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Chapter 11 Classical and Keynesian Macro Analyses 417
37) If the U.S. government were to relax its restrictions on offshore oil well drilling and open
drilling in Alaskan national parks, the result to aggregate supply would be to
A) cause a shift in the SRAS to the left.
B) cause a shift in the LRAS to the left.
C) cause no long term shifts in AS.
D) cause a shift in both LRAS and SRAS to the right.
38) In the short run, if aggregate demand shifts to the left while the position of the short run
aggregate supply curve does NOT change, then
A) the level of economic activity rises.
B) a recessionary gap occurs.
C) there is no change in real GDP and the price level.
D) an inflationary gap occurs.
39) In the above figure, what are the long run equilibrium price level and real GDP?
A) 130 and $12 trillion B) 130 and $11.5 trillion
C) 120 and $11.5 trillion D) 120 and $12 trillion
40) In the above figure, if the relevant aggregate demand curve is AD2
,
what are the short run
equilibrium price level and real GDP?
A) 130 and $12 trillion B) 130 and $11.5 trillion
C) 120 and $11.5 trillion D) 120 and $12 trillion
41) In the above figure, if the relevant aggregate demand curve is AD2
,
what type of gap exists and
how large is it?
A) inflationary gap of $500 billion B) inflationary gap of $1 trillion
C) recessionary gap of $1 trillion D) recessionary gap of $500 billion
42) In the above figure, what could cause the shift of aggregate demand from AD1to AD2?
A) depletion of raw materials
B) an increase in input prices
C) a decrease in consumer confidence
D) an increase in international trade barriers
43) If the equilibrium level of real GDP per year is greater than the full employment level of GDP,
then
A) a recessionary gap occurs.
B) the economy is at full employment with no price changes.
C) the economy expands the level of real GDP.
D) an inflationary gap occurs.
44) Which of the following actions would cause the aggregate demand curve to shift to the left?
A) an increase in consumer spending caused by a cut in the personal income tax rate
B) an increase in government spending caused by increased spending on highways and
bridge construction
C) a decrease net export spending caused by an appreciation of the home currency
D) an increase in exports caused by an increase in economic activity in the European Union
45) A recessionary gap results when
A) aggregate demand is below the level consistent with full employment.
B) aggregate demand is above the level consistent with full employment.
C) aggregate supply and aggregate demand are not in short run equilibrium.
D) aggregate supply decreases.
46) If the full employment level of real GDP is greater than the equilibrium level of real GDP, the
nation would be experiencing a(n)
A) inflationary gap. B) recessionary gap.
C) demand pull inflation. D) rising prices.
47) Consider the above figure. If the aggregate demand fell from AD 1to AD2
,
our nation would be
experiencing
A) an inflationary gap. B) a recessionary gap.
C) overemployment. D) rising prices.
48) Consider the above figure. If the aggregate demand curve rose from AD1to AD3
,
our nation
would be experiencing
A) an inflationary gap. B) a recessionary gap.
C) unemployment. D) falling prices.
49) Consider the above figure. If the aggregate demand went from AD 2to AD3
,
our nation would
have gone from
A) a recessionary gap to an inflationary gap.
B) a recessionary gap to full employment real GDP.
C) an inflationary gap to full employment GDP.
D) full employment real GDP to an inflationary gap.
50) According to modern Keynesian analysis, an increase in aggregate demand leads to a higher
price level because the
A) aggregate demand curve is upward sloping.
B) short run aggregate supply curve is upward sloping.
C) aggregate demand curve is upward horizontal.
D) short run aggregate supply curve is vertical.
51) Suppose aggregate demand is increasing over time. Would the modern Keynesian model
assume that the price level would always be constant? Explain.
11.6 Explaining Short Run Variations in Inflation
1) Inflation that is caused by an increase in aggregate demand which is not matched by an increase
in aggregate supply is called
A) demand push inflation. B) demand pull inflation.
C) cost push inflation. D) cost pull inflation.
2) The significant run up in oil prices during the latter 2000s was an example of
A) an aggregate demand shock that increased the price level and increased the rate of growth
of real Gross Domestic Product (GDP).
B) an aggregate demand shock that reduced the price level and reduced the rate of growth of
real Gross Domestic Product (GDP).
C) an aggregate supply shock that increased the price level and reduced the rate of growth of
real Gross Domestic Product (GDP).
D) an aggregate supply shock that reduced the price level and increased the rate of growth of
real Gross Domestic Product (GDP).
3) Suppose that last year $1 U.S. exchanged for 1 euro. If this year $1 exchanges for 0.75 euro, then
we can conclude that
A) the dollar is weaker this year than it was last year and this will cause the United States
short run aggregate supply (SRAS) curve to shift to the left.
B) the dollar is weaker this year than it was last year and this will cause the United States
short run aggregate supply (SRAS) to shift to the right.
C) the dollar is stronger this year than it was last year and this will cause the United States
short run aggregate supply (SRAS) curve to shift to the left.
D) the dollar is weaker this year than it was last year but this will have no impact on the
United States short run aggregate supply (SRAS) curve.
4) If the U.S. dollar becomes weaker in international foreign exchange markets, imported goods
become more expensive. One result of this is that
A) net exports decrease.
B) net exports increase.
C) domestic employment rises.
D) real Gross Domestic Product (GDP) increases.
5) A weaker U.S. dollar simultaneously leads to ________ in SRAS and ________ in AD.
A) a leftward shift ; a rightward shift B) a rightward shift; a leftward shift
C) an outward shift; an outward shift D) an inward shift; an inward shift
6) If the U.S. dollar becomes weaker in international markets, the net effects will include
A) a decrease in short run aggregate supply (SRAS) and an increase in aggregate demand.
B) an increase in short run aggregate supply (SRAS) and a decrease in aggregate demand.
C) a decrease in both short run aggregate supply (SRAS) and aggregate demand.
D) an increase in both short run aggregate supply (SRAS) and aggregate demand.
7) Demand pull inflation is
A) inflation caused by increases in aggregate demand that generate an even larger increase in
aggregate supply.
B) inflation caused by increases in aggregate demand that are not matched by increases in
aggregate supply.
C) inflation caused by reductions in short run aggregate supply.
D) inflation caused by reductions in long run aggregate supply.
8) Cost push inflation is
A) inflation caused by increases in aggregate demand that generate an even larger increase in
aggregate supply.
B) inflation caused by increases in aggregate demand that are not matched by increases in
aggregate supply.
C) inflation caused by decreases in aggregate supply that generate an even larger decrease in
aggregate demand.
D) inflation caused by decreases in aggregate supply that are not matched by decreases in
aggregate demand.
9) Which of the following can cause inflation?
A) Increases in short run aggregate supply
B) Increases in long run aggregate supply
C) Decreases in short run aggregate supply
D) Decreases in aggregate demand
10) The inflation associated with the oil price shocks in the 1970s after OPEC restricted the supply of
oil is an example of
A) cost push inflation due to a supply shock.
B) cost push inflation due to a demand shock.
C) demand pull inflation due to a demand shock.
D) demand pull inflation due to a supply shock.
11) After a small hurricane in Florida, unemployment is low as there is a great deal of construction
work and businesses run at full capacity. This suggests that
A) the economy is operating above the full employment level and will eventually adjust back
to long run aggregate supply.
B) living standards are falling as employment and economic activity are too high.
C) the economy is operating below its long run level and living standards are less than they
would have been without the hurricane.
D) the hurricane is beneficial since it is increasing employment and replacing less efficient
capital with newer and more efficient capital.
12) A stronger U.S. dollar in world exchange markets means that
A) a dollar buys more units of foreign currency than it could before.
B) a dollar buys less units of foreign currency than it could before.
C) a dollar buys the same amount of foreign currency than it could before, with gold backing
up the value of the dollar.
D) foreigners sell the dollars that they have.
13) A stronger dollar leads to cheaper input prices for U.S. firms because
A) U.S. workers are willing to work for less pay because of the stronger dollar.
B) U.S. producers of intermediate goods lower prices in order to benefit from the stronger
dollar.
C) imports of raw materials and intermediate goods are cheaper.
D) exports of raw materials and intermediate goods are cheaper.
14) One effect of a stronger dollar is
A) an increase in U.S. exports and a reduction in U.S. imports.
B) a reduction in U.S. exports and an increase in U.S. imports.
C) an increase in net exports.
D) an increase in both imports and exports. The effect on net exports is uncertain.
15) The net effect of a stronger dollar on real GDP is
A) an increase in real GDP.
B) a decrease in real GDP.
C) an increase in the price level.
D) dependent on whether the increase in aggregate supply is more or less than the decrease
in aggregate demand.
16) Suppose we observe the price level increasing and real GDP decreasing. An explanation for this
is that
A) the dollar weakened and the effect on aggregate supply was less than the effect on
aggregate demand.
B) the dollar weakened and the effect on aggregate supply was greater than the effect on
aggregate demand.
C) the dollar strengthened and the effect on aggregate supply was less than the effect on
aggregate demand.
D) the dollar strengthened and the effect on aggregate supply was greater than the effect on
aggregate demand.
17) Equilibrium real GDP rises after the dollar strengthened. From this, we can conclude that
A) the increase in aggregate demand was greater than the decrease in aggregate supply.
B) the decrease in aggregate demand was less than the increase in aggregate supply.
C) the decrease in aggregate demand was more than the increase in aggregate supply.
D) the increase in aggregate demand was less than the decrease in aggregate supply.
18) Refer to the above figure. Suppose the economy is at E. A stronger dollar leads to a lower real
GDP. Which of the aggregate supply curves must be the relevant curve after the change in the
value of the dollar?
A) 1 B) 2 C) 4 D) 5
19) Refer to the above figure. Suppose the economy is at E originally, when the dollar increases in
value. Which aggregate supply curve applies if the value of real GDP increases?
A) 1 B) 2 C) 4 D) 5
20) Refer to the above figure. Suppose we are at E and the dollar weakens. Which aggregate supply
curve must apply if the price level increases?
A) 3 only B) 4 only C) 5 only D) 4 or 5
21) Suppose the Japanese yen increases in its value relative to the U.S. dollar. In the U.S. economy,
A) the price level will increase and real GDP will fall if the increase in aggregate demand is
less than the decrease in aggregate supply.
B) the price level will increase and real GDP will fall if the decrease in aggregate demand is
more than the increase in aggregate supply.
C) the price level will fall and real GDP will increase if the increase in aggregate supply is
greater than the decrease in aggregate demand.
D) the price level will fall and real GDP will decrease if the decrease in aggregate demand is
less than the increase in aggregate supply.
22) Cost push inflation occurs
A) when the aggregate supply curve shifts to the left, while aggregate demand remains
stable.
B) when the aggregate supply curve shifts to the right, while aggregate demand remains
stable.
C) when the aggregate demand curve shifts to the left, while aggregate supply remains
stable.
D) when the aggregate demand curve shifts to the right, while aggregate supply remains
stable.
23) Demand pull inflation occurs
A) when the aggregate supply curve shifts to the left, while aggregate demand remains
stable.
B) when the aggregate supply curve shifts to the right, while aggregate demand remains
stable.
C) when the aggregate demand curve shifts to the left, while aggregate supply remains
stable.
D) when the aggregate demand curve shifts to the right, while aggregate supply remains
stable.
24) If the price level should increase in the near term due to decreases in the short run aggregate
supply, the result would be
A) demand pull inflation. B) demand pull recession.
C) cost push inflation. D) cost pull expansion.
25) Suppose the Federal Reserve increases the money supply. Which of the following will tend to
occur as a result of this policy in a Keynesian model?
A) an inflationary gap
B) demand pull inflation
C) a movement along the short run aggregate supply curve
D) all of the above
26) Other things being equal, if input prices rise in a country, then there would be
A) cost push inflation.
B) demand pull inflation.
C) cost push deflation.
D) more production and a lower price level.
27) An increase in aggregate demand will tend to cause which of the following?
A) a deflationary gap B) a recessionary gap
C) cost push inflation D) none of the above
28) Inflation caused by continually decreasing short run aggregate supply is
A) cost pull inflation. B) cost push inflation.
C) demand pull inflation. D) demand push inflation.
29) Oil prices increased significantly in 2008. According to the Keynesian model, this increase in oil
prices should have caused which of the following to occur?
A) demand pull inflation B) demand push inflation
C) cost push inflation D) cost pull inflation
30) Cost push inflation can be shown on an aggregate supply aggregate demand diagram as
A) a rightward shift of the aggregate supply curve with no change in aggregate demand.
B) a rightward shift in the aggregate demand curve with no change in aggregate supply.
C) a leftward shift in the aggregate demand curve with no change in aggregate supply.
D) a leftward shift in the aggregate supply curve with no change in aggregate demand.
31) Demand pull inflation is caused by
A) aggregate demand increasing along a horizontal aggregate supply curve.
B) aggregate demand decreasing along a horizontal aggregate supply curve.
C) aggregate demand decreasing along an upward sloping or a vertical aggregate supply
curve.
D) aggregate demand increasing along an upward sloping or a vertical aggregate supply
curve.
32) In the original
A
ustin Powers
,
Dr. Evil is cryogenically frozen for thirty years (from the late 1960s
to the late 1990s). Upon his return he hatches a plan to extort one million dollars from various
world governments. His henchmen are unimpressed. What type(s) of inflation have made Dr.
Evil s proposed blackmail amount seem too small?
A) cost push inflation
B) demand pull inflation
C)
b
oth cost price and price pull inflation
D)
b
oth cost push and demand pull inflation
33) Natural disasters like severe earthquakes are devastating to the economy as well as to the
individuals harmed due to
A) supply shocks. B) demand shocks.
C) demand pull inflation. D) demand pull deflation.
34) Suppose the U.S. dollar gains strength against the euro (and against other major currencies).
This strengthening of the dollar will cause which of the following to occur?
A) The aggregate demand curve will shift to the right and the short run aggregate supply
will shift to the right.
B) The aggregate demand curve will shift to the left and the short run aggregate supply will
shift to the right.
C) The aggregate demand curve will shift to the right and the short run aggregate supply
will shift to the left.
D) the aggregate demand curve will shift to the left and the short run aggregate supply will
shift to the left.
35) Suppose the U.S. dollar weakens against the euro (and against other major currencies). This
weakening of the dollar will cause which of the following to occur?
A) The aggregate demand curve will shift to the right and the short run aggregate supply
will shift to the right.
B) The aggregate demand curve will shift to the left and the short run aggregate supply will
shift to the right.
C) The aggregate demand curve will shift to the right and the short run aggregate supply
will shift to the left.
D) The aggregate demand curve will shift to the left and the short run aggregate supply will
shift to the left.
36) The exchange rate last month was $1 3.2 Swiss francs. This month it is $1 3.12 Swiss francs.
We can say that the value of the dollar
A) fell, causing net exports to increase and aggregate demand to rise.
B) fell, causing net exports to decrease and aggregate demand to fall.
C) increased, causing net exports to decrease and aggregate demand to fall.
D) increased, causing net exports to decrease and aggregate demand to rise.
37) The exchange rate last month was $1 3.12 Swiss francs. This month it is $1 3.21 Swiss francs.
We can say that the value of the dollar
A) fell; causing net exports to increase and aggregate demand to rise.
B) fell; causing net exports to decrease and aggregate demand to fall.
C) increased; causing net exports to decrease and aggregate demand to fall.
D) increased; causing net exports to decrease and aggregate demand to rise.
38) An appreciation of the U.S. dollar ________ the price of U.S. imports, and ________ the price of
U.S. exports.
A) lowers, lowers B) increases, increases
C) increases, lowers D) lowers, increases
39) Suppose the U.S. dollar weakens against the euro (and against other major currencies). We
know with certainty that this weakening of the dollar will cause which of the following to
occur?
A) a recessionary gap B) an inflationary gap
C) a deflationary gap D) none of the above
40) Suppose the euro appreciates against the dollar. This causes U.S. exports to become less
expensive for consumers in the European Union, which would likely cause the U.S.
A) aggregate supply to shift leftward. B) aggregate supply to shift rightward.
C) aggregate demand to shift leftward. D) aggregate demand to shift rightward.
41) Refer to the above figure. If the aggregate demand curve shifts beyond AD5
,
which of the
following would we NOT expect?
A) Strong demand pull inflation
B) No increase in real Gross Domestic Product (GDP)
C) Strong and rapid increases in the price level
D) Increases in real net domestic product
42) Refer to the above figure. If the aggregate demand curve shifts beyond AD5
,
then the economy
will experience
A) demand pull inflation. B) cost push inflation.
C) structural inflation. D) stagflation.
43) When the value of the dollar increases, the net effect on the economy
A) will be an increase in short run aggregate supply and a decrease in aggregate demand.
B) will be decrease in short run aggregate supply and an increase in aggregate demand.
C) will be an increase in both aggregate demand and aggregate supply.
D) will be a decrease in both aggregate demand and aggregate supply.
44) When the value of the dollar decreases, the net effect on the economy
A) will be an increase in short run aggregate supply and a decrease in aggregate demand.
B) will be decrease in short run aggregate supply and an increase in aggregate demand.
C) will be an increase in both aggregate demand and aggregate supply.
D) will be a decrease in both aggregate demand and aggregate supply.
45) What effect does a stronger dollar have on aggregate supply? Why?
46) Using a graph, show the effects of a weaker dollar on the economy. Explain.
