Question 1

A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate demand curve slopes downward.

Accepted Answer

A) True 
 B)False

Question 2

What does a fall in the economy's overall level of prices tend to do?

Accepted Answer

A) It tends to raise both the quantity demanded and supplied of goods and services. 
B) It tends to raise the quantity demanded of goods and services, but lower the quantity supplied. 
C) It tends to lower the quantity demanded of goods and services, but raise the quantity supplied. 
D) It tends to lower both the quantity demanded and the quantity supplied of goods and services.

Question 3

When the government spends more, what is the initial effect?

Accepted Answer

A) Aggregate demand shifts right. 
B) Aggregate demand shifts left. 
C) Aggregate supply shifts right. 
D) Aggregate supply shifts left.

Question 4

Consider the exhibit below for the following questions.
Figure 14-1 
-Refer to Figure 14-1. If the economy starts at A and there is a fall in aggregate demand, what happens to the economy in the long run?

Accepted Answer

A) It moves back to A. 
B) It moves to B. 
C) It moves to C. 
D) It moves to D.

Question 5

Which of the following best describes what happens when the price level falls?

Accepted Answer

A) Households increase foreign bond purchases, and the supply of dollars increases. 
B) Households increase foreign bond purchases, and the supply of dollars decreases. 
C) Households decrease foreign bond purchases, and the supply of dollars increases. 
D) Households decrease foreign bond purchases, and the supply of dollars decreases.

Question 6

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short-run?

Accepted Answer

A) Real GDP will rise, and the price level might rise, fall, or stay the same. 
B) Real GDP will fall, and the price level might rise, fall, or stay the same. 
C) The price level will rise, and real GDP might rise, fall, or stay the same. 
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Question 7

How does the aggregate demand and aggregate supply model reflect a rise in production costs?

Accepted Answer

A) The short-run aggregate supply curve shifts to the right. 
B) The short-run aggregate supply curve shifts to the left. 
C) The aggregate demand curve shifts to the right. 
D) The aggregate demand curve shifts to the left.

Question 8

Which of the following typically rises during a recession?

Accepted Answer

A) garbage collection 
B) unemployment 
C) corporate profits 
D) automobile sales

Question 9

Which of the following best explains an increase in consumer spending?

Accepted Answer

A) People spend more when the price level rises, because the dollars they hold worth more. 
B) People spend more when the price level rises, because the dollars they hold worth less. 
C) People spend more when the price level falls, because the dollars they hold worth more. 
D) People spend more when the price level falls, because the dollars they hold worth less.

Question 10

Which of the following would cause prices to fall and output to rise in the short run?

Accepted Answer

A) Short-run aggregate supply shifts right. 
B) Short-run aggregate supply shifts left. 
C) Aggregate demand shifts right. 
D) Aggregate demand shifts left.

Question 11

Assuming that a is positive, how are theories of short-run aggregate supply expressed mathematically?

Accepted Answer

A) quantity of output supplied = natural rate of output + a(actual price level - expected price level) 
B) quantity of output supplied = natural rate of output + a(expected price level - actual price level) 
C) quantity of output supplied = a(actual price level - expected price level) - natural rate of output 
D) quantity of output supplied = a(expected price level - actual price level) - natural rate of output

Question 12

Suppose the economy is in long-run equilibrium. Premier Aviary succeeds in getting a major new highway project for his province. At the same time, Premier Green succeeds in getting major new restrictions on logging enacted for her province. In the short run, what would we expect to happen?

Accepted Answer

A) Real GDP will rise, and the price level might rise, fall, or stay the same. 
B) Real GDP will fall, and the price level might rise, fall, or stay the same. 
C) The price level will rise, and real GDP might rise, fall, or stay the same. 
D) The price level will fall, and real GDP might rise, fall, or stay the same.

Question 13

In which of the following situations would the long-run aggregate supply curve shift right?

Accepted Answer

A) if technology improves 
B) if the price level decreases 
C) if the price of oil increases 
D) if the money supply increases

Question 14

Scenario 14-2. The economy is in long-run equilibrium. Suddenly, due to corporate scandals, international tensions, and the loss of confidence among policymakers, citizens become pessimistic concerning the future. They maintain this level of pessimism for a long time.
-Refer to Scenario 14-2. In the short-run, which of the following are consistent with the aggregate demand and aggregate supply theory?

Accepted Answer

A) The price level and real GDP both increase. 
B) The price level and real GDP both decrease. 
C) The price level rises, and real GDP falls 
D) The price level falls, and real PDP rises.

Question 15

Scenario 14-1. The economy is in long-run equilibrium. Suddenly, due to improved international relations and the increased confidence of policymakers, citizens become more optimistic about the future and stay this way for a long time.
-Refer to Scenario 14-1. In the long-run, how does the change in price expectations created by optimism change the aggregate demand and aggregate supply diagram?

Accepted Answer

A) The long-run aggregate supply curve shifts left. 
B) The long-run aggregate supply curve shifts right. 
C) The short-run aggregate supply curve shifts right. 
D) The short-run aggregate supply curve shifts left.

Question 16

What happens when the price level rises?

Accepted Answer

A) Interest rates rise, so firms increase investment. 
B) Interest rates rise, so firms decrease investment. 
C) Interest rates fall, so firms increase investment. 
D) Interest rates fall, so firms decrease investment.

Question 17

If the government increased the money supply in response to a decrease in aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Accepted Answer

A) True 
 B)False

Question 18

Which of the following best describes what happens when the price level rises?

Accepted Answer

A) Households increase foreign bond purchases, and the supply of dollars increases. 
B) Households increase foreign bond purchases, and the supply of dollars decreases. 
C) Households decrease foreign bond purchases, and the supply of dollars increases. 
D) Households decrease foreign bond purchases, and the supply of dollars decreases.

Question 19

What are the effects of a decrease in the price level?

Accepted Answer

A) Wealth falls, people lend less, interest rates fall, and the dollar appreciates. 
B) Wealth falls, people lend less, interest rates rise, and the dollar depreciates. 
C) Wealth rises, people lend more, interest rates rise, and the dollar appreciates. 
D) Wealth rises, people lend more, interest rates fall, and the dollar depreciates.

Question 20

Which of the following could create an increase in the price level and a reduction in real GDP?

Accepted Answer

A) a fall in stock prices 
B) natural disasters such as hurricanes and famines 
C) declining government expenditures 
D) tax rebates

Exam 14: Aggregate Demand and Aggregate Supply

A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate demand curve slopes downward.

What does a fall in the economy's overall level of prices tend to do?

When the government spends more, what is the initial effect?

Consider the exhibit below for the following questions. Figure 14-1 -Refer to Figure 14-1. If the economy starts at A and there is a fall in aggregate demand, what happens to the economy in the long run?

Which of the following best describes what happens when the price level falls?

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short-run?

How does the aggregate demand and aggregate supply model reflect a rise in production costs?

Which of the following typically rises during a recession?

Which of the following best explains an increase in consumer spending?

Which of the following would cause prices to fall and output to rise in the short run?

Assuming that a is positive, how are theories of short-run aggregate supply expressed mathematically?

Suppose the economy is in long-run equilibrium. Premier Aviary succeeds in getting a major new highway project for his province. At the same time, Premier Green succeeds in getting major new restrictions on logging enacted for her province. In the short run, what would we expect to happen?

In which of the following situations would the long-run aggregate supply curve shift right?

What happens when the price level rises?

If the government increased the money supply in response to a decrease in aggregate supply, unemployment would return towards its natural rate, but prices would rise even more.

Which of the following best describes what happens when the price level rises?

What are the effects of a decrease in the price level?

Which of the following could create an increase in the price level and a reduction in real GDP?