1. Business cycles are linked to the interaction between:
a.
the foreign exchange rate and the balance of payments account.
b.
the aggregate demand and aggregate supply curves.
c.
the demand and supply curves for a particular good.
d.
the substitution and the wealth effect.
e.
the long-run aggregate supply curve and the aggregate resource curve.
2. Aggregate demand represents the _____ at alternative price levels.
a.
total spending in the economy
b.
total saving in the economy
c.
total money demand in the economy
d.
total output of the economy
e.
total money supply in the economy
MACR.BOYE.16.34 – ch. 08, 1
Aggregate Demand, Aggregate Supply, and Business Cycles
3. Which of the following is an incorrect statement?
a.
Macroeconomic equilibrium occurs at the intersection of the aggregate demand and aggregate supply curves.
b.
The aggregate supply curve indicates a positive relationship between the price level and GDP.
c.
Other things equal, a downward shift of the aggregate demand curve implies that the economy is entering a
contractionary phase.
d.
Aggregate demand and aggregate supply determine the equilibrium price and quantity of any given good.
e.
The aggregate demand curve indicates a negative relationship between the price level and GDP.
MACR.BOYE.16.34 – ch. 08, 1
Aggregate Demand, Aggregate Supply, and Business Cycles
MACR.BOYE.16.34 – ch. 08, 1
Aggregate Demand, Aggregate Supply, and Business Cycles
4. Which of the following is most likely to lead to an economic contraction?
a.
A decrease in the average price level
b.
An increase in aggregate supply
c.
A decrease in aggregate demand
d.
A decrease in taxes
e.
An increase in transaction demand for money
5. Which of the following is true of the aggregate demand curve?
a.
The aggregate demand curve shows the various levels of expenditures in the economy at alternative price
levels.
b.
The aggregate demand curve implies a positive relationship between inflation and unemployment.
c.
The aggregate demand curve is identical to the income consumption curve.
d.
The aggregate demand curve has the same slope as the aggregate supply curve.
e.
The aggregate demand curve relates relative prices to the quantity demanded of a particular good.
Moderate
MACR.BOYE.16.34 – ch. 08, 1
Supply
United States – Analytic – BB-Legal
Aggregate Demand, Aggregate Supply, and Business Cycles
Knowledge
6. _____ represents the relation between total expenditures, or total spending, and the price level.
a.
b.
c.
d.
e.
Easy
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
Knowledge
7. Which of the following is not a component of the aggregate expenditures of a country?
Easy
MACR.BOYE.16.34 – ch. 08, 1
Aggregate Demand, Aggregate Supply, and Business Cycles
Comprehension
a.
Investment
b.
Government spending
c.
Net exports
d.
Consumption
e.
Transfer payments
8. Which of the following economic changes will decrease household expenditures?
a.
Population growth
b.
Lower income taxes
c.
An appreciation of the domestic currency
d.
Increased consumer confidence
e.
A higher domestic price level
Moderate
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
9. Which of the following is true of the disposable income of the households?
a.
An increase in the average price level lowers the disposable income of the households.
b.
Disposable income refers to the purchasing power of nominal income.
c.
An increase in direct taxes will lower the disposable income of the households.
d.
A decrease in government transfers will increase the disposable income of the households.
e.
Disposable income refers to the net private transfers of the household sector.
Moderate
MACR.BOYE.16.34 – ch. 08, 1
United States – Analytic – BB-Legal
Factors that Influence Aggregate Demand
Revised
10. Lower interest rates on business loans usually result in a(n):
a.
decrease in aggregate demand.
Easy
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
b.
decrease in aggregate supply.
c.
decrease in investment spending.
d.
increase in government spending.
e.
increase in aggregate expenditures.
11. Other things equal, investment spending will increase when:
a.
interest rates are lowered.
b.
firms operate under full capacity.
c.
corporate taxes are increased.
d.
capacity utilization is low.
e.
the cost of capital rises.
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
12. Identify the correct statement.
a.
Investment is positively related to the interest rate.
b.
Investment spending in an economy is stimulated by new production technology.
c.
Investment is positively related to excess capacity.
d.
Investment spending is positively related to the cost of capital goods.
e.
Investment is negatively related to the rate of government spending.
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
13. Other things equal, a decrease in government spending:
a.
increases the slope of the aggregate demand curve.
b.
increases the domestic interest rate.
c.
decreases aggregate expenditures.
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
d.
shifts the aggregate demand curve to the right.
e.
increases the equilibrium level of GDP.
14. Which of the following will cause net exports to rise?
a.
A depreciation of the domestic currency
b.
A fall in foreign income
c.
Higher foreign tariffs on domestic goods
d.
Inflation in domestic economy
e.
A depreciation of the foreign currency
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
15. If the exchange rate is defined as the price of the foreign currency in terms of the domestic currency, an increase in the
exchange rate:
a.
increases domestic demand for foreign goods.
b.
makes domestic goods cheaper in the foreign markets.
c.
lowers net exports.
d.
lowers aggregate expenditure on domestic goods.
e.
increases the domestic country’s external debt burden.
Factors that Influence Aggregate Demand
16. Identify the correct statement.
a.
As domestic income rises, imports rise and net exports fall.
b.
As foreign income rises, net exports fall.
c.
As domestic income falls, imports rise and net exports fall.
d.
As domestic income rises, imports fall and net exports rise.
MACR.BOYE.16.34 – ch. 08, 1
United States – Analytic – BB-Legal
Factors that Influence Aggregate Demand
e.
As foreign income falls, net exports rise.
17. A lower domestic price level tends to:
a.
reduce aggregate expenditures and lower the aggregate quantity of goods and services supplied.
b.
reduce aggregate expenditures and lower aggregate demand.
c.
reduce aggregate expenditures and raise aggregate demand.
d.
increase aggregate expenditures and raise the aggregate quantity of goods and services demanded.
e.
increase aggregate expenditure on foreign goods and lower net exports.
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
18. Other things held constant, when the general price level changes:
a.
we move along the aggregate demand curve.
b.
we shift the aggregate demand curve to the right.
c.
we shift the aggregate demand curve to the left.
d.
we shift the aggregate supply curve to the right.
e.
we shift the aggregate demand curve to the left.
MACR.BOYE.16.34 – ch. 08, 1
United States – Analytic – BB-Legal
The Aggregate Demand Curve
19. Which of the following is an impact of an increase in the general price level?
a.
An increase in aggregate demand for goods and services
b.
A decrease in aggregate supply of goods and services
c.
An increase in the price of the financial assets
d.
A decrease in supply of bonds and other assets
e.
An increase in interest rates
MACR.BOYE.16.34 – ch. 08, 1
Factors that Influence Aggregate Demand
20. The wealth effect and the interest rate effect are changes in the price level that:
a.
bring about a movement along the aggregate demand curve.
b.
lead to a shift of the demand curve for a particular good.
c.
result in a shift of the aggregate supply curve.
d.
help explain the vertical shape of the long-run aggregate supply curve.
e.
cause a movement along the aggregate supply curve.
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
21. The _____ is the change in the purchasing power of assets that causes spending to change when the price level
changes.
a.
purchasing power effect
b.
interest rate effect
c.
substitution effect
d.
income effect
e.
real-balance effect
MACR.BOYE.16.34 – ch. 08, 1
United States – Analytic – BB-Legal
The Aggregate Demand Curve
22. A decrease in the price level will result in:
a.
a downward shift of the AD curve.
b.
an upward shift of the AD curve.
c.
a movement up the AD curve.
d.
a steeper slope of the AD curve.
e.
a movement down the AD curve.
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
23. As the general price level in the country of Norweinshire rose, the average interest rate in the economy increased,
thereby lowering aggregate expenditure. This relationship between price level, interest rate, and aggregate expenditure is
referred to as the:
a.
total price effect.
b.
interest rate effect.
c.
wealth effect.
d.
real-balance effect.
e.
income effect.
MACR.BOYE.16.34 – ch. 08, 1
United States – Analytic – BB-Legal
The Aggregate Demand Curve
The table given below reports the inflation rate in the U.S. and Canada for two years.
Table 8.1
United States
Canada
Inflation Rate (year 1)
0 %
0 %
Inflation Rate (year 2)
0 %
3.6 %
24. Refer to Table 8.1. Assume the exchange rate is fixed at 1.4 CAD (Canadian dollars) = 1 USD (United States dollars).
Between year 1 and year 2, what happens to the U.S. aggregate demand curve?
a.
There is a movement to the right along the AD curve.
b.
The AD curve shifts to the right.
c.
The AD curve becomes relatively elastic.
d.
The AD curve shifts to the left.
e.
There is a movement to the left along the AD curve.
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
25. Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = 1 USD and that price changes for lumber are
identical to the inflation rate for each country. If Canadian lumber is sold in year 1 for 5,500 CAD, what is the price of
that lumber in year 2, given that exchange rates do not change?
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
a.
5,500 CAD
b.
7,977 CAD
c.
5,698 CAD
d.
7,700 CAD
e.
9,700 CAD
26. Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = $1 and that price changes for salmon are
identical to the inflation rate in each country. If U.S. importers pay 10,000 CAD for a trailer of Canadian salmon in year 1,
what is the approximate price of that salmon in year 2, given that exchange rates do not change?
a.
$10,360
b.
$14,504
c.
$7,400
d.
$7,143
e.
$10,000
Challenging
MACR.BOYE.16.34 – ch. 08, 1
United States – Reflective Thinking
The Aggregate Demand Curve
Application
27. The change in aggregate expenditures resulting from a movement in the domestic price level, which in turn changes
the price of domestic goods in relation to foreign goods, is known as the:
a.
international trade effect.
b.
multilateral equilibrium condition.
c.
international exchange rate effect.
d.
magnified international pricing effect.
e.
international deficit effect.
Easy
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
Knowledge
Moderate
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
Application
28. Suppose a representative household holds a bond that is expected to pay a real return of $100 one year from now.
However, over the next year, the inflation rate rises 15 percent more than was originally anticipated. As a consequence:
a.
the real value of household wealth will increase.
b.
consumption spending will increase, and aggregate demand will rise.
c.
the purchasing power of money will rise.
d.
savings will fall and aggregate expenditures will rise.
e.
the aggregate expenditure in the economy will decrease.
29. Assuming a fixed exchange rate, a decrease in U.S. prices relative to European prices will:
a.
decrease European exports to the United States.
b.
increase U.S. imports from Europe.
c.
decrease aggregate spending in the U.S.
d.
not affect U.S. exports or imports.
e.
raise the purchasing power of U.S. consumers.
MACR.BOYE.16.34 – ch. 08, 1
United States – Reflective Thinking
The Aggregate Demand Curve
30. The wealth effect, the interest rate effect, and the international trade effect account for the:
a.
positive slope of the short-run aggregate supply curve.
b.
the shape of the long-run aggregate supply curve.
c.
positive slope of the aggregate demand curve.
d.
negative slope of the aggregate demand curve.
e.
negative slope of the short-run aggregate supply curve.
MACR.BOYE.16.34 – ch. 08, 1
The Aggregate Demand Curve
31. The AD curve will shift to the right if:
MACR.BOYE.16.34 – ch. 08, 1
United States – Reflective Thinking
The Aggregate Demand Curve
a.
people become pessimistic about the future of the economy.
b.
there is a decrease in foreign income.
c.
the government decreases spending.
d.
the domestic price level decreases.
e.
the foreign price level increases.
32. If foreign income falls, there will be _____.
a.
an increase in foreign spending
b.
a rise in domestic aggregate demand
c.
no change in either domestic net exports or aggregate demand
d.
a decline in the domestic price level
e.
a decrease in domestic aggregate demand
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
33. Which of the following is most likely to lead to an inward shift of the aggregate demand curve?
a.
A decrease in the prices of raw materials
b.
A decline in foreign price levels
c.
A decline in the domestic price level
d.
An optimistic expectation about the economy’s performance in the near future
e.
A decrease in foreign income
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
34. Which of the following accounts for a movement along a given AD curve?
a.
The substitution effect
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
b.
The tax rate effect
c.
The real-balance effect
d.
The foreign aid effect
e.
The government spending effect
35. Which of the following illustrates an optimistic expectation of the people about the economy?
a.
A movement to the right along the aggregate demand curve
b.
A rightward shift of the aggregate demand curve
c.
A leftward shift of the aggregate demand curve
d.
A movement to the left along the aggregate demand curve
e.
A flatter slope of the aggregate demand curve
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
36. Which of the following would result in a decrease in aggregate demand?
a.
A higher domestic price level
b.
Higher raw materials prices
c.
Higher rates of tax
d.
Technological advances
e.
Expansionary government policy
MACR.BOYE.16.35 – ch. 08, 2
United States – Analytic – BB-Legal
The Aggregate Demand Curve
37. An increase in aggregate demand due to higher foreign income will cause:
a.
domestic equilibrium GDP to increase.
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
b.
domestic equilibrium GDP to decrease.
c.
domestic prices to fall.
d.
foreign prices to fall.
e.
foreign equilibrium GDP to fall.
38. Pessimistic consumer expectations and decreased government spending are both associated with:
a.
a downward movement along the aggregate demand curve.
b.
an upward movement along the aggregate demand curve.
c.
a leftward shift of the aggregate demand curve.
d.
a rightward shift of the aggregate demand curve.
e.
a steeper slope of the aggregate demand curve.
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
39. Other things remaining unchanged, the flatter the aggregate supply curve:
a.
the greater the expansionary effect of an increase in aggregate demand.
b.
the smaller the inflationary effect of an increase in aggregate demand.
c.
the greater the recessionary effect of a decrease in aggregate demand.
d.
the greater the expansionary effect of a decrease in aggregate demand.
e.
the smaller the recessionary effect of an increase in aggregate demand.
MACR.BOYE.16.36 – ch. 08, 3
Aggregate Demand, Aggregate Supply, and Business Cycles
40. Identify the correct statement about the aggregate supply curve.
a.
The aggregate supply curve is irrelevant for determining macroeconomic equilibrium.
b.
The aggregate supply curve shows the various quantities of a particular good that is produced in the economy.
c.
The aggregate supply curve shows an inverse relationship between price level and employment.
MACR.BOYE.16.35 – ch. 08, 2
The Aggregate Demand Curve
d.
The aggregate supply curve shifts inward with an increase in consumer spending, investment, government
spending, and net exports.
e.
The aggregate supply curve relates total output in the economy to alternative price levels.
41. The steepness of the aggregate supply curve depends on the:
a.
rate of inflation in the economy.
b.
change in relative prices of commodities.
c.
substitutability of the inputs used in producing various goods and services.
d.
ability of the producers to respond to price-level changes in the short run.
e.
the market rate of interest.
MACR.BOYE.16.36 – ch. 08, 3
Aggregate Supply
42. Which of the following explains the effect of prices on profits in the short-run?
a.
The direct relationship between aggregate quantity demanded and national output.
b.
The direct relationship between aggregate quantity supplied and the price level.
c.
The inverse relationship between aggregate quantity demanded and national output.
d.
The inverse relationship between aggregate quantity supplied and profits.
e.
The inverse relationship between aggregate quantity supplied and national output.
Aggregate Supply
43. Which of the following is true of the aggregate supply curve?
a.
It shows the inverse relationship between prices and national output.
b.
It shows the positive relationship between the price level and the supply of all goods produced in the economy.
c.
It shows the amount of real GDP consumed at different price levels.
d.
It is a negatively sloped curve that shows the relationship between the price level and the cost of production of
MACR.BOYE.16.36 – ch. 08, 3
Aggregate Demand, Aggregate Supply, and Business Cycles
firms in the economy.
e.
It shows the positive relationship between price and quantity supplied of an individual good.
44. Which of the following is not held constant in the short run when determining the aggregate supply curve?
a.
Interest rates
b.
Rent
c.
Wages
d.
Profit
e.
Price level
Easy
MACR.BOYE.16.36 – ch. 08, 3
Aggregate Supply
Knowledge
45. In the short-run, an increase in the average price level in the economy will cause:
a.
demand for a good to increase but total production to decline.
b.
profits to rise and thus, total production to increase.
c.
interest rates to fall and thus, total production to decline.
d.
input costs to fall and thus, total production to rise.
e.
input costs to fall and thus, total production to decline.
b
Moderate
MACR.BOYE.16.36 – ch. 08, 3
Aggregate Supply
Knowledge
Revised
46. The positive slope of the AS curve is a _____ phenomena, when the _____ are held constant.
a.
long-run; business profits
b.
short-run; government expenditures
c.
short-run; costs of production
d.
long-run; commodity prices
b
Moderate
MACR.BOYE.16.36 – ch. 08, 3
United States – Analytic – BB-Legal
Aggregate Supply
Knowledge
e.
long-run; aggregate expenditures
47. As the level of real GDP increases, the short-run aggregate supply curve:
a.
shifts to the right.
b.
shifts to the left.
c.
becomes flatter.
d.
becomes steeper.
e.
becomes horizontal to the real GDP axis.
d
MACR.BOYE.16.37 – ch. 08, 4
Aggregate Supply
Knowledge
48. The degree of responsiveness of aggregate output to a price change declines as the:
a.
rate of savings increases.
b.
economy approaches its maximum potential output.
c.
level of real GDP declines over time.
d.
the price elasticity of imports declines.
e.
the excess capacity of all the firms in the economy increases over time.
b
MACR.BOYE.16.37 – ch. 08, 4
United States – Reflective Thinking
Aggregate Supply
Comprehension
Revised
49. If the national output cannot be increased unless the productive capacity or potential GDP increases, the aggregate
supply curve is:
a.
downward-sloping.
b.
U-shaped.
c.
vertical.
d.
upward-sloping.
MACR.BOYE.16.36 – ch. 08, 3
Aggregate Supply
Knowledge
e.
horizontal.
50. Consider the following statement: “If the government attempts to raise employment through increased fiscal spending,
all it will end up doing is increasing the price level.” The statement rests on the assumption that:
a.
the aggregate demand curve is a horizontal line.
b.
the aggregate supply curve is a vertical line.
c.
the aggregate supply curve is upward-sloping.
d.
the aggregate supply curve is downward-sloping.
e.
the aggregate supply curve is a horizontal line.
Challenging
MACR.BOYE.16.38 – ch. 08, 5
Aggregate Supply
51. The long-run aggregate supply of an economy at the potential level of real GDP is graphically represented by:
a.
a horizontal line.
b.
an upward-sloping curve.
c.
a downward-sloping curve.
d.
a vertical line.
e.
a backward bending curve.
Easy
MACR.BOYE.16.38 – ch. 08, 5
United States – Analytic – BB-Legal
Aggregate Supply
Knowledge
52. Firms’ profits or production do not increase in the long run because:
a.
some factors of production are fixed in the long run.
b.
all the factors of production are variable in the long run.
c.
changes in factor costs completely offset any change in the price level.
d.
there exists an excess capacity in the economy in the long run.
e.
factor costs remain fixed in the long run.
MACR.BOYE.16.38 – ch. 08, 5
Aggregate Supply
Comprehension
53. Which of the following statements is true about the economy in the long run?
a.
Equilibrium output is below potential GDP and the rate of unemployment exceeds the natural rate.
b.
Production costs are close to zero in the long run.
c.
The rate of unemployment is zero in the long run.
d.
The aggregate demand curve plays no role in determining the equilibrium level of real GDP.
e.
The aggregate supply curve is a horizontal line.
MACR.BOYE.16.38 – ch. 08, 5
Aggregate Supply
54. What happens to aggregate supply when production costs adjust completely to price increases?
a.
Both equilibrium output and prices increase
b.
Only prices rise; equilibrium output remains fixed
c.
Only equilibrium output rises; equilibrium prices remain fixed
d.
Equilibrium output falls while prices rise
e.
Both equilibrium output and prices remain fixed
MACR.BOYE.16.38 – ch. 08, 5
Aggregate Supply
55. In the long-run, if the economy is operating at the full employment level, the equilibrium level of real GDP is
determined solely by the:
a.
level of unemployment in the economy.
b.
rate of inflation in the economy.
c.
real interest rate in the economy.
d.
aggregate supply curve of the economy.
MACR.BOYE.16.38 – ch. 08, 5
Aggregate Supply
e.
aggregate demand curve of the economy.
56. The short-run aggregate supply curve will shift to the left if:
a.
there is a significant increase in worker productivity.
b.
workers on fixed-wage contracts expect higher inflation.
c.
the price of raw materials decreases.
d.
the price of capital goods rises.
e.
wages fall in anticipation of higher prices.
MACR.BOYE.16.39 – ch. 08, 6
Aggregate Supply
57. Given that energy is an input in production, the development of a cheaper source of energy will result in:
a.
a lower price level and a lower amount of production.
b.
a higher price level and a higher amount of production.
c.
a lower amount of production at every price level.
d.
a higher amount of production at every price level.
e.
a lower profit at every price level.
MACR.BOYE.16.39 – ch. 08, 6
United States – Reflective Thinking
Aggregate Supply
58. Which of the following could lead to a decline in aggregate supply in the U.S.?
a.
The discovery of new mineral deposits in Arizona
b.
Higher real wage rates in the U.S.
c.
Lower personal income in France
d.
Cutbacks in government borrowing
e.
Rapid depreciation of the Swiss franc
MACR.BOYE.16.38 – ch. 08, 5
Aggregate Supply
The table given below reports the average hourly wage received by laborers and the price index for two years.
Table 8.2
Year 1
Year 2
Average hourly wage
$6.00
$7.00
Price index
117
125
59. Refer to Table 8.2. The data in the table suggests that in year 2:
a.
aggregate supply remains constant.
b.
aggregate demand decreases.
c.
aggregate supply decreases.
d.
aggregate demand increases.
e.
aggregate supply increases
MACR.BOYE.16.39 – ch. 08, 6
Aggregate Supply
60. The long-run aggregate supply increases as:
a.
new production technology is introduced.
b.
the quality of labor declines.
c.
the average price level increases.
d.
natural resources become depleted.
e.
the minimum wage rate increases.
MACR.BOYE.16.39 – ch. 08, 6
Aggregate Supply
61. Suppose in Country X, anticipating high inflation in the economy, wages of workers are increased in the beginning of
a financial year. However, prices remain unchanged during the year. Everything else remaining constant, which of the
MACR.BOYE.16.39 – ch. 08, 6
Aggregate Supply