Question 1

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?
A) It would have to have shifted left by less than aggregate supply shifted
B) It would have to have to shifted left by more than aggregate supply shifted.
C) It would have to have shifted right by less than aggregate supply shifted
D) It would have to have to shifted right by more than aggregate supply shifted.

Accepted Answer

If the long-run aggregate supply curve shifted right, it means that the economy's productive capacity increased. This would lead to an increase in output and decrease in prices. In order for this to happen, aggregate demand would have to shift left, but not by more than the increase in aggregate supply. If aggregate demand shifted left by more than the increase in aggregate supply, output would have decreased even more and prices would have fallen further. Therefore, the best choice is A.

Question 2

During World War II, the economy's production increased about
A) 25 percent and prices rose about 5 percent.
B) 50 percent and prices rose about 10 percent.
C) 75 percent and prices rose about 15 percent.
D) 100 percent and prices rose about 20 percent.

Accepted Answer

The answer of During World War II, the economy's production...

Question 3

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
A) aggregate supply to the right.
B) aggregate supply to the left.
C) aggregate demand to the right.
D) aggregate demand to the left.

Accepted Answer

If policymakers want to offset the effects of an economic contraction caused by a shift in aggregate supply, they would use policy to shift aggregate demand to the right. This is known as expansionary monetary and fiscal policy. By increasing government spending, lowering interest rates, and/or increasing the money supply, policymakers can stimulate consumer and business spending, increasing aggregate demand and offsetting the negative effects of the supply shock.

Question 4

Which of the following would increase output in the short run?
A) an increase in stock prices makes people feel wealthier
B) government spending increases
C) firms chose to purchase more investment goods
D) All of the above are correct.

Accepted Answer

All of the above options would increase output in the short run. 
- An increase in stock prices makes people feel wealthier and therefore more likely to spend. 
- Government spending would increase demand for goods and services, leading firms to increase production to meet that demand. 
- Firms choosing to purchase more investment goods would increase the demand for capital goods, leading to further production and output increase.

Question 5

When production costs rise,
A) the short-run aggregate supply curve shifts to the right.
B) the short-run aggregate supply curve shifts to the left.
C) the aggregate demand curve shifts to the right.
D) the aggregate demand curve shifts to the left.

Accepted Answer

When production costs rise, firms will be less willing to produce goods and services at the same level of prices as before, meaning that the short-run aggregate supply curve will shift to the left.

Question 6

Which of the following is a lesson concerning shifts in aggregate demand?
A) they contribute to fluctuations in output.
B) in the long-run they change real output, but not the price level.
C) policymakers are unable to mitigate the severity of economic fluctuations.
D) All of the above are correct.

Accepted Answer

Shifts in aggregate demand cause fluctuations in output, which can have significant economic consequences.

Question 7

Which of the following has been suggested as a cause of the Great Depression?
A) a decline in the money supply
B) a decrease in stock prices
C) the collapse of the banking system
D) All of the above are correct.

Accepted Answer

All of the choices - a decline in the money supply, a decrease in stock prices, and the collapse of the banking system - have been suggested as causes of the Great Depression.

Question 8

During World War II,
A) government purchases of goods and services increased fivefold.
B) the economy's production increased about 25 percent.
C) unemployment fell to about 5%.
D) All of the above are correct.

Accepted Answer

The answer of During World War II,
A) government purchases of...

Question 9

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
A) as people revise their price-level expectations upward, firms and workers strike bargains for higher nominal wages.
B) as people revise their price-level expectations upward, firms and workers strike bargains for lower nominal wages.
C) as people revise their price-level expectations downward, firms and workers strike bargains for higher nominal wages.
D) as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages.

Accepted Answer

If the government decreases its expenditures, the aggregate demand in the economy will decrease, leading to a decrease in the price level. As people revise their price-level expectations downward, firms and workers will strike bargains for lower nominal wages, which will lead to a decrease in the costs of production. As a result, firms will be able to supply output at lower prices, and the long-run aggregate supply curve will shift down and to the right. This movement of the long-run aggregate supply curve will continue until the economy reaches a new long-run equilibrium at a lower price level and the same level of output as before.

Question 10

Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression?
A) aggregate demand shifted right
B) aggregate demand shifted left
C) aggregate supply shifted right
D) aggregate supply shifted left

Accepted Answer

The answer of Which of the following by itself is...

Question 11

In the early 1930s in the United States, there was a
A) large increase in output. In the early 1940s there was also a large increase in output.
B) large increase in output. In the early 1940s there was a large decrease in output.
C) large decrease in output. In the early 1940s there was a large increase in output.
D) large decrease in output. In the early 1940s there was also a large decrease in output.

Accepted Answer

The early 1930s in the United States saw a large decrease in output due to the Great Depression. However, in the early 1940s, the United States entered World War II and experienced a large increase in output due to increased government spending on the military and war production.

Question 12

Which of the following alone can explain the change in the price level and output during World War II?
A) aggregate demand shifted right
B) aggregate demand shifted left
C) aggregate supply shifted right
D) aggregate supply shifted left

Accepted Answer

The answer of Which of the following alone can explain...

Question 13

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand?
A) It would have to have shifted left by less than aggregate supply.
B) It would have to have shifted left by more than aggregate supply.
C) It would have to have shifted right by less than aggregate supply.
D) It would have to have shifted right by more than aggregate supply.

Accepted Answer

If long-run aggregate supply shifted left during the Great Depression, it means that the economy's potential output decreased. Therefore, to be consistent with the decrease in output, aggregate demand would have had to shift left by a corresponding amount. However, during the Great Depression, the actual decrease in output and the price level was much greater than the decrease in potential output. This suggests that aggregate demand must have shifted left by more than long-run aggregate supply to explain the observed decrease in output and prices. Thus, the correct answer is B.

Question 14

If output is above its natural rate, then according to sticky-wage theory
A) workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve right.
B) workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
C) workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve right.
D) workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve left.

Accepted Answer

According to sticky-wage theory, if output is above its natural rate, workers and firms will strike bargains for higher wages. However, due to the stickiness of wages, these increases in wages will not immediately adjust to their new market equilibrium level, resulting in higher production costs for firms. Therefore, the short-run aggregate supply curve shifts leftward, leading to higher prices and lower output in the short run.

Question 15

The economic boom of the early 1940s resulted mostly from
A) increased government expenditures.
B) falling prices of oil and other natural resources.
C) an increase in the growth rate of the money supply.
D) rapid developments in transportation, electronics, and communication.

Accepted Answer

The economic boom of the early 1940s was largely a result of increased government expenditures during World War II. The government spent heavily on military supplies and equipment, which created jobs and stimulated economic growth. This spending was financed by borrowing, which also contributed to the growth in the money supply. The other options (B, C, and D) may have had some impact on the economy, but they were not the primary drivers of the economic boom during this time period.

Question 16

The long-run effect of an increase in government spending is to raise
A) both real output and the price level.
B) real output and lower the price level.
C) real output and leave the price level unchanged.
D) the price level and leave real output unchanged.

Accepted Answer

The answer of The long-run effect of an increase in...

Question 17

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting
A) aggregate supply right.
B) aggregate supply left.
C) aggregate demand right.
D) aggregate demand left.

Accepted Answer

If there is an economic contraction caused by a shift in aggregate demand, policymakers need to respond quickly and precisely. The best way to offset the initial shift is by shifting aggregate demand to the right. This can be done by implementing expansionary fiscal or monetary policies that stimulate spending and investment. Shifting aggregate supply would not be effective in this scenario as it would only address the supply-side of the economy, which is not the root cause of the contraction.

Question 18

In the first few years of the Great Depression, unemployment rose to about
A) 10 percent, and prices rose about 14 percent.
B) 15 percent, and prices rose about 22 percent.
C) 20 percent, and prices fell about 14 percent.
D) 25 percent, and prices fell about 22 percent.

Accepted Answer

During the early part of the Great Depression, unemployment rose to about 25 percent and prices fell about 22 percent. This was due to the decrease in demand for goods and services, leading to a decrease in prices as businesses tried to stimulate sales. The high unemployment rate was a result of businesses cutting back on production and laying off workers.

Question 19

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
A) rise. This rise in price expectations shifts the short-run aggregate supply curve to the right.
B) rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
C) fall. This fall in price expectations shifts the short-run aggregate supply curve to the right.
D) fall. This fall in price expectations shifts the short-run aggregate supply curve to the left.

Accepted Answer

When the government increases its expenditures, the aggregate demand also increases which causes an increase in the price level. As the price level increases, the price expectations of firms and consumers also increase. This causes an upward shift in the short-run aggregate supply curve to the left, leading to higher prices and output. Therefore, the correct answer is B.

Question 20

Which of the following did not happen during the onset of the Great Depression?
A) The money supply fell as households took money out of bank deposits.
B) The Fed conducted expansionary monetary policy.
C) Stock prices fell about 90 percent.
D) Disruption of the banking system made it difficult for some firms to obtain funds for investment.

Accepted Answer

The Fed actually conducted contractionary monetary policy by allowing the money supply to fall and not taking action to prevent bank failures. Expansionary monetary policy would involve increasing the money supply and lowering interest rates to spur economic activity.

Quiz 15: Aggregate Demand and Aggregate Supply

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?

During World War II, the economy's production increased about

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

Which of the following would increase output in the short run?

When production costs rise,

Which of the following is a lesson concerning shifts in aggregate demand?

Which of the following has been suggested as a cause of the Great Depression?

During World War II,

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?

Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression?

In the early 1930s in the United States, there was a

Which of the following alone can explain the change in the price level and output during World War II?

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand?

If output is above its natural rate, then according to sticky-wage theory

The economic boom of the early 1940s resulted mostly from

The long-run effect of an increase in government spending is to raise

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

In the first few years of the Great Depression, unemployment rose to about

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

Which of the following did not happen during the onset of the Great Depression?