Money, Banking, and the Financial System (Hubbard/O’Brien)
Chapter 17 Monetary Theory I: The Aggregate Demand and Aggregate Supply Model
17.1 The Aggregate Demand Curve
1) Which of the following is NOT included in aggregate demand?
A) Demand for goods and services for consumption
B) Investment in business plant and equipment
C) Net exports
D) Investment in Treasury bonds
2) Which of the following expressions is correct?
A) AE = C + I + G – NX.
B) AE = C + I + G + NX.
C) AE = C + I + (G – T) + NX.
D) AE = C + I + (G – T) – NX.
3) The aggregate demand curve illustrates the relationship between
A) the aggregate demand for goods and services, and the real interest rate.
B) the aggregate demand for goods and services, and the level of current output.
C) the level of current output and the real interest rate.
D) the aggregate demand for goods and services, and the price level.
4) The best explanation of why the aggregate demand curve has a negative slope is that
A) at a higher price level households cut back on their spending on goods and services.
B) at a higher price level business firms wish to produce more goods and services.
C) a higher price level results in lower real balances and a higher real interest rate.
D) a higher price level results in less government spending on transfers, such as unemployment
insurance and social security payments.
5) A rise in the real interest rate will cause which of the components of aggregate demand to
decline?
A) Only C
B) Only C and I
C) Only C, I, and NX
D) C, I, G, and NX
6) Everything else being constant, a lower real interest rate
A) increases desired saving and net exports.
B) decreases desired saving but increases net exports.
C) increases desired saving and investment.
D) increases desired investment but decreases net exports.
7) A decrease in the price level will lead to
A) a decrease in the real interest rate and an increase in net exports.
B) an increase in the real interest rate and an increase in net exports.
C) a decrease in the real interest rate and a decrease in net exports.
D) an increase in the real interest rate and a decrease in net exports.
8) An increase in the price level reduces net exports because
A) it leads indirectly to a higher exchange rate.
B) it leads indirectly to a lower exchange rate.
C) it leads indirectly to a lower real interest rate.
D) it leads directly to higher real money balances.
9) A shift of the AD curve
A) to the right is considered expansionary, and a shift to the left is considered contractionary.
B) to the left is considered expansionary, and a shift to the right is considered contractionary.
C) to the right or to the left is considered contractionary.
D) to the right or to the left is considered expansionary.
10) Which of the following will NOT shift the aggregate demand curve to the right?
A) a decline in the price level
B) an increase in government expenditures
C) an increase in investment
D) an increase in the money supply
11) Which of the following would shift the aggregate demand curve to the left?
A) an increase in the money supply
B) a cut in federal income taxes
C) an expected decrease in future income
D) an increase in the price level
12) Which of the following would NOT shift the aggregate demand curve to the left?
A) an increase in money demand
B) a cut in federal government spending
C) a reduction in federal income taxes
D) a decrease in consumption spending
13) If there is a decrease in the expected future profitability of capital,
A) the aggregate demand curve will shift right.
B) the aggregate demand curve will shift left.
C) the aggregate demand curve will become steeper.
D) the aggregate demand curve will be unaffected.
14) If there is a decrease in foreign demand for U.S. goods due to a recession in Europe
A) the U.S. aggregate demand will shift right.
B) the U.S. aggregate demand will shift left.
C) the U.S. aggregate demand will not be affected.
D) the U.S. aggregate demand will become steeper.
15) An increase in all of the following will increase AD EXCEPT
A) investment.
B) savings.
C) exports.
D) government spending.
16) Why is the short-term nominal interest rate the opportunity cost of holding money?
17) How does an increase in the price level lead to a higher interest rate?
18) How does an increase in interest rates affect net exports?
17.2 The Aggregate Supply Curve
1) The aggregate supply curve represents levels of output that producers are willing to sell at
A) each level of the real interest rate.
B) each level of real GDP.
C) each price level.
D) each inflation rate.
2) Most economists believe that changes in the price level have
A) no effect on the quantity of output supplied in either the short run or the long run.
B) an effect on the quantity of output supplied in the short run, but not in the long run.
C) an effect on the quantity of output supplied in the long run, but not in the short run.
D) an effect on the quantity of output supplied in both the short run and the long run.
3) Most economists believe that the short-run aggregate supply curve
A) slopes down.
B) slopes up.
C) is a vertical line.
D) is a horizontal line.
4) Most economists believe that the aggregate supply curve is
A) upward-sloping in the short run, but vertical in the long run.
B) upward-sloping in the long run, but vertical in the short run.
C) upward-sloping in both the short run and in the long run.
D) vertical in both the short run and in the long run.
5) The new classical explanation of aggregate supply in the short run builds on research by
A) Irving Fisher.
B) John Maynard Keynes.
C) Robert Lucas.
D) Robert Solow.
6) The new classical explanation of aggregate supply is also known as
A) Monetarism.
B) Keynesianism.
C) the misperception theory.
D) the adaptive expectations theory.
7) The key concept in the new classical approach to the aggregate supply curve is
A) the impact of imperfect information on business decisions.
B) the impact of changes in the price level on real balances.
C) the inverse relationship between the real interest rate and desired investment spending.
D) the crowding out of investment spending by government spending.
8) The new classical approach to the aggregate supply curve assumes that businesses are
A) better informed about the general price level than they are about prices in their own markets.
B) better informed about prices in their own markets than they are about the general price level.
C) equally well informed about prices in their own markets and the general price level.
D) reluctant to engage in investment spending because of a lack of information concerning future
prices.
9) According to the new classical approach to the aggregate supply curve, the aggregate supply
curve slopes upward because
A) increases in the price level result in lower real balances.
B) higher current output results in higher desired investment.
C) higher prices result in higher levels of spending as consumers attempt to stay ahead of
inflation.
D) businesses have difficulty in distinguishing relative price increases from general price
increases.
10) Which of the following is the correct expression for short-run aggregate supply in the new
classical view?
A) YP = Y + a(P – Pe)
B) Y = YP + a(P – Pe)
C) YP = Y + a(P + Pe)
D) Y = YP + a(P + Pe)
11) What does the coefficient a in the new classical expression for short-run aggregate supply
represent?
A) the full employment level of output
B) the price level in the previous period
C) how much output responds when the actual price level differs from the expected price level
D) how much the price level responds when the actual level of output differs from the full
employment level of output
12) If the coefficient a in the new classical expression for short-run aggregate supply were equal
to zero,
A) aggregate output would always be at its full-employment level.
B) the short-run aggregate supply curve would slope down.
C) the short-run aggregate supply curve would be a horizontal line.
D) aggregate output would only differ from its full-employment level if the actual price level did
not equal the expected price level.
13) According to the new classical view, when the actual price level is greater than the expected
price level
A) aggregate output is above the full employment level.
B) aggregate output is below the full employment level.
C) the aggregate supply curve will slope downward.
D) the coefficient a is equal to zero.
14) According to the new classical view, aggregate output will differ from full-employment
output
A) whenever saving does not equal investment.
B) only if the actual price level does not equal the expected price level.
C) only if the federal government’s expenditures are greater than its tax receipts.
D) whenever imports exceed exports.
15) If in the short run prices did not respond at all to changes in aggregate demand, the short-run
aggregate supply curve would
A) be vertical.
B) be horizontal.
C) slope up.
D) slope down.
16) An important difference between the new classical and new Keynesians views is that new
classicals
A) assume that all firms are price takers, but new Keynesians assume that some firms are price
setters.
B) take into account the existence of long-term nominal wage and price contracts, but new
Keynesians do not believe they are important.
C) focus on the importance of investment spending, but new Keynesians believe that government
spending is more important.
D) believe that the aggregate supply curve is horizontal, even in the short run, but new
Keynesians believe that the aggregate supply curve slopes upward in the short run.
17) In which of the following markets is a producer likely to be a price taker?
A) the apple market
B) the automobile market
C) the steel market
D) the college textbook market
18) Which of the following best describes a price taker?
A) a firm taking the market price as given
B) price strategies found in monopolistically competitive markets
C) prices being set by long-term contracts
D) firms taking the aggregate price level as given
19) Which of the following best describes a price setter?
A) firms in perfect competition
B) pricing of products that are not standardized
C) firms setting prices equal to the market price
D) firms setting price equal to the aggregate price level
20) A monopolistically competitive market differs from a perfectly competitive market in that a
monopolistically competitive market has
A) more sellers.
B) products that are identical.
C) less sticky prices.
D) firms that are price setters.
21) In the new Keynesian view a monopolistically competitive firm may fail to increase the price
of its product as demand increases because
A) if it does so it will lose all of its customers.
B) the cost to it of changing prices may exceed the benefit of doing so.
C) prices of monopolistically competitive firms are regulated by the federal government and may
only be changed with permission.
D) for a monopolistically competitive firm, price is below marginal cost.
22) In the new Keynesian view, the larger the proportion of firms in the economy with sticky
prices,
A) the steeper the SRAS curve will be.
B) the flatter the SRAS curve will be.
C) the greater the increase in the price level for a given shift in the AD curve.
D) the less effective is fiscal policy in increasing output.
23) Which of the following statements is correct?
A) New classicals believe that the aggregate supply curve is vertical in the short run.
B) New Keynesians believe that the aggregate supply curve is vertical in the short run.
C) New Keynesians believe that the aggregate supply curve slopes upward in the long run.
D) New classicals believe that the aggregate supply curve slopes upward in the short run.
24) Which of the following statements is correct?
A) New classicals believe that the aggregate supply curve is a vertical line in both the short run
and the long run.
B) Both new classicals and new Keynesians believe that the aggregate supply curve is vertical in
the long run.
C) New Keynesians believe that the aggregate supply curve is vertical in the short run but not in
the long run.
D) New Keynesians believe that the aggregate supply curve slopes upward in the long run.
25) Which of the following will NOT shift the short-run aggregate supply function?
A) changes in labor costs
B) changes in the costs of nonlabor inputs
C) changes in the price level
D) changes in the expected price level
26) An increase in oil prices will
A) shift the short-run aggregate supply curve up and to the left.
B) shift the short-run aggregate supply curve down and to the right.
C) cause a movement along the short-run aggregate supply curve.
D) not affect the short-run aggregate supply curve.
27) An increase in the expected price level
A) shifts the short-run aggregate supply curve up and to the left.
B) shifts the short-run aggregate supply curve down and to the right.
C) has no effect on the short-run aggregate supply curve.
D) results in a movement along the short-run aggregate supply curve, rather than a shift in the
short-run aggregate supply curve.
28) An increase in the price level
A) shifts the short-run aggregate supply curve up and to the left.
B) shifts the short-run aggregate supply curve down and to the right.
C) shifts the long-run aggregate supply curve to the left.
D) results in a movement along the short-run aggregate supply curve, rather than a shift in the
short-run aggregate supply curve.
29) Which of the following would cause the long-run aggregate supply curve to shift?
A) an increase in the price level
B) a decrease in the expected price level
C) an increase in labor productivity
D) an autonomous increase in consumption spending
30) The Polish experience indicates that
A) the aggregate supply curve is vertical, even in the short run.
B) changes in the expected price level do not affect aggregate supply.
C) the transition from a centrally planned to a market economy can result in an upward shift in
the short-run aggregate supply curve.
D) increases in the factor productivity will shift the long-run aggregate supply curve to the left.
31) Between 1992 and the 2000s, Poland experienced
A) strong economic growth, but increasing inflation.
B) weak economic growth, but falling inflation.
C) strong economic growth and falling inflation.
D) weak economic growth and increasing inflation.