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CHAPTER 9
THE AGGREGATE DEMAND – AGGREGATE
SUPPLY (AD-AS) MODEL
LAUGHER CURVE
We adults do have something in common with today’s teenagers. They listen to rock groups and we
listen to economists. None of us understands a word they’re saying.
POP QUIZ
1. Which of the following statements is true?
a. Activist economists are economists who believe that the government can create and implement
policy proposals that can positively effect the economy.
b. Laissez-faire economists generally favour government intervention in the economy.
c. Classical economists are sometimes referred to as activist economists, whereas Keynesian
economists are often referred to as laissez-faire economists.
d. Most economists are either committed Classical or committed Keynesian economists.
2. According to Keynesian economics:
a. savings always equal investment.
b. there is a difference between equilibrium income and potential income: the economy could be in
equilibrium well above the full employment potential.
c. market forces that are supposed to bring the economy back to long-run potential work fast and
are strong enough to get the economy out of a recession.
d. the key determinant to the level of economic activity is potential income.
3. In the long run, an increase in the aggregate demand curve:
a. in the Keynesian range will increase the price level and the real output level.
b. in the intermediate range will increase the price level and the real output level.
c. in the Classical range will increase the price level and have no effect on the real output level.
d. in the intermediate range will increase price levels with no effect on the real output levels.
4. Regarding the AD-AS model, which of the following is false?
a. It is an historical model because it starts at a point in time, and tells one what will happen when
shocks hit the economy.
b. The SAS curve specifies us how changes in aggregate demand will affect real output and the
price level.
c. The AD curve slopes downward because of substitution effects.
d. The SAS curve illustrates that as economy’s real output expands and unemployment falls, the
price level typically rises.
5. The amplification of initial changes in expenditures is called:
a. The wealth effect.
b. The interest rate effect.
c. The international effect.
d. The multiplier effect.
6. Which of the following statements is true?
a. The multiplier (repercussion) effects cause the AD curve to be steeper than in the absence of
those multiplier effects.
b. Because of the multiplier effects, when an initial shift factor of the AD curve equals, say 100,
the AD curve will shift by a multiple of that amount.
c. The AD curve slopes downward because of the international effect that tells us that as the price
level falls, people are richer, so they buy more.
d. The AD curve slopes downward because of the wealth effect that tells us that as the price level
falls, people are poorer, so they save more and buy less.
7. Which of the following statements is true?
a. Firms typically reduce prices to bring about equilibrium when demand falls.
b. Firms typically reduce supply to bring about equilibrium when demand falls.
c. The vertical portion of the SAS curve is the Keynesian range.
d. The horizontal portion of the SAS curve is the Classical range.
8. What shifts the SAS curve?
a. Sudden changes in C, I, or X – IM caused by monetary or fiscal policy.
b. Sudden changes in C, I, or X – IM caused by expectations about future income or prices.
c. Increases or decreases in input prices.
d. Technological innovation.
9. If an economy is in a recessionary gap:
a. the potential output curve will shift in to eliminate the gap.
b. the aggregate supply curve will shift down to eliminate the pap.
c. the aggregate demand curve will shift in to eliminate the gap.
d. the economy is stuck in an inflation in the long run.
10. If an economy is at equilibrium at potential output and the AD curve shifts out, the economy will
be in:
a. an inflationary gap and eventually the SAS curve will shift down.
b. a recessionary gap and the potential output curve will shift in.
c. a recessionary gap and the SAS curve will shift down.
d. an inflationary gap and eventually the SAS curve will shift up.
ANSWERS TO POP QUIZ
1. a 2. b 3. b 4. c 5. b 6. b 7. b 8. c 9. b 10. d