Question 1

In the long run, an increase in government spending tends to increase output and prices.

Accepted Answer

False

Question 2

The short run effect of an increase in aggregate demand is an increase in output and an increase in the price level.

Accepted Answer

An increase in aggregate demand will shift the aggregate demand curve to the right, causing an increase in both output and the price level in the short run. This is due to firms increasing production to meet the higher demand, which leads to higher prices due to a temporary shortage of inputs.

Question 3

If policy makers choose to try to move the economy out of a recession, they should use their policy tools to decrease aggregate demand.

Accepted Answer

If policy makers want to move the economy out of a recession, they should use their policy tools to increase aggregate demand, not decrease it. Decreasing aggregate demand would worsen the recession.

Question 4

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Accepted Answer

The answer of The misperceptions theory explains why the long...

Question 5

Most economists believe that money neutrality holds
A)in the short run but not the long run.
B)in the long run but not the short run.
C)in both the short run and the long run.
D)in neither the short run nor the long run.

Accepted Answer

Most economists believe that money neutrality holds in the long run, but not in the short run. In the short run, changes in the money supply can have a real impact on output and inflation. However, in the long run, changes in the money supply only affect nominal variables such as prices and do not have any real impact on the economy. This is known as the long-run neutrality of money.

Question 6

Investment is a particularly volatile component of spending across the business cycle.

Accepted Answer

Investment spending tends to fluctuate significantly based on changes in the overall economy and consumer confidence. Economic expansions often lead to increased investment, while recessions can result in decreased investment due to uncertainty and decreased profitability.

Question 7

If the classical dichotomy and monetary neutrality hold in the long run, then the long run aggregate supply curve should be vertical.

Accepted Answer

The classical dichotomy and monetary neutrality suggest that changes in the money supply do not have a long-term impact on real variables such as output or employment. Therefore, in the long run, the only factor determining the level of output is the economy's potential output or natural rate of unemployment. This implies that the long run aggregate supply curve is vertical, as it represents the economy's potential output level.

Question 8

Which of the following is most commonly used to monitor short run changes in economic activity?
A)The inflation rate.
B)Real GDP.
C)Aggregate demand.
D)Aggregate supply.

Accepted Answer

Real GDP is the most commonly used measure to monitor short run changes in economic activity. It gives a snapshot of the total economic output of a country and is frequently reported by governments and media outlets to gauge the health of the economy. The inflation rate, aggregate demand, and aggregate supply are also important economic indicators, but they are not as commonly used to monitor short run changes in activity as real GDP.

Question 9

A rise in price expectations that causes wages to rise causes the short run aggregate supply curve to shift to the left.

Accepted Answer

When price expectations rise and wages increase, firms' costs increase, which leads to a decrease in short-run aggregate supply due to higher production costs. Therefore, the short run aggregate supply curve shifts to the left.

Question 10

Which of the following is correct?
A)Short run fluctuations in economic activity happen only in developing countries.
B)During economic contractions most firms experience rising sales.
C)Recessions come at regular intervals and are easy to predict.
D)When real GDP falls, the rate of unemployment rises.

Accepted Answer

When real GDP falls, it means there is less economic activity, which potentially leads to firms cutting back on expenses and laying off workers. Therefore, the rate of unemployment rises during a recession. Option A is incorrect because short run fluctuations happen in all countries, not just developing countries. Option B is incorrect because firms generally experience a decline in sales during economic contractions, not a rise. Option C is incorrect because there is no fixed interval for recessions, and they are difficult to predict.

Question 11

Shifts in aggregate demand affect the price level in
A)the short run but not in the long run.
B)the long run but not in the short run.
C)both the short and long run.
D)neither the short nor long run.

Accepted Answer

Shifts in aggregate demand will affect the price level both in the short and long run. In the short run, an increase in aggregate demand will cause price levels to rise as firms try to increase production to meet higher demand. In the long run, however, an increase in aggregate demand will also lead to an increase in the quantity of goods and services supplied, which will eventually cause prices to stabilize. Alternatively, a decrease in aggregate demand in the short run will cause prices to decrease as firms try to reduce production to match lower demand, while in the long run, it will lead to a decrease in the quantity of goods and services supplied, eventually causing prices to stabilize. Therefore, shifts in aggregate demand can impact price levels both in the short and long run.

Question 12

An increase in price expectations shifts the long run aggregate supply curve to the left.

Accepted Answer

An increase in price expectations shifts the short run aggregate supply curve to the left, not the long run aggregate supply curve. In the long run, the economy adjusts to the new price level and the long run aggregate supply curve remains vertical.

Question 13

According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices
A)increase money holdings, decrease lending, interest rates rise, and investment spending falls.
B)increase the value of money holdings and consumer spending increases.
C)decrease the value of money holdings and consumer spending decreases.
D)reduce money holdings, increase lending, interest rates fall, and investment spending increases.

Accepted Answer

The answer of According to the interest rate effect, aggregate...

Question 14

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Accepted Answer

A decrease in the price level increases the purchasing power of money, which makes people feel wealthier and more confident to spend, leading to an increase in aggregate demand.

Question 15

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

Accepted Answer

Fluctuations in output may be regular but they are not always predictable, and can be affected by unpredictable events such as natural disasters, political crises, and technological innovations.

Question 16

According to classical macroeconomic theory, changes in the money supply affect
A)nominal variables and real variables.
B)nominal variables, but not real variables.
C)real variables, but not nominal variables.
D)neither nominal nor real variables.

Accepted Answer

According to classical macroeconomic theory, changes in the money supply affect only nominal variables, such as inflation and nominal interest rates, and do not affect real variables, such as output, employment, and real interest rates. This is because the classical model assumes that changes in the money supply only have short-run effects on the economy and that in the long run, prices and wages adjust to equate supply and demand for goods and labor, leaving real variables unchanged.

Question 17

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Accepted Answer

The misperceptions theory explains short-run aggregate supply curve, not the long-run aggregate supply curve. The downward slope of the long-run aggregate supply curve is due to changes in the economy's capital stock and labor force.

Question 18

Most economists believe that classical macroeconomic theory is a good description of the economy
A)in neither the short nor long run.
B)in the short run and in the long run.
C)in the short run, but not in the long run.
D)in the long run, but not in the short run.

Accepted Answer

Most economists believe that classical macroeconomic theory is a good description of the economy in the long run, where prices and wages have fully adjusted to changes in supply and demand. However, in the short run, there may be frictions that prevent prices and wages from adjusting quickly, and classical theory may not be an accurate description of the economy in this case.

Question 19

The classical dichotomy refers to the separation of
A)variables that move with the business cycle and variables that do not.
B)changes in money and changes in government expenditures.
C)decisions made by the public and decisions made by the government.
D)real and nominal variables.

Accepted Answer

The classical dichotomy refers to the separation of real and nominal variables in macroeconomics. Real variables are those that are adjusted for inflation, such as real GDP or real wages, while nominal variables are those that are not adjusted for inflation, such as nominal GDP or nominal interest rates. The classical dichotomy suggests that changes in nominal variables, such as the money supply, do not affect real variables, such as output or employment, in the long run.

Question 20

When we say that economic fluctuations are "irregular and unpredictable," we mean that
A)the relationship between output and unemployment is erratic and difficult to characterize.
B)when one macroeconomic variable that measures income or spending is falling, other macroeconomic variables that measure income or spending are likely to be rising.
C)recessions do not occur at regular intervals.
D)All of the above are correct.

Accepted Answer

The answer of When we say that economic fluctuations are...

Quiz 15: Aggregate Demand and Aggregate Supply

In the long run, an increase in government spending tends to increase output and prices.

The short run effect of an increase in aggregate demand is an increase in output and an increase in the price level.

If policy makers choose to try to move the economy out of a recession, they should use their policy tools to decrease aggregate demand.

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Most economists believe that money neutrality holds

Investment is a particularly volatile component of spending across the business cycle.

If the classical dichotomy and monetary neutrality hold in the long run, then the long run aggregate supply curve should be vertical.

Which of the following is most commonly used to monitor short run changes in economic activity?

A rise in price expectations that causes wages to rise causes the short run aggregate supply curve to shift to the left.

Which of the following is correct?

Shifts in aggregate demand affect the price level in

An increase in price expectations shifts the long run aggregate supply curve to the left.

According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

According to classical macroeconomic theory, changes in the money supply affect

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Most economists believe that classical macroeconomic theory is a good description of the economy

The classical dichotomy refers to the separation of

When we say that economic fluctuations are "irregular and unpredictable," we mean that