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Aggregate Demand and Aggregate Supply 181
42. Refer to Optimism. In the long run, the change in price expectations created by optimism shifts
a. long-run aggregate supply right.
b. long-run aggregate supply left.
c. short-run aggregate supply right.
d. short-run aggregate supply left.
43. Refer to Optimism. How is the new long-run equilibrium different from the original one?
a. both price and real GDP are higher
b. both price and real GDP are lower.
c. the price level is the same and GDP is higher.
d. the price level is higher and real GDP is the same.
182 Aggregate Demand and Aggregate Supply
Pessimism
Suppose the economy is in long-run equilibrium. Then because of corporate scandal, international
tensions, and loss of confidence in policymakers, people become pessimistic regarding the future
and retain that level of pessimism for some time.
44. Refer to Pessimism. Which curve shifts and in which direction?
a. aggregate demand shifts right
b. aggregate demand shifts left
c. aggregate supply shifts right.
d. aggregate supply shifts left.
45. Refer to Pessimism. In the short run what happens to the price level and real GDP?
a. Both the price level and real GDP rise.
b. Both the price level and real GDP fall.
c. The price level rises and real GDP falls.
d. The price level falls and real GDP rises.
Aggregate Demand and Aggregate Supply 183
46. Refer to Pessimism. What happens to the expected price level and what’s the result for wage
bargaining?
a. The expected price level rises. Bargains are struck for higher wages.
b. The expected price level rises. Bargains are struck for lower wages.
c. The expected price level falls. Bargains are struck for higher wages.
d. The expected price level falls. Bargains are struck for lower wages.
47. Refer to Pessimism. In the long run, the change in price expectations created by pessimism
shifts
a. long-run aggregate supply right.
b. long-run aggregate supply left.
c. short-run aggregate supply right.
d. short-run aggregate supply left.
184 Aggregate Demand and Aggregate Supply
48. Refer to Pessimism. How is the new long-run equilibrium different from the original one?
a. both price and real GDP are higher.
b. both price and real GDP are lower.
c. the price level is the same and GDP is lower.
d. the price level is lower and real GDP is the same.
Financial Crisis
Suppose that banks are less able to raise funds and so lend less. Consequently, because people
and households are less able to borrow, they spend less at any given price level than they would
otherwise. The crisis is persistent so lending should remain depressed for some time.
49. Refer to Financial Crisis. What happens to the price level and real GDP in the short run?
a. both the price level and real GDP rise
b. the price level rises and real GDP falls
c. the price level falls and real GDP rises
d. both the price level and real GDP fall
Aggregate Demand and Aggregate Supply 185
50. Refer to Financial Crisis. If nominal wages are sticky, which of the following helps explains the
change in output?
a. real wages fall, so firms choose to produce less
b. real wages fall, so firms choose to produce more
c. real wages rise, so firms choose to produce less
d. real wages rise, so firms choose to produce more
51. Refer to Financial Crisis. In the long run, if the Fed does not respond, the change in price
expectations created by the crisis shifts
a. aggregate demand right.
b. aggregate demand left.
c. short-run aggregate supply right.
d. short-run aggregate supply left.
186 Aggregate Demand and Aggregate Supply
52. Refer to Financial Crisis. Suppose the economy reaches long-run equilibrium without the Fed
responding. Now suppose the financial crisis ends and the ability of banks to lend returns to
normal. In which case is the price level lower compared to its value prior to the crisis?
a. both after the economy reaches long-run equilibrium during the crisis and in the long-run
equilibrium after the crisis is over
b. after the economy reaches long-run equilibrium during the crisis but not in the long-run
equilibrium after the crisis is over
c. in the long-run equilibrium after the crisis is over but not after the economy reaches long-run
equilibrium during the crisis
d. neither after the economy reaches long-run equilibrium during the crisis nor in the long-run
equilibrium after the crisis is over
53. Refer to Financial Crisis. How is the new long-run equilibrium different from the original one?
a. both price and real GDP are higher.
b. both price and real GDP are lower.
c. the price level is the same and GDP is lower.
d. the price level is lower and real GDP is the same.
Aggregate Demand and Aggregate Supply 187
54. Which of the following would increase the price level?
a. an increase in the money supply.
b. an increase in taxes.
c. a decrease in the expected price level.
d. a decrease in the natural rate of unemployment.
55. The long-run effect of an increase in household consumption 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.
188 Aggregate Demand and Aggregate Supply
56. 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.
57. 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.
Aggregate Demand and Aggregate Supply 189
58. 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.
59. 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.
190 Aggregate Demand and Aggregate Supply
60. 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.
61. 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.
Aggregate Demand and Aggregate Supply 191
62. 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.
63. 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.
192 Aggregate Demand and Aggregate Supply
64. 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.
65. 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
Aggregate Demand and Aggregate Supply 193
66. 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.
67. 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.
194 Aggregate Demand and Aggregate Supply
68. 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.
69. 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
Aggregate Demand and Aggregate Supply 195
70. 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.
71. 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.
196 Aggregate Demand and Aggregate Supply
72. 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.
73. 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.
Aggregate Demand and Aggregate Supply 197
74. 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.
75. In the short-run an increase in the costs of production makes
a. output and prices rise.
b. output rise and prices fall.
c. output fall and prices rise.
d. output and prices fall.
198 Aggregate Demand and Aggregate Supply
76. Which of the following shifts short-run aggregate supply left?
a. an increase in price expectations
b. an increase in the actual price level
c. a decrease in the money supply
d. a decrease in the price of oil
77. A decrease in the availability of an important major resource such as oil shifts
a. aggregate supply right.
b. aggregate supply left.
c. aggregate demand right.
d. aggregate demand left.
Aggregate Demand and Aggregate Supply 199
78. If there are floods or droughts or a decrease in the availability of raw materials
a. aggregate supply shifts right.
b. output falls in the short run.
c. prices fall in the short run.
d. None of the above is correct.
79. An increase in the price level and a reduction in output would result from
a. a fall in stock prices.
b. a decrease in the supply of an important resource.
c. an increase in government expenditures.
d. an increase in taxes.
200 Aggregate Demand and Aggregate Supply
80. An increase in the price level and a reduction in output would result from
a. an increase in the money supply.
b. an increase in government expenditures.
c. a fall in stock prices.
d. bad weather in farm states.
81. Stagflation exists when prices
a. rise and unemployment falls.
b. rise and unemployment falls.
c. fall and unemployment rises.
d. fall and unemployment rises.
