Question 1

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are known as:
A) sticky prices.
B) regulatory prices.
C) fixed prices.
D) market prices.

Accepted Answer

Sticky prices refer to prices that do not adjust quickly to changes in market conditions such as changes in supply and demand. This can lead to imbalances between quantity supplied and quantity demanded, which can result in surpluses or shortages. Sticky prices can be attributed to various factors such as contracts, regulations, and social norms.

Question 2

If the economy is in equilibrium at full employment, an increase in aggregate demand will:
A) increase the price level and leave the level of output unchanged in the short run.
B) decrease both the price level and the level of output in the short run.
C) decrease the price level and leave the level of output unchanged in the short run.
D) increase both the price level and the level of output in the short run.

Accepted Answer

If the economy is in equilibrium at full employment, there is no spare capacity, and any increase in aggregate demand will drive up prices in the short run. Firms will increase production to meet the higher demand, but since they can't hire more workers due to full employment, they will have to pay higher wages to retain employees. This increase in wages will increase costs, and firms will pass on some of these costs to consumers in the form of higher prices. Therefore, an increase in aggregate demand will increase both the price level and the level of output in the short run.

Question 3

In the short run, an increase in the price of a major input such as oil will:
A) decrease both the price level and the level of output.
B) decrease the price level and increase the level of output.
C) increase the price level and decrease the level of output.
D) increase the price level and increase the level of output.

Accepted Answer

An increase in the price of a major input such as oil will increase the cost of production for firms, leading to a decrease in the level of output. As a result of the decrease in the level of output, there will be a decrease in the supply of goods and services in the economy, leading to an increase in the price level. Hence, option C is correct.

Question 4

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions:
-According to the application, a recession caused by a decrease in aggregate demand occurred in:
A) 1973
B) 1929
C) 1979
D) All of the above were caused by a decrease in aggregate demand.

Accepted Answer

The Great Depression, which began in 1929, is a classic example of a recession caused by a significant decrease in aggregate demand.

Question 5

Figure 9.1 -Refer to Figure 9.1. When the price level rises and causes lower consumption expenditures, it is illustrated as: A) a move from Point A to Point B, but not a shift of the aggregate demand curve. B) an aggregate demand curve shift from AD₁to AD₂. C) a move from Point B to Point A, but not a shift of the aggregate demand curve. D) an aggregate demand curve shift from AD₁to AD₀.

Accepted Answer

The answer of  Figure 9.1
-Refer to Figure 9.1. When...

Question 6

Figure 9.1 -Refer to Figure 9.1. When the price level drops and causes a higher net exports, it is illustrated as: A) an aggregate demand curve shift from AD₁to AD₀. B) an aggregate demand curve shift from AD₁to AD₂. C) a move from Point A to Point B, but not a shift of the aggregate demand curve. D) a move from Point B to Point A, but not shift of the aggregate demand curve.

Accepted Answer

A drop in the price level leading to higher net exports results in a movement along the aggregate demand curve, not a shift.

Question 7

In the short- run, an increase in the money supply will cause output:
A) not to change.
B) to increase.
C) to fluctuate up and then down.
D) to decrease.

Accepted Answer

In the short-run, an increase in the money supply will likely lower interest rates, encouraging increased borrowing and spending, which will lead to an increase in output. This is known as the liquidity effect.

Question 8

The four components of the aggregate demand curve are the same as the:
A) components of market demand.
B) components of investment.
C) components of aggregate supply.
D) components of real GDP.

Accepted Answer

The four components of the aggregate demand curve are consumption, investment, government spending, and net exports, which are the same components used to calculate real GDP.

Question 9

A rightward shift in the aggregate demand curve can be caused by:
A) an increase in government spending.
B) an increase in the money supply.
C) a decrease in taxes.
D) all of the above

Accepted Answer

All of the choices can cause a rightward shift in the aggregate demand curve. An increase in government spending would increase aggregate demand directly. An increase in the money supply would lower interest rates and increase borrowing, leading to increased spending and therefore increased aggregate demand. A decrease in taxes would increase disposable income and therefore increase consumer spending, leading to increased aggregate demand.

Question 10

Explain the wealth effect on aggregate demand. Using the wealth effect, summarize how the GDP changes after an increase in the price level.

Accepted Answer

The answer of Explain the wealth effect on aggregate demand....

Question 11

Figure 9.2
-Refer to Figure 9.2. Suppose the economy is at Point A, a decrease in the price level causes a movement to Point:
A) E.
B) B.
C) D.
D) C.

Accepted Answer

A decrease in the price level causes a movement along the aggregate demand curve to the right. Therefore, the new equilibrium point will be on the same aggregate supply curve but at a higher level of output. Only Point C satisfies these conditions.

Question 12

Based on our understanding of the aggregate demand curve, we know that a(n) _______ in the price level causes the quantity of real GDP demanded to _______.
A) decrease; increase
B) decrease; decrease
C) decrease; remain unchanged
D) increase; increase

Accepted Answer

A decrease in the price level leads to an increase in the quantity of real GDP demanded because lower prices increase consumers' purchasing power, leading to higher consumption and investment.

Question 13

Using aggregate demand and aggregate supply curves, graphically illustrate the effect of an increase in government spending on the price level and equilibrium level of output in the long- run. Assume that the economy is initially in long- run equilibrium at full employment.

Accepted Answer

The answer of Using aggregate demand and aggregate supply curves,...

Question 14

The reason why an increase in government expenditure has a more than proportional impact on aggregate demand is known as:
A) the wealth effect.
B) the multiplier effect.
C) the interest rate effect.
D) the divider effect.

Accepted Answer

The multiplier effect suggests that an increase in government expenditure leads to an initial increase in aggregate demand, which then leads to an increase in income, spending, and production, resulting in a more than proportional impact on aggregate demand. This occurs as the initial increase in government spending leads to increased income and spending for individuals and businesses, who in turn spend more and increase economic activity, creating a cycle of further economic growth.

Question 15

Figure 9.1 -Refer to Figure 9.1. An increase in the money supply causes: A) the aggregate demand curve to shift from AD₁to AD₂. B) the aggregate demand curve to shift from AD₁to AD₀. C) the economy to move from Point A to Point B, but will not shift the aggregate demand curve. D) neither a shift of the aggregate demand curve nor a change in real GDP.

Accepted Answer

An increase in the money supply shifts the aggregate demand curve to the right, which is represented as a movement from ADS1U1B11S1U1B0S1U1B1 to ADS1U1B12S1U1B0, as shown in the graph. This leads to an increase in both real GDP and the price level.

Question 16

An increase in the money supply will cause:
A) output to increase in the short- run and return to the potential output in the long run.
B) output to decrease in the long run and return to potential output in the long run.
C) output to increase in the long run and in the short run.
D) output to decrease in the long run and in the short run.

Accepted Answer

An increase in the money supply can lead to an increase in aggregate demand, which can lead to an increase in output in the short run. However, in the long run, as prices adjust to the increase in money supply, production costs rise, and output returns to potential output. This is known as the short-run versus long-run trade-off of monetary policy. Therefore, option A is the best choice.

Question 17

When the general price level rises:
A) investment falls as a result of the consumption link effect.
B) consumption increases as a result of the multiplier effect.
C) investment rises as a result of the wealth effect.
D) consumption falls as a result of the wealth effect.

Accepted Answer

When the general price level rises, consumers' real incomes are reduced as they have to spend more to purchase the same quantity of goods and services. This reduction in the real income of consumers leads to a decrease in their purchasing power, which in turn leads to a decrease in consumption. This is known as the wealth effect. Therefore, choice D is the best answer.

Question 18

The aggregate demand curve that shows the _______ relationship between the price level and the quantity of real GDP demanded.
A) exponential
B) positive
C) linear
D) negative

Accepted Answer

The aggregate demand curve shows a negative relationship between the price level and the quantity of real GDP demanded because as the price level increases, the quantity of real GDP demanded decreases due to factors such as higher interest rates, increased costs of production, and lower consumer purchasing power.

Question 19

Define the aggregate demand curve. Explain the impact of an increase in the price level on the quantity of real GDP demanded.

Accepted Answer

The answer of Define the aggregate demand curve. Explain the...

Question 20

If the consumption function is C = 200 + 0.75Y and there is a $10 million increase in consumption spending, then the aggregate demand curve will shift horizontally to the right by:
A) $750 million.
B) $7.5 million.
C) $75 million.
D) $40 million.

Accepted Answer

To calculate the shift in the aggregate demand curve, we need to divide the increase in consumption spending ($10 million) by the marginal propensity to consume (0.75):

$10 million / 0.75 = $13.33 million

Therefore, the aggregate demand curve will shift rightward by $13.33 million. However, the question asks for a horizontal shift, which means we need to consider the initial level of aggregate demand.

At Y = $0, consumption is C = $200. That means initial aggregate demand is:

AD = C + I + G + (X-M) = $200 + I + G + (X-M)

If consumption increases by $10 million, then at Y = $0, aggregate demand increases by:

ΔAD = $10 million + ΔI + ΔG + Δ(X-M)

We assume no change in investment, government spending, or net exports, so:

ΔAD = $10 million

To calculate the horizontal shift, we need to find the level of output where the initial and new aggregate demand curves intersect.

At the initial level of output (Y), aggregate demand is:

AD = $200 + 0.75Y

At the new level of output (Y'), aggregate demand is:

AD' = $210 million + 0.75Y'

We set these two expressions equal to each other and solve for Y':

$200 + 0.75Y = $210 million + 0.75Y'

0.75Y' = 0.75Y + $10 million

Y' = Y + $13.33 million

Therefore, the horizontal shift is $13.33 million, or approximately $40 million (assuming Y is in billions of dollars).

Quiz 9: Aggregate Demand and Aggregate Supply

Prices that do not always adjust rapidly to maintain equality between quantity supplied and quantity demanded are known as:

If the economy is in equilibrium at full employment, an increase in aggregate demand will:

In the short run, an increase in the price of a major input such as oil will:

Recall Application 2, "Two Approaches to Determining the Causes of Recessions," to answer the following questions: -According to the application, a recession caused by a decrease in aggregate demand occurred in:

Figure 9.1 -Refer to Figure 9.1. When the price level rises and causes lower consumption expenditures, it is illustrated as:

Figure 9.1 -Refer to Figure 9.1. When the price level drops and causes a higher net exports, it is illustrated as:

In the short- run, an increase in the money supply will cause output:

The four components of the aggregate demand curve are the same as the:

A rightward shift in the aggregate demand curve can be caused by:

Explain the wealth effect on aggregate demand. Using the wealth effect, summarize how the GDP changes after an increase in the price level.

Figure 9.2 -Refer to Figure 9.2. Suppose the economy is at Point A, a decrease in the price level causes a movement to Point:

Based on our understanding of the aggregate demand curve, we know that a(n) _ in the price level causes the quantity of real GDP demanded to _.

Using aggregate demand and aggregate supply curves, graphically illustrate the effect of an increase in government spending on the price level and equilibrium level of output in the long- run. Assume that the economy is initially in long- run equilibrium at full employment.

The reason why an increase in government expenditure has a more than proportional impact on aggregate demand is known as:

Figure 9.1 -Refer to Figure 9.1. An increase in the money supply causes:

An increase in the money supply will cause:

When the general price level rises:

The aggregate demand curve that shows the _______ relationship between the price level and the quantity of real GDP demanded.

Define the aggregate demand curve. Explain the impact of an increase in the price level on the quantity of real GDP demanded.

If the consumption function is C = 200 + 0.75Y and there is a $10 million increase in consumption spending, then the aggregate demand curve will shift horizontally to the right by: