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CHAPTER 24
Aggregate Demand and Aggregate Supply
1. The vertical curve through the natural rate of output to which the economy will return in the long
run, regardless of the price level, is called the
a. long-run aggregate supply curve.
b. short-run aggregate supply curve.
c. aggregate supply curve.
d. aggregate demand curve.
ANSWER: a
2. A curve showing the direct relationship between the overall price level and the level of real
output supplied, ceteris paribus, in response to changes in the demand before full adjustment of
relative prices has taken place is called the
a. long-run aggregate supply curve.
b. short-run aggregate supply curve.
c. aggregate supply curve.
d. aggregate demand curve.
ANSWER: b
3. A curve showing an inverse relationship between the overall price level and the quantity of real
output that will be demanded at various price levels, ceteris paribus, is called the
a. long-run aggregate supply curve.
b. short-run aggregate supply curve.
c. aggregate supply curve.
d. aggregate demand curve.
ANSWER: d
4. The curve graphically depicting the relationship between the overall price level and the quantity
of real GDP supplied at various price levels, ceteris paribus, is called the
a. long-run aggregate supply curve.
b. short-run aggregate supply curve.
c. aggregate supply curve.
d. aggregate demand curve.
ANSWER: c
5. The aggregate demand curve is downward sloping because of the which of the following?
a. The wealth or real balances effect
b. The substitution effect
c. The income effect
d. All of the above
ANSWER: a
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6. The change in the domestic price level that causes consumers to substitute into or out of
relatively cheaper or relatively more expensive imported goods is called
a. the substitution-of-foreign-goods effect.
b. the wealth effect or real-balances effect.
c. the constant nominal income effect.
d. long-run equilibrium.
ANSWER: a
7.
explains why price level decreases for a given supply of nominal money balances
cause an increase in the quantity of aggregate demand.
a. The substitution-of-foreign-goods effect
b. The wealth effect or real-balances effect
c. The constant nominal income effect
d. Long-run equilibrium
ANSWER: b
8. When the price level changes, the quantity demanded must change in the opposite direction to
maintain the same level of non-inflation-adjusted income. This is called
a. the substitution-of-foreign-goods effect.
b. the wealth effect or real-balances effect.
c. the constant nominal income effect.
d. long-run equilibrium.
ANSWER: c
9. When all prices (including wages) have fully adjusted to previous shifts in aggregate supply or
demand and the flow of spending, saving, borrowing, and lending will continue until something
else changes, this is called
a. the substitution-of-foreign-goods effect.
b. the wealth effect or real-balances effect.
c. the constant nominal income effect.
d. long-run equilibrium.
ANSWER: d
10. The relationship between the price level and the quantity of real output demanded is which of the
following?
a. Direct (positive)
b. Indirect
c. Circuitous
d. Inverse
ANSWER: d
11. The difference between nominal and real GDP is which of the following?
a. Real GDP has been adjusted for price changes.
b. Nominal GDP refers to last year’s GDP, whereas real GDP is for the current fiscal year.
c. Real GDP is adjusted for depreciation whereas nominal GDP is not.
d. Nominal GDP has been adjusted for price changes.
ANSWER: a
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12. The two factors that make up nominal GDP are which of the following?
a. Aggregate supply and demand
b. The overall price level and real GDP
c. Fiscal and monetary policy
d. Transfer payments and taxes
ANSWER: b
13. In measuring the health of the economy, economists are most interested in which of the
following?
a. Nominal GDP
b. Real GDP
c. Growth with inflation
d. Quality of people’s lives
ANSWER: b
14. An increase in aggregate demand will initially tend to lead firms to
a. increase production.
b. decrease employment.
c. cut prices.
d. All of the above
ANSWER: a
15. An increase in aggregate demand will initially tend to lead firms to
a. decrease production.
b. increase employment.
c. cut prices.
d. All of the above
ANSWER: b
16. Aggregate demand is
a. the quantity of real goods and services that will be demanded at various price levels.
b. a curve showing the positive relationship between the overall price level and the quantity of
real GDP.
c. in the short run illustrated with an upward sloping curve.
d. the quantity of real output supplied at various price levels.
ANSWER: a
17. Aggregate demand changes in response to which factors of the following factors?
a. Changes in input prices
b. Changes in the number of firms in an industry
c. Changes in transfer payments
d. Changes in monetary and fiscal policy
ANSWER: d
18. Consumption demand does not include purchases of which of the following?
a. Stocks and bonds
b. Durable goods
c. Nondurable goods
d. Services
ANSWER: a
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19. Consumer spending is directly (positively) related to which of the following?
a. Wealth and income
b. The interest rate
c. The unemployment rate
d. Apprehensions about the job market
ANSWER: a
20. Gross investment demand by households and firms is directly (positively) related to which of the
following?
a. Income
b. The interest rate
c. The unemployment rate
d. Apprehensions about the job market
ANSWER: a
21. Which of these are excluded from the aggregate expenditures of the government sector?
a. Expenditures for roads and bridges
b. Spending on unemployment benefits
c. National defense spending
d. Spending on K-12 education
ANSWER: b
22. Which of these are excluded from the aggregate expenditures of the government sector?
a. Salaries of defense personnel
b. Police cars
c. Social security payments
d. Computers bought by the defense department
ANSWER: c
23. Transfers are excluded from aggregate demand because they
a. do not represent purchasing power.
b. merely shift purchasing from one group to another.
c. are not easy to register in accounting.
d. only add to confusion.
ANSWER: b
24. Federal, state and local government purchases of goods and services, make up over __________
of real GDP.
a. 5 percent
b. 10 percent
c. 20 percent
d. 30 percent
ANSWER: c
25. Net exports are
a. (positively) directly
b. weakly
c. not
d. inversely
ANSWER: d
related to the exchange rate.
26. Net exports are
related to net capital inflows.
Aggregate Demand and Aggregate Supply
a. (positively) directly
b. weakly
c. not
d. inversely
ANSWER: a
27. One reason demand curves for individual products are downward sloping is because of the
a. wealth or real-balances effect.
b. substitution effect.
c. substitution-of-foreign-goods effect.
d. constant-nominal-income effect.
ANSWER: b
28. The substitution effect means consumers substitute good A for Good B if Good A is
a. relatively more expensive.
b. of higher quality.
c. more closely aligned with the natural level of real output.
d. relatively cheaper.
ANSWER: d
29. Nominal income is equal to which of the following?
a. Aggregate demand
b. Real GDP
c. The overall price level multiplied by real GDP
d. Real GDP divided by a price index
ANSWER: c
30. If aggregate demand changes,
a. the entire aggregate demand curve shifts.
b. there is movement along the aggregate demand curve.
c. there is movement along the aggregate supply curve.
d. Both a and c
ANSWER: d
31. Ceteris paribus, increases in government spending __________ aggregate demand.
a. increase
b. decrease
c. have no affect on
d. None of the above
ANSWER: a
32. Ceteris paribus, increases in income tax rates __________ consumption expenditures.
a. increase
b. decrease
c. have no affect on
d. None of the above
ANSWER: b
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33. Ceteris paribus, increases in corporate tax rates __________ the expected profitability of
investment.
a. increase
b. decrease
c. have no affect on
d. None of the above
ANSWER: b
34. Monetary and fiscal policy
a. are always affected by aggregate demand.
b. have no influence on aggregate demand.
c. can and do cause fluctuations in aggregate demand.
d. can affect consumption but not investment.
ANSWER: c
35. The aggregate demand curve is downward sloping because of the which of the following?
a. The wealth or real balances effect
b. The substitution-of-foreign-goods effect
c. The constant-nominal-income effect
d. All of the above
ANSWER: d
36. Which of the following phrases is most closely associated with investment demand?
a. It is the largest component of aggregate demand.
b. It is the most volatile component of aggregate demand.
c. It is largely determined by government fiscal policy.
d. It includes intended purchases of goods and services.
ANSWER: b
37. Which of the following is the smallest component part of aggregate demand?
a. Consumption spending
b. Investment spending
c. Government purchases
d. Net exports
ANSWER: d
38. Which of the following phrases best describes the wealth effect?
a. When the overall price level increases, ceteris paribus, domestic goods and services become
relatively more expensive and foreign goods become relatively cheaper.
b. When income or wealth increase, consumption is likely to decrease.
c. If the price level increases while the nominal money supply remains constant, the supply of
real money balances decreases and spending units experience a loss of purchasing power.
d. When the price level rises, the quantity demanded of real GDP must fall in accordance with
the constant nominal income constraint. In short, less is demanded at higher prices because
the funds run out sooner.
ANSWER: c
Aggregate Demand and Aggregate Supply
39. Which of the following is most likely to cause an increase in aggregate demand?
a. A decrease in interest rates
b. A decrease in national income
c. An increase in imports
d. A decrease in defense spending by the federal government
ANSWER: a
40. Which of the following is most likely to cause an increase in aggregate demand?
a. An increase in interest rates
b. A decrease in national income
c. An increase in exports
d. A defense in defense spending by the federal government
ANSWER: c
41. Which of the following is most likely to cause an increase in aggregate demand?
a. An increase in interest rates
b. A decrease in national income
c. An increase in imports
d. An increase in defense spending by the federal government
ANSWER: d
42. Which of the following is likely to lead to a decrease in aggregate demand?
a. A decrease in interest rates
b. A decrease in national income
c. An increase in national income
d. An increase in government spending on goods and services.
ANSWER: b
43. Which of the following is likely to lead to a decrease in aggregate demand?
a. An increase in interest rates
b. An increase in wealth
c. An increase in national income
d. An increase in government spending on goods and services.
ANSWER: a
44. Which of the following is likely to lead to a decrease in aggregate demand?
a. A decrease in interest rates
b. An increase in income
c. An increase in imports
d. An increase in government spending on goods and services.
ANSWER: c
45. What is measured on the vertical axis of the aggregate supply curve?
a. Real output
b. The overall price level as captured by a price index
c. A goods relative price
d. The quantity per time period of a particular good
ANSWER: b
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46. Starting from long-run equilibrium, an increase in aggregate demand will cause an increase in
which of the following?
a. The price level
b. Expectations
c. Real wages
d. Unemployment
ANSWER: a
47. Starting from long-run equilibrium, an increase in aggregate demand will cause
a. a decrease in production in the short run.
b. an increase in employment in the short run.
c. a decrease in the price level.
d. downward pressure on wage rate.
ANSWER: b
48. Which of the following statements regarding the short-run effects of an increase in aggregate
demand is false?
a. Increases in aggregate demand will lead to increases in output, employment, and prices.
b. In the post World War II period, prices have been equally flexible upward and downward.
c. Increases in aggregate demand are shown as a rightward shift of the AD curve.
d. In response to an increase in aggregate demand, firms will supply more output in response to
higher prices in the short run.
ANSWER: b
49. In the short run, if aggregate demand increases, what happens to output prices relative to input
prices?
a. They rise.
b. They decline or stay the same.
c. They may rise or decline.
d. They do not change.
ANSWER: a
50. Ceteris paribus, the relationship between the overall price level and the quantity of real GDP
supplied is which of the following?
a. Direct
b. Indirect
c. Inverse
d. Circuitous
ANSWER: a
51. If the input prices are fixed or slow to change, firms respond to higher output prices by offering
more for sale in which of the following?
a. The market period
b. The short run
c. The long run
d. The very long run
ANSWER: b
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52. In the AD/AS framework, the natural level of real output is determined by the quantity and
quality of the factors of production, which include all of the following except
a. capital stock.
b. natural resources.
c. money supply.
d. the labor force.
ANSWER: c
53. The economy is in long-run equilibrium when
a. optimal mix is reached.
b. input prices have fully adjusted to changes in output prices.
c. few input and output prices have adjusted.
d. change is the leading characteristic of the production factors.
ANSWER: b
54. If the actual price level for goods and services turns out to be higher than expected, workers will
a. find their purchasing power is higher than expected.
b. realize higher real wages.
c. seek higher nominal wages.
d. ask for wage decreases to keep their employment.
ANSWER: c
55. With short-run aggregate supply,
a. input prices are fixed or slower to change than output prices.
b. output prices are fixed or slower to change than input prices.
c. input prices are variable and change quickly.
d. output prices are not a consideration.
ANSWER: a
56. In the AD/AS framework, an unexpected increase in the money supply and a resulting increase in
aggregate demand, causes nominal wages
a. to remain unchanged.
b. to decrease.
c. to start to rise, but at a slower rate than prices.
d. to fluctuate wildly.
ANSWER: c
57. A rise in aggregate demand causes which of the following?
a. A lowering of the level of output prices relative to input prices
b. A cutback in production
c. Moderate layoffs
d. An initial fall in inventories
ANSWER: d
58. When higher prices cause greater production and employment,
a. the bargaining position of labor improves.
b. the labor market loosens up and more workers are looking for work.
c. resource suppliers tend to lower their prices.
d. long-run aggregate supply increases.
ANSWER: a
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59. If government policymakers are shortsighted and use monetary or fiscal policy to increase
aggregate demand, then they will
a. encourage growth with little inflation in the long run.
b. tend to focus on short-run benefits while ignoring the possibility of accelerating inflation in
the long run.
c. be careful to guard against long-run inflation.
d. All of the above
ANSWER: b
60. When the price level changes for a given supply of nominal money balances, the supply of real
balances changes. This effect is called the
a. wealth effect.
b. constant nominal income effect.
c. substitution of foreign goods effect.
d. investment effect.
ANSWER: a
61. Changes in the price level necessarily cause the quantity demanded to change in the opposite
direction. This effect is called which of the following?
a. The wealth effect
b. The constant-nominal-income effect
c. The substitution-of-foreign-goods effect
d. The investment effect
ANSWER: b
62. Changes in the domestic price level cause consumers to purchase more of relatively cheaper
foreign goods or less of relatively more expensive foreign goods. This effect is called which of
the following?
a. The wealth effect
b. The constant-nominal-income effect
c. The substitution-of-foreign-goods effect
d. The investment effect
ANSWER: c
63. Which of the following will not shift the aggregate demand curve?
a. Changes in income
b. Changes in wealth
c. Changes in expected future prices
d. Changes in the overall price level
ANSWER: d
64. Which of the following is false?
a. In long-run equilibrium, all prices, including wages, have fully adjusted to changes in
aggregate demand or aggregate supply.
b. The real wage is the nominal wage divided by the overall price level.
c. The aggregate supply curve is always upward sloping.
d. The aggregate demand curve is always downward sloping.
ANSWER: c
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65. Which of the following is true?
a. The long-run aggregate supply curve is vertical.
b. The short-run aggregate supply curve is downward sloping.
c. There is always a direct relationship between the overall price level and the quantity of real
output that will be demanded.
d. Aggregate supply is the amount of output that firms will demand at various prices for the
economy as a whole.
ANSWER: a
66. Sustained increases in the overall price level due to high levels of aggregate demand are called
which of the following?
a. Booming aggregate demand
b. Demand-pull inflation
c. Cost-push inflation
d. Stagflation
ANSWER: b
67. If the economy is in short-run equilibrium but not in long-run equilibrium, what forces cause the
economy to return to long-run equilibrium?
a. Input prices change, causing the short-run aggregate supply curve to shift.
b. The long-run aggregate supply curve shifts until long-run equilibrium is restored.
c. The aggregate demand curve shifts, causing price changes that restore long-run equilibrium.
d. None of the above
ANSWER: a
68. The largest component of spending is which of the following?
a. Consumption
b. Investment
c. Government purchases
d. Net exports
ANSWER: a
69. The most volatile component of spending is which of the following?
a. Consumption
b. Investment
c. Government purchases
d. Net exports
ANSWER: b
70. In recent years, the foreign sector has been
a. a surplus sector.
b. a deficit sector.
c. both a surplus and a deficit sector.
d. unimportant in the flows of funds for the United States.
ANSWER: a
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71. As a component of aggregate demand, government spending
a. includes government purchases of goods and services, transfers, and interest on the national
debt.
b. is the largest component.
c. is the most volatile component of aggregate demand.
d. includes only government purchases of goods and services.
ANSWER: d
72. Which of the following is true?
a. The long-run aggregate supply curve is upward sloping.
b. The short-run aggregate supply curve is downward sloping.
c. The long-run aggregate supply curve is vertical.
d. The long-run aggregate demand curve is vertical.
ANSWER: c
73. In the short run, if aggregate demand decreases,
a. output increases while prices fall.
b. only prices fall.
c. prices rise.
d. both output and the price level fall.
ANSWER: d
74. The short-run aggregate supply curve is upward sloping because
a. output prices rise and fall faster than input prices rise and fall, respectively.
b. of the real balance effect.
c. of the substitution-of-foreign-goods effect.
d. of the interest rate effect.
ANSWER: a
75. Which of the following phrases best explains the short-run aggregate supply curve’s upward
slope?
a. Actual prices equal expected prices.
b. Expected prices are higher than actual prices.
c. Output prices increase faster than input prices.
d. The real balances effect ensures a positive slope.
ANSWER: c
76. Which of the following phrases best explains the slope of the long-run aggregate supply curve?
a. Actual prices equal expected prices.
b. Expected prices are higher than actual prices.
c. Output prices increase faster than input prices.
d. None of the above
ANSWER: a
77. The short-run aggregate supply curve will shift leftward when
a. consumption spending, investment spending, government purchases, or net exports decrease.
b. price expectations are revised upward.
c. actual prices in the economy as a whole increase.
d. the economy’s natural output level falls.
ANSWER: b
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78. The long-run aggregate supply curve will shift leftward when
a. consumption spending, investment spending, government purchases, or net exports decrease.
b. price expectations are revised upward.
c. actual prices in the economy as a whole increase.
d. the economy’s natural output level falls.
ANSWER: d
79. In the long run, if aggregate demand increases,
a. output increases while prices fall.
b. only prices fall.
c. only prices rise.
d. both output and prices fall.
ANSWER: c
80. Demand-pull inflation
a. occurs when an excessive level of demand pulls up the price level.
b. occurs if the government increases spending, ceteris paribus, from a position of long-run
equilibrium.
c. does not occur when there are increases in demand if there is a lot of unemployment and
excess capacity in the economy.
d. All of the above
ANSWER: d
81. The ________________________________ is a price index that measures the overall changes in
the prices of everything in GDP.
a. the Consumer Price Index (CPI)
b. the Producer Price Index
c. the GDP deflator
d. the GDP inflator
ANSWER: c
82.
expectations are formed by taking past and expected future values into
consideration.
a. Great
b. Irrational
c. Adaptive
d. Rational
ANSWER: d
83.
expectations are formed as a weighted average of past values.
a. Great
b. Irrational
c. Adaptive
d. Rational
ANSWER: c
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84. The Phillips Curve shows a tradeoff between
a. the rate of economic growth and the rate of inflation.
b. the rate of inflation and the rate of unemployment.
c. the rate of economic growth and the rate of unemployment.
d. the rate of growth in the labor supply and the rate of growth in wages.
ANSWER: b
85. Which of the following statements best characterizes the original tradeoff discovered by A.W.
Phillips in 1957?
a. When the unemployment rate was very low, the rate of increase in overall prices was very
high.
b. When the unemployment rate was very high, the rate of increase in overall prices was very
high.
c. When the unemployment rate was very low, the rate of increase in wages was very high.
d. When the unemployment rate was very low, the rate of increase in wages was very low.
ANSWER: c
86. Basing expectations on the past and giving more weight to the recent past is an example of which
of the following?
a. Rational expectations
b. Adaptive expectations
c. Illusional expectations
d. The expectations theory
ANSWER: b
87. Which of the following is false?
a. The Phillips curve suggests that there may be a trade-off between inflation and
unemployment, which would imply that lower unemployment can be “bought” by the
public’s willingness to accept higher inflation.
b. A.W. Phillips’s original work stressed the relationship between increases in the growth rate
of wages and changes in the unemployment rate.
c. According to Phillips, when the unemployment rate was low, wages increased at a high rate.
Likewise, when the unemployment rate was high, the rate of increase in wages was low or
even negative.
d. The Phillips curve analysis demonstrates that there is a trade-off between unemployment and
inflation in both the short run and the long run.
ANSWER: d
88. Which of the following is true?
a. The Phillips curve trade-off holds in the long run but not necessarily in the short run because
of randomness in markets.
b. A.W. Phillips’ original work related changes in unemployment and changes in prices; later
economists demonstrated that there was also a trade-off between changes in prices and
changes in unemployment.
c. In the short run, there is a trade-off between inflation and unemployment even if the change
in aggregate demand is expected.
d. Although a trade-off exists in the short run, in the long run, the Phillips curve is vertical.
ANSWER:d
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89. In the long run, the Phillips curve is
a. upward sloping.
b. downward sloping.
c. horizontal.
d. vertical.
ANSWER: d
90. In the short run, the Phillips curve is
a. upward sloping.
b. downward sloping.
c. horizontal.
d. vertical.
ANSWER: b
91. With regards to the Phillips curve, the ___________________is measured on the horizontal axis
and the ______________________is measured on the vertical axis.
a. unemployment, inflation
b. inflation, unemployment
c. rate of wage changes, unemployment
d. unemployment, rate of wage changes
ANSWER: b
92. Which of the following is false?
a. The expected price level is a major determinant of the interaction between aggregate supply
and aggregate demand and a major determinant of the relationship between prices and real
output.
b. The slower and less complete the public adjusts its price expectations, the slower the
response of wages and the more likely that output and employment will change in the short
run as aggregate demand and aggregate supply change.
c. The weight of current research on the formation of price expectations suggests that the public
adjusts its expectations fairly instantaneously.
d. The evidence about the formation of price expectations suggests that as the public has come
to better understand the process of inflation in recent years and that the lag in adjusting
expectations has shortened considerably.
ANSWER: c
93. Price expectations are a function which of the following?
a. current and past prices, expected changes in aggregate
demand, and expected changes in production costs
b. current prices only
c. current and past prices only
d. None of the above
ANSWER: a