Aggregate Demand and Aggregate Supply
Multiple Choice – Section 00: Introduction
1. Which of the following explains why production rises in most years?
a. increases in the labor force
b. increases in the capital stock
c. advances in technological knowledge
d. All of the above are correct.
2. A relatively mild period of falling incomes and rising unemployment is called a(n)
a. depression.
b. recession.
c. expansion.
d. business cycle.
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3. During a recession the economy experiences
a. rising employment and income.
b. rising employment and falling income.
c. rising income and falling employment.
d. falling employment and income.
4. During recessions
a. workers are laid off.
b. factories are idle.
c. firms may find they are unable to sell all they produce.
d. All of the above are correct.
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5. During a recession the economy experiences
a. rising income and unemployment.
b. rising income and falling unemployment.
c. falling income and rising unemployment.
d. falling income and unemployment.
6. Most economists use the aggregate demand and aggregate supply model primarily to analyze
a. short–run fluctuations in the economy.
b. the effects of macroeconomic policy on the prices of individual goods.
c. the long-run effects of international trade policies.
d. productivity and economic growth.
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7. Which of the following is not correct?
a. The model of aggregate demand and aggregate supply is used by most economists to analyze
short-run fluctuations.
b. During a recession firms cut back production and workers are laid off.
c. A recession is a period of declining real incomes and declining unemployment.
d. A depression is a severe recession.
Multiple Choice – Section 01: Three Key Facts about Economic Fluctuations
1. Which of the following is correct?
a. Short run fluctuations in economic activity happen only in developing countries.
b. During economic contractions most firms experience rising profits.
c. Recessions come at irregular intervals and are easy to predict.
d. When real GDP falls, the rate of unemployment rises.
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2. When we say that economic fluctuations are “irregular and unpredictable,” we mean that
a. the relationship between output and unemployment is erratic and difficult to characterize.
b. when one macroeconomic variable that measures income or spending is falling, other
macroeconomic variables that measure income or spending are likely to be rising.
c. recessions do not occur at regular intervals.
d. All of the above are correct.
3. Which of the following is correct?
a. Economic fluctuations are easily predicted by competent economists.
b. Recessions have never occurred very close together.
c. Spending, income, and production do not fluctuate closely with real GDP.
d. None of the above is correct.
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4. Which of the following is correct?
a. Real GDP is the variable most commonly used to measure short-run economic fluctuations.
These fluctuations can be predicted with some accuracy.
b. Real GDP is the variable most commonly used to measure short-run economic fluctuations. It is
almost impossible to predict these fluctuations with much accuracy.
c. Nominal GDP is the variable most commonly used to measure short–run economic fluctuations.
These fluctuations can be predicted with some accuracy.
d. Nominal GDP is the variable most commonly used to measure short–run economic fluctuations.
It is almost impossible to predict these fluctuations with much accuracy.
5. Which of the following is most commonly used to monitor short–run changes in economic activity?
a. the inflation rate.
b. real GDP.
c. interest rates.
d. value of the U.S. dollar in the foreign exchange market.
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6. Real GDP
a. is the current dollar value of all goods produced by the citizens of an economy within a given
time.
b. measures economic activity and income.
c. is used primarily to measure long–run changes rather than short-run fluctuations.
d. All of the above are correct.
7. During recessions
a. sales and profits fall.
b. sales and profits rise.
c. sales rise, profits fall.
d. profits fall, sales rise.
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8. Which of the following is correct?
a. Over the business cycle investment fluctuates more than consumption.
b. Economic fluctuations are easy to predict.
c. During recessions employment rises.
d. Because of government policy the U.S. had zero recessions in the last 25 years.
9. Which of the following fall during a recession?
a. both retail sales and employment
b. retail sales but not employment
c. employment but not retail sales
d. neither employment nor retail sales
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10. During recessions which type of spending falls?
a. consumption and investment
b. investment but not consumption
c. consumption but not investment
d. neither consumption nor investment
11. The investment component of GDP measures spending on
a. financial assets such as stocks and bonds. During recessions it declines by a relatively large
amount.
b. residential construction, business equipment, business structures, and changes in inventory.
During recessions it declines by a relatively large amount.
c. financial assets such as stocks and bonds. During recessions it declines by a relatively small
amount.
d. residential construction, business equipment, business structures, and changes in inventory.
During recessions it declines by a relatively small amount.
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12. During recessions investment
a. falls by a larger percentage than GDP.
b. falls by about the same percentage as GDP.
c. falls by a smaller percentage than GDP.
d. falls but the percentage change is sometimes much larger and sometimes much smaller.
13. During recessions declines in investment account for about
a. 1/6 of the decline in real GDP.
b. 1/7 of the decline in real GDP.
c. 1/3 of the decline in real GDP.
d. 2/3 of the decline in real GDP.
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Figure 33-1.
14. Refer to Figure 33-1. Line A is
a. investment spending.
b. real GDP.
c. unemployment rate.
d. CPI.
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Figure 33-2.
15. Refer to Figure 33-2. Line X is
a. investment spending.
b. real GDP.
c. unemployment rate.
d. CPI.
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16. Historically, the change in real GDP during recessions has been
a. mostly a change in investment spending.
b. mostly a change in consumption spending.
c. about equally divided between consumption and investment spending.
d. sometimes mostly a change in consumption and sometimes mostly a change in investment.
17. Investment is a
a. small part of real GDP, so it accounts for a small share of the fluctuation in real GDP.
b. small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
c. large part of real GDP, so it accounts for a large share of the fluctuation in real GDP.
d. large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP.
18. Which part of real GDP fluctuates most over the course of the business cycle?
a. consumption expenditures
b. government expenditures
c. investment expenditures
d. net exports
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19. Which of the following accounts for about two–thirds of the decline in output during a recession?
a. the decline in government purchases.
b. the decline in total consumption spending.
c. the decline in investment spending.
d. the decline in net exports.
20. Recession come at
a. regular intervals. During recessions consumption spending falls relatively more than investment
spending.
b. regular intervals. During recessions investment spending falls relatively more than consumption
spending.
c. irregular intervals. During recessions consumption spending falls relatively more than
investment spending.
d. irregular intervals. During recessions investment spending falls relatively more than
consumption spending.
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21. Which of the following typically rises during a recession?
a. investment.
b. unemployment.
c. tax revenues.
d. new home construction.
22. Real GDP
a. moves in the opposite direction as unemployment.
b. increases as production falls.
c. falls when households save a smaller fraction of their income.
d. All of the above are correct.
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23. As recessions begin, income
a. and unemployment both rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment both fall.
24. Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to
see most of these pairs in the U.S. Which pair of GDP growth rates and unemployment rates is
realistic?
a. 10 percent, 1 percent
b. 2 percent, 12 percent
c. –1 percent, 8 percent
d. -2 percent, 2 percent
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25. Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to
see most of these pairs in the U. S. Which pair of GDP growth rates and unemployment rates is
realistic?
a. 5 percent, 1 percent
b. 3 percent, 5 percent
c. –1 percent, 3 percent
d. -2 percent, 4 percent
26. In the last half of 1999, the U.S. unemployment rate was about 4 percent. Historical experience
suggests that this is
a. above the natural rate, so real GDP growth was likely low.
b. above the natural rate, so real GDP growth was likely high.
c. below the natural rate, so real GDP growth was likely low.
d. below the natural rate, so real GDP growth was likely high.
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27. During the last half of 2012, the U.S. unemployment rate was just under 8 percent. Historical
experience suggests that this is
a. above the natural rate, so real GDP growth was likely low.
b. above the natural rate, so real GDP growth was likely high.
c. below the natural rate, so real GDP growth was likely low.
d. below the natural rate, so real GDP growth was likely high.
28. During recessions employment typically
a. falls substantially. As the recession ends, employment rises rapidly.
b. rises substantially. As the recession ends, employment declines gradually.
c. falls substantially. As the recession ends, employment rises gradually.
d. rises substantially. As the recession ends, employment declines rapidly.
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29. Historically, as recessions have ended the unemployment rate declined
a. gradually to near zero.
b. rapidly to near zero.
c. gradually to a rate of about 5%-6%.
d. rapidly to a rate of about 5%-6%.
30. Historical evidence for the U.S. economy indicates that
a. recessions have occurred roughly once every six years since the 1960s.
b. the unemployment rate usually decreases during a recession and increases shortly after the
recession ends.
c. real GDP usually remains roughly constant during a recession and decreases shortly after the
recession ends.
d. changes in real GDP over the business cycle are largely attributable to changes in investment
over the business cycle.
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31. Which of the following rises during recessions?
a. layoffs and consumer spending
b. layoffs but not consumer spending
c. consumer spending but not layoffs
d. neither layoffs nor consumer spending
32. In 2008, the United States was in recession. Which of the following things would you not expect
to have happened?
a. increased layoffs and firings.
b. a higher rate of bankruptcy.
c. increased claims for unemployment insurance.
d. increased real GDP.