Question 1

Pessimism about the future leads to falling prices and rising unemployment.

Accepted Answer

When individuals and businesses are pessimistic about the future, they tend to cut back on spending and investment, leading to decreased demand for goods and services. This can cause a decrease in prices as businesses try to attract customers, and may ultimately result in unemployment as businesses respond to lower demand by reducing their workforce.

Question 2

Increased output and prices in Canada in the early 1940s was mostly the result of increased government expenditures.

Accepted Answer

The Canadian government significantly increased its expenditures during World War II, which led to increased economic activity, production, and prices.

Question 3

Because not all prices adjust instantly to changing conditions,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 is known as the sticky price phenomenon and it can lead to a decrease in aggregate demand and output in the short run.

Question 4

When all prices rise together,there is no change in the overall quantity of goods and services supplied.

Accepted Answer

This is because the overall quantity of goods and services supplied depends on factors such as technology, resources, and production capacity, which are independent of the price level. Therefore, if all prices rise together, it does not affect the overall quantity of goods and services supplied.

Question 5

The explanations for the downward slope of the aggregate demand curve say that as the price level rises,consumption,investment,and net exports all fall.

Accepted Answer

This is a correct explanation for the downward slope of the aggregate demand curve. As the price level increases, consumers tend to spend less, businesses invest less, and exports tend to decline, all of which lead to a decrease in aggregate demand.

Question 6

In response to a decrease in output,the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply.

Accepted Answer

The economy would not necessarily revert to its original level of prices and output in response to a decrease in output caused by a decrease in aggregate demand or aggregate supply. The specific factors causing the decrease in output would need to be addressed in order to bring the economy back to its original level.

Question 7

We could explain continued increases in both output and the price level by supposing that only long-run aggregate supply shifted right over time.

Accepted Answer

If only the long-run aggregate supply shifted right over time, we would expect to see increases in output without significant increases in price level due to the natural rate of unemployment being unchanged in the long-run. Therefore, continued increases in both output and price level would suggest that aggregate demand has also shifted right.

Question 8

Economists mostly agree that the Great Depression was the result of a very large adverse supply shock.

Accepted Answer

While there is debate among economists about the causes of the Great Depression, many attribute it to a combination of factors including a stock market crash, monetary policy failures, and a decrease in consumer spending. Few economists would argue that it was solely the result of a large adverse supply shock.

Question 9

A decrease in the price level makes consumers feel wealthier,so they purchase more.This logic helps explain why the aggregate demand curve slopes downward.

Accepted Answer

This is because when prices decrease, consumers can buy more goods and services with the same amount of money, which increases their purchasing power and makes them feel wealthier. As a result, they are likely to increase their spending, which leads to an increase in aggregate demand.

Question 10

Increased uncertainty and pessimism about the future of the economy decreases investment spending,shifting aggregate demand to the left.

Accepted Answer

Increased uncertainty and pessimism about the future of the economy leads to a decrease in investment spending, which in turn leads to a decrease in aggregate demand, shifting it to the left.

Question 11

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 both changes in aggregate demand and changes in aggregate supply. For example, an increase in productivity or a decrease in input costs could increase aggregate supply and lead to an increase in real GDP even if aggregate demand remains constant. Similarly, a decrease in productivity or an increase in input costs could decrease aggregate supply and lead to a decrease in real GDP even if aggregate demand remains constant.

Question 12

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

Accepted Answer

A decrease in the money supply causes the interest rate to rise, but this typically leads to a decrease in investment because higher interest rates make borrowing more expensive.

Question 13

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

Accepted Answer

Technological progress increases productivity and efficiency in the economy, leading to an increase in potential output and shifting the long-run aggregate supply curve to the right.

Question 14

Other things the same,a decrease in the price level makes the interest rate increase,which leads to an appreciation of the dollar in the foreign-currency exchange.

Accepted Answer

A decrease in the price level leads to a decrease in the interest rate, which leads to a depreciation of the dollar in the foreign-currency exchange.

Question 15

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

Accepted Answer

A decrease in the money supply leads to higher interest rates, which in turn reduces consumer and business spending, leading to a decrease in aggregate demand.

Question 16

If speculators bid up the value of the dollar in the market for foreign-currency exchange,aggregate demand will 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 to foreign buyers and foreign goods cheaper to U.S. consumers, reducing exports and increasing imports. Consequently, this decreases the aggregate demand as net exports are a component of it, leading to a leftward shift in the aggregate demand curve.

Question 17

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

Accepted Answer

An unexpected increase in the price level affects the short-run aggregate supply because producers might temporarily increase production due to higher prices, but it doesn't shift the curve itself. An expected increase in the price level can lead to a leftward shift in the aggregate-supply curve as producers anticipate higher costs and might reduce the quantity supplied at every price level.

Question 18

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

Accepted Answer

The upward slope of the short-run aggregate-supply curve is due to the assumption that firms will increase output when the price level increases more than expected, due to nominal wages and other input prices being sticky in the short-run.

Question 19

The explanations for the slopes of the aggregate-demand and aggregate-supply curves are the same as the explanations for the slope of demand and supply curves for specific goods and services.

Accepted Answer

The slopes of the aggregate-demand and aggregate-supply curves are based on different underlying principles than those for individual goods and services. The aggregate-demand curve slopes downward in part because of the wealth effect, interest-rate effect, and exchange-rate effect, which do not apply to individual market demand curves. The aggregate-supply curve, especially in the short run, reflects how quantities supplied at the aggregate level respond to price levels, incorporating factors like nominal wage stickiness and menu costs, which are not considerations in the supply curves for specific goods and services.

Question 20

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

Accepted Answer

The long-run aggregate supply curve is vertical and does not shift based on changes in the money supply.

Quiz 14: Aggregate Demand and Aggregate Supply