted Answer

A decrease in government transfer payments will reduce disposable income and lower consumption expenditure. This will lead to a decrease in aggregate demand and a shift of the AD-curve to the left. A decrease in taxes (choice A) would increase disposable income and consumption, thus shifting AD to the right. An increase in business and consumer confidence (choice B) would also increase consumption and investment, shifting AD to the right. An increase in nominal money supply (choice C) would lower interest rates and stimulate investment and consumption, also shifting AD to the right. Finally, a decrease in money demand (choice E) would lead to lower interest rates and higher investment, shifting AD to the right.

Question 16

Expansionary fiscal policy is very effective in significantly increasing the level of output
A)if the AS-curve is totally price inelastic
B)in the classical case
C)if the economy is close to full employment
D)if the economy is in a recession
E)both A and D

Accepted Answer

Expansionary fiscal policy is most effective when the economy is in a recession because there are idle resources and capacity that can be utilized to increase output without causing inflationary pressures. In contrast, expansionary fiscal policy may be less effective or even harmful if the economy is already at full employment, as it can lead to price increases or crowding out of private investment. Therefore, choice C is incorrect, and choice B is irrelevant since it refers to the classical model which assumes full employment in the long-run. Choice A is also incorrect because a totally price inelastic AS-curve implies that any increase in demand would be fully absorbed by higher prices rather than higher output. Choice E is partly correct, but only D captures the essential condition for the effectiveness of expansionary fiscal policy.

Question 17

When nominal money supply is held constant and the price level increases, then
A)real money balances increase and real interest rates decrease
B)real money balances decrease and real interest rates increase
C)real money balances decrease and real interest rates remain the same
D)the AS-curve must have shifted to the right
E)both B and D

Accepted Answer

The nominal money supply is held constant, meaning the quantity of money in the economy remains unchanged. As the price level increases, the value of each unit of currency decreases, reducing real money balances for individuals and firms. Real interest rates would then increase, as borrowers demand more compensation for the decrease in purchasing power of each dollar borrowed. Therefore, choice B is correct. Choice D is incorrect, as there is no information given about any shift in the AS-curve.

Question 18

An increase in government purchases will NOT increase the level of output if
A)the AS-curve is totally price elastic
B)the price level is fixed
C)wages and prices are completely rigid
D)wages and prices are completely flexible
E)real money balances are not affected

Accepted Answer

If wages and prices are completely flexible, any increase in government purchases will lead to an increase in the price level rather than the level of output, as the economy is already at full employment.

Question 19

If government purchases and taxes are both increased by the same lump sum, we can expect the following in the medium run:
A)output, prices, and interest rates will all remain unchanged
B)output, prices, and interest rates will all decrease
C)output, prices, and interest rates will all increase
D)output and prices will remain the same but interest rates will increase
E)output and prices will increase but interest rates will remain the same

Accepted Answer

In the medium run, an increase in government purchases increases aggregate demand, leading to higher output and prices. The increase in taxes offsets some of this effect, but typically not completely, resulting in higher interest rates due to increased demand for money.

Question 20

Fiscal policy will affect prices and interest rates but not the level of output if
A)the AD-curve is vertical
B)the AS-curve is vertical
C)the AD-curve is horizontal
D)the AS-curve is horizontal
E)both A)or D)

Accepted Answer

If the AS-curve is vertical, then changes in fiscal policy will only affect prices and interest rates, but not the level of output. This is because the vertical AS-curve indicates a fixed level of potential output that cannot be increased or decreased in response to changes in aggregate demand. Fiscal policy can only shift the AD-curve, leading to changes in prices and interest rates, but not output.

Quiz 5: Aggregate supply and demand

A shift of the AD-curve to the right could be caused by

In the classical supply curve case, monetary expansion will

The AD-curve has a negative slope since

In an AD-AS diagram with an upward-sloping AS-curve, if a tax decrease is combined with money expansion,

Expansionary monetary policy will increase nominal GDP

Assume investment is very interest sensitive and wages always adjust immediately to maintain an equilibrium in the labor market.Which of the following would be most effective in significantly increasing the level of output?

If output is at its full-employment level, then

An increase in aggregate demand can be caused by

In the medium run, if government purchases are decreased and nominal money supply is increased, then we can expect that

In an AD-AS diagram with an upward-sloping AS-curve, an increase in money supply will

In a normal AD-AS diagram with an upward-sloping AS-curve, if the government wanted to maintain a fixed level of output, it would need to respond to a decrease in money supply by

A decrease in nominal money supply will be reflected in

To maintain a fixed level of aggregate demand, a central bank would have to respond to a tax increase by

In which of the following cases is expansionary fiscal policy LEAST effective in increasing output?

A shift of the AD-curve to the left can be caused by

Expansionary fiscal policy is very effective in significantly increasing the level of output

When nominal money supply is held constant and the price level increases, then

An increase in government purchases will NOT increase the level of output if

If government purchases and taxes are both increased by the same lump sum, we can expect the following in the medium run:

Fiscal policy will affect prices and interest rates but not the level of output if