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284 Miller Economics Today, 16th Edition
7) The sum of all planned expenditures for the entire economy at each possible price level is
A) aggregate supply. B) effective demand.
C) aggregate demand. D) actual expenditures by consumers.
8) The aggregate demand curve plots
A) desired expenditures against production.
B) total expenditures against the level of employment.
C) planned expenditures against the price level.
D) employment against the price level.
9) The aggregate demand curve is usually
A) vertical. B) upward sloping.
C) downward sloping. D) horizontal.
10) The horizontal axis for an aggregate demand curve measures
A) quantity demanded of the representative good.
B) real Gross Domestic Product (GDP).
C) output of all goods and services measured as a quantity index.
D) disposable personal income.
11) Which of the following is NOT a reason for the slope of the aggregate demand curve?
A) The substitution effect B) The real balance effect
C) The interest rate effect D) The open economy effect
12) At each price level, the aggregate demand curve indicates
A) the nominal value of total production of goods and services domestic income that will be
produced.
B) the total amount of real planned expenditures.
C) the nominal Gross Domestic Product (GDP) that will be produced.
D) the total amount of real Gross Domestic Product (GDP) that will be produced.
13) The aggregate demand curve shows that, if other factors are held constant,
A) higher price levels will result in lower total planned spending.
B) higher price levels will result in higher total planned spending.
C) higher price levels will result in lower interest rates.
D) lower price levels will result in inflationary conditions.
14) According to the interest rate effect, an increase in the price level, if other factors are held
constant, will lead to
A) a reduction in total real spending on interest rate sensitive goods.
B) an increase in the stock of real wealth held by the public.
C) an outward shift of the aggregate demand curve.
D) an increase in the real interest rate.
15) The real
b
alance effect implies that when
A) the price level decreases, the value of money balances held by individuals, firms,
government, and foreigners increases and spending decreases.
B) the price level increases, the value of money balances held by individuals, firms,
government, and foreigners increases and spending increases.
C) the price level increases, the value of money balances held by individuals, firms,
government, and foreigners decreases and spending decreases.
D) the price level decreases, the value of money balances held by individuals, firms,
government, and foreigners decreases and spending decreases.
16) The real
b
alance effect refers to
A) the economy s response to interest rate changes.
B) the change in the value of cash balances due to price level changes.
C) the change in net exports.
D) the economy s ability to balance recession and expansion.
17) When prices increase, the real interest rate
A) will increase and total planned spending on goods and services will increase.
B) will increase and total planned spending on goods and services will decrease.
C) will decrease and total planned spending on goods and services will decrease.
D) will not be affected.
18) In the above figure, a movement from point A to point B can be explained by
A) an decrease in the quantity of money in circulation.
B) a decrease in the real value of cash balances.
C) the decrease in interest rates.
D) the increase in exports to the foreign sector.
19) In the above figure, a movement from point B to point A can be explained by
A) an increase in spending due to a war.
B) an increase in spending due to increases in education expenditures.
C) an increase in the demand for manufacturing goods due to new technology.
D) a drop in the price level.
20) The interest rate effect operates through
A) credit markets by changing borrowing costs.
B) the purchasing power of individuals checking accounts.
C) government spending levels.
D) labor supply.
21) When a change in the price level causes a change in the purchasing power of currency, which
then changes planned real expenditures at all income levels, it is called
A) the real
b
alance effect. B) the substitution effect.
C) the open economy effect. D) the interest rate effect.
22) One reason that the aggregate demand curve slopes downward is because
A) higher price levels increase real wealth and consumption.
B) higher price levels reduce net exports.
C) higher price levels reduce interest rates.
D) higher price levels increase investment.
23) A rise in the price level has a direct effect on spending because
A) people like to spend more when prices are higher.
B) the real value of the money people have varies directly with the price level.
C) the real value of the money people have decreases and they can buy less with it.
D) a higher price gives people more money, and so the more goods and services they can buy.
24) The real
b
alance effect shows that
A) aggregate demand is upward sloping.
B) a higher price level leads to higher interest rates.
C) a lower price level will increase the purchasing power of currency and increase personal
consumption.
D) consumption and the price level are positively correlated.
25) Another term for the real
b
alance effect is
A) the substitution effect. B) the wealth effect.
C) the indirect effect. D) the interest rate effect.
26) If other factors are held constant, an increase in the price level
A) causes desired net export spending to rise.
B) causes desired net export spending to fall.
C) causes the real value of the money to increase.
D) induces people to spend their money faster.
27) The interest rate effect that helps explain the slope of the aggregate demand curve arises
because
A) interest rates and total planned real expenditures are unrelated.
B) an increase in the price level lead to decreases in interest rates, which induces more
borrowing and hence raises planned real expenditures.
C) an increase in the price level boosts interest rates, which discourages borrowing and hence
reduces planned real expenditures.
D) a decrease in the price level boosts interest rates, which discourages borrowing and hence
frees up income for more planned real expenditures.
28) Higher interest rates tend to
A) reduce the total planned spending on goods and services.
B) lower the costs of building new plants and equipment.
C) increase the quantity demanded of goods and services.
D) make it less costly for people to buy houses and cars.
29) When interest rates rise,
A)
b
orrowing costs increase, and total planned real expenditures decline.
B)
b
orrowing costs increase and total planned real expenditures increase.
C)
b
orrowing costs decline, and total planned real expenditures increase.
D)
b
orrowing costs decline, and total planned real expenditures decline.
30) When the relative prices of U.S. manufactured goods go up, the result is
A) an increase in exports. B) a decrease in exports.
C) a decrease in imports. D) no net change in imports or exports.
31) A price level increase tends to reduce net exports, thereby reducing the amount of real goods
and services purchased in the United States. Economists refer to this phenomenon as
A) the wealth effect.
B) the barrier effect.
C) the open economy effect.
D) the Gross Domestic Product (GDP) effect.
32) If the price level increases,
A) the buying power of your checking account falls.
B) the buying power of your checking accounts rises with it.
C) there is no effect on buying power.
D) the economy tends to grow faster.
33) One impact of a rise in the dollar s value is that
A) imports become cheaper for the U.S. consumer.
B) exports will increase sharply.
C) U.S. goods will become cheaper overseas.
D) U.S. goods are cheaper domestically.
34) An individual holds $10,000 in a non interest earning checking account, and the overall price
level rises significantly. Other things being constant, we would expect
A) the individual s real wealth to decrease and consumption to decline.
B) the individual s stock of real wealth to decrease but real national income to increase.
C) no change in the individual s real wealth but a decline in real national product.
D) the individual s wealth to increase.
35) A higher domestic price level should
A) decrease net exports. B) increase desired investment.
C) increase real wealth and consumption. D) none of these.
36) According to the interest rate effect, a decrease in the price level will
A) decrease the real value of money balances, which causes total planned real expenditures to
increase.
B) cause interest rates to fall, which generates an increase in borrowing, so that total planned
real expenditures increase.
C) lead to a decrease in net exports, which causes total planned real expenditures to decrease.
D) increase the real value of money balances, which causes interest rates to increase, thereby
reducing total planned expenditures.
37) What happens when the price level falls?
A) Total planned real spending remains constant.
B) Total planned real spending increases.
C) Total planned real spending also falls.
D) Planned real spending on goods increases but planned real spending on services falls.
38) When the U.S. price level falls, the open economy effect indicates that
A) U.S. imports will rise.
B) U.S. residents will move away from domestic goods and buy more foreign goods.
C) U.S. exports will increase.
D) foreigners will buy fewer U.S. goods.
39) The aggregate demand curve differs from an individual demand curve in that
A) the aggregate demand curve may not slope down while an individual demand curve must
always slope down.
B) the aggregate demand curve looks at the entire circular flow of income and product, while
an individual demand curve looks at one good, holding everything else constant.
C) prices change along an individual demand curve but prices are held constant along an
aggregate demand curve.
D) the aggregate demand curve slopes up while an individual demand curve slopes down.
40) How does aggregate demand curve (AD) differ from an individual demand curve (D)?
A) AD is generally vertical while D is usually downward sloping.
B) D represents the price quantity relationship for a single good or service while AD looks at
the entire economic system.
C) Look for D in macroeconomic analyses and for AD in microeconomics.
D) AD is generally a downward sloping curve while D usually slopes upward.
41) Aggregate demand is
A) the horizontal summation of all demand curves for a product.
B) the sum of all planned expenditures for the economy.
C) the total quantity of all goods sold in an economy in a year.
D) the horizontal summation of all demand curves for state, local, and federal governments
and business firms.
42) The total of all planned expenditures in the entire economy is the definition of
A) aggregate supply. B) production possibilities curve.
C) aggregate demand. D) net domestic product.
43) The open economy effect suggests that
A) a decrease in domestic price level will cause foreign residents to buy fewer domestic
goods, increasing net exports .
B) a decrease in domestic price level will cause foreign residents to buy more domestic goods,
increasing net exports.
C) a rise in domestic price level will cause foreign residents to buy more domestic goods.
D) a rise in domestic price level will cause domestic residents to buy fewer imported goods.
44) The interest rate effect suggests that
A) an increase in the price level decreases the interest rate, which causes businesses and
consumers to reduce desired spending.
B) an increase in the price level increases the interest rate, which causes businesses and
consumers to reduce desired spending.
C) a decrease in the price level decreases the interest rate, which causes businesses and
consumers to reduce desired spending.
D) an increase in the price level increases the money supply, which causes businesses and
consumers to increase desired spending.
45) The aggregate demand curve gives the
A) planned purchases for all goods and services in the economy, holding other things such as
the price level constant.
B) planned purchase rates for all goods and services in the economy at various price levels.
C) demand for goods and services by the government at various price levels.
D) amount of all goods everyone wants to buy at various income levels.
46) The total of all planned expenditures in the entire economy is
A) the open economy effect. B) LRAS.
C) aggregate supply. D) aggregate demand.
47) The various quantities of all final commodities demanded at various price levels, ceteris paribus,
is the
A) LRAS. B) production possibilities curve.
C) aggregate demand curve. D) aggregate supply curve.
48) The aggregate demand curve gives
A) the total amount of real domestic output that will be purchased at each price level.
B) the total amount of nominal domestic income that will be purchased at each price level.
C) the total value of nominal GDP in an economy for a year, holding income and technology
constant.
D) the total value of output produced by workers in both foreign and domestic markets at
each price level.
49) All of the following are components of aggregate demand EXCEPT
A) consumption spending.
B) government purchases.
C) the level of technology.
D) net foreign spending on domestic production.
50) The aggregate demand curve
A) is vertical at the full employment level of output.
B) is horizontal at the full employment level of output.
C) is downward sloping.
D) is upward sloping.
51) The aggregate demand curve has
A) no relationship between the price level and real GDP.
B) a negative relationship between the price level and real GDP.
C) a positive relationship between the price level and real GDP.
D) a positive relationship between the price level and nominal GDP.
52) Which of the following explains why the aggregate demand curve is downward sloping?
A) the interest rate effect B) the real
b
alance effect
C) the open economy effect D) all of the above
53) Suppose that along the aggregate demand curve, real GDP equals $14.2 trillion when the GDP
deflator is 90. If the GDP deflator were 95, real GDP along the aggregate demand curve would
equal
A) less than $14.2 trillion.
B) $14.2 trillion.
C) more than $14.2 trillion but less than $14.8 trillion.
D) more than $14.8 trillion.
54) Other things being equal, along an aggregate demand curve, a higher price level is associated
with
A) a higher real GDP. B) a lower real GDP.
C) a lower nominal GDP. D) higher income levels.
55) Other things being equal, the lower are planned real expenditures along an aggregate demand
curve, the
A) more the production possibilities cure shifts to the left.
B) lower the price level.
C) higher the price level.
D) lower the level of endowments.
56) When the price level increases, total planned real expenditures on goods and services falls. All
of the following are responsible EXCEPT
A) the substitution effect. B) the real
b
alance effect.
C) the interest rate effect. D) the open economy effect.
57) Which of the following is a factor that determines the shape of the aggregate demand curve?
A) The real
b
alance effect B) The nominal
b
alance effect
C) The price level effect D) The wage effect
58) According to the real
b
alance effect, an increase in the price level will
A) leave total planned real expenditures unchanged since the price level of all goods has
increased.
B) decrease total planned real expenditures because of an increase in interest rates.
C) lead to a corresponding increase in total planned real expenditures since businesses are
now earning higher profits.
D) decrease total planned real expenditures as a result of a decrease in the real value of
money balances.
59) The change in total planned real expenditures resulting from a change in the real value of
money balances when the price level changes, all other things held constant, is
A) the real
b
alance effect. B) the interest rate effect.
C) the open economy effect. D) demand side inflation.
60) The real
b
alance effect refers to
A) the real interest rate.
B) the production of real goods and services as opposed to financial instruments.
C) the prices of goods and services.
D) the real value of cash balances that a person is holding.
61) If you have $5000 and the GDP deflator decreases from 100 to 80
A) the $5000 will buy 20 percent less of the goods and services produced by society.
B) the $5000 will buy 20 percent more of the goods and services produced by society.
C) the value of the $5000 decreases.
D) the value of the $5000 remains constant.
62) The wealth effect is another term for the
A) substitution effect. B) the indirect effect.
C) the real
b
alance effect. D) the interest rate effect.
63) Holding nominal money balances constant, a decrease in the price level
A) causes the real value of the money balances to increase, in turn increasing total planned
real expenditures.
B) causes the real value of the money balances to decrease, in turn decreasing total planned
real expenditures.
C) causes the real value of the money balances to increase, thereby increasing the interest rate.
D) generates a reduction in the value of the money balances, leading to higher interest rates
and a decrease in total planned real expenditures.
64) An indirect effect of an increase in the price level works through
A) people substituting out of domestic goods and into foreign goods as exchange rates rise.
B) changes in trade balances as domestic goods become more expensive, causing interest
rates to move in the opposite direction from the change in the exchange rate.
C) interest rates as people save more as the higher prices make their money balances less
attractive.
D) interest rates as people borrow to maintain their money balances, bidding up interest rates
and reducing total planned real expenditures.
65) The interest rate effect is part of the reason
A) the short run aggregate supply curve is upward sloping.
B) the long run aggregate supply curve is vertical.
C) the aggregate demand curve is upward sloping.
D) the aggregate demand curve is downward sloping.
66) Which of the following statements is true about the interest rate effect?
A) The interest rate effect is why the aggregate demand curve is upward sloping.
B) A lower price level lowers the interest rate, which causes businesses and consumers to
increase their desired spending.
C) A higher price level lowers the interest rate, which causes business and consumers to
increase their desired spending.
D) Expenditures will change as a result of a change in the real value of money balances when
there is a change in the price level.
67) Higher interest rates
A) reduce total planned real expenditures because they increase the cost of borrowing funds.
B) reduce total planned real expenditures because they reduce the income of bankers and
other creditors.
C) increase total planned real expenditures because they increase the incomes of all people in
the economy.
D) increase total planned real expenditures because they lower the costs of building new
plants and equipment.
68) If the price level increases, then
A) the exchange rate will increase, causing U.S. goods to become cheaper and increasing total
planned real expenditures.
B) imports increase but exports do not change. Therefore, there is no effect on total planned
real expenditures.
C) foreign residents buy fewer U.S. goods, leaving more goods for U.S. residents and an
increase in total planned real production by firms.
D) domestic goods are more expensive relative to foreign goods, which reduces total planed
real expenditures.
69) The open economy effect refers to the fact that
A) the position and shape of the long run aggregate supply curve is partially due to the fact
that we import goods.
B) the aggregate supply curve shifts when the economy grows.
C) the slope of the aggregate demand curve is partially explained by the reduction in the
desire to buy fewer U.S. goods by U.S. residents and foreign residents as a result of a
higher price level.
D) the immigration policies of the United States are disruptive to labor markets.
70) A shift away from expenditures on domestic goods and a shift toward expenditures on foreign
goods when the domestic price level increases is known as
A) the real
b
alance effect. B) the interest rate effect.
C) the open economy effect. D) demand side inflation.
71) Suppose a country has no trade with other countries and people can borrow as many funds as
they want at the current interest rate. An increase in the price level will generate
A) a decrease in total planned real expenditures because of the real
b
alance effect.
B) a decrease in total planned real expenditures because of the open economy effect and the
indirect effect.
C) a decrease in total planned real expenditures because the real
b
alance effect will be
stronger than the indirect effect and the open economy effect.
D) a decrease in total planned real expenditures because the indirect effect will be stronger
than the real balance effect.
72) A fall in the price level
A) increases the real value of money balances, which causes borrowing to decrease, leading to
a decrease in investment and total planned real expenditures.
B) causes exports to rise and imports to fall, leading to an increase in total planned real
expenditures.
C) leads to an increase in total planned real expenditures because of the indirect effect.
D) causes total planned real expenditures to increase as long as the fall is less than the fall in
the price level in other countries.
73) The aggregate demand curve
A) is like individual demand curves in that prices of other goods are held constant.
B) is like individual demand curves in that income is constant.
C) differs from individual demand curves in that the aggregate demand curve is not
downward sloping.
D) differs from individual demand curves in that the aggregate demand curve looks at the
entire circular flow of income and product while the individual demand curve looks at
only one good.
74) Which of the following is NOT true about the aggregate demand curve?
A) The production possibilities curve determines the slope of the aggregate demand curve.
B) The aggregate demand curve shows total planned real expenditures at different price
levels.
C) Changes in the economic conditions in other countries will lead to a shift of the aggregate
demand curve.
D) The aggregate demand curve considers the entire circular flow of income.
75) Which of the following is true about how the aggregate demand curve differs from the
individual s demand curve?
A) The individual s demand curve shows the relationship between price and quantity
demanded while the aggregate demand curve is not influenced by price.
B) For the individual s demand curve equilibrium is determined by the intersection of supply
and demand while for the aggregate demand curve equilibrium is determined by the real
balance effect.
C) The individual s demand curve is just for an individual while the aggregate demand curve
looks at the entire circular flow of income.
D) The individual s demand curve will shift when there is a change in taxes while the
aggregate demand curve will not.
76) What determines the total value of aggregate demand for U.S. real GDP?
A) the spending decisions of consumers, firms, and governments
B) the Congressional Budget Office
C) the Federal Reserve Board
D) Wall Street
77) Total planned expenditures for domestically produced goods and services consist of
A) government spending, business spending, and import spending only.
B) consumer spending, business spending, and net export spending only
C) consumer spending, business spending, government spending, and net export spending
D) consumer spending, business spending, government spending, and import spending.
78) Which one of the following is NOT a component of aggregate demand?
A) merchandise inventories B) consumption spending
C) investment expenditures D) government purchases
79) The total of all planned real expenditures in the economy is called
A) aggregate demand. B) aggregate spending.
C) aggregate GDP. D) aggregate consumption.
80) The aggregate demand curve shows the relationship between planned purchases of
A) all final goods and services and interest rates.
B) all final goods and services and the price level.
C) all final goods and services and nominal GDP.
D) all final goods and services and total planned production.
