Exam
Name___________________________________
MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
1)
An increase in the price level will
1)
A)
move the economy down along a stationary aggregate demand curve.
B)
shift the aggregate demand curve to the left.
C)
move the economy up along a stationary aggregate demand curve.
D)
shift the aggregate demand curve to the right.
2)
An increase in aggregate demand causes an increase in ________ only in the short run, but causes
an increase in ________ in both the short run and the long run.
2)
A)
real GDP; the price level
B)
real GDP; real GDP
C)
the price level; real GDP
D)
the price level; the price level
3)
Because of the slope the aggregate demand curve we can say that
3)
A)
a decrease in the price level leads to a lower level of real GDP demanded.
B)
a decrease in the price level leads to a higher level of real GDP demanded.
C)
an increase in the price level leads to a shift in the aggregate demand curve.
D)
an increase in the price level leads to a higher level of real GDP demanded.
4)
An increase in aggregate demand in the economy will have what effect on macroeconomic
equilibrium in the long run?
4)
A)
The price level will rise, and the level of GDP will be unaffected.
B)
The price level will fall, and the level of GDP will rise.
C)
The price level will fall, and the level of GDP will fall.
D)
The price level will rise, and the level of GDP will fall.
5)
The short–run aggregate supply curve has a
5)
A)
slope equal to infinity.
B)
negative slope.
C)
slope equal to zero.
D)
positive slope.
6)
When GDP growth slowed to 1 percent during the first quarter of 2008, FedEx reported that
6)
A)
the number of shipments it handled in the U.S. declined and it reported its first loss in 11
years.
B)
the federal government had increased its spending on overnight delivery services ; this
caused profits for FedEx to reach an all–time high.
C)
the slow growth in the U.S. would have no impact on its profits because international orders
had increased.
D)
businesses and firms increased their demand for shipping services because their orders had
been placed before the slowdown in GDP growth occurred.
7)
In the early 2000s, oil shocks have been less likely to push the U.S. economy into recession than in
the past. Which of the following can explain that?
7)
A)
The use of SUVs increased.
B)
Firms have begun to use less oil–dependent production processes.
C)
GDP in the U.S. economy has been steadily growing, making it more difficult to absorb the
adverse effects of higher oil prices.
D)
Increases in oil prices have occurred more abruptly recently.
8)
The invention of the cotton gin ushered in the Industrial Revolution and began a long period of
technological innovation. What did this technological change do the short–run supply curve?
8)
A)
It moved the economy down along a stationary short–run aggregate supply curve.
B)
It moved the economy up along a stationary short–run aggregate supply curve.
C)
It shifted the short–run aggregate supply curve to the left.
D)
It shifted the short–run aggregate supply curve to the right.
9)
When the price level in the U.S. rises relative to the price level of other countries, ________ will rise,
________ will fall, and ________ will fall.
9)
A)
exports; imports; net exports
B)
net exports; imports; exports
C)
imports; exports; net exports
D)
net exports; exports; imports
10)
If workers leave a country to seek out better opportunities in another country, then this will
10)
A)
move the original economy up along a stationary short–run aggregate supply curve.
B)
move the original economy down along a stationary short–run aggregate supply curve.
C)
shift the short–run aggregate supply curve of the original country to the right.
D)
shift the short–run aggregate supply curve of the original country to the left.
11)
Suppose the U.S. GDP growth rate is slower relative to other countries’ GDP growth rates. This
will
11)
A)
shift the aggregate demand curve to the left.
B)
move the economy up along a stationary aggregate demand curve.
C)
shift the aggregate demand curve to the right.
D)
move the economy down along a stationary aggregate demand curve.
Figure 14–2
12)
Refer to Figure 14–2. Given the economy is at point A in year 1, What will happen to the
unemployment rate in year 2?
12)
A)
It will rise.
B)
It will remain constant.
C)
It will fall.
D)
not enough information to answer the question
13)
Which of the following is considered a negative supply shock?
13)
A)
an unexpected increase in the price of natural gas
B)
an improvement in technology
C)
increasing investment in the economy causes the capital stock to rise
D)
a decline in wages
14)
If the U.S. dollar increases in value relative to other currencies, how does this affect the aggregate
demand curve?
14)
A)
This will shift the aggregate demand curve to the right.
B)
This will shift the aggregate demand curve to the left.
C)
This will move the economy down along a stationary aggregate demand curve.
D)
This will move the economy up along a stationary aggregate demand curve.
15)
Increases in personal income taxes
15)
A)
increase aggregate demand.
B)
increase disposable income.
C)
decrease aggregate demand.
D)
both B and C
16)
The main result of which of the following models is that the quantity of money should be increased
at a constant rate?
16)
A)
the monetarist model
B)
the new classical model
C)
the real business cycle model
D)
the new Keynesian model
17)
Chinese toy exports were hurt in 2007 as a result of lead paint fears. How would this decrease in
exports have affected China’s aggregate demand curve?
17)
A)
Aggregate demand would have shifted to the left.
B)
Aggregate demand would not have shifted, but there would have been a movement up the
aggregate demand curve.
C)
Aggregate demand would have shifted to the right.
D)
Aggregate demand would not have shifted, but there would have been a movement down the
aggregate demand curve.
18)
An increase in investment causes the price level to ________ in the short run and ________ in the
long run.
18)
A)
decrease; decrease further
B)
decrease; increase
C)
increase; decrease
D)
increase; increase further
19)
Changes in the price level
19)
A)
decrease the level of aggregate supply in the long run.
B)
increase the level of aggregate supply in the long run only at very high levels of output.
C)
do not affect the level of aggregate supply in the long run.
D)
increase the level of aggregate supply in the long run.
20)
Which of the following can explain why there is an increase in potential GDP but the equilibrium
level of GDP does not rise?
20)
A)
SRAS shifted to the right by more than LRAS.
B)
AD shifted to the right by more than SRAS.
C)
SRAS and AD do not shift.
D)
AD shifted to the right by less than SRAS.
21)
Which of the following models relies on emphasizing the importance of sticky wages and prices?
21)
A)
the monetarist model
B)
the new classical model
C)
the real business cycle model
D)
the new Keynesian model
22)
Which of the following correctly describes the automatic mechanism through which the economy
adjusts to long–run equilibrium?
22)
A)
the rightward shift in short–run aggregate supply that occurs after a recession
B)
the leftward shift in short–run aggregate supply that occurs after a recession
C)
the rightward shift in aggregate demand that occurs after a recession
D)
the leftward shift in aggregate demand that occurs after a recession
23)
In the long run,
23)
A)
GDP = potential GDP.
B)
unemployment is above its natural rate.
C)
unemployment is below its natural rate.
D)
LRAS and SRAS lie on the same line.
24)
The automatic mechanism ________ the price level in the case of ________ and ________ the price
level in the case of ________.
24)
A)
lowers; expansion; lowers; recession
B)
raises; expansion raises; recession
C)
raises; recession; lowers; expansion
D)
lowers; recession; raises; expansion
25)
Monetarism is a school of thought put forth by Milton Friedman. He argued that the economy
would most likely
25)
A)
be below potential GDP.
B)
be unstable.
C)
be at potential GDP.
D)
be above potential GDP.
26)
Which of the following models has as its central idea that workers and firms have rational
expectations?
26)
A)
the monetarist model
B)
the new classical model
C)
the real business cycle model
D)
the new Keynesian model
27)
Potential GDP is also referred to as
27)
A)
balanced–budget GDP.
B)
realized GDP.
C)
full–employment GDP.
D)
politico–economic GDP.
28)
How do changes in income tax policies affect aggregate demand?
28)
A)
Higher taxes increase disposable income, consumption, and aggregate demand.
B)
Higher taxes increase corporate investment and aggregate demand.
C)
Higher taxes increase aggregate supply and thus increase aggregate demand as well.
D)
Higher taxes reduce disposable income, consumption, and aggregate demand.
29)
The long–run aggregate supply curve
29)
A)
has a steep but positive slope.
B)
is horizontal.
C)
has a negative slope.
D)
is vertical.
30)
If potential GDP is equal to $600 billion, what does long–run aggregate supply look like?
30)
A)
It is a vertical line at a level of GDP above $600 billion.
B)
It is a horizontal line at $600 billion of GDP.
C)
It is a vertical line at a level of GDP below $600 billion.
D)
It is a vertical line at $600 billion of GDP.
31)
Last week, six Swedish kronor could purchase one U.S. dollar. This week, it takes eight Swedish
kronor to purchase one U.S. dollar. This change in the value of the dollar will ________ exports
from the U.S. to Sweden and ________ U.S. aggregate demand.
31)
A)
increase; decrease
B)
decrease; decrease
C)
decrease; increase
D)
increase; increase
32)
The long–run aggregate supply curve shows the relationship between the ________ and ________.
32)
A)
price level; quantity of real GDP supplied
B)
inflation rate; quantity of real GDP demanded
C)
real interest rate; quantity of real GDP supplied
D)
nominal interest rate; quantity of real GDP supplied
33)
Which of the following is not a reason why the increase in aggregate demand in 2002 was rather
weak?
33)
A)
Uncertainly about the future due to the war on terrorism made individuals reluctant to spend.
B)
Stock prices did not rise substantially so that real wealth grew slowly.
C)
Firms did not want to invest as they had over–invested in technology in the 1990s
D)
Government spending was declining.
D
34)
Proponents of the real business cycle model argue that the short–run supply curve is
34)
A)
negatively sloped.
B)
vertical.
C)
flat.
D)
positively sloped.
B
35)
Which of the following models focuses on how productivity shocks explain fluctuations in real
GDP?
35)
A)
the monetarist model
B)
the new classical model
C)
the real business cycle model
D)
the new Keynesian model
C
A
36)
An Inside Look mentions that freight companies experienced weak earnings in early 2007. What was
the cause of the weak earnings?
36)
A)
slow economic growth in the U.S. that reduced orders received by the freight companies
B)
an increase in short–run aggregate supply that reduced the prices freight companies could
charge for their services
C)
an increase in aggregate demand spurred by large increases in consumption spending in the
U.S. economy
D)
a reduction in environmental regulations freight companies faced beginning in 2006
37)
What is potential GDP?
37)
A)
the difference between current GDP and maximum GDP
B)
the level of real GDP in the short run
C)
the level of GDP at which inflation is constant
D)
the level of real GDP in the long run
38)
After an unexpected increase in the price of oil, the long–run adjustment ________ the price level
and ________ the unemployment rate as they return to their original levels.
38)
A)
increases; increases
B)
increases; decreases
C)
decreases; decreases
D)
decreases; increases
39)
Suppose the economy is at a short run equilibrium GDP that lies above potential GDP. Which of
the following will occur because of the automatic mechanism adjusting the economy back to
potential GDP?
39)
A)
Unemployment will decline.
B)
The short–run aggregate supply curve will shift to the left.
C)
Prices will decline.
D)
Output will increase.
40)
________ of unemployment during ________ make it easier for workers to ________ wages.
40)
A)
Low levels; a recession; negotiate higher
B)
High levels; an expansion; negotiate higher
C)
High levels; a recession; accept lower
D)
Low levels; an expansion; accept lower
41)
Stagflation occurs when
41)
A)
inflation rises and GDP rises.
B)
inflation rises and GDP falls.
C)
inflation falls and GDP falls.
D)
inflation falls and GDP rises.
B
42)
A decrease in aggregate demand results in a(n) ________ in the ________.
42)
A)
recession; short run
B)
expansion; long run
C)
expansion; short run
D)
recession; long run
A
43)
If the short–run aggregate supply curve increases (shifts to the right) by less than long–run
aggregate supply, then at the short–run equilibrium
43)
A)
aggregate demand will increase.
B)
GDP will be above potential GDP.
C)
GDP will be equal to potential GDP.
D)
GDP will be below potential GDP.
D
44)
Suppose a developing country receives more machinery and capital equipment as foreign
entrepreneurs increase the amount of investment in the economy. As a result,
44)
A)
the long–run aggregate supply curve will shift to the left.
B)
the economy will move up along the long run aggregate supply curve.
C)
the economy will move down along the long run aggregate supply curve.
D)
the long–run aggregate supply curve will shift to the right.
D
C
45)
Why does the short–run aggregate supply curve shift to the right in the long run, following a
decrease in aggregate demand?
45)
A)
Workers and firms adjust their expectations of wages and prices upward and they push for
higher wages and prices.
B)
Workers and firms adjust their expectations of wages and prices downward and they push for
higher wages and prices.
C)
Workers and firms adjust their expectations of wages and prices upward and they accept
lower wages and prices.
D)
Workers and firms adjust their expectations of wages and prices downward and they accept
lower wages and prices.
46)
When the price level rises from 110 to 115, the aggregate level of GDP supplied rises from $80
billion to $120 billion. This ________ relationship represents the ________ relationship between
GDP and the price level.
46)
A)
negative; short–run
B)
negative; long–run
C)
positive; long–run
D)
positive; short–run
47)
When the economy enters a recession, your employer is ________ to reduce your wages because
________.
47)
A)
likely; aggregate demand is vertical in the long run
B)
unlikely; lower wages reduce productivity and morale
C)
likely; output prices always fall during recession
D)
unlikely; output and input prices generally fall during recession
48)
Which of the following would cause the short–run aggregate supply curve to shift to the right?
48)
A)
an increase in interest rates
B)
a technological advance
C)
an increase in the price level
D)
a decrease in inflation expectations
49)
Stagflation is often a result of
49)
A)
a negative supply shock.
B)
an increase in aggregate supply.
C)
a decrease in aggregate demand.
D)
an increase in aggregate demand.
50)
The international trade effect states that
50)
A)
an increase in the price level will lower imports.
B)
an increase in the price level will raise net exports.
C)
an increase in the price level will lower net exports.
D)
an increase in the price level will raise exports.
51)
Which of the following best describes the “interest rate effect”?
51)
A)
An increase in the price level raises the interest rate and chokes off government spending.
B)
An increase in the price level lowers the interest rate and chokes off government spending.
C)
An increase in the price level lowers the interest rate and chokes off investment and
consumption spending.
D)
An increase in the price level raises the interest rate and chokes off investment and
consumption spending.
52)
The static aggregate demand and aggregate supply curve model helps explain
52)
A)
price fluctuations in an individual market.
B)
long term growth.
C)
short term fluctuations in real GDP and the price level.
D)
output fluctuations in an individual market.
53)
The result of the more rapidly rising aggregate demand during the economy’s recovery in
2003–2004 was
53)
A)
falling inflation.
B)
a decline in the price level.
C)
rising unemployment.
D)
real GDP increasing toward potential GDP.
54)
The long– run adjustment to a negative supply shock results in
54)
A)
the price level rising.
B)
unemployment rising.
C)
the short–run aggregate supply curve shifting to the right.
D)
workers being willing to accept higher wages.
55)
The level of real GDP in the long run is called
55)
A)
potential GDP.
B)
frictional GDP.
C)
low capacity GDP.
D)
short run GDP.
Figure 14–1
56)
Refer to Figure 14–1. Suppose the economy is at point C. If government spending decreases in the
economy, where will the eventual long–run equilibrium be?
56)
A)
A
B)
B
C)
C
D)
D
57)
The simple static aggregate demand and aggregate supply model assumes
57)
A)
the economy’s aggregate demand curve shifts to the right in most periods.
B)
potential real GDP increases continuously.
C)
the economy does not experience long–run growth.
D)
the economy experiences continuing inflation.
58)
Why does the short–run aggregate supply curve shift to the left in the long run, following an
increase in aggregate demand?
58)
A)
Workers and firms adjust their expectations of wages and prices downward and they accept
lower wages and prices.
B)
Workers and firms adjust their expectations of wages and prices upward and they push for
higher wages and prices.
C)
Workers and firms adjust their expectations of wages and prices downward and they push for
higher wages and prices.
D)
Workers and firms adjust their expectations of wages and prices upward and they accept
lower wages and prices.
59)
In the dynamic aggregate demand (AD) and aggregate supply (AS) model, inflation occurs if
59)
A)
AD shifts faster than AS.
B)
AS shifts slower than AD.
C)
AS shifts faster than AD.
D)
AD shifts slower than AS.
A
60)
Inflation will
60)
A)
increase the quantity of real GDP demanded.
B)
decrease the quantity of real GDP demanded.
C)
decrease aggregate demand.
D)
increase aggregate demand.
B
61)
A negative supply shock in the short run causes
61)
A)
a decrease in the price level.
B)
a increase in equilibrium real GDP.
C)
a decrease in unemployment.
D)
the aggregate supply curve to shift to the left.
D
B
62)
Which of the following is not a reason why the wages of workers and the prices of inputs rise more
slowly than the prices of final goods and services?
62)
A)
Firms are often slow to adjust wages.
B)
Unions are successful in pushing up wages.
C)
Menu costs make some prices sticky.
D)
Contracts make prices and wages “sticky.”
Figure 14–2
63)
Refer to Figure 14–2. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1,
while LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in
year 1, what is the growth rate in potential GDP in year 2?
63)
A)
8%
B)
9.1%
C)
12%
D)
10%
64)
Which of the following will shift aggregate demand to the left, holding everything else constant?
64)
A)
an increase in interest rates
B)
an increase in net exports
C)
an increase in expected profits for firms
D)
an increase in disposable income