Page 1
1.
Stagflation is a combination of _____ unemployment and _____ inflation.
A)
increasing; increasing
B)
decreasing; decreasing
C)
increasing; decreasing
D)
decreasing; increasing
2.
The economic slump in the 1970s looked different from the slump at the beginning of
the Great Depression because it was:
A)
the result of a lack of confidence that led businesses and consumers to spend less.
B)
largely caused by events in the Middle East that led to sudden cuts in world oil
production and soaring prices for oil.
C)
the direct result of a contractionary monetary policy.
D)
the result solely of a negative demand shock.
3.
In 2008 the Federal Reserve worried about:
A)
the threat of stagflation, and it had a difficult time stabilizing the economy, as
stabilization policies are not very effective in managing negative supply shocks.
B)
hyperinflation, and it used strong disinflationary policies to bring the rise in prices
under control.
C)
a healthy, booming economy, and it used fine-tuning methods to keep the growing
economy on track.
D)
a deep recession with falling prices, and it used stabilization policies to take the
economy out of the slump.
4.
In 2008 the Federal Reserve was facing:
A)
hyperinflation, which can be reversed only with disinflationary policies.
B)
stagflation, a combination of high inflation and high unemployment, which cannot
be reversed easily.
C)
the deepest recession since the Great Depression combined with rapidly falling
prices.
D)
a very severe deflation, rare in history, which was experienced only by Japan.
5.
The Great Depression was caused by _____ shocks, and the stagflation of the 1970s was
caused by _____ shocks.
A)
demand; demand
B)
demand; supply
C)
supply; demand
D)
supply; supply
Page 2
6.
The three consequences of the decline in demand during the Great Depression were
_____ prices, _____ output, and a surge in unemployment.
A)
falling; declining
B)
falling; increasing
C)
rising; increasing
D)
rising; declining
Use the following to answer question 7:
Figure: Aggregate Demand
7.
(Figure: Aggregate Demand) Look at the figure Aggregate Demand. The quantity of
output demanded if the price level is 120 is:
A)
$9 trillion.
B)
$10 trillion.
C)
$11 trillion.
D)
$12 trillion.
8.
The negative relationship between the aggregate price level and aggregate output
demanded gives the aggregate demand curve a _____ slope.
A)
upward
B)
vertical
C)
horizontal
D)
downward
Page 3
9.
The aggregate demand curve shows the relationship between the aggregate price level
and (the) aggregate:
A)
productivity.
B)
unemployment rate.
C)
quantity of output demanded by households, businesses, the government, and the
rest of the world.
D)
quantity of output demanded by businesses only.
10.
According to the aggregate demand curve, when the aggregate price level _____, the
quantity of aggregate output _____.
A)
rises; supplied falls
B)
falls; demanded falls
C)
rises; demanded falls
D)
rises; demanded does not change
11.
The relationship between the aggregate price level and the quantity of aggregate output
demanded by households, businesses, the government, and the rest of the world is called
_____ demand.
A)
market
B)
surplus
C)
aggregate
D)
simple
12.
A graphical representation of the relationship between the total quantity of goods and
services demanded and the price level is the:
A)
aggregate demand curve.
B)
average price level.
C)
circular-flow model.
D)
GDP curve.
13.
The aggregate demand curve:
A)
slopes downward.
B)
slopes upward.
C)
is horizontal at potential output.
D)
is vertical at potential output.
Page 4
14.
In general, a change in the price level, all other things unchanged, causes:
A)
a movement along the aggregate demand curve.
B)
a shift of the aggregate demand curve.
C)
both a movement along the aggregate demand curve and a shift in the curve.
D)
no change in the purchasing power of assets.
15.
The _____ curve shows the negative relationship between the aggregate price level and
the quantity of aggregate output demanded in the economy.
A)
aggregate demand
B)
short-run aggregate supply
C)
long-run aggregate supply
D)
investment demand
16.
When the aggregate price level increases, the purchasing power of many assets falls,
causing a decrease in consumer spending. This, the _____ effect, is a reason the _____
curve slopes _____.
A)
interest rate; aggregate demand; downward
B)
wealth; aggregate demand; downward
C)
interest rate; investment demand; downward
D)
wealth; short-run aggregate supply; upward
17.
According to the wealth effect, when prices decrease, the purchasing power of assets
_____ and consumer spending _____.
A)
decreases; decreases
B)
increases; decreases
C)
decreases; increases
D)
increases; increases
18.
Besides consumption, the component(s) of aggregate demand is (are):
A)
investment expenditures.
B)
investment expenditures and government expenditures.
C)
investment expenditures and net exports.
D)
investment expenditures, government expenditures, and net exports.
19.
The wealth effect suggests:
A)
a positive relationship between the price level and consumption spending.
B)
that price level changes do not affect real wealth.
C)
a negative relationship between the price level and consumption spending.
D)
that when the price level increases, the real value of money increases also.
Page 5
20.
The aggregate demand curve is negatively sloped in part because of the impact of:
A)
the wealth effect on consumption.
B)
a changing exchange rate on potential output.
C)
the stickiness of nominal wages and salaries.
D)
the flexibility of nominal wages and salaries.
21.
The aggregate demand curve is negatively sloped in part because of the impact of
interest rates on:
A)
potential output.
B)
net exports.
C)
consumption and investment spending.
D)
government purchases.
22.
The interest rate effect is the tendency for changes in the price level to affect:
A)
the quantity of investment demanded and thus interest rates.
B)
export demand and thus aggregate demand.
C)
interest rates and thus the quantity of investment spending and consumption.
D)
real incomes and lead to shifts in potential output.
23.
The aggregate demand curve slopes:
A)
downward for the same reasons that an ordinary demand curve does.
B)
downward in part because when the price level falls, the real wealth of the public
falls, and this induces people to change their consumption.
C)
downward in part because as the price level falls, the ability of households and
firms to borrow cheaply increases.
D)
upward, unlike an ordinary demand curve.
24.
The aggregate demand curve is downward sloping because of:
A)
the inverse relationship between price and quantity demanded.
B)
changes in expectation of future prices.
C)
unexpected changes in commodity prices.
D)
the wealth effect of a change in aggregate price level.
25.
The wealth effect is reflected in:
A)
increases in interest rates to savers.
B)
the upward slope in aggregate supply.
C)
the upward slope in aggregate demand.
D)
the downward slope in aggregate demand.
Page 6
26.
According to the interest rate effect, an increase in the price level causes people to
_____ their money holdings, which _____ interest rates and _____ investment
spending.:
A)
increase; increases; decreases
B)
decrease; increases; decreases
C)
increase; decreases; decreases
D)
decrease; decreases; increases
27.
Which of the following is one of the reasons that the aggregate demand curve slopes
downward?
A)
the paradox of thrift
B)
the interest rate effect
C)
the substitution effect
D)
the income effect
28.
Which of the following statements is FALSE?
A)
A rise in the price level lowers real wealth and results in a lower level of consumer
spending.
B)
A rise in the price level increases the demand for money, raises the interest rate,
and reduces investment spending.
C)
A fall in the price level will generally lead to a rise in the level of aggregate output
demanded.
D)
A fall in the price level will reduce the demand for money, raise the interest rate,
and increase investment spending.
29.
The aggregate demand curve is negatively sloped because of:
A)
the substitution effect of an aggregate price level change.
B)
the wealth effect of an aggregate price level change.
C)
the elasticity effect of an aggregate price level change.
D)
the fiscal policy effect.
30.
The interest rate effect of a change in the aggregate price level causes:
A)
the long-run aggregate supply curve to be vertical.
B)
the aggregate demand curve to be negatively sloped.
C)
the short-run aggregate supply curve to be positively sloped.
D)
the aggregate demand curve to be positively sloped.
Page 7
31.
The interest rate effect of the price level is reflected in:
A)
the increase in interest rates to savers.
B)
the upward slope in aggregate supply.
C)
the upward slope in aggregate demand.
D)
the downward slope in aggregate demand.
32.
The interest rate effect of a change in the aggregate price level occurs when:
A)
a higher price level decreases the purchasing power of money, resulting in an
increase in the interest rate.
B)
the Fed uses contractionary monetary policy, causing an increase in the interest
rate.
C)
government borrowing in the loanable funds market raises the interest rate.
D)
the price of a bond increases, reducing the interest rate.
33.
According to the interest rate effect, a decrease in the price level causes people to _____
their money holdings, which _____ interest rates and _____ investment spending.
A)
increase; increases; decreases
B)
decrease; increases; decreases
C)
increase; decreases; decreases
D)
decrease; decreases; increases
34.
The interest rate effect leads to a downward-sloping aggregate demand curve because a
higher price level causes consumption to _____ and investment to _____.
A)
decrease; decrease
B)
decrease; increase
C)
increase; decrease
D)
increase; increase
35.
If the price level rises by 10%, the purchasing power of $10,000 will:
A)
increase to $11,000.
B)
decrease to $9,000.
C)
decrease to $1,000.
D)
remain constant.
36.
If the price level falls by 10%, the purchasing power of $10,000 will:
A)
increase to $11,000.
B)
decrease to $9,000.
C)
decrease to $1,000.
D)
remain constant.
Page 8
Use the following to answer questions 37-38:
Figure: The Multiplier
37.
(Figure: The Multiplier) Look at the figure The Multiplier. If this economy is at Y1 and
the price level decreases:
A)
AD1 will shift to the left, reflecting a multiplied decrease in real GDP at every price
level.
B)
AD1 will shift to the right, reflecting a multiplied increase in real GDP at every
price level.
C)
an upward movement along the AD1 will take place, reflecting an increase in the
price level.
D)
a downward movement along the AD1 will take place, reflecting a decrease in the
price level.
Page 9
38.
(Figure: The Multiplier) Look at the figure The Multiplier. If this economy is at Y1 and
investment spending increases:
A)
AD1 will shift to the left, reflecting a multiplied decrease in real GDP at every price
level.
B)
AD1 will shift to the right, reflecting a multiplied increase in real GDP at every
price level.
C)
an upward movement along the AD1 will take place, reflecting an increase in the
price level.
D)
a downward movement along the AD1 will take place, reflecting a decrease in the
price level.
39.
Suppose that the stock market crashes, which causes a large decrease in the value of
many households’ financial assets. The most likely outcome is a _____ the aggregate
demand curve.
A)
right-shift in
B)
left-shift in
C)
movement up
D)
movement down
40.
Changes in _____ CANNOT shift the aggregate demand curve.
A)
expectations
B)
wealth
C)
the existing stock of physical capital
D)
the price level
41.
The aggregate demand curve would shift to the left for all the following reasons
EXCEPT:
A)
a fall in consumers’ wealth.
B)
a decrease in the amount of money in circulation.
C)
more pessimistic consumer expectations.
D)
lower labor productivity.
42.
If prices are constant, but the value of financial assets increases, aggregate _____ shifts
to the _____.
A)
supply; left
B)
supply; right
C)
demand; left
D)
demand; right
Page 10
43.
As a result of a decrease in the value of the dollar in relation to other currencies, U.S.
imports decrease and exports increase. Consequently, there is a(n):
A)
increase in short-run aggregate supply.
B)
decrease in the quantity of aggregate output supplied in the short run.
C)
increase in aggregate demand.
D)
decrease in the quantity of aggregate output demanded.
44.
An increase in aggregate demand is seen as a(n) _____ the aggregate demand curve.
A)
shift to the right in
B)
downward movement along
C)
upward movement along
D)
shift to the left in
45.
A decrease in aggregate demand is seen as a(n) _____ the aggregate demand curve.
A)
downward movement along
B)
upward movement along
C)
shift to the left in
D)
shift to the right in
46.
If the stock of physical capital increases, all other things unchanged, the aggregate
demand curve will:
A)
shift to the right.
B)
shift to the left.
C)
remain constant.
D)
become positively sloped.
47.
Changes in aggregate demand can be caused by changes in:
A)
the stock of physical capital.
B)
business costs.
C)
raw materials costs.
D)
the expenses of complying with government regulations.
48.
Suppose that consumer expectations improve. The aggregate demand curve will
undergo a:
A)
shift to the left.
B)
movement upward.
C)
shift to the right.
D)
movement downward.
Page 11
49.
Assuming that prices remain constant, suppose that consumer assets and wealth lose
value. The aggregate demand curve will undergo a:
A)
shift to the left.
B)
movement upward.
C)
shift to the right.
D)
movement downward.
50.
Which of the following would shift the aggregate demand curve to the LEFT?
A)
monetary policy that raises the interest rate
B)
an increase in the aggregate price level
C)
an increase in consumer wealth
D)
stronger consumer optimism about income
51.
Suppose that a presidential candidate who promised large personal income tax cuts is
elected. Which of the following is most likely?
A)
a decrease in short-run aggregate supply
B)
a decrease in aggregate demand
C)
an increase in short-run aggregate supply
D)
an increase in aggregate demand
52.
An increase in government spending on health care is likely to shift the _____ curve to
the _____.
A)
short-run aggregate supply; right
B)
short-run aggregate supply; left
C)
aggregate demand; right
D)
aggregate demand; left
53.
A decrease in the money supply is likely to cause a(n) _____ in borrowing and interest
rates and a(n)_____ in aggregate demand.
A)
increase; decrease
B)
increase; increase
C)
decrease; decrease
D)
decrease; increase
54.
Raising taxes shifts the _____ curve to the _____.
A)
aggregate demand; left
B)
long-run aggregate supply; left
C)
aggregate demand; right
D)
short-run aggregate supply; left
Page 12
55.
Increasing the quantity of money in circulation shifts the _____ curve to the _____.
A)
aggregate demand; left
B)
long-run aggregate supply; right
C)
aggregate demand; right
D)
short-run aggregate supply; right
56.
The only government policy that has a DIRECT effect on the aggregate demand curve
is:
A)
changing the quantity of money.
B)
raising or lowering the tax rate.
C)
changing the level of government purchases of final goods and services.
D)
changing the level of government transfers.
57.
A decrease in the supply of money shifts the aggregate _____ curve to the _____.
A)
supply; left
B)
supply; right
C)
demand; left
D)
demand; right
58.
If government increases income tax rates, the aggregate demand curve is likely to:
A)
shift to the right.
B)
shift to the left.
C)
remain constant.
D)
become positively sloped.
59.
An increase in government spending, all other things unchanged, will cause the
aggregate demand curve to:
A)
become positively sloped.
B)
remain constant.
C)
shift to the right.
D)
shift to the left.
60.
Changes in aggregate demand can be caused by changes in:
A)
wages.
B)
business costs.
C)
raw materials costs.
D)
government spending.
Page 13
61.
Aggregate demand will shift to the RIGHT if:
A)
the aggregate price level increases.
B)
government purchases increase.
C)
taxes go up.
D)
the money supply shrinks.
62.
All of the following are examples of fiscal policy EXCEPT:
A)
government spending on infrastructure to stimulate aggregate demand.
B)
reducing the interest rate by increasing the money supply.
C)
an economic stimulus package.
D)
a $1,500 per family tax rebate.
63.
Reducing taxes in response to a recession is an example of _____ policy.
A)
monetary
B)
investment
C)
consumption
D)
fiscal
64.
The economy is in a recession. The desired FISCAL policy is:
A)
a decrease in government transfer payments.
B)
an increase in government purchases of goods and services.
C)
an increase in tax rates.
D)
a decrease in interest rates.
65.
A change in _____ has the most DIRECT effect on aggregate demand.
A)
taxes
B)
interest rates
C)
the money supply
D)
government spending
66.
Government purchases of goods and services _____, while changes in taxes and transfer
payments _____.
A)
are exercises of fiscal policy; are exercises of monetary policy
B)
are exercises of monetary policy; are exercises of fiscal policy
C)
influence aggregate demand directly; influence aggregate demand indirectly
D)
influence aggregate demand indirectly; influence aggregate demand directly
Page 14
67.
If the Fed increases the quantity of money in circulation, interest rates _____,
investment spending _____, and the aggregate demand curve shifts to the _____.
A)
decrease; increases; right
B)
increase; increases; right
C)
decrease; increases; left
D)
increase; decreases; left
68.
If the Fed decreases the quantity of money in circulation, interest rates _____,
investment spending _____, and the aggregate demand curve shifts to the _____.
A)
decrease; increases; right
B)
decrease; decreases; left
C)
increase; decreases; left
D)
increase; decreases; right
69.
Aggregate demand will increase in all of the following cases EXCEPT when:
A)
household wealth rises but prices are constant.
B)
government purchases of goods rise.
C)
the quantity of money increases.
D)
interest rates increase.
70.
Aggregate demand will DECREASE if:
A)
the aggregate price level falls.
B)
the government raises tax rates.
C)
productivity declines.
D)
the money supply increases.
71.
Aggregate demand will increase if:
A)
the public becomes more optimistic.
B)
the aggregate price level falls.
C)
government spending is reduced.
D)
household wealth decreases.
Page 15
Use the following to answer questions 72-76:
Figure: Shift of the Aggregate Demand Curve
72.
(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the
Aggregate Demand Curve. A movement from point A on AD1 to point C on AD2 could
have resulted from a(n):
A)
lower price level.
B)
higher price level.
C)
increase in the total quantity of consumer goods and services demanded.
D)
significant decrease in the consumers’ income.
73.
(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the
Aggregate Demand Curve. A movement from point B on AD1 to point E on AD2 could
have been the result of:
A)
an increase in consumer optimism.
B)
an increase in consumer pessimism.
C)
an increase in personal income taxes.
D)
the central bank reducing the quantity of money.
74.
(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the
Aggregate Demand Curve. A movement from point C on AD2 to point A on AD1 may
have been the result of:
A)
an increase in investment spending following optimistic GDP forecasts.
B)
a decrease in investment spending following pessimistic GDP forecasts.
C)
decreases in the taxes paid by businesses.
D)
lower interest rates.
Page 16
75.
(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the
Aggregate Demand Curve. An increase in aggregate demand is illustrated by a
movement from:
A)
AD1 to AD2.
B)
point C to point A.
C)
point B to point A.
D)
point C to point E.
76.
(Figure: Shift of the Aggregate Demand Curve) Look at the figure Shift of the
Aggregate Demand Curve. A movement from AD1 to AD2 may have been the result of:
A)
an increase in government spending.
B)
a decrease in government spending.
C)
increases in personal income taxes.
D)
a decrease in consumer wealth.
77.
When demand declined in the Great Depression of 1929–1933, the GDP deflator:
A)
increased by 15%.
B)
increased by 26%.
C)
decreased by 15%.
D)
decreased by 26%.
78.
During the Great Depression, the United States moved to the _____ along its _____
curve.
A)
right; aggregate demand
B)
right; short-run aggregate supply
C)
left; aggregate demand
D)
left; short-run aggregate supply
79.
The aggregate supply curve shows the relationship between the _____ and the quantity
of aggregate output supplied.
A)
price of oil
B)
aggregate price level
C)
price of money
D)
level of employment
Page 17
80.
The aggregate supply curve shows the relationship between the aggregate price level
and the aggregate:
A)
output supplied.
B)
money supply.
C)
unemployment rate.
D)
employment.
81.
The aggregate supply curve shows the relationship of prices to:
A)
sales.
B)
the quantity of output people want to buy.
C)
the quantity of output producers are willing to provide.
D)
both the amount of output people want to buy and the amount of output producers
want to provide.
82.
As a result of a sharp decrease in aggregate demand between 1929 and 1933, real GDP
was _____ its 1929 level.
A)
29% below
B)
100% below
C)
29% above
D)
50% above
83.
As a result of a sharp decrease in aggregate demand between 1929 and 1933, the
unemployment rate changed from _____ in 1929 to _____ in 1933.
A)
0%; 3%
B)
3%: 25%
C)
40%; 5%
D)
25%; 0%
84.
If Nike sells basketball shoes for $150 per pair and the cost of producing and selling a
pair of basketball shoes is $15, Nike’s profit per unit on a pair of basketball shoes is:
A)
$135.
B)
$160
C)
$165.
D)
$10.
85.
When the price level decreases, firms in perfectly competitive markets will:
A)
decrease output and increase the price.
B)
decrease output.
C)
increase output and decrease the price.
D)
increase output.
Page 18
86.
When the price level increases, firms in perfectly competitive markets will:
A)
decrease output and increase the price.
B)
decrease output.
C)
increase output and decrease the price.
D)
increase output.
87.
When the price level decreases, firms in imperfectly competitive markets will:
A)
decrease output and increase the price.
B)
decrease output.
C)
decrease output and decrease the price.
D)
increase output.
88.
When the price level increases, firms in imperfectly competitive markets will:
A)
decrease output and increase the price.
B)
decrease output and leave their price unchanged.
C)
increase output and increase their price.
D)
increase output and leave their price constant.
89.
The short-run aggregate supply curve slopes upward because a _____ aggregate price
level leads to _____.
A)
higher; lower output as costs of production increase.
B)
higher; higher output, since most production costs are fixed in the short run.
C)
lower; higher output, since production costs tend to fall in the short run.
D)
lower; higher profit and higher productivity.
90.
The short-run aggregate supply curve is positively sloped because:
A)
wages and other costs of production respond immediately to changes in prices.
B)
profit is lower when prices increase, so output decreases.
C)
workers are willing to work for lower wages rather than be laid off.
D)
higher prices lead to higher profit and higher output.
91.
According to the short-run aggregate supply curve, when the _____ rises, the quantity of
aggregate output _____ rises.
A)
profit per unit; demanded
B)
aggregate price level; supplied
C)
aggregate price level; demanded
D)
interest rate; supplied
Page 19
92.
The positive relationship between the aggregate price level and aggregate output
supplied gives the short-run aggregate supply curve a(n) _____ slope.
A)
upward
B)
vertical
C)
horizontal
D)
downward
93.
The short-run aggregate supply curve is positively sloped because:
A)
business people are subject to money illusion.
B)
wages are sticky.
C)
workers care about nominal wages, not real wages.
D)
of diminishing returns to labor.
94.
Profit per unit equals:
A)
price per unit minus cost per unit.
B)
price per unit divided by cost per unit.
C)
cost per unit minus price per unit.
D)
price per unit minus the nominal wage rate.
95.
The short-run aggregate supply curve illustrates:
A)
the price level at which real output will be consumed.
B)
the price level at which real output will be in equilibrium.
C)
the positive relationship between the aggregate price level and aggregate output
supplied.
D)
the negative relationship between the aggregate price level and aggregate output
supplied.
96.
In the short run, wages and some prices are considered to be:
A)
sticky.
B)
unpredictable.
C)
extremely flexible.
D)
irrelevant.
97.
The short run in macroeconomic analysis is a period:
A)
in which many production costs can be taken as fixed.
B)
in which wages become fully flexible.
C)
of two months, and the long run is more than 12 months.
D)
in which interest rates are fixed.
Page 20
98.
The short-run aggregate supply curve is:
A)
downward sloping.
B)
upward sloping.
C)
horizontal at the natural level of employment.
D)
vertical at the natural level of employment.
99.
The short-run aggregate supply curve slopes upward because of:
A)
wage and price stickiness.
B)
wage and price flexibility.
C)
increasing technology.
D)
a reduction in resource availability at higher price levels.
100.
The _____ curve shows the positive relationship between the aggregate price level and
the quantity of aggregate output supplied when wages and prices are not fully flexible.
A)
aggregate demand
B)
short-run aggregate supply
C)
aggregate spending
D)
long-run aggregate supply
101.
An increase in the aggregate price level will increase:
A)
short-run aggregate supply.
B)
the quantity of aggregate output supplied in the short run.
C)
aggregate demand.
D)
the quantity of aggregate output demanded.
102.
Nominal wages are sticky because:
A)
wages are slow to rise when there are labor shortages and slow to fall even when
the level of unemployment is significant.
B)
wages remain fixed in the long run, increasing the profitability of the firms.
C)
wages are slow to fall when there are labor shortages and slow to rise even when
the level of unemployment is significant.
D)
in the long run all wages are adjusted for inflation.
103.
The short-run aggregate supply curve is:
A)
upward sloping.
B)
vertical.
C)
horizontal.
D)
downward sloping.
Page 21
104.
When short-run aggregate supply increases, it means that the short-run aggregate supply
curve shifts to the _____ and the quantity of aggregate output that producers are willing
to supply _____.
A)
right; decreases
B)
right; increases
C)
left; decreases
D)
left; increases
105.
When short-run aggregate supply decreases, it means that the short-run aggregate supply
curve shifts to the _____ and the quantity of aggregate output that producers are willing
to supply _____.
A)
right; decreases
B)
right; increases
C)
left; decreases
D)
left; increases
106.
An increase in the minimum wage would likely:
A)
cause a movement up the short-run aggregate supply curve from left to right.
B)
cause a movement down the short-run aggregate supply curve from right to left.
C)
shift the short-run aggregate supply curve to the right.
D)
shift the short-run aggregate supply curve to the left.
107.
A decrease in health care insurance premiums paid by employers would likely:
A)
cause a movement up the short-run aggregate supply curve from left to right.
B)
cause a movement down the short-run aggregate supply curve from right to left.
C)
shift the short-run aggregate supply curve to the right.
D)
shift the short-run aggregate supply curve to the left.
108.
Suppose that productivity increases as workers’ health improves. This increase in
productivity will:
A)
cause a movement up the short-run aggregate supply curve from left to right.
B)
cause a movement down the short-run aggregate supply curve from right to left.
C)
shift the short-run aggregate supply curve to the right.
D)
shift the short-run aggregate supply curve to the left.
109.
Which of the following will shift the short-run aggregate supply curve to the RIGHT?
A)
a widespread decrease in commodity prices
B)
an increase in nominal wages
C)
a decrease in productivity
D)
a decrease in government purchases of goods and services
Page 22
110.
The short-run aggregate supply curve may shift to the right if:
A)
productivity increases.
B)
nominal wages increase.
C)
personal income taxes decrease.
D)
commodity prices rise.
Use the following to answer question 111:
Figure: Aggregate Supply Movements
111.
(Figure: Aggregate Supply Movements) Look at the figure Aggregate Supply
Movements. Which statement is CORRECT?
A)
An increase in the price level is responsible for pushing the curve to the right.
B)
A decrease in the price level is responsible for pushing the short-run aggregate
supply curve to the right.
C)
Short-run aggregate supply has increased.
D)
Short-run aggregate supply has decreased.
112.
A change in _____ would cause a shift in the short-run aggregate supply curve.
A)
the quantity of real output supplied
B)
the price level
C)
commodity prices
D)
aggregate demand
Page 23
113.
_____ would likely shift the short-run aggregate supply curve to the left.
A)
A decrease in consumer spending
B)
A decrease in the price of oil
C)
An increase in the price of oil
D)
An increase in consumer spending
114.
A decrease in energy prices will:
A)
increase short-run aggregate supply.
B)
decrease the quantity of aggregate output supplied in the short run.
C)
decrease aggregate demand.
D)
increase the quantity of aggregate output demanded.
115.
A rise in labor productivity will most likely result in:
A)
an increase in aggregate demand.
B)
a decrease in aggregate demand.
C)
a decrease in aggregate supply.
D)
an increase in aggregate supply.
116.
Which of the following will increase short-run aggregate supply?
A)
a law that requires health insurance for all employees
B)
an increase in the aggregate price level
C)
a large decrease in the price of oil
D)
an increase in the minimum wage
117.
The short-run aggregate supply curve would shift to the left for all the following reasons
EXCEPT:
A)
a decrease in productivity.
B)
an increase in nominal wages.
C)
an increase in interest rates.
D)
an increase in the price of commodities used for production.
118.
A simultaneous rise in productivity and nominal wages would shift the short-run
aggregate supply curve to the:
A)
right if the rise in nominal wages is larger than the rise in productivity.
B)
right if the cost per unit of output rises.
C)
left if the cost per unit of output falls.
D)
left if the rise in nominal wages is larger than the rise in productivity.
Page 24
119.
During the Great Depression, the United States underwent a movement _____ along the
short-run aggregate supply curve; during the 1979 oil crisis, the United States
underwent a _____ shift in the short-run aggregate supply curve.
A)
down; leftward
B)
up; leftward
C)
up; rightward
D)
down; rightward
120.
The short-run aggregate supply curve will shift to the right if:
A)
commodity prices rise.
B)
nominal wages rise.
C)
productivity decreases.
D)
nominal wages fall.
121.
The short-run aggregate supply curve will shift to the left if:
A)
the aggregate price level falls.
B)
commodity prices rise.
C)
tax revenues fall.
D)
productivity increases.
122.
If nominal wages fall, then the short-run aggregate _____ curve shifts to the _____.
A)
supply; right
B)
supply; left
C)
demand; right
D)
demand; left
123.
A shift to the right of the short-run aggregate supply curve may be caused by:
A)
a decrease in productivity.
B)
an increase in productivity.
C)
an increase in the price of inputs.
D)
an increase in wages.
124.
A general increase in wages will result primarily in the _____ curve shifting to the
_____.
A)
aggregate demand; right
B)
aggregate demand; left
C)
short-run aggregate supply; right
D)
short-run aggregate supply; left
Page 25
125.
A general decrease in wages will result primarily in the _____ curve shifting to the
_____.
A)
aggregate demand; right
B)
aggregate demand; left
C)
short-run aggregate supply; right
D)
short-run aggregate supply; left
126.
Changes in short-run aggregate supply can be caused by changes in:
A)
wages.
B)
wealth.
C)
government spending.
D)
consumption spending.
127.
Changes in short-run aggregate supply can be caused by changes in:
A)
wealth.
B)
commodity prices.
C)
government spending.
D)
the price level.
128.
The short-run aggregate supply curve will shift to the:
A)
right if commodity prices increase.
B)
left if productivity increases.
C)
left if nominal wages increase.
D)
right if government spending increases.
129.
In the long run, nominal wages are:
A)
sticky downward but flexible upward.
B)
sticky upward but flexible downward.
C)
sticky both upward and downward.
D)
flexible, because contracts and informal agreements are renegotiated in the long
run.
130.
In the long run, the aggregate price level has:
A)
no effect on the quantity of aggregate output.
B)
a positive effect on the quantity of aggregate output.
C)
a negative effect on the quantity of aggregate output.
D)
an effect on aggregate output but none on employment.
Page 26
131.
In the long run, changes in the aggregate price level will be accompanied by _____
proportional changes in input prices.
A)
less than
B)
more than
C)
equal
D)
opposite
132.
The long-run aggregate supply curve is:
A)
upward sloping.
B)
downward sloping.
C)
horizontal.
D)
vertical.
133.
The point where the long-run aggregate supply curve intercepts the horizontal axis is:
A)
the point that reflects the economy’s actual output.
B)
the economy’s potential output.
C)
the level of real GDP the economy would produce if all prices were flexible and
wages were fixed.
D)
impossible to attain.
134.
According to the long-run aggregate supply curve, when _____, the quantity of
aggregate output supplied _____.
A)
nominal wages rise; falls
B)
the aggregate price level rises; does not change
C)
the aggregate price level rises; falls
D)
the price of commodities falls; rises
135.
Because the aggregate price level has no effect on aggregate output in the long run, the
long-run aggregate supply curve is:
A)
upward sloping.
B)
vertical.
C)
horizontal.
D)
downward sloping.
136.
The long-run aggregate supply curve is vertical because in the long run:
A)
technological progress outpaces raises in nominal wages.
B)
all factors of production increase.
C)
the price of labor is flexible, while the price of physical capital is fixed.
D)
all prices are flexible.
Page 27
137.
The long-run supply curve illustrates how the aggregate output supplied is _____ the
aggregate price level.
A)
positively related to
B)
negatively related to
C)
unrelated to
D)
a one-to-one correspondence with
138.
If all prices, including the nominal wage rate, double in the long run, then aggregate
output supplied will:
A)
double.
B)
rise.
C)
fall.
D)
remain unchanged.
139.
Potential output is the level of real GDP that:
A)
occurs when the economy has only cyclical unemployment.
B)
the economy would produce if all prices, including nominal wages, were fully
flexible.
C)
occurs when the actual rate of unemployment is zero.
D)
the economy would produce if all prices, including nominal wages, were sticky.
140.
Potential output:
A)
is the level of output that the economy would produce if all prices, including
nominal wages, were fully flexible.
B)
varies with the price level.
C)
depends on the level of consumer confidence.
D)
is greater in periods of expansion than in recessions.
141.
The level of output that the economy would produce if all prices, including nominal
wages, were fully flexible is called:
A)
real GDP.
B)
Keynesian GDP.
C)
structural GDP.
D)
potential output.
142.
The long run in macroeconomic analysis is a period:
A)
in which wages and some other prices are sticky.
B)
in which prices and nominal wages are flexible.
C)
longer than one year.
D)
in which the capital stock is held constant.
Page 28
143.
The long run in macroeconomic analysis is a period:
A)
in which nominal wages and other prices are flexible.
B)
in which wages are sticky.
C)
of less than one year.
D)
of one to two years.
144.
In the long run, wages and prices are considered to be:
A)
sticky.
B)
constant.
C)
flexible.
D)
irrelevant.
145.
The long-run level of output is known as _____ output.
A)
recognized
B)
structural
C)
potential
D)
balanced budget
146.
The point at which the long-run aggregate supply curve touches the X-axis is known as:
A)
potential output.
B)
the accelerator point.
C)
the multiplier point.
D)
the self-correcting economy point.
147.
All of the following will increase potential output EXCEPT:
A)
an increase in physical capital.
B)
a decrease in the aggregate price level.
C)
an increase in human capital.
D)
technological innovation.
148.
Producing an aggregate output level that is higher than potential output is possible only
if nominal wages:
A)
remain fixed.
B)
fully adjust upward.
C)
haven’t yet fully adjusted upward.
D)
haven’t yet fully adjusted downward.
Page 29
149.
An aggregate output level lower than potential output means there will be:
A)
high interest rates.
B)
high inflation.
C)
low unemployment.
D)
high unemployment.
150.
Suppose that the aggregate output level is lower than potential output. Which of the
following is FALSE?
A)
Workers are abundant.
B)
Jobs are scarce.
C)
Nominal wages will fall over time.
D)
The short-run aggregate supply curve will gradually shift to the left.
151.
Which of the following is TRUE with respect to short-run and long-run aggregate
supply?
A)
The economy can be on both curves simultaneously.
B)
If the economy is on the short-run aggregate supply curve, it cannot also be on the
long-run aggregate supply curve.
C)
If the economy is on the long-run aggregate supply curve, it cannot also be on the
short-run aggregate supply curve.
D)
The economy can never rest on both curves simultaneously.
152.
When the economy is on the short-run aggregate supply curve and to the left of the
long-run aggregate supply curve, actual aggregate output will eventually equal potential
output as _____ fall(s) and the _____ aggregate _____ curve shifts to the _____.
A)
nominal wages; long-run; supply; left
B)
the aggregate price level; long-run; supply; left
C)
nominal wages; short-run; supply; right
D)
the aggregate price level; short-run; demand; right
153.
Producing a short-run level of aggregate output that exceeds the economy’s potential
output results in a(n) _____ adjustment in _____.
A)
downward; nominal wages
B)
downward; profits per unit of output
C)
downward; production costs
D)
upward; nominal wages
Page 30
Use the following to answer questions 154-156:
Figure: Aggregate Supply
154.
(Figure: Aggregate Supply) Look at the figure Aggregate Supply. If the economy is at
point E:
A)
actual output is less than potential output.
B)
actual output is more than potential output.
C)
actual output is equal to potential output.
D)
potential output will decrease.
155.
(Figure: Aggregate Supply) Look at the figure Aggregate Supply. If the economy is at
point E, nominal wages will _____, and the short-run aggregate supply curve will shift
_____ until actual potential is _____ potential output.
A)
increase; left; equal to
B)
increase; right; greater than
C)
decrease; right; equal to
D)
decrease; right; less than
156.
(Figure: Aggregate Supply) Look at the figure Aggregate Supply. At point F, potential
output is _____ than actual output and unemployment is _____.
A)
less; high
B)
less; low
C)
higher; high
D)
higher; low
Page 31
157.
In the late 1970s, the U.S. economy slid to the_____ along the aggregate _____ curve.
A)
left; supply
B)
right; supply
C)
left; demand
D)
right; demand
158.
A major reason for the end of the Great Depression was an increase in government
spending:
A)
for social security.
B)
for space exploration
C)
for environmental protection.
D)
during World War II.
159.
_____ will shift the aggregate demand curve.
A)
An interest rate effect of an aggregate price level change
B)
A wealth effect of an aggregate price level change
C)
A demand expectation
D)
A demand shock
160.
In the short run, a positive demand shock _____ aggregate output and _____ the
aggregate price level.
A)
reduces; increases
B)
increases; reduces
C)
reduces; reduces
D)
increases; increases
161.
All of the following are examples of demand shocks EXCEPT:
A)
a reduction in money supply.
B)
a tax increase.
C)
an increase in government expenditure.
D)
an increase in commodity prices.
162.
A positive demand shock leads to:
A)
higher prices and higher employment.
B)
higher prices and higher unemployment.
C)
higher prices and lower output.
D)
lower prices and lower output.
Page 32
163.
Suppose that political instability in the Middle East interrupts the supply of oil. The
_____ curve shifts _____, output _____, and prices _____.
A)
short-run aggregate supply; right; increases; decrease
B)
short-run aggregate supply; left; decreases; increase
C)
aggregate demand; left; decreases; decrease
D)
aggregate demand; right; increases; increase
164.
A natural disaster that destroys part of a country’s infrastructure is a type of negative
_____ shock and therefore shifts the _____ curve to the _____.
A)
demand; aggregate demand; right
B)
supply; aggregate demand; left
C)
supply; short-run aggregate supply; left
D)
demand; long-run aggregate supply; left
165.
A negative short-run supply shock _____ aggregate output and _____ the aggregate
price level.
A)
reduces; increases
B)
increases; reduces
C)
reduces; reduces
D)
increases; increases
166.
An increase in the price of imported oil leads to a _____ shock.
A)
positive supply
B)
negative supply
C)
positive demand
D)
negative demand
167.
Stagflation may result from:
A)
an increase in the supply of money.
B)
a decrease in the supply of money.
C)
an increase in the price of oil.
D)
a decrease in the price of oil.
168.
Unexpectedly rising commodity prices lead to a _____ shock.
A)
positive supply
B)
positive demand
C)
negative supply
D)
negative demand
Page 33
169.
Stagflation is usually caused by a _____ shock.
A)
negative demand
B)
positive supply
C)
negative supply
D)
positive demand
Use the following to answer question 170:
Figure: Macroeconomics Equilibrium
170.
(Figure: Macroeconomic Equilibrium) Look at the figure Macroeconomic Equilibrium.
Curve 1 refers to _____, curve 2 refers to _____, and curve 3 refers to _____.
A)
long-run aggregate supply; short-run aggregate supply; aggregate demand
B)
aggregate demand; short-run aggregate supply; long-run aggregate supply
C)
short-run aggregate supply; long-run aggregate supply; aggregate demand
D)
aggregate demand; long-run aggregate supply; short-run aggregate supply
171.
In the short run, the equilibrium price level and the equilibrium level of total output are
determined by the intersection of:
A)
LRAS and SRAS.
B)
LRAS and aggregate demand.
C)
SRAS and aggregate demand.
D)
potential output and LRAS.
Page 34
172.
An increase in investment spending leads to _____ in the price level and _____ in real
GDP in the short run.
A)
an increase; no change
B)
a decrease; no change
C)
no change; no change
D)
an increase; an increase
173.
An increase in aggregate demand will generate _____ in real GDP and _____ in the
price level in the short run.
A)
an increase; an increase
B)
an increase; no change
C)
a decrease; no change
D)
no change; an increase
174.
A decrease in aggregate demand will generate _____ in real GDP and _____ in the price
level in the short run.
A)
an increase; no change
B)
a decrease; no change
C)
a decrease; a decrease
D)
no change; an increase
175.
Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are
both rising. This is probably the effect of a(n) _____ in aggregate _____.
A)
increase; supply
B)
increase; demand
C)
decrease; supply
D)
decrease; demand
176.
Suppose that the U.S. government doubles its spending on health care. The _____ curve
shifts _____, output _____, and prices _____.
A)
short-run aggregate supply; right; increases; decrease
B)
short-run aggregate supply; left; decreases; increase
C)
aggregate demand; left; decreases; decrease
D)
aggregate demand; right; increases; increase
Page 35
177.
An improvement in the business outlook of firms is a type of positive _____ shock and
therefore shifts the _____ curve to the _____.
A)
supply; long-run aggregate supply; right
B)
demand; aggregate demand; left
C)
supply; short-run aggregate supply; right
D)
demand; aggregate demand; right
178.
An economic policy maker would rank a _____ shock as the MOST preferred type.
A)
positive demand
B)
negative demand
C)
positive supply
D)
negative supply
179.
An economic policy maker would rank a _____ shock as the LEAST preferred type.
A)
positive demand
B)
negative demand
C)
positive supply
D)
negative supply
180.
If membership in labor unions falls, production costs will:
A)
increase, and SRAS will shift to the left, decreasing equilibrium GDP and
increasing the aggregate price level.
B)
fall, there will be a downward movement along SRAS, equilibrium GDP will
increase, and aggregate price level will fall.
C)
not change and AD will shift to the right, increasing equilibrium GDP and
aggregate price level.
D)
fall and SRAS will shift to the right, increasing equilibrium GDP and lowering the
aggregate price level.
181.
Suppose the equilibrium aggregate price level is rising and the equilibrium level of real
GDP is falling. Which of the following MOST likely caused these changes?
A)
an increase in short-run aggregate supply
B)
an increase in aggregate demand
C)
a decrease in short-run aggregate supply
D)
a decrease in aggregate demand
Page 36
182.
Suppose the economy is operating in long-run equilibrium and a positive demand shock
hits. We expect a short-run increase in real GDP and the price level and a long-run
in_____ real GDP and _____ the price level.
A)
decrease; increase
B)
increase; increase
C)
decrease; decrease
D)
increase; decrease
183.
Potential real GDP is $10,000 and the current level of real GDP is $9,000. The output
gap is therefore:
A)
–90%.
B)
–110%.
C)
–10%.
D)
10%.
184.
In the long run, as the economy self-corrects, an increase in aggregate demand will
cause the price level to _____ and potential output to _____.
A)
rise; increase
B)
fall; decrease
C)
rise; remain stable
D)
fall; remain stable
185.
In the long run, as the economy self-corrects, a decrease in aggregate demand, all other
things unchanged, will cause the price level to _____ and potential output to _____.
A)
rise; increase
B)
fall; decrease
C)
rise; remain stable
D)
fall; remain stable
186.
The intersection of an economy’s aggregate demand and long-run aggregate supply
curves:
A)
determines its equilibrium real GDP in both the long run and the short run.
B)
determines its equilibrium price level in both the long run and the short run.
C)
occurs at the economy’s potential output.
D)
occurs at high levels of cyclical unemployment.
Page 37
187.
If the economy is in a recessionary gap, actual output will be _____ potential output.
A)
below
B)
the same as
C)
above
D)
in equilibrium with
188.
If the SRAS curve intersects the aggregate demand curve to the right of LRAS, the result
will be:
A)
a recessionary gap.
B)
an inflationary gap.
C)
cyclical unemployment.
D)
long-run equilibrium.
189.
When the economy is producing output below potential, it has a(n):
A)
full-employment output.
B)
natural level of employment.
C)
recessionary gap.
D)
inflationary gap.
190.
A recessionary gap occurs if:
A)
actual real GDP is less than potential output.
B)
actual real GDP is greater than potential output.
C)
actual real GDP is equal to potential output.
D)
unemployment is less than the natural rate.
191.
Graphically, a recessionary gap is measured as the:
A)
difference between the actual price level and the equilibrium price level.
B)
difference between actual GDP and potential output.
C)
vertical distance between aggregate demand and aggregate supply at actual real
GDP.
D)
vertical distance between aggregate demand and aggregate supply at potential
output.
Page 38
Use the following to answer questions 192-195:
Figure: Inflationary and Recessionary Gaps
192.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. The intersection of SRAS with AD in panel (a) indicates an
economy:
A)
in a recessionary gap.
B)
in an inflationary gap.
C)
in long-run equilibrium.
D)
with an unusually low unemployment rate.
193.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. Yp in panel (b):
A)
is potential output.
B)
indicates a decrease in aggregate demand.
C)
indicates a recessionary gap.
D)
is associated with considerable unemployment.
194.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. The level of income associated with Y1 in panel (b):
A)
is equal to potential output.
B)
reveals an inflationary gap compared with Yp.
C)
is a long-run equilibrium.
D)
is caused by flexible wages and prices.
Page 39
195.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. The intersection of AD with SRAS in panel (b) indicates:
A)
a short-run equilibrium.
B)
a long-run equilibrium.
C)
that unemployment is too high.
D)
stagflation.
196.
An inflationary gap:
A)
is generally regarded as desirable, especially by people living on a fixed income.
B)
means that the economy is operating beyond its potential output.
C)
means that there are pressures for wages to fall.
D)
means that SRAS will soon shift rightward.
197.
When the economy is producing output above the potential, it has:
A)
a Keynesian gap.
B)
falling wages.
C)
a recessionary gap.
D)
an inflationary gap.
198.
An inflationary gap occurs if:
A)
actual real GDP is less than potential output.
B)
actual real GDP is greater than potential output.
C)
actual real GDP is equal to potential output.
D)
unemployment is greater than the natural rate.
Use the following to answer questions 199-200:
Figure: An Increase in Aggregate Demand
Page 40
199.
(Figure: An Increase in Aggregate Demand) Look at the figure An Increase in
Aggregate Demand. The short-run equilibrium at Y2 and P2:
A)
exerts pressure for nominal wages to fall as workers seek to restore lost purchasing
power.
B)
exerts pressure for prices to fall, since real GDP exceeds potential real GDP.
C)
results in a recessionary gap.
D)
results in an inflationary gap.
200.
(Figure: An Increase in Aggregate Demand) Look at the figure An Increase in
Aggregate Demand. Because of the pressures at the short-run equilibrium at Y2 and P2:
A)
the SRAS will shift to the right.
B)
the SRAS curve will shift to the left.
C)
unemployment will decrease.
D)
LRAS will shift to the right.
Use the following to answer questions 201-204:
Figure: Policy Alternatives
201.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. Suppose that the
initial equilibrium is at real GDP level Y1 and price level P2 in panel (a). At real GDP
level Y1 there is:
A)
an inflationary gap.
B)
a recessionary gap.
C)
no gap.
D)
long-run equilibrium.
Page 41
202.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. Assume that the
economy depicted in panel (a) is in short-run equilibrium with AD1 and SRAS1. If the
economy is left to correct itself:
A)
real interest rates will fall, which will shift SRAS rightward.
B)
lower wages will result in a gradual shift from SRAS1 to SRAS2.
C)
long-run equilibrium will be established at YP and P3.
D)
the aggregate demand curve will shift leftward.
203.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. Assume that the
economy depicted in panel (a) is in short-run equilibrium at a real GDP level of Y1. The
economy will correct itself:
A)
rapidly, without use of fiscal policy.
B)
in the long run as wages fall.
C)
in the short run as wages rise.
D)
because the aggregate demand curve shifts.
204.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. The economy in
panel (b) is initially in short-run equilibrium at real GDP level Y1 and price level P2. At
real GDP level Y1 there is:
A)
an inflationary gap.
B)
a recessionary gap.
C)
no gap.
D)
long-run equilibrium.
205.
Inflationary and recessionary gaps are closed by self-correcting adjustments that shift:
A)
the SRAS curve.
B)
the AD curve.
C)
the LRAS curve.
D)
both the SRAS curve and the LRAS curve.
206.
An inflationary gap is automatically closed by _____ wages that shift the SRAS curve
_____.
A)
falling; rightward
B)
falling; leftward
C)
rising; rightward
D)
rising; leftward
Page 42
207.
An inflationary gap will be eliminated because there is _____ pressure on wages,
shifting the _____.
A)
downward; long-run aggregate supply curve to the right
B)
downward; long-run aggregate supply curve to the left
C)
downward; aggregate demand curve to the left
D)
upward; short-run aggregate supply curve to the left
208.
A recessionary gap can be closed by _____ wages that shift the _____.
A)
falling; SRAS curve rightward
B)
falling; LRAS curve rightward
C)
falling; SRAS curve leftward
D)
rising; SRAS curve rightward
209.
A recessionary gap will be eliminated because there is _____ pressure on wages,
shifting the _____.
A)
downward; short-run aggregate supply curve rightward
B)
downward; short-run aggregate supply curve leftward
C)
downward; aggregate demand curve downward
D)
upward; aggregate demand curve leftward
210.
As a recessionary gap self-corrects, the equilibrium price level _____ and the
equilibrium real output _____.
A)
rises; decreases
B)
rises; increases
C)
falls; decreases
D)
falls; increases
211.
As an inflationary gap self-corrects, the equilibrium price level _____ and the
equilibrium real output _____.
A)
rises; decreases
B)
rises; increases
C)
falls; decreases
D)
falls; increases
Page 43
212.
Suppose that the economy is in long-run macroeconomic equilibrium and aggregate
demand increases. As the economy moves to short-run macroeconomic equilibrium,
there is a(n) _____ gap with _____.
A)
recessionary; high inflation
B)
recessionary; low inflation
C)
inflationary; high unemployment
D)
inflationary; low unemployment
213.
If the short-run macroeconomic equilibrium is to the _____ of the economy’s potential
output, then there is a(n) _____ gap and the aggregate price level is expected to _____.
A)
right; inflationary; fall
B)
right; recessionary; rise
C)
left; inflationary; fall
D)
left; recessionary; fall
214.
In the long run, inflationary and recessionary gaps are self-correcting because
eventually:
A)
nominal wages rise to close an inflationary gap or fall to close a recessionary gap.
B)
the government applies the right combination of fiscal and monetary policies.
C)
the multiplier compensates for the negative supply or demand shocks.
D)
nominal wages rise to close a recessionary gap and fall to close an inflationary gap.
215.
A recessionary gap occurs when:
A)
potential output is below aggregate output.
B)
potential output is receding.
C)
aggregate output is below potential output.
D)
aggregate output is above potential output.
216.
A recessionary gap gradually:
A)
increases short-run aggregate supply.
B)
decreases short-run aggregate supply.
C)
increases aggregate demand.
D)
decreases aggregate demand.
217.
If there is an inflationary gap, nominal wages _____, and the _____ curve shifts _____
until the economy reaches long-run equilibrium.
A)
fall; aggregate demand; left
B)
rise; aggregate demand; right
C)
fall; short-run aggregate supply; right
D)
rise; short-run aggregate supply; left
Page 44
218.
An inflationary gap gradually:
A)
increases short-run aggregate supply.
B)
decreases short-run aggregate supply.
C)
increases aggregate demand.
D)
decreases aggregate demand.
219.
In the long run, the economy is:
A)
unstable.
B)
self-correcting.
C)
inflexible.
D)
uncontrollable.
220.
If actual GDP is less than potential output, then the economy is:
A)
in an inflationary gap.
B)
in a recessionary gap.
C)
in a long-run equilibrium.
D)
at full employment.
221.
Suppose the economy is in a short-run equilibrium and actual output is greater than
potential output. The economy is in:
A)
an inflationary gap; nominal wages will increase and SRAS will shift to the left
until actual GDP is equal to potential GDP in the long run.
B)
a recessionary gap; nominal wages will decrease and AD will shift to the left until
actual GDP is equal to potential GDP in the long run.
C)
an inflationary gap; prices of goods will increase and AD will shift to the right until
the economy is in long-run equilibrium.
D)
a recessionary gap; prices of goods will decrease and LRAS will shift to the left
until the economy is in long-run equilibrium.
222.
If the economy is in a recessionary gap:
A)
it will remain in a recession forever without any kind of government intervention.
B)
nominal wages will fall and SRAS will shift to the right until the economy is at full
employment.
C)
AD will shift to the right and prices of goods will rise until the economy goes back
to producing potential output.
D)
nominal wages will rise, SRAS will shift to the left, and the economy will
eventually restore itself.
Page 45
223.
Suppose that an economy is in an inflationary gap in the short run. In the long run:
A)
the economy’s self-correcting mechanism will restore GDP to its potential level.
B)
inflation will spiral unless the government takes dramatic fiscal measures.
C)
sustained inflation will reduce the value of money.
D)
fiscal and monetary policies may lower prices, but output will remain higher than
potential level.
224.
The correct formula for the output gap is:
A)
Potential Output 100
Actual Aggregate Output
B)
(Potential Output Actual Aggregate Output) 100
Actual Aggregate Output
−
C)
(Actual Aggregate Output Potential Output)×100
Potential Output
−
D)
(Potential Output Actual Aggregate Output) 100
Actual Aggregate Output
+
225.
In the long run, the economy is:
A)
self-correcting, as commodity prices rise during recessionary gaps and fall during
inflationary gaps to move the economy to long-run equilibrium.
B)
self-correcting, as prices of goods that are sticky in the short run become very
flexible in the long run and thus move the economy to full employment.
C)
fluctuating, as nominal wages rise and fall during short-run economic fluctuations.
D)
self-correcting, as nominal wages rise during recessionary gaps and fall during
inflationary gaps to move the economy to long-run equilibrium.
226.
A negative demand shock can cause:
A)
a liquidity trap.
B)
crowding out.
C)
a recessionary gap.
D)
an inflationary gap.
227.
An advantage of stabilizing macroeconomic policy over economic self-correction is
that:
A)
stabilization policies achieve potential output with a lower aggregate price level.
B)
economic self-correction can take a decade or more.
C)
economic self-correction affects the aggregate price level but not the aggregate
output level.
D)
stabilization policies are particularly effective to address supply shocks.
Page 46
228.
Which of the following is a NEGATIVE side effect of using macroeconomic policies to
offset a recessionary gap?
A)
a crowding-out of private investment
B)
possibly unpredictable consequences
C)
a higher aggregate price level
D)
All of the answers are correct.
229.
Which curve is easiest to shift?
A)
the short-run aggregate supply curve
B)
the long-run aggregate supply curve
C)
the aggregate demand curve
D)
All of the curves easily shift.
Use the following to answer questions 230-231:
Figure: An Increase in Aggregate Demand
230.
(Figure: An Increase in Aggregate Demand) Look at the figure An Increase in
Aggregate Demand. Assume that the economy is initially in long-run equilibrium at YP
and P1. Now suppose that there is an increase in the level of government purchases at
each price level. This will:
A)
shift the aggregate demand curve from AD2 to AD1.
B)
shift the aggregate demand curve from AD1 to AD2.
C)
lead to increased output and a decrease in the price level.
D)
lead to decreased output and a decreased price level.
Page 47
231.
(Figure: An Increase in Aggregate Demand) Look at the figure An Increase in
Aggregate Demand. At the Y2 level of real GDP:
A)
an inflationary gap equal to the sum of Y2 and YP occurs.
B)
an inflationary gap equal to the difference between Y2 and YP occurs.
C)
the solution at Y2 is a long-run equilibrium.
D)
a recessionary gap equal to the difference between Y2 and YP occurs.
232.
Policy can offset the effects of all of the following shocks EXCEPT:
A)
a positive demand shock by decreasing government spending.
B)
a negative demand shock by cutting taxes.
C)
a negative supply shock by increasing money supply.
D)
a positive demand shock by increasing taxes.
233.
Stabilization policies have:
A)
not reduced the effects of business cycles caused by either demand shocks or
supply shocks.
B)
reduced the economic fluctuations caused by demand shocks but have not been
effective against supply shocks.
C)
reduced the economic costs of supply shocks but have not been so successful
against demand shocks.
D)
reduced economic fluctuations by neutralizing the effects of both supply and
demand shocks.
Use the following to answer questions 234-239:
Figure: Inflationary and Recessionary Gaps
Page 48
234.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. In panel (a), an expansionary policy designed to move the economy
from Y1 to Yp would attempt to shift the:
A)
aggregate demand curve to the left by increasing aggregate demand.
B)
aggregate demand curve to the right by increasing aggregate demand.
C)
SRAS curve to the left.
D)
LRAS curve to the left.
235.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. If the economy is in short-run equilibrium at Y1 in panel (a), the
economy is in:
A)
a recessionary gap.
B)
an inflationary gap.
C)
simultaneous short-run and long-run equilibrium.
D)
full employment.
236.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. If the economy is in short-run equilibrium at Y1 in panel (a), to
return to potential output at YP policy makers should use:
A)
contractionary policy.
B)
expansionary policy.
C)
policies to shift the SRAS to the left.
D)
policies to shift the LRAS to the left.
237.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. If the economy is in short-run equilibrium at Y1 in panel (b), the
economy is in:
A)
a recessionary gap.
B)
an inflationary gap.
C)
simultaneous short-run and long-run equilibrium.
D)
a high level of unemployment.
238.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. If the economy is in short-run equilibrium at Y1 in panel (b), to
return to potential output at YP policy makers should use:
A)
contractionary stabilization policy.
B)
expansionary stabilization policy.
C)
policies to shift the SRAS to the left.
D)
policies to shift the LRAS to the left.
Page 49
239.
(Figure: Inflationary and Recessionary Gaps) Look at the figure Inflationary and
Recessionary Gaps. If the economy is in short-run equilibrium at Y1 in panel (b), a
contractionary policy to bring the economy back to potential output at YP would attempt
to shift the:
A)
SRAS to the left.
B)
LRAS to the left.
C)
aggregate demand curve to the left by decreasing aggregate demand.
D)
aggregate demand curve to the right by increasing aggregate demand.
240.
When the economy is in a recessionary gap, the government can improve economic
outcomes by:
A)
increasing taxes and aggregate spending via the multiplier.
B)
increasing the money supply, lowering the interest rate, increasing investment
spending and consumption spending, and thus increasing aggregate demand.
C)
cutting government expenditure, decreasing investment spending and consumption
spending, and thus increasing aggregate supply.
D)
increasing nominal wages, shifting the short run aggregate supply to the left and
thus removing the recessionary gap.
Page 50
Use the following to answer questions 241-244:
Figure: Shifts of the AD–AS Curves
241.
(Figure: Shifts of the AD–AS Curves) Look at the figure Shifts of the AD–AS Curves. A
short run decrease in investment spending is illustrated by:
A)
panel (a).
B)
panel (b).
C)
panel (c).
D)
panel (d).
242.
(Figure: Shifts of the AD–AS Curves) Look at the figure Shifts of the AD–AS Curves. A
short run increase in net exports is illustrated by:
A)
panel (a).
B)
panel (b).
C)
panel (c).
D)
panel (d).
Page 51
243.
(Figure: Shifts of the AD–AS Curves) Look at the figure Shifts of the AD–AS Curves. A
decrease in wages in the short run is illustrated by:
A)
panel (a).
B)
panel (b).
C)
panel (c).
D)
panel (d).
244.
(Figure: Shifts of the AD–AS Curves) Look at the figure Shifts of the AD–AS Curves.
An increase in wages in the short run is illustrated by:
A)
panel (a).
B)
panel (b).
C)
panel (c).
D)
panel (d).
245.
A positive demand shock will result from:
A)
a sudden increase in nominal wages.
B)
an increase in the potential GDP.
C)
a move by the Federal Reserve to lower the interest rate.
D)
consumers and firms becoming more pessimistic.
Use the following to answer questions 246-249:
Figure: AD–AS Model I
Page 52
246.
(Figure: AD–AS Model I) Look at the figure AD–AS Model I. If the economy is at point
X, there is a(n) _____ gap with _____ unemployment.
A)
inflationary; low
B)
inflationary; high
C)
recessionary; low
D)
recessionary; high
247.
(Figure: AD–AS Model I) Look at the figure AD–AS Model I. If the economy is at point
X, nominal wages _____, and the _____ curve shifts _____ until the economy reaches
long-run equilibrium.
A)
fall; aggregate demand; left
B)
rise; aggregate demand; right
C)
fall; short-run aggregate supply; right
D)
fall; short-run aggregate supply; left
248.
(Figure: AD–AS Model I) Look at the figure AD–AS Model I. If the economy is at point
X, the appropriate fiscal policy is to:
A)
increase taxes and decrease government spending.
B)
decrease taxes and increase government spending.
C)
increase the money supply and interest rates.
D)
decrease the money supply and interest rates.
249.
(Figure: AD–AS Model I) Look at the figure AD–AS Model I. If the economy is at point
X, the appropriate monetary policy is to:
A)
increase taxes and decrease government spending.
B)
decrease taxes and increase government spending.
C)
increase the money supply and decrease interest rates.
D)
decrease the money supply and increase interest rates.
Page 53
Use the following to answer questions 250-259:
Figure: AD–AS Model II
250.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. Which of the following
will raise the price level?
A)
SRAS curve shifts to the left.
B)
SRAS curve shifts to the right.
C)
AD curve shifts to the left.
D)
The economy moves down the aggregate demand curve.
251.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. If commodity prices rise,
the _____ curve will shift to the _____.
A)
SRAS; left
B)
SRAS; right
C)
AD; left
D)
AD; right
252.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. If nominal wages fall, in
the short run the _____ curve will shift to the _____.
A)
SRAS; left
B)
SRAS; right
C)
LRAS; right
D)
AD; right
Page 54
253.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. If productivity increases,
the _____ curve will shift to the _____.
A)
SRAS; left
B)
SRAS; right
C)
AD; left
D)
AD; right
254.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. As the size of the labor
force increases over time, the _____ curve will shift to the _____.
A)
LRAS; right
B)
LRAS; left
C)
AD; left
D)
AD; right
255.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. When consumers and
firms become more optimistic, in the short run the _____ curve will shift to the _____.
A)
SRAS; left
B)
SRAS; right
C)
AD; right
D)
AD; left
256.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. When firms decrease
their investment spending, in the short run the _____ curve will shift to the _____.
A)
LRAS; left
B)
LRAS; right
C)
AD; right
D)
AD; left
257.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. If the value of household
wealth increases, the _____ curve will shift to the _____.
A)
SRAS; left
B)
SRAS; right
C)
AD; right
D)
AD; left
Page 55
258.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. If there is a significant
increase in government spending, in the short run the _____ curve will shift to the
_____.
A)
SRAS; left
B)
SRAS; right
C)
AD; left
D)
AD; right
259.
(Figure: AD–AS Model II) Look at the figure AD–AS Model II. If the central bank
reduces the quantity of money that is circulating in the economy, the _____ curve will
shift to the _____.
A)
LRAS; right
B)
LRAS; left
C)
AD1; left to AD3
D)
AD1; right to AD2
Use the following to answer questions 260-262:
Figure: AD–AS
260.
(Figure: AD–AS) Look at the figure AD–AS. Suppose the economy is in an inflationary
gap so that SRAS1 intersects AD2. The size of the gap is equal to:
A)
Y1 – YP.
B)
Y1.
C)
Y1 – Y2.
D)
YP – Y2.
Page 56
261.
(Figure: AD–AS) Look at the figure AD–AS. Suppose that initially the economy is at
long-run equilibrium. If the government cuts taxes, _____ will shift to the _____.
A)
SRAS; right
B)
SRAS; left
C)
AD1; right to AD2
D)
AD1; left to AD3
262.
(Figure: AD–AS) Look at the figure AD–AS. Assume that the economy is in long-run
equilibrium. If the Federal Reserve lowers the key interest rate:
A)
the aggregate demand curve will shift to AD2.
B)
the aggregate demand curve will stay unchanged at AD1.
C)
there will be a downward movement along the aggregate demand curve AD1.
D)
the aggregate demand curve will shift to AD3.
Use the following to answer questions 263-271:
Figure: Policy Alternatives
263.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. In panel (b), the
economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If
the government decides to intervene, it will most likely:
A)
increase taxes.
B)
decrease the quantity of money.
C)
increase its spending.
D)
decrease its spending.
Page 57
264.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (a), it is in:
A)
a recessionary gap.
B)
an inflationary gap.
C)
simultaneous short-run and long-run equilibrium.
D)
full employment.
265.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (a), it is in:
A)
full employment.
B)
an inflationary gap.
C)
a liquidity trap.
D)
stagflation.
266.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (a) and government spending increases, the result will likely
be:
A)
an increase in unemployment.
B)
a decrease in interest rates.
C)
inflation.
D)
deflation.
267.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (a) and the government does not intervene, the result will
likely be:
A)
a shift of AD1 to the left.
B)
a shift of SRAS1 to SRAS2.
C)
a shift of LRAS to the left.
D)
no change in AD or SRAS.
268.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (a) and the government decides to intervene, it will most
likely:
A)
increase taxes.
B)
decrease the money supply.
C)
increase its spending.
D)
decrease its spending.
Page 58
269.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at I1 in panel (b), it is in:
A)
a recessionary gap.
B)
an inflationary gap.
C)
simultaneous short-run and long-run equilibrium.
D)
full employment.
270.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (a) and the government decreases taxes, the result will likely
be:
A)
an increase in unemployment.
B)
a decrease in interest rates.
C)
a decrease in aggregate demand.
D)
an increase in aggregate demand.
271.
(Figure: Policy Alternatives) Look at the figure Policy Alternatives. If the economy is in
equilibrium at Y1 in panel (b) and the government does not intervene, the result will
likely be a shift of:
A)
AD1 to AD2.
B)
SRAS to the left.
C)
LRAS to the left.
D)
SRAS to the right.
272.
An inflationary gap caused by a demand shock can be addressed by _____ to _____.
A)
raising government spending; lower the unemployment rate
B)
raising taxes; lower the unemployment rate
C)
lowering government spending; lower the aggregate price level
D)
lowering taxes; lower the aggregate price level
273.
In response to a negative supply shock, the government decreases taxes. The most likely
result of the government’s tax decrease is a(n) _____ in unemployment and a(n) _____
in the aggregate price level.
A)
decrease; increase
B)
decrease; decrease
C)
increase; increase
D)
increase; decrease
Page 59
274.
Using monetary policy to address a recessionary gap caused by a supply shock involves
_____ to _____.
A)
decreasing the money supply; lower the aggregate price level
B)
increasing interest rates; decrease investment spending
C)
decreasing interest rates; lower the aggregate price level
D)
increasing the money supply; lower the unemployment rate
275.
Deflation was a problem in both the Great Depression and the recession of 1979–1982.
A)
True
B)
False
276.
The aggregate demand curve shows a negative relationship between the price level and
the quantity of aggregate output demanded.
A)
True
B)
False
277.
The aggregate demand curve shows that at higher price levels the quantity of aggregate
output demanded will be less than at lower price levels.
A)
True
B)
False
278.
When the price level increases, people want to hold more money.
A)
True
B)
False
279.
When the price level increases and people want to hold more money, interest rates
decrease.
A)
True
B)
False
280.
If the price level decreases by 20%, the purchasing power of $1,000 will increase to
$1,200.
A)
True
B)
False
Page 60
281.
If the price level increases by 20%, the purchasing power of $1,000 will increase to
$1,200.
A)
True
B)
False
282.
Other things equal, in the income–expenditure model, a decrease in the price level will
cause the planned aggregate expenditure curve to shift downward, resulting in a lower
level of real GDP.
A)
True
B)
False
283.
In the income–expenditure model, if the price level increases, the wealth and interest
rate effects will decrease planned expenditures.
A)
True
B)
False
284.
An increase in Social Security benefits will likely increase consumption and shift the
aggregate demand curve to the right.
A)
True
B)
False
285.
The higher the existing physical capital stock, the higher is aggregate demand.
A)
True
B)
False
286.
Because of the multiplier effect, an increase in government spending of $200 billion will
increase aggregate output by less than that amount.
A)
True
B)
False
287.
The purchasing power of money increased during the oil crisis of 1979 because the
aggregate price level increased but the growth rate of the money supply was faster than
the increase in the price level.
A)
True
B)
False
Page 61
288.
In 1979 and 1980, because of the interest rate and wealth effects, the economy was
moving upward along the aggregate demand curve from right to left.
A)
True
B)
False
289.
The aggregate supply curve shows the relationship between the aggregate price level
and the quantity of aggregate output supplied.
A)
True
B)
False
290.
The short-run aggregate supply curve has a positive slope, showing that increases in the
price level will increase the quantity of aggregate output supplied by firms.
A)
True
B)
False
291.
Between 1929 and 1933, the U.S. economy moved upward from left to right along its
short-run aggregate supply curve.
A)
True
B)
False
292.
When aggregate demand decreased between 1929 and 1933, the GDP deflator
decreased.
A)
True
B)
False
293.
Between 1929 and 1933, real GDP increased by a large amount.
A)
True
B)
False
294.
Between 1929 and 1933, as aggregate demand decreased, the unemployment rate
increased.
A)
True
B)
False
295.
The dollar amount of the wage paid is called the sticky wage.
A)
True
B)
False
Page 62
296.
The nominal wage is the dollar amount of the wage paid.
A)
True
B)
False
297.
If it costs Betsy $10 to bake a cake and she sells the cake for $25, her profit per unit (per
cake) is $35.
A)
True
B)
False
298.
When the price level increases, firms in perfectly competitive markets usually have an
increase in profit per unit and increase output.
A)
True
B)
False
299.
When the price level increases, firms in imperfectly competitive markets usually have a
decrease in profit per unit and decrease output.
A)
True
B)
False
300.
Short-run aggregate supply increases when producers are willing to supply more at any
given price level.
A)
True
B)
False
301.
When short-run aggregate supply increases, it means that the short-run aggregate supply
curve shifts to the right, showing that producers are willing to produce more at each
price level.
A)
True
B)
False
302.
An increase in the minimum wage would likely cause an increase in short-run aggregate
supply.
A)
True
B)
False
Page 63
303.
An increase in health care insurance premiums would likely cause a decrease in
short-run aggregate supply and shift the short-run aggregate supply curve to the left.
A)
True
B)
False
304.
If the labor force becomes healthier and productivity increases, short-run aggregate
supply is likely to increase.
A)
True
B)
False
305.
An increase in the price of oil is likely to shift the short-run aggregate supply curve to
the right.
A)
True
B)
False
306.
In the long run, the aggregate price level has no effect on the quantity of aggregate
output supplied.
A)
True
B)
False
307.
Potential output is the level of real GDP that the economy would produce if all prices,
including nominal wages, were inflexible.
A)
True
B)
False
308.
An increase in the nominal wage will increase potential output.
A)
True
B)
False
309.
The end of the Great Depression was due largely to increased government spending for
World War II.
A)
True
B)
False
310.
A positive short-run aggregate supply shock increases aggregate output and the
aggregate price level.
A)
True
B)
False
Page 64
311.
A negative supply shock raises production costs and increases the quantity producers are
willing to supply at any given price level.
A)
True
B)
False
312.
When the economy is in stagflation, the price level is falling.
A)
True
B)
False
313.
Stagflation is the combination of inflation and rising aggregate output.
A)
True
B)
False
314.
The economy is in short-run macroeconomic equilibrium when the quantity of
aggregate output supplied is equal to the quantity of aggregate output demanded.
A)
True
B)
False
315.
In long-run macroeconomic equilibrium, actual aggregate output equals potential
output.
A)
True
B)
False
316.
An inflationary gap occurs when potential output is above actual aggregate output.
A)
True
B)
False
317.
The economy is self-correcting in the long run.
A)
True
B)
False
318.
Shocks to aggregate demand do NOT affect aggregate output in the long run.
A)
True
B)
False
Page 65
319.
What is meant by the interest rate effect, and why does it help to explain the shape of
the aggregate demand curve?
Use the following to answer question 320:
Figure: I-E and AD
320.
(Figure: I-E and AD) Look at the figure I-E and AD. Explain how a change in the price
level increases the equilibrium real GDP from $8 billion to $10 billion.
321.
How does rising consumer optimism affect the aggregate demand curve? Explain your
response.
322.
Explain the difference between fiscal and monetary policy.
323.
What is meant by sticky wages, and how does this explain the shape of the short-run
aggregate supply curve?
324.
What is stagflation? How would stagflation show in the AD–AS model?
325.
If the economy is operating on its short-run aggregate supply curve at an output below
potential, what adjustment will occur?
Page 66
326.
Suppose the economy is initially in long-run equilibrium and there is a negative demand
shock. Describe the short-run effects of this demand shock and how the economy will
adjust in the long run.
327.
Suppose the economy is initially in long-run equilibrium and there is a positive demand
shock. Describe the short-run effects of this demand shock and how the economy will
adjust in the long run.
328.
Suppose the economy is in short-run equilibrium. Use the AD–AS model to predict
short-run changes to real GDP and the aggregate price level if the U.S. stock market has
a prolonged fall in value. Explain your reasoning.
329.
Suppose the economy is in short-run equilibrium. Use the AD–AS model to predict
short-run changes to real GDP and the aggregate price level if the stock of physical
capital is relatively small and falling. Explain your reasoning.
330.
Suppose the economy is in short-run equilibrium. Use the AD–AS model to predict
short-run changes to real GDP and the aggregate price level if commodity prices
suddenly increase. Explain your reasoning.
331.
A rise in the aggregate price level will, other things equal, lead to a(n):
A)
rightward shift in the AD curve.
B)
leftward shift in the AD curve.
C)
decrease in the quantity of aggregate output demanded.
D)
increase in the quantity of aggregate output demanded.
332.
A movement along the aggregate demand curve is caused by a(n):
A)
change in the aggregate price level.
B)
increase in consumer spending.
C)
fall in commodity prices.
D)
reduction in government spending.
Page 67
333.
When the aggregate price level falls, the purchasing power of assets rises, which leads
to:
A)
an increase in the quantity of aggregate output demanded.
B)
a decrease in the quantity of aggregate output demanded.
C)
a shift in the AD curve to the right.
D)
a shift in the AD curve to the left.
334.
If the aggregate price level rises, holding everything constant, consumers will:
A)
need more money to purchase the same basket of goods, which will lead to an
increase in the demand for money, hence to interest rate increases and a reduction
in the quantity of aggregate output demanded via a drop in investment demand.
B)
find their purchasing power has increased and will purchase more goods and
services, leading to an increase in the aggregate output demanded.
C)
demand less aggregate output at all price levels, resulting in a shift right of the AD
curve.
D)
need less money to purchase the same basket of goods, which will lead to a
decrease in the demand for money, hence to interest rate decreases and an increase
in the quantity of aggregate output demanded via an increase in investment
demand.
335.
The interest rate effect states that as the aggregate price level rises, holding everything
else constant, people demand _____ money, which drives the interest rate _____ and
investment _____.
A)
less; down; up
B)
more; up; down
C)
less; up; down
D)
more; down; down
336.
The wealth effect explains why:
A)
the aggregate demand curve slopes downward, since changes in aggregate price
levels change the purchasing power of people’s assets.
B)
the aggregate supply curve slopes upward, since an increase in wealth leads to
more consumption.
C)
the aggregate supply curve shifts, since changes in wealth affect production.
D)
the aggregate demand curve slopes upward, since wealth allows consumers to
purchase more regardless of the price level.
Page 68
337.
All else being equal, if the aggregate price level falls, the planned expenditure curve
will:
A)
slope downward.
B)
shift upward.
C)
shift downward.
D)
turn horizontal.
338.
An increase in wealth or an increase in government spending will result in a:
A)
left-shift of the aggregate supply curve.
B)
right-shift of the aggregate demand curve.
C)
right-shift of the aggregate supply curve.
D)
movement along the aggregate demand curve.
339.
The AD curve will shift to the left:
A)
because of the wealth and interest rate effects.
B)
if household wealth decreases.
C)
if the aggregate price level falls.
D)
if the government decreases taxes paid by households.
340.
Which of the following will shift the AD curve to the right?
A)
an increase in wealth
B)
pessimism about the economy
C)
a supply shock
D)
a decrease in productivity
341.
Which of the following policies will shift the AD curve to the LEFT?
A)
The government spends more.
B)
The government raises tax rates.
C)
The Federal Reserve increases the money supply.
D)
The government cuts tax rates.
342.
When the aggregate price level rises:
A)
AD will shift right.
B)
SRAS will shift left.
C)
there will be a movement along the SRAS curve.
D)
AD will shift left.
Page 69
343.
An increase in the prices of goods in the short run will:
A)
increase producers’ profit per unit.
B)
decrease producers’ profit per unit.
C)
lead to a movement along the AD curve.
D)
reduce output.
344.
A movement along the short-run AS curve occurs, holding everything else constant,
when there is a:
A)
change in commodity prices.
B)
supply shock.
C)
change in the aggregate price level.
D)
productivity change.
345.
Sticky wages and prices occur:
A)
in the long run.
B)
in the short run.
C)
in both the short and long run.
D)
only when the economy is operating above its potential real GDP.
346.
An economy operating at a real GDP level below its potential will have:
A)
relatively high unemployment levels.
B)
nominal wages moving upward as the economy moves from the short run to the
long run.
C)
the SRAS curve shifting left as the economy corrects itself from the short run to the
long run.
D)
no change in price levels.
347.
When unemployment is high, in the short run, nominal wages will:
A)
be flexible.
B)
be inflexible.
C)
not be affected.
D)
be contracted at the minimum wage.
348.
Increased government spending in the short run will _____ aggregate output and _____
aggregate price levels.
A)
increase; increase
B)
increase; decrease
C)
decrease; decrease
D)
decrease; increase
Page 70
349.
In the short run, when there is an increase in aggregate demand, the aggregate price
level will _____ and the aggregate output level will _____.
A)
rise; fall
B)
rise; rise
C)
fall; rise
D)
fall; fall
350.
A negative demand shock, holding everything else constant:
A)
shifts AD to the left and results in lower aggregate price levels and lower real GDP
in the short run.
B)
shifts AS to the left and results in lower aggregate price levels and lower real GDP
in the short run.
C)
moves the economy downward along the AD curve.
D)
moves the economy upward along the AD curve.
351.
When wages rise, AS shifts _____ and aggregate price levels _____.
A)
left; fall.
B)
right; fall
C)
right; rise
D)
left; rise
352.
Stagflation occurs when the aggregate price level _____ and the aggregate output level
_____.:
A)
falls; falls
B)
falls; rises
C)
rises; falls
D)
rises; rises
353.
A negative supply shock often results in:
A)
a leftward shift of the AD curve.
B)
an increase in the aggregate price level and a decrease in aggregate output.
C)
no change in the price level.
D)
a drop in the unemployment level.
354.
In the United States during the 1970s, oil prices increased dramatically and shifted:
A)
AD to the right.
B)
AD to the left.
C)
SRAS to the right.
D)
SRAS to the left.
Page 71
355.
A sudden increase in commodity prices will lead to a shift in the _____ curve to the
_____, resulting in _____ aggregate _____.
A)
SRAS; right; higher; output
B)
AD; right; higher; prices
C)
SRAS ; left; lower; output
D)
AD; left; lower; prices
356.
If an economy is in short-run equilibrium such that the level of output is greater than the
potential output:
A)
nominal wages will rise after some time.
B)
the economy is in long-run equilibrium.
C)
the short run AS curve will shift right over time.
D)
unemployment is much higher than its natural rate.
357.
If an economy is in short-run equilibrium and the level of actual real GDP is greater
than potential output, in the long run nominal wages will _____ and the _____ curve
will shift _____, bringing the economy back to its potential real GDP.
A)
rise; SRAS; left;
B)
rise; AD; right;
C)
fall; SRAS; right;
D)
fall; AD; left;
358.
In the long run, an increase in AD will result in:
A)
no change in the aggregate price level.
B)
no change in the aggregate output level.
C)
increases in both the aggregate price level and the aggregate output level.
D)
an increase in the aggregate price level but no change in the aggregate output level.
359.
In the long run, the aggregate price level falls. This could result from:
A)
a leftward shift in AD.
B)
a rightward shift in AD.
C)
a rightward shift in short-run AS.
D)
more spending by consumers.
360.
Starting from its potential output, an economy’s government increases spending. In the
long run, this economy will produce at:
A)
an output level above its potential output.
B)
its potential output.
C)
an output level below its potential output.
D)
its potential output level at a lower aggregate price level.
Page 72
361.
In an inflationary gap:
A)
aggregate output is above potential output.
B)
aggregate output equals potential output.
C)
aggregate output is less than potential output.
D)
short-run flexibility will bring the economy back to its potential output without any
intervention.
362.
An economy is operating at an output level below potential real GDP. If the government
wishes to use fiscal policy to bring the economy back to its potential real GDP, it will:
A)
increase the money supply.
B)
increase its spending.
C)
increase taxation.
D)
decrease the money supply.
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Answer Key
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