Question 1

Figure 7-1  
-Refer to Figure 7-1. A movement from point A to point B

Accepted Answer

A)  is a change in aggregate demand resulting from a lower price level. 
B)  is a change in aggregate quantity demanded resulting from a lower price level. 
C)  could be due to an increase in investment demand. 
D)  occurs because aggregate output supplied has increased. 
A)  is a change in aggregate demand resulting from a lower price level. 
B)  is a change in aggregate quantity demanded resulting from a lower price level. 
C)  could be due to an increase in investment demand. 
D)  occurs because aggregate output supplied has increased.

Question 2

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is the

Accepted Answer

A)  aggregate demand curve. 
B)  average price level. 
C)  circular flow model. 
D)  GDP curve. 
A)  aggregate demand curve. 
B)  average price level. 
C)  circular flow model. 
D)  GDP curve.

Question 3

Suppose households become more future-oriented and decide to save more at each income level. All other things unchanged, this will

Accepted Answer

A)  shift the aggregate demand curve to the right. 
B)  shift the aggregate demand curve to the left. 
C)  not affect aggregate but rather aggregate supply because firms will now produce less. 
D)  shift both the aggregate demand curve and the aggregate supply curve to the left. 
A)  shift the aggregate demand curve to the right. 
B)  shift the aggregate demand curve to the left. 
C)  not affect aggregate but rather aggregate supply because firms will now produce less. 
D)  shift both the aggregate demand curve and the aggregate supply curve to the left.

Question 4

When the Great Depression reached its trough in 1933, real GDP had fallen by ________ since the depression began in 1929.

Accepted Answer

A)  5% 
B)  10% 
C)  30% 
D)  50% 
A)  5% 
B)  10% 
C)  30% 
D)  50%

Question 5

Figure 7-6  
-Refer to Figure 7-6. Suppose the economy is initially at point A. All of the following statements are true except

Accepted Answer

A)  the economy is in equilibrium at its potential output. 
B)  the labor market is in equilibrium. 
C)  there is no cyclical unemployment. 
D)  there is no structural or frictional unemployment. 
A)  the economy is in equilibrium at its potential output. 
B)  the labor market is in equilibrium. 
C)  there is no cyclical unemployment. 
D)  there is no structural or frictional unemployment.

Question 6

All other things unchanged, a lower exchange rate

Accepted Answer

A)  increases exports, imports, and aggregate demand. 
B)  decreases exports, imports, and aggregate demand. 
C)  increases exports, decreases imports, increases net exports and aggregate demand. 
D)  decreases exports, increases imports, decreases net exports and aggregate demand. 
A)  increases exports, imports, and aggregate demand. 
B)  decreases exports, imports, and aggregate demand. 
C)  increases exports, decreases imports, increases net exports and aggregate demand. 
D)  decreases exports, increases imports, decreases net exports and aggregate demand.

Question 7

As an inflationary gap is eliminated through an economy's self-correcting adjustments process,

Accepted Answer

A)  the equilibrium price level increases and the equilibrium real output decreases. 
B)  the equilibrium price level decreases and the equilibrium real output increases. 
C)  the equilibrium price level and the equilibrium real output increase. 
D)  the equilibrium price level and the equilibrium real output decrease. 
A)  the equilibrium price level increases and the equilibrium real output decreases. 
B)  the equilibrium price level decreases and the equilibrium real output increases. 
C)  the equilibrium price level and the equilibrium real output increase. 
D)  the equilibrium price level and the equilibrium real output decrease.

Question 8

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and real GDP in the short run?

Accepted Answer

A)  A decrease in health insurance premiums paid by firms raises the cost of employing labor 
B)  An increase in government transfer payments 
C)  An increase in the cost of a key input such as oil 
D)  A sharp fall in stock market prices 
A)  A decrease in health insurance premiums paid by firms raises the cost of employing labor 
B)  An increase in government transfer payments 
C)  An increase in the cost of a key input such as oil 
D)  A sharp fall in stock market prices

Question 9

Figure 7-6  
-Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. What happens in the new short run?

Accepted Answer

A)  Firms increase output because product prices rise while real wage falls. 
B)  Firms increase output because product prices and real wage rise. 
C)  Firms will have to pay higher nominal wages and employ more workers to supply the increased output. 
D)  The price level increases to Pb, real wages, nominal wages, and employment increase. 
A)  Firms increase output because product prices rise while real wage falls. 
B)  Firms increase output because product prices and real wage rise. 
C)  Firms will have to pay higher nominal wages and employ more workers to supply the increased output. 
D)  The price level increases to Pb, real wages, nominal wages, and employment increase.

Question 10

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects.

Accepted Answer

A)  The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases. 
B)  The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. 
C)  The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. 
D)  The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease. 
A)  The aggregate supply curve shifts right; the aggregate demand curve is not affected; price level decreases; real GDP increases. 
B)  The aggregate supply curve shifts left; the aggregate demand curve is not affected; price level increases; real GDP decreases. 
C)  The aggregate demand curve shifts right; the aggregate supply curve is not affected; price level and real GDP increase. 
D)  The aggregate demand curve shifts left; the aggregate supply curve is not affected; price level and real GDP decrease.

Question 11

In the short-run, an output gap occurs because

Accepted Answer

A)  there is insufficient demand for goods and services. 
B)  there is insufficient supply of goods and services. 
C)  wages and prices are fully flexible. 
D)  wages and some prices have not adjusted sufficiently to maintain output at its potential level. 
A)  there is insufficient demand for goods and services. 
B)  there is insufficient supply of goods and services. 
C)  wages and prices are fully flexible. 
D)  wages and some prices have not adjusted sufficiently to maintain output at its potential level.

Question 12

A movement along the short-run aggregate supply curve in response to a change in the price level is called a

Accepted Answer

A)  determinant of aggregate supply. 
B)  revealed cost on aggregate supply. 
C)  change in aggregate supply. 
D)  change in the aggregate quantity of goods and services supplied. 
A)  determinant of aggregate supply. 
B)  revealed cost on aggregate supply. 
C)  change in aggregate supply. 
D)  change in the aggregate quantity of goods and services supplied.

Question 13

An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.

Accepted Answer

A) True 
 B)False

Question 14

Figure 7-7  
-Refer to Figure 7-7. Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?

Accepted Answer

A)  Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed. 
B)  Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H. 
C)  In response to rising prices, firms will increase production moving along SRAS2 until long- run equilibrium is restored at J and the gap is closed. 
D)  Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS2 until long-run equilibrium is restored at J and the gap is closed. 
A)  Over time, the aggregate demand curve will shift to the right until long-run equilibrium is restored at J and the gap is closed. 
B)  Rising unemployment puts pressure on nominal wages to fall. The SRAS curve shifts right to SRAS1 closing the gap at H. 
C)  In response to rising prices, firms will increase production moving along SRAS2 until long- run equilibrium is restored at J and the gap is closed. 
D)  Rising unemployment puts pressure on nominal wages to fall. Firms employ more workers moving along SRAS2 until long-run equilibrium is restored at J and the gap is closed.

Question 15

Public policy to eliminate a recessionary gap could involve an increase in taxes.

Accepted Answer

A) True 
 B)False

Question 16

Figure 7-2  
-Refer to Figure 7-2. Based on the figure, we can conclude that

Accepted Answer

A)  in the short run, the economy will always achieve full-employment equilibrium. 
B)  in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level. 
C)  flexible wages and prices are irrelevant since the LRAS curve is vertical. 
D)  in the long run, the aggregate demand curve determines the potential output level. 
A)  in the short run, the economy will always achieve full-employment equilibrium. 
B)  in the long run, given flexible wages and prices, the economy will achieve equilibrium at its potential output level. 
C)  flexible wages and prices are irrelevant since the LRAS curve is vertical. 
D)  in the long run, the aggregate demand curve determines the potential output level.

Question 17

What are the four sources of aggregate demand?

Accepted Answer

A)  Consumption, private investment, taxes, and expenditures 
B)  Consumption, private investment, wage increases, and government expenditures 
C)  Consumption, private investment, expenditures, and net exports 
D)  Consumption, private investment, government purchases, and net exports 
A)  Consumption, private investment, taxes, and expenditures 
B)  Consumption, private investment, wage increases, and government expenditures 
C)  Consumption, private investment, expenditures, and net exports 
D)  Consumption, private investment, government purchases, and net exports

Question 18

All the following explain price stickiness except

Accepted Answer

A)  firms choose not to adjust prices until they can assess if changes in sales are temporary or permanent. 
B)  the more firms produce, the lower the average cost of production. Therefore, firms are willing to not raise prices as long as they can sell more. 
C)  firms may be concerned that consumers may be angered by price increases. 
D)  firms may be concerned that their rivals may not match their price increases. 
A)  firms choose not to adjust prices until they can assess if changes in sales are temporary or permanent. 
B)  the more firms produce, the lower the average cost of production. Therefore, firms are willing to not raise prices as long as they can sell more. 
C)  firms may be concerned that consumers may be angered by price increases. 
D)  firms may be concerned that their rivals may not match their price increases.

Question 19

If an economy is operating at its potential output level, a change in aggregate demand or short-run aggregate supply will induce an inflationary or a recessionary gap.

Accepted Answer

A) True 
 B)False

Question 20

The sticky price explanation of the short-run aggregate supply curve says that when the average price level rises,

Accepted Answer

A)  some firms will immediately pass the higher prices to consumers. 
B)  because of adjustment costs associated with changing prices, some firms will not raise their prices immediately which may temporarily boost their sales. 
C)  firms will raise their output prices by more than the increase in the average price level to make up for the shortfall in sales. 
D)  consumers are unwilling to pay higher prices resulting in a decrease in aggregate demand. 
A)  some firms will immediately pass the higher prices to consumers. 
B)  because of adjustment costs associated with changing prices, some firms will not raise their prices immediately which may temporarily boost their sales. 
C)  firms will raise their output prices by more than the increase in the average price level to make up for the shortfall in sales. 
D)  consumers are unwilling to pay higher prices resulting in a decrease in aggregate demand.

Figure 7-1 -Refer to Figure 7-1. A movement from point A to point B

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is the

Suppose households become more future-oriented and decide to save more at each income level. All other things unchanged, this will

When the Great Depression reached its trough in 1933, real GDP had fallen by ________ since the depression began in 1929.

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. All of the following statements are true except

All other things unchanged, a lower exchange rate

As an inflationary gap is eliminated through an economy's self-correcting adjustments process,

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and real GDP in the short run?

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. What happens in the new short run?

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects.

In the short-run, an output gap occurs because

A movement along the short-run aggregate supply curve in response to a change in the price level is called a

An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.

Figure 7-7 -Refer to Figure 7-7. Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?

Public policy to eliminate a recessionary gap could involve an increase in taxes.

Figure 7-2 -Refer to Figure 7-2. Based on the figure, we can conclude that

What are the four sources of aggregate demand?

All the following explain price stickiness except

If an economy is operating at its potential output level, a change in aggregate demand or short-run aggregate supply will induce an inflationary or a recessionary gap.

The sticky price explanation of the short-run aggregate supply curve says that when the average price level rises,

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Exam 7: Aggregate Demand and Aggregate Supply

Figure 7-1 -Refer to Figure 7-1. A movement from point A to point B

A graph that depicts the relationship between the total quantity of goods and services demanded and the price level is the

Suppose households become more future-oriented and decide to save more at each income level. All other things unchanged, this will

When the Great Depression reached its trough in 1933, real GDP had fallen by ________ since the depression began in 1929.

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. All of the following statements are true except

All other things unchanged, a lower exchange rate

As an inflationary gap is eliminated through an economy's self-correcting adjustments process,

Suppose the economy is initially in long-run equilibrium. Which of the following events leads to an increase in the price level and real GDP in the short run?

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD2. What happens in the new short run?

Using the aggregate demand-aggregate supply model, predict what happens in the short run when the consumer confidence index falls as consumers become pessimistic about their economic prospects.

In the short-run, an output gap occurs because

A movement along the short-run aggregate supply curve in response to a change in the price level is called a

An increase in the prices of natural resources will lead to a decrease in short-run aggregate supply.

Figure 7-7 -Refer to Figure 7-7. Suppose the economy is initially at K. Which of the following statements best explains how the economy responds to restore long-run macroeconomic equilibrium?

Public policy to eliminate a recessionary gap could involve an increase in taxes.

Figure 7-2 -Refer to Figure 7-2. Based on the figure, we can conclude that

What are the four sources of aggregate demand?

All the following explain price stickiness except

If an economy is operating at its potential output level, a change in aggregate demand or short-run aggregate supply will induce an inflationary or a recessionary gap.

The sticky price explanation of the short-run aggregate supply curve says that when the average price level rises,

Economics: the Study of Choice

Demand and Supply

Applications of Demand and Supply

Macroeconomics: the Big Picture

Measuring Total Output and Income

Economic Growth

The Nature and Creation of Money

Financial Markets and the Economy

Monetary Policy and the Fed

Government and Fiscal Policy

Consumption and the Aggregate Expenditures Model

Investment and Economic Activity

Net Exports and International Finance

Inflation and Unemployment

A Brief History of Macroeconomic Thought and Policy

Inequality, Poverty, and Discrimination

Economic Development

Socialist Economies in Transition

Filters

Figure 7-6 -Refer to Figure 7-6. Suppose the economy is initially at point A. Now suppose an increase in government purchases shifts the aggregate demand curve to AD₂. What happens in the new short run?