Question 1

During recessions investment
A)falls by a larger percentage than GDP.
B)falls by about the same percentage as GDP.
C)falls by a smaller percentage than GDP.
D)falls but the percentage change is sometimes much larger and sometimes much smaller.

Accepted Answer

A

Question 2

The classical model is appropriate for analysis of the economy in the
A)long run,since evidence indicates that money is not neutral in the long run.
B)long run,since real and nominal variables are essentially determined separately in the long run.
C)short run,provided money is not neutral.
D)short run,provided real and nominal variables are highly intertwined.

Accepted Answer

The classical model assumes that real and nominal variables are essentially determined separately in the long run, which makes it appropriate for the analysis of the economy in the long run. This is because in the long run, changes in the supply of money will only affect nominal variables, such as prices and wages, but not real variables, such as output and employment. In other words, the classical model assumes that money is neutral in the long run.

Question 3

Which of the following explains why production rises in most years?
A)increases in the labor force
B)increases in the capital stock
C)advances in technological knowledge
D)All of the above are correct.

Accepted Answer

All three factors - increases in the labor force, increases in the capital stock, and advances in technological knowledge - contribute to rising production in most years. As the labor force grows, there are more workers available to produce goods and services. Increases in the capital stock, such as new machinery or equipment, can increase productivity and output per worker. Advancements in technology can also lead to more efficient production methods, reducing costs and increasing output.

Question 4

The aggregate quantity of goods and services demanded changes as the price level rises because
A)real wealth falls,interest rates rise,and the dollar appreciates.
B)real wealth falls,interest rates rise,and the dollar depreciates.
C)real wealth rises,interest rates fall,and the dollar appreciates.
D)real wealth rises,interest rates fall,and the dollar depreciates.

Accepted Answer

When the price level rises, the purchasing power of people's wealth falls, leading to a decrease in real wealth. As a result, people tend to reduce their consumption, lowering the aggregate demand for goods and services. This decline in demand leads to an increase in interest rates and a strengthened dollar, as the demand for money rises. Therefore, option A is the correct choice.

Question 5

The aggregate-demand curve
A)has a slope that is explained in the same way as the slope of the demand curve for a particular product.
B)is vertical in the long run.
C)shows an inverse relation between the price level and the quantity of all goods and services demanded.
D)All of the above are correct.

Accepted Answer

The aggregate-demand curve shows an inverse relationship between the price level and the quantity of all goods and services demanded. This is because as the overall price level in the economy increases, people can afford to buy less, reducing the aggregate demand for goods and services. In the long run, the aggregate-demand curve will be vertical because changes in the price level do not affect the quantity of output supplied, so any change in aggregate demand will only result in a change in the price level. The slope of the aggregate-demand curve is not explained in the same way as the slope of the demand curve for a particular product since it takes into account all goods and services in the economy.

Question 6

Which of the following effects helps to explain the slope of the aggregate-demand curve?
A)the exchange-rate effect
B)the wealth effect
C)the interest-rate effect
D)All of the above are correct.

Accepted Answer

All of the effects listed - the exchange-rate effect, the wealth effect, and the interest-rate effect - help explain the slope of the aggregate-demand curve. The exchange-rate effect states that as prices in the domestic economy rise relative to prices in other countries, exports become more expensive and imports become cheaper, leading to a decrease in net exports and a decrease in aggregate demand. The wealth effect states that as the price level rises, the real value of households' wealth decreases, leading to a decrease in consumption spending and a decrease in aggregate demand. The interest-rate effect states that as the price level rises, the demand for money increases, causing interest rates to rise, which in turn lowers investment spending and consumption spending, leading to a decrease in aggregate demand. Together, these effects help to explain why the aggregate-demand curve slopes downward from left to right.

Question 7

Other things the same,if the price level falls,people
A)increase foreign bond purchases,so the currency appreciates.
B)increase foreign bond purchases,so the currency depreciates.
C)increase domestic bond purchases,so the currency appreciates.
D)increase domestic bond purchases,so the currency depreciates.

Accepted Answer

The answer of Other things the same,if the price level...

Question 8

Most economists use the aggregate demand and aggregate supply model primarily to analyze
A)short-run fluctuations in the economy.
B)the effects of macroeconomic policy on the prices of individual goods.
C)the long-run effects of international trade policies.
D)productivity and economic growth.

Accepted Answer

The aggregate demand and aggregate supply model is primarily used by economists to analyze short-run fluctuations in the economy, such as business cycles and recessions. This model helps to explain how changes in aggregate demand (i.e. total spending by households, businesses, and government) and aggregate supply (i.e. total output of goods and services) can affect the level of output, employment, and prices in the economy over the short run.

Question 9

Other things the same,a fall in an economy's overall level of prices tends to
A)raise both the quantity demanded and supplied of goods and services.
B)raise the quantity demanded of goods and services,but lower the quantity supplied.
C)lower the quantity demanded of goods and services,but raise the quantity supplied.
D)lower both the quantity demanded and the quantity supplied of goods and services.

Accepted Answer

The answer of Other things the same,a fall in an...

Question 10

If the price level falls,the real value of the currency
A)rises,so people will want to buy more.This response helps explain the slope of the aggregate demand curve.
B)rises,so people will want to buy more.This response shifts aggregate demand to the right.
C)falls,so people will want to buy less.This response helps explain the slope of the aggregate demand curve.
D)falls,so people will want to buy less.This response shifts aggregate demand to the left.

Accepted Answer

If the price level falls, the purchasing power of currency increases, which means that people can now buy more goods and services with the same amount of currency. This leads to an increase in the real value of the currency, making people want to buy more. This helps to explain the downward slope of the aggregate demand curve, as a lower price level will lead to a higher quantity demanded due to increased real income and purchasing power.

Question 11

The aggregate demand and aggregate supply graph has
A)quantity of output on the horizontal axis.Output can be measured by the GDP deflator.
B)quantity of output on the horizontal axis.Output can be measured by real GDP.
C)quantity of output on the vertical axis.Output can be measured by the GDP deflator.
D)quantity of output on the vertical axis.Output can be measured by real GDP.

Accepted Answer

The aggregate demand and aggregate supply graph typically has the quantity of output on the horizontal axis, which is measured by real GDP. This is because real GDP represents the total amount of goods and services produced in an economy, and it is commonly used as a measure of output. The vertical axis usually represents the price level, which is measured by the GDP deflator or another price index. Therefore, choice B is the best answer as it corresponds to this standard format for the aggregate demand and aggregate supply graph.

Question 12

In the context of aggregate demand and aggregate supply,the wealth effect refers to the idea that,when the price level decreases,the real wealth of households
A)increases and as a result consumption spending increases.This effect contributes to the downward slope of the aggregate-demand curve.
B)decreases and as a result consumption spending increases.This effect contributes to the upward slope of the aggregate-supply curve.
C)increases and as a result households increase their money holdings; in turn,interest rates increase and investment spending decreases.This effect contributes to the downward slope of the aggregate-demand curve.
D)decreases and as a result households increase their money holdings; in turn,interest rates increase and investment spending decreases.This effect contributes to the upward slope of the aggregate-supply curve.

Accepted Answer

The wealth effect refers to the idea that when the price level decreases, the real wealth of households increases, as the purchasing power of their assets increases. This, in turn, leads to an increase in consumption spending, as households feel richer and are more willing to spend. This effect contributes to the downward slope of the aggregate demand curve, as a lower price level leads to a higher level of real output demanded.

Question 13

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

Accepted Answer

The answer of According to classical macroeconomic theory,changes in the...

Question 14

Other things the same,if the price level rises,then domestic interest rates
A)rise,so domestic residents will want to hold more foreign bonds.
B)rise,so domestic residents will want to hold fewer foreign bonds.
C)fall,so domestic residents will want to hold more foreign bonds.
D)fall,so domestic residents will want to hold fewer foreign bonds.

Accepted Answer

The answer of Other things the same,if the price level...

Question 15

Which of the following is correct?
A)Real GDP is the variable most commonly used to measure short-run economic fluctuations.These fluctuations can be predicted with some accuracy.
B)Real GDP is the variable most commonly used to measure short-run economic fluctuations.It is almost impossible to predict these fluctuations with much accuracy.
C)Nominal GDP is the variable most commonly used to measure short-run economic fluctuations.These fluctuations can be predicted with some accuracy.
D)Nominal GDP is the variable most commonly used to measure short-run economic fluctuations.It is almost impossible to predict these fluctuations with much accuracy.

Accepted Answer

Real GDP is the variable most commonly used to measure short-run economic fluctuations, and it is difficult to predict these fluctuations with much accuracy. Nominal GDP, on the other hand, does not take into account inflation and is therefore less useful for measuring economic fluctuations.

Question 16

Which of the following accounts for about two-thirds of the decline in output during a recession?
A)the decline in consumption expenditures on consumer durables alone
B)the decline in total consumption spending alone
C)the decline in investment spending alone
D)the combined decline in consumption and investment spending

Accepted Answer

The answer of Which of the following accounts for about...

Question 17

The model of aggregate demand and aggregate supply
A)is different from the model of supply and demand for a particular market,in that we cannot focus on the substitution of resources between markets to explain aggregate relationships.
B)is different from the model of supply and demand for a particular market,in that we have to separate real and nominal variables in the aggregate model.
C)is a straightforward extension of the model of supply and demand for a particular market,in which substitution of resources between markets is highlighted.
D)is a straightforward extension of the model of supply and demand for a particular market,in which the interaction between real and nominal variables is highlighted.

Accepted Answer

The answer of The model of aggregate demand and aggregate...

Question 18

Which of the following decreases in response to the interest-rate effect from an increase in the price level?
A)both investment and consumption
B)consumption but not investment
C)investment but not consumption
D)neither investment nor consumption

Accepted Answer

According to the interest-rate effect, an increase in the price level leads to an increase in the interest rate. This increase in interest rate leads to a decrease in investment since it becomes more expensive for firms to borrow and invest. Additionally, higher interest rates also decrease disposable income, leading to a decrease in consumption. Therefore, both investment and consumption decrease in response to the interest-rate effect from an increase in the price level.

Question 19

As the price level falls
A)people are more willing to lend,so interest rates rise.
B)people are more willing to lend,so interest rates fall.
C)people are less willing to lend,so interest rates fall.
D)people are less willing to lend,so interest rates rise.

Accepted Answer

When the price level falls, the purchasing power of money increases. This means that people may be more willing to lend money because they can buy more with the same amount of money they would receive back. As a result, the demand for loans increases and interest rates fall.

Question 20

The quantity of aggregate goods and service demanded rises when the
A)price level rises,because the interest rate rises.
B)price level rises,because the interest rate falls.
C)price level falls,because the interest rate rises.
D)price level falls,because the interest rate falls.

Accepted Answer

The quantity of aggregate goods and service demanded rises when the price level falls, because the interest rate falls. This is because lower interest rates make it cheaper to borrow money, leading to increased consumer and investment spending. As a result, aggregate demand increases, leading to a higher quantity of goods and services demanded.

Quiz 34: Aggregate Demand and Aggregate Supply

During recessions investment

The classical model is appropriate for analysis of the economy in the

Which of the following explains why production rises in most years?

The aggregate quantity of goods and services demanded changes as the price level rises because

The aggregate-demand curve

Which of the following effects helps to explain the slope of the aggregate-demand curve?

Other things the same,if the price level falls,people

Most economists use the aggregate demand and aggregate supply model primarily to analyze

Other things the same,a fall in an economy's overall level of prices tends to

If the price level falls,the real value of the currency

The aggregate demand and aggregate supply graph has

In the context of aggregate demand and aggregate supply,the wealth effect refers to the idea that,when the price level decreases,the real wealth of households

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

Other things the same,if the price level rises,then domestic interest rates

Which of the following is correct?

Which of the following accounts for about two-thirds of the decline in output during a recession?

The model of aggregate demand and aggregate supply

Which of the following decreases in response to the interest-rate effect from an increase in the price level?

As the price level falls

The quantity of aggregate goods and service demanded rises when the