Question 1

The real balances effect predicts that higher prices:
A)make people worse off by reducing the value of their wealth, leading them to save more and spend less.
B)make people worse off by reducing the value of their wealth, leading them to save less and spend more.
C)make people better off by increasing the value of their wealth, leading them to save less and spend more.
D)increase borrowing, leading to higher interest rates and less investment.
E)make domestic goods relatively more expensive, increasing the demand for domestic goods and decreasing the demand for foreign goods.

Accepted Answer

The answer of The real balances effect predicts that higher...

Question 2

The real balances effect is the impact on real GDP caused by the ____ relationship between the price level and the real value of financial assets.
A)direct
B)inverse
C)independent
D)linear

Accepted Answer

The real balances effect operates through changes in the purchasing power of money balances. Specifically, if the price level increases, the real value of money balances (i.e. their purchasing power) falls. This in turn reduces the amount of goods and services that can be purchased with a given level of money balances, leading to a decrease in real GDP. This relationship is inverse, meaning that as the price level goes up, real GDP goes down. Therefore, the best choice is B - inverse.

Question 3

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:
A)real balances effect.
B)interest-rate effect.
C)net exports effect.
D)substitution effect.

Accepted Answer

This argument is called the interest-rate effect. A higher price level causes an increase in the interest rate, which reduces the quantity of credit demanded. As a result, consumption and investment spending decrease, leading to a decrease in aggregate demand.

Question 4

According to the interest rate effect, as the price level:
A)rises, people feel poorer and buy less.
B)rises, United States products become more expensive and foreigners buy less U.S. goods.
C)rises, interest rates fall, and people buy less.
D)rises, interest rates rise, and people buy less.
E)falls, interest rates fall, and people buy less.

Accepted Answer

According to the interest rate effect, as the price level rises, interest rates rise, and people buy less. This is because the higher price level leads to an increase in demand for money, which then causes interest rates to rise. As interest rates rise, borrowing and spending become more expensive, causing people to buy less.

Question 5

The net exports effect is the inverse relationship between net exports and the ____ of an economy.
A)potential real GDP
B)chain-price deflator
C)price level
D)consumption spending

Accepted Answer

The net exports effect arises from an increase in price levels leading to a decrease in net exports, as higher domestic prices make exports relatively more expensive and imports relatively less expensive. As net exports decrease, this leads to a decrease in aggregate demand and a potential decrease in the overall output of the economy, which is measured by real GDP. However, the potential real GDP is not directly affected by net exports, making choice A incorrect. The chain-price deflator is a measure of inflation and is not directly related to net exports, making choice B incorrect. Consumption spending is not directly affected by net exports, making choice D incorrect.

Question 6

The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption is known as the:
A)real balances effect.
B)interest rate effect.
C)foreign purchases effect.
D)income effect.
E)aggregate demand effect.

Accepted Answer

The real balances effect states that when prices rise, the purchasing power of money decreases, leading to a decrease in consumption. This is because higher prices erode the real value of financial assets, such as bank deposits or bonds, making people feel poorer and reducing their willingness to spend.

Question 7

Which of the following correctly describes the interest-rate effect?
A)If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
B)If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
C)If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
D)If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.

Accepted Answer

The interest-rate effect suggests that a lower price level increases consumer purchasing power, which reduces the demand for credit, leading to lower interest rates. This, in turn, encourages more debt-financed borrowing, increasing the quantity of real GDP demanded.

Question 8

The net exports effect exists because a:
A)higher price level will reduce interest rates and stimulate foreign investment.
B)lower price level will make domestically produced exports less expensive relative to foreign goods.
C)higher price level will reduce the purchasing power of money.
D)lower price level will encourage Americans to import more foreign goods.

Accepted Answer

The net exports effect describes how changes in the price level affect a country's exports and imports. As the price level decreases, domestic goods become relatively cheaper compared to foreign goods, making them more attractive to foreign buyers. This leads to an increase in exports, which contributes positively to a country's net exports. Therefore, the correct answer is B since a lower price level will make domestically produced exports less expensive relative to foreign goods.

Question 9

The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the:
A)price level.
B)exports.
C)consumption.
D)investment.

Accepted Answer

The answer of The interest-rate effect is the impact on...

Question 10

In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate demand curve to shift outwards, which of the following is most likely to occur?
A)The price level and real GDP will both rise.
B)The price level will not change, but real GDP will increase.
C)The price level will rise, but real GDP will not change.
D)Both the price level and real GDP will not change.

Accepted Answer

In the intermediate range of the aggregate supply curve, there is still some excess capacity in the economy, so an increase in government spending would lead to an increase in both the price level and real GDP. This is because there is still room for firms to increase their output without experiencing significant cost pressures.

Question 11

According to the net exports effect, as the price level falls relative to the rest of the world,
A)foreigners buy fewer goods.
B)foreigners buy more U.S. goods.
C)the aggregate demand curve shifts to the left.
D)the aggregate demand curve shifts to the right.
E)the supply of U.S.-made goods increases.

Accepted Answer

The net exports effect states that as the domestic price level falls relative to other countries, U.S. goods become relatively cheaper and more attractive to foreign consumers. This leads to an increase in exports and a decrease in imports, thus increasing net exports and shifting the aggregate demand curve to the right. Therefore, foreigners buy more U.S. goods as the price level falls relative to the rest of the world.

Question 12

The negative slope of the aggregate demand curve is caused by:
A)the real balances effect, the interest rate effect, and the price level effect.
B)the real balances effect, the money supply effect, and the net exports effect.
C)the interest rate effect, the net exports effect, and the real GDP effect.
D)the real balances effect, the interest rate effect, and the net exports effect.
E)the real balances effect, the interest rate effect, and the net export effect.

Accepted Answer

The negative slope of the aggregate demand curve is caused by the real balances effect, the interest rate effect, and the net exports effect. The real balances effect suggests that as the price level increases, the purchasing power of individuals' wealth decreases, reducing their real money balances and ultimately decreasing their consumption spending. The interest rate effect suggests that as the price level increases, there is an increased demand for money, which drives up interest rates and ultimately decreases investment spending. Finally, the net exports effect suggests that as the price level increases, domestic goods become relatively more expensive, reducing net exports and ultimately decreasing aggregate demand.

Question 13

Which of the following will most likely increase aggregate demand?
A)A decrease in stock market prices.
B)An increase in business investment spending.
C)A decrease in the expected inflation rate.
D)A decrease in real GDP.

Accepted Answer

An increase in business investment spending will increase aggregate demand as businesses spend more money on goods and services, creating a ripple effect throughout the broader economy. A decrease in stock market prices will likely decrease aggregate demand, as people may feel less wealthy and therefore reduce their spending. A decrease in the expected inflation rate may not have a significant impact on aggregate demand, as it does not directly affect people's incomes or spending decisions. A decrease in real GDP will also decrease aggregate demand, as people have less money to spend on goods and services.

Question 14

The interest rate effect predicts that higher prices:
A)make it more expensive to borrow, leading to higher interest rates and less investment.
B)make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C)decrease borrowing, leading to higher interest rates and less investment.
D)decrease borrowing, leading to lower interest rates and more investment.
E)increase borrowing, leading to higher interest rates and less investment.

Accepted Answer

The answer of The interest rate effect predicts that higher...

Question 15

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:
A)interest-rate effect.
B)real balance effect.
C)investment effect.
D)disinvestment effect.

Accepted Answer

The answer of When prices rise, consumers and businesses hold...

Question 16

The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and the interest rate.
A)direct
B)independent
C)linear
D)inverse

Accepted Answer

The answer of The interest-rate effect is the impact on...

Question 17

The real balances effect occurs because a higher price level will reduce the real value of people's:
A)financial assets.
B)wages.
C)unpaid debt.
D)physical investments.

Accepted Answer

The real balances effect occurs because a higher price level reduces the purchasing power of people's financial assets (such as savings, bonds, etc.) since the nominal value of these assets remains constant but their real value decreases. This causes a decrease in consumption and a shift towards saving, which reduces aggregate demand.

Question 18

The aggregate demand curve is downward sloping because:
A)an increase in the price level will cause an increase in spending.
B)at lower price levels, real wealth decreases, causing a decrease in the quantities of goods and services demanded.
C)at lower price levels, interest rates decrease, causing a decrease in the quantities of goods and services demanded.
D)at lower price levels, exports increase, causing an increase in real GDP.
E)increases in the price level do not affect people's real wealth.

Accepted Answer

The answer of The aggregate demand curve is downward sloping...

Question 19

The net exports effect is the ____ relationship between net exports and the price level of an economy.
A)inverse
B)independent
C)direct
D)linear

Accepted Answer

The net exports effect is an inverse relationship between net exports and the price level of an economy. As the price level increases, exports become relatively more expensive, reducing the quantity of exports demanded by foreign consumers, and imports become relatively cheaper, increasing the quantity of imports demanded by domestic consumers. This leads to a decrease in net exports, which in turn leads to a decrease in aggregate demand and a lower price level.

Question 20

Suppose the price level falls. The result is that the:
A)aggregate supply curve would shift to the right.
B)aggregate supply curve would shift to the left.
C)general price level would rise causing a movement up the aggregate demand curve.
D)aggregate demand curve would slope downward because of the real balances effect.

Accepted Answer

When the price level falls, the real value of money increases, which means consumers have more purchasing power. This leads to an increase in consumption and shifts the aggregate demand curve to the right, not the aggregate supply curve. The downward slope of the aggregate demand curve is partly due to the real balances effect, which is the increase in consumption and investment spending that results from the increase in the real value of money balances when the price level falls.

Quiz 10: Aggregate Demand and Supply

The real balances effect predicts that higher prices:

The real balances effect is the impact on real GDP caused by the ____ relationship between the price level and the real value of financial assets.

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:

According to the interest rate effect, as the price level:

The net exports effect is the inverse relationship between net exports and the ____ of an economy.

The idea that higher prices reduce the purchasing power of financial assets and lead to less consumption is known as the:

Which of the following correctly describes the interest-rate effect?

The net exports effect exists because a:

The interest-rate effect is the impact on real GDP caused by the direct relationship between the interest rate and the:

In the intermediate range of the aggregate supply curve, if government spending increases caused the aggregate demand curve to shift outwards, which of the following is most likely to occur?

According to the net exports effect, as the price level falls relative to the rest of the world,

The negative slope of the aggregate demand curve is caused by:

Which of the following will most likely increase aggregate demand?

The interest rate effect predicts that higher prices:

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:

The interest-rate effect is the impact on real GDP caused by the ____ relationship between the price level and the interest rate.

The real balances effect occurs because a higher price level will reduce the real value of people's:

The aggregate demand curve is downward sloping because:

The net exports effect is the ____ relationship between net exports and the price level of an economy.

Suppose the price level falls. The result is that the: