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40. The model of aggregate demand and aggregate supply
a. is different from the model of supply and demand for a particular market, in that we cannot
focus on the substitution of resources between markets to explain aggregate relationships.
b. is different from the model of supply and demand for a particular market, in that we have to
separate real and nominal variables in the aggregate model.
c. is a straightforward extension of the model of supply and demand for a particular market, in
which substitution of resources between markets is highlighted.
d. is a straightforward extension of the model of supply and demand for a particular market, in
which the interaction between real and nominal variables is highlighted.
Multiple Choice – Section 03: The Aggregate-Demand Curve
1. The aggregate demand and aggregate supply graph has the
a. quantity of output on the horizontal axis. Output is best measured by real GDP.
b. quantity of output on the horizontal axis. Output is best measured by nominal GDP.
c. quantity of output on the vertical axis. Output is best measured by real GDP.
d. quantity of output on the vertical axis. Output is best measured by nominal GDP.
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2. The aggregate-demand curve shows that a decrease in the price level
a. decreases the dollar value of goods and services demanded in the economy.
b. decreases the real value of goods and services demanded in the economy.
c. increases the dollar value of goods and services demanded in the economy.
d. increases the real value of goods and services demanded in the economy.
3. The aggregate-demand curve
a. has a slope that is explained in the same way as the slope of the demand curve for a particular
product.
b. is vertical in the long run.
c. shows an inverse relation between the price level and the quantity of all goods and services
demanded.
d. All of the above are correct.
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4. Which of the following is included in the aggregate demand for goods and services?
a. consumption demand
b. investment demand
c. net exports
d. All of the above are correct.
5. Which of the following is not included in aggregate demand?
a. purchases of stock and bonds
b. purchases of services such as visits to the doctor
c. purchases of capital goods such as equipment in a factory
d. purchases by foreigners of consumer goods produced in the United States
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6. When the price level falls the quantity of
a. consumption goods demanded rises, while the quantity of net exports demanded falls.
b. consumption goods demanded and the quantity of net exports demanded both rise.
c. consumption goods demanded and the quantity of net exports demanded both fall.
d. consumption goods demanded falls, while the quantity of net exports demand rises.
7. Other things the same, as the price level decreases it induces greater spending on
a. both net exports and investment.
b. net exports but not investment.
c. investment but not net exports.
d. neither net exports nor investment.
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8. Other things the same, a fall in an economy‘s overall level of prices tends to
a. raise both the quantity demanded and supplied of goods and services.
b. raise the quantity demanded of goods and services, but lower the quantity supplied.
c. lower the quantity demanded of goods and services, but raise the quantity supplied.
d. lower both the quantity demanded and the quantity supplied of goods and services.
9. The effect of an increase in the price level on the aggregate-demand curve is represented by a
a. shift to the right of the aggregate-demand curve.
b. shift to the left of the aggregate-demand curve.
c. movement to the left along a given aggregate-demand curve.
d. movement to the right along a given aggregate-demand curve.
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10. Which of the following would help explain why the aggregate demand curve slopes downward?
a. An unexpectedly low price level raises the real wage, which causes firms to hire fewer
workers and produce a smaller quantity of goods and services.
b. A lower price level causes domestic interest rates to rise and the real exchange rate to
appreciate, which stimulates spending on net exports.
c. A higher price level increases real wealth, which stimulates spending on consumption.
d. A lower price level reduces the interest rate, which encourages greater spending on investment
goods.
11. The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for
a. the slope of short-run aggregate supply.
b. the slope of long-run aggregate supply.
c. the slope of the aggregate-demand curve.
d. everything that makes the aggregate-demand curve shift.
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12. Which of the following effects helps to explain the slope of the aggregate-demand curve?
a. the exchange-rate effect
b. the wealth effect
c. the interest-rate effect
d. All of the above are correct.
13. When the price level changes, which of the following variables will change and thereby cause a
change in the aggregate quantity of goods and services demanded?
a. the real value of wealth
b. the interest rate
c. the value of currency in the market for foreign exchange
d. All of the above are correct.
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14. Changes in the price level affect which components of aggregate demand?
a. only consumption and investment
b. only consumption and net exports
c. only investment
d. consumption, investment, and net exports
15. If the price level falls, the real value of a dollar
a. rises, so people will want to buy more.
b. rises, so people will want to buy less.
c. falls, so people will want to buy more.
d. falls, so people will want to buy less.
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16. If the price level falls, the real value of a dollar
a. rises, so people will want to buy more. This response helps explain the slope of the aggregate
demand curve.
b. rises, so people will want to buy more. This response shifts aggregate demand to the right.
c. falls, so people will want to buy less. This response helps explain the slope of the aggregate
demand curve.
d. falls, so people will want to buy less. This response shifts aggregate demand to the left.
17. A decrease in the price level
a. increases the quantity of goods and services supplied in the short run.
b. decreases the quantity of goods and services supplied in the long run.
c. decreases the quantity of goods and services demanded.
d. increases the quantity of goods and services demanded.
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18. Which of the following rises when the U.S. price level falls?
a. interest rates
b. the value of the dollar in the market for foreign-currency exchange
c. real wealth
d. All of the above are correct.
19. Other things the same, as the price level falls,
a. the money supply falls.
b. interest rates rise.
c. a dollar buys more domestic goods.
d. the aggregate-demand curve shifts right.
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20. The aggregate quantity of goods and services demanded changes as the price level rises because
a. real wealth falls, interest rates rise, and the dollar appreciates.
b. real wealth falls, interest rates rise, and the dollar depreciates.
c. real wealth rises, interest rates fall, and the dollar appreciates.
d. real wealth rises, interest rates fall, and the dollar depreciates.
21. The aggregate quantity of goods and services demanded changes as the price level falls because
a. real wealth falls, interest rates rise, and the dollar appreciates.
b. real wealth falls, interest rates rise, and the dollar depreciates.
c. real wealth rises, interest rates fall, and the dollar appreciates.
d. real wealth rises, interest rates fall, and the dollar depreciates.
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22. Other things the same, an increase in the price level makes the dollars people hold worth
a. more, so they can buy more.
b. more, so they can buy less.
c. less, so they can buy more.
d. less, so they can buy less.
23. When the price level increases, the real value of people’s money holdings
a. falls, so they buy more.
b. falls, so they buy less.
c. rises, so they buy more.
d. rises, so they buy less.
24. Other things the same, a decrease in the price level makes the dollars people hold worth
a. more, so they can buy more.
b. more, so they can buy less.
c. less, so they can buy more.
d. less, so they can buy less.
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25. Other things the same, an increase in the price level makes consumers feel
a. less wealthy, so the quantity of goods and services demanded falls.
b. less wealthy, so the quantity of goods and services demanded rises.
c. more wealthy, so the quantity of goods and services demanded rises.
d. more wealthy, so the quantity of goods and services demanded falls.
26. Other things the same, a decrease in the price level makes consumers feel
a. less wealthy, so the quantity of goods and services demanded falls.
b. less wealthy, so the quantity of goods and services demanded rises.
c. more wealthy, so the quantity of goods and services demanded rises.
d. more wealthy, so the quantity of goods and services demanded falls.
27. People will buy more if the price level
a. rises because rising prices increase the real value of a dollar.
b. rises because rising prices decrease the real value of a dollar.
c. falls because falling prices increase the real value of a dollar.
d. falls because falling prices decrease the real value of a dollar.
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28. In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea
that, when the price level decreases, the real wealth of households
a. increases and as a result consumption spending increases. This effect contributes to the
downward slope of the aggregate-demand curve.
b. decreases and as a result consumption spending increases. This effect contributes to the
upward slope of the aggregate-supply curve.
c. increases and as a result households increase their money holdings; in turn, interest rates
increase and investment spending decreases. This effect contributes to the downward slope of
the aggregate-demand curve.
d. decreases and as a result households increase their money holdings; in turn, interest rates
increase and investment spending decreases. This effect contributes to the upward slope of the
aggregate-supply curve.
29. As the price level rises
a. people will want to buy more bonds, so the interest rate rises.
b. people will want to buy fewer bonds, so the interest rate falls.
c. people will want to buy more bonds, so the interest rate falls.
d. people will want to buy fewer bonds, so the interest rate rises.
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30. As the price level rises
a. people will want to hold more money, so the interest rate rises.
b. people will want to hold more money, so the interest rate falls.
c. people will want to hold less money, so the interest rate falls.
d. people will want to hold less money, so the interest rate rises.
31. As the price level falls
a. people will want to buy more bonds, so the interest rate rises.
b. people will want to buy fewer bonds, so the interest rate falls.
c. people will want to buy more bonds, so the interest rate falls.
d. people will want to buy fewer bonds, so the interest rate rises.
32. As the price level falls
a. people will want to hold more money, so the interest rate rises.
b. people will want to hold more money, so the interest rate falls.
c. people will want to hold less money, so the interest rate falls.
d. people will want to hold less money, so the interest rate rises.
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33. As the price level rises
a. people are more willing to lend, so interest rates rise.
b. people are more willing to lend, so interest rates fall.
c. people are less willing to lend, so interest rates fall.
d. people are less willing to lend, so interest rates rise.
34. As the price level falls
a. people are more willing to lend, so interest rates rise.
b. people are more willing to lend, so interest rates fall.
c. people are less willing to lend, so interest rates fall.
d. people are less willing to lend, so interest rates rise.
35. Other things the same, a decrease in the price level motivates people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate rises.
d. more money, so they lend less, and the interest rate falls.
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36. Other things the same, an increase in the price level induces people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate falls.
d. more money, so they lend less, and the interest rate rises.
37. When the price level falls
a. people want to hold less money.
b. the interest rate falls.
c. investment spending rises.
d. All of the above are correct.
38. When the price level falls
a. people want to hold more money.
b. the interest rate rises.
c. investment spending rises.
d. All of the above are correct.
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39. When the price level falls
a. The interest rate falls because people will want to hold more money and so sell bonds.
b. Firms will want to spend more on new business buildings and business equipment and
households will want to spend more building new homes.
c. Both A and B are correct.
d. None of the above are correct.
40. When the price level falls
a. the interest rate rises, so the quantity of goods and services demand rises.
b. the interest rate rises, so the quantity of goods and services demand falls.
c. the interest rate falls, so the quantity of goods and services demand rises.
d. the interest rate falls, so the quantity of goods and services demand falls.
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41. Other things the same, when the price level rises, interest rates
a. rise, so firms increase investment.
b. rise, so firms decrease investment.
c. fall, so firms increase investment.
d. fall, so firms decrease investment.
42. Other things the same, when the price level falls, interest rates
a. rise, so firms increase investment.
b. rise, so firms decrease investment.
c. fall, so firms increase investment.
d. fall, so firms decrease investment.
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43. Which of the following decreases in response to the interest-rate effect from an increase in the
price level?
a. both investment and consumption
b. consumption but not investment
c. investment but not consumption
d. neither investment nor consumption
44. Other things the same, when the price level rises, interest rates
a. rise, which means consumers will want to spend more on homebuilding.
b. rise, which means consumers will want to spend less on homebuilding.
c. fall, which means consumers will want to spend more on homebuilding.
d. fall, which means consumers will want to spend less on homebuilding.