Question 1

The downward slope of the aggregate demand curve is based on logic that as the price level rises, consumption, investment, and net exports all fall.

Accepted Answer

The downward slope of the aggregate demand curve reflects the inverse relationship between the price level and the quantity of all goods and services demanded in an economy. As the price level rises, the real value of money decreases, leading to lower consumption, investment, and net exports, thus reducing overall demand.

Question 2

The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run.

Accepted Answer

There are multiple reasons for the upward slope of the short-run aggregate-supply curve, including not only sticky wages but also sticky prices, misperceptions about relative prices, and short-run adjustments in resource utilization.

Question 3

All explanations for the upward slope of the short-run aggregate supply curve suppose that the quantity of output supplied increases when the actual price level exceeds the expected price level.

Accepted Answer

The upward slope of the short-run aggregate supply curve is based on the idea that, when the actual price level is higher than what producers expected, they will increase production because they perceive the prices of their products to be rising relative to their costs, leading to higher profits.

Question 4

If speculators bid up the value of the dollar in the market for foreign-currency exchange, U.S. aggregate demand would shift to the left.

Accepted Answer

When speculators bid up the value of the dollar, it becomes stronger compared to other currencies. This makes U.S. goods more expensive for foreign buyers, reducing exports. At the same time, imports become cheaper for U.S. consumers, leading to a decrease in domestic production and a shift of the U.S. aggregate demand to the left.

Question 5

If not all prices adjust instantly to changing economic circumstances, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Accepted Answer

This statement describes a situation where prices are sticky downwards, meaning they do not adjust quickly to economic changes. When the general price level unexpectedly falls but some firms' prices do not adjust downward immediately, their products become relatively more expensive compared to the market. This discrepancy can lead to decreased sales for those firms, prompting them to reduce their production output to match the lower demand for their higher-priced goods.

Question 6

The effect of a change in the value of the dollar in the foreign exchange market due to a change in the price level helps explain the slope of aggregate demand, but does not shift it. The effects of a change in the value of the dollar in the foreign exchange market due to speculation is shown by shifting the aggregate demand curve.

Accepted Answer

The slope of the aggregate demand curve is influenced by the price level's effect on the value of the dollar in foreign exchange markets, which in turn affects net exports. However, shifts in the aggregate demand curve are caused by factors other than price level changes, such as changes in consumer confidence, fiscal policy, or speculation affecting the value of the dollar, which impact the overall demand for goods and services at all price levels.

Question 7

An increase in the actual price level does not shift the short-run aggregate supply curve, but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Accepted Answer

An increase in the actual price level affects the quantity of goods and services supplied in the short run but does not shift the short-run aggregate supply (SRAS) curve itself. However, if producers expect higher prices in the future, they might adjust their production plans, which can shift the SRAS curve to the left as they anticipate higher costs or demand higher prices for their products.

Question 8

Because the price level does not affect the long-run determinants of real GDP, the long-run aggregate-supply is vertical.

Accepted Answer

In the long run, the aggregate supply is considered vertical because real GDP is determined by factors such as capital, labor, and technology, rather than by the price level. This implies that changes in the price level do not affect the long-run output of the economy.

Question 9

The exchange-rate effect is the idea that a higher U.S. price level causes the value of the dollar to increase in foreign exchange markets, and this effect contributes to the downward slope of the aggregate-demand curve.

Accepted Answer

The answer of The exchange-rate effect is the idea that...

Question 10

Technological progress shifts the long-run aggregate supply curve to the right.

Accepted Answer

Technological progress increases the efficiency of production, allowing the economy to produce more goods and services with the same amount of resources, which shifts the long-run aggregate supply curve to the right, indicating an increase in potential output.

Question 11

An increase in the money supply causes the interest rate to fall, investment spending to rise, and aggregate demand to shift right.

Accepted Answer

An increase in the money supply typically lowers interest rates, making borrowing cheaper. This encourages more investment spending by businesses and consumers, which in turn increases aggregate demand, shifting its curve to the right.

Question 12

Increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Accepted Answer

Increased uncertainty and pessimism about the future economy make firms less inclined to invest in new projects or expansion, reducing the overall demand for goods and services, which is represented by a leftward shift in the aggregate-demand curve.

Question 13

When the price level rises unexpectedly, some businesses may mistake part of the increase for an increase in the price of their product relative to others and so decrease their production.

Accepted Answer

When the price level rises unexpectedly, businesses may mistakenly perceive it as an increase in demand for their product, leading them to increase production, not decrease it.

Question 14

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP can be caused by changes in both aggregate demand and aggregate supply, not just by changes in aggregate demand. Changes in aggregate supply, due to factors such as technological advancements or changes in input prices, can also affect the economy's output and price level.

Question 15

Other things the same, technological progress raises the price level.

Accepted Answer

Technological progress typically increases productivity, which can lead to lower production costs and potentially lower prices for consumers, not a higher price level.

Question 16

Aggregate demand shifts to the left if the money supply increases.

Accepted Answer

An increase in the money supply typically lowers interest rates, which can increase spending on investment and consumption, thereby shifting aggregate demand to the right.

Question 17

An increase in the money supply shifts the long-run aggregate supply curve to the right.

Accepted Answer

An increase in the money supply does not shift the long-run aggregate supply curve; it primarily affects the aggregate demand curve by increasing demand for goods and services, which can lead to higher prices in the short run but does not affect the economy's long-run productive capacity.

Question 18

An increase in the expected price level shifts the short-run aggregate supply curve to the right.

Accepted Answer

An increase in the expected price level actually shifts the short-run aggregate supply curve to the left, as producers require higher prices to cover their increased expectations of costs.

Question 19

We can explain continued increases in both output and the price level by supposing that only aggregate demand shifted right over time.

Accepted Answer

While a rightward shift in aggregate demand can explain an increase in both output and the price level in the short run, over time, increases in the price level with continued output growth would likely also require shifts in aggregate supply to sustain the growth without leading to excessive inflation.

Question 20

A decrease in the money supply causes the interest rate to rise so that investment falls.

Accepted Answer

A decrease in the money supply typically leads to higher interest rates as there is less money available for borrowing. Higher interest rates make borrowing more expensive, which can lead to a decrease in investment since businesses and individuals are less likely to take out loans for investment purposes when it costs more to do so.

Quiz 33: Aggregate Demand and Aggregate Supply