Aggregate Demand and Aggregate Supply 221
120. According to the “In the News” article, macroprudential tools
a. allow a central bank to alter lending for specific industries.
b. allow a central bank to alter taxes.
c. limit a central bank’s power to act independently of the political process.
d. limit the policy tools available to a central bank.
121. In 1936, John Maynard Keynes published a book, The General Theory, which attempted to
explain
a. stagflation.
b. the classical dichotomy.
c. short-run economic fluctuations.
d. how changes in the money supply had created the Great Depression.
222 Aggregate Demand and Aggregate Supply
122. Keynes explained that recessions and depressions occur because of
a. excess aggregate demand.
b. inadequate aggregate demand.
c. excess aggregate supply.
d. inadequate aggregate supply.
123. Keynes believed that economies experiencing high unemployment should adopt policies to
a. reduce the money supply.
b. reduce government expenditures.
c. increase aggregate demand.
d. increase aggregate supply.
Aggregate Demand and Aggregate Supply 223
True/False and Short Answer
1. According to classical macroeconomic theory, changes in the money supply change nominal but not
real variables.
a. True
b. False
2. According to classical macroeconomic theory, changes in the money supply change real GDP but
not the price level.
a. True
b. False
3. Because economists understand what things change GDP, they can predict recessions with a fair
amount of accuracy.
a. True
b. False
224 Aggregate Demand and Aggregate Supply
4. Recessions occur at irregular intervals and are almost impossible to predict with much accuracy.
a. True
b. False
5. The recessions associated with the business cycle come at regular intervals.
a. True
b. False
6. Most macroeconomic variables that measure some type of income, spending, or production
fluctuate closely together.
a. True
b. False
Aggregate Demand and Aggregate Supply 225
7. Like real GDP, investment fluctuates, but it fluctuates much less than real GDP.
a. True
b. False
8. When output rises, unemployment falls.
a. True
b. False
9. An increase in the money supply causes output to rise in the long run.
a. True
b. False
226 Aggregate Demand and Aggregate Supply
10. Although wages, incomes, and interest rates are most often discussed in nominal terms, what
matters most are their real values.
a. True
b. False
11. Most economists believe that classical theory describes the world in the short run but not in the
long run.
a. True
b. False
12. A change in the money supply changes only nominal variables in the long run.
a. True
b. False
Aggregate Demand and Aggregate Supply 227
13. Most economist agree that money changes real GDP in both the short and long run.
a. True
b. False
14. The explanations for the slopes of the aggregate demand and short-run aggregate supply curves
are the same as the explanations for the slopes of demand and supply curves for specific goods
and services.
a. True
b. False
15. The aggregate-demand curve shows the quantity of domestic goods and services that households,
firms, the government, and customers abroad want to buy at each price level.
a. True
b. False
228 Aggregate Demand and Aggregate Supply
16. The aggregate demand and aggregate supply model helps us to understand both short-run
economic fluctuations and how the economy moves from the short to the long run.
a. True
b. False
17. 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.
a. True
b. False
18. The logic of the exchange-rate effect begins with a change in the price level changing the interest
rate.
a. True
b. False
Aggregate Demand and Aggregate Supply 229
19. Other things the same, a decrease in the price level makes the interest rate decrease, which leads
to a depreciation of the dollar in the market for foreign-currency exchange.
a. True
b. False
20. Other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate
leads to a decrease in net exports.
a. True
b. False
21. The exchange-rate effect is the idea that a higher U.S. price level causes the value of the dollar
to increase in foreign exchange markets, and this effect contributes to the downward slope of the
aggregate-demand curve.
a. True
b. False
230 Aggregate Demand and Aggregate Supply
22. The downward slope of the aggregate demand curve is based on logic that as the price level rises,
consumption, investment, and net exports all fall.
a. True
b. False
23. Aggregate demand shifts to the left if the money supply increases.
a. True
b. False
24. A decrease in the money supply causes the interest rate to rise so that investment falls.
a. True
b. False
Aggregate Demand and Aggregate Supply 231
25. An increase in the money supply causes the interest rate to fall, investment spending to rise, and
aggregate demand to shift right.
a. True
b. False
26. If speculators bid up the value of the dollar in the market for foreign-currency exchange, U.S.
aggregate demand would shift to the left.
a. True
b. False
232 Aggregate Demand and Aggregate Supply
27. The effect of a change in the value of the dollar in the foreign exchange market due to a change
in the price level helps explain the slope of aggregate demand, but does not shift it. The effects of
a change in the value of the dollar in the foreign exchange market due to speculation is shown by
shifting the aggregate demand curve.
a. True
b. False
28. An increase in the money supply shifts the long–run aggregate supply curve to the right.
a. True
b. False
29. Technological progress shifts the long-run aggregate supply curve to the right.
a. True
b. False
Aggregate Demand and Aggregate Supply 233
30. Other things the same, technological progress raises the price level.
a. True
b. False
31. Because the price level does not affect the long–run determinants of real GDP, the long–run
aggregate-supply is vertical.
a. True
b. False
32. We can explain continued increases in both output and the price level by supposing that only
aggregate demand shifted right over time.
a. True
b. False
234 Aggregate Demand and Aggregate Supply
33. If not all prices adjust instantly to changing economic circumstances, 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.
a. True
b. False
34. When the price level rises unexpectedly, some businesses may mistake part of the increase for an
increase in the price of their product relative to others and so decrease their production.
a. True
b. False
35. All explanations for the upward slope of the short-run aggregate supply curve suppose that the
quantity of output supplied increases when the actual price level exceeds the expected price level.
a. True
b. False
Aggregate Demand and Aggregate Supply 235
36. The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue
that wages are sticky in the short run.
a. True
b. False
37. An increase in the expected price level shifts the short-run aggregate supply curve to the right.
a. True
b. False
38. An increase in the actual price level does not shift the short-run aggregate supply curve, but an
expected increase in the price level shifts the short-run aggregate supply curve to the left.
a. True
b. False
236 Aggregate Demand and Aggregate Supply
39. Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in
aggregate supply.
a. True
b. False
40. Increased uncertainty and pessimism about the future of the economy lead firms to desire less
investment spending which shifts the aggregate-demand curve to the left.
a. True
b. False
41. Increased optimism about the future leads to rising prices and falling unemployment in the short
run.
a. True
b. False
Aggregate Demand and Aggregate Supply 237
42. 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 short-run aggregate supply.
a. True
b. False
43. If aggregate demand shifts right, then eventually price level expectations rise. The increase in
price level expectations causes the short–run aggregate-supply curve to shift to the left.
a. True
b. False
44. If aggregate demand shifts right, then eventually price level expectations rise. This increase in
price level expectations causes the aggregate demand curve to shift to the left back to its original
position.
a. True
b. False
238 Aggregate Demand and Aggregate Supply
45. If aggregate demand and aggregate supply both shift right, we can be sure that the price level is
higher in the short run.
a. True
b. False
46. In the long-run, an increase in aggregate demand increases the price level, but not real GDP.
a. True
b. False
47. Economists mostly agree that the Great Depression was principally caused by factors that shifted
short-run aggregate supply left.
a. True
b. False
Aggregate Demand and Aggregate Supply 239
48. The primary purpose of the aggregate demand and aggregate supply model is to demonstrate the
classical dichotomy.
a. True
b. False
49. Increased output and prices in the United States in the early 1940s were mostly the result of
increased government expenditures.
a. True
b. False
50. During World War II government expenditures increased almost five-fold and output almost
doubled.
a. True
b. False
240 Aggregate Demand and Aggregate Supply
51. The recession of 2008–2009 was in many ways the worst macroeconomic event in more than half
a century.
a. True
b. False
52. The recession of 2008-2009 was associated with a fall in housing prices which shifted aggregate
demand to the left.
a. True
b. False
53. Policymakers who influence aggregate demand can potentially mitigate the severity of economic
fluctuations.
a. True
b. False