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Macroeconomics [ch. 20]

35 Questions
Macroeconomics Quizzes & Trivia

Aggregate Demand & Aggregate Supply

Questions and Answers
  • 1. 
    • A. 

      True

    • B. 

      False

  • 2. 
    • A. 

      True

    • B. 

      False

  • 3. 
    • A. 

      True

    • B. 

      False

  • 4. 
    • A. 

      True

    • B. 

      False

  • 5. 
    • A. 

      True

    • B. 

      False

  • 6. 
    One reason aggregate demand slopes downward is the wealth effect: A decrease in the price level increases the value of money holdings and consumer spending rises. 
    • A. 

      True

    • B. 

      False

  • 7. 
    • A. 

      True

    • B. 

      False

  • 8. 
    • A. 

      True

    • B. 

      False

  • 9. 
    A rise in price expectations that causes wages to rise causes the short-run aggregate-supply curve to shift left
    • A. 

      True

    • B. 

      False

  • 10. 
    If the economy is in a recession, the economy will adjust to long-run equilibrium on its own as wages and price expectations rise
    • A. 

      True

    • B. 

      False

  • 11. 
    In the short-run, if the government cuts back spending to balance its budget, it will likely cause a recession
    • A. 

      True

    • B. 

      False

  • 12. 
    The short-run effect of an increase in aggregate demand is an increase in output and an increase in the price level
    • A. 

      True

    • B. 

      False

  • 13. 
    A rise in the price of oil tends to cause stagflation
    • A. 

      True

    • B. 

      False

  • 14. 
    In the long-run, an increase in government spending tends to increase output and prices
    • A. 

      True

    • B. 

      False

  • 15. 
    If policymakers choose to try to move the economy out of a recession, they should use their policy tools to decrease aggregate demand
    • A. 

      True

    • B. 

      False

  • 16. 
    Which of the following statements about economic fluctuations is true?
    • A. 

      A recession is when output rises above the natural rate of output

    • B. 

      A depression is a mild recession

    • C. 

      Economic fluctuations have been termed the "business cycle" because the movements in output are regular and predictable

    • D. 

      A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together

    • E. 

      None of the above

  • 17. 
    According to the interest-rate effect, aggregate demand slopes downward (negatively) because
    • A. 

      Lower prices increase the value of money holdings and consumer spending increases

    • B. 

      Lower prices decrease the value of money holdings and consumer spending decreases

    • C. 

      Lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases

    • D. 

      Lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls

  • 18. 
    Which of the following would not cause a shift in the long-run aggregate-supply curve?
    • A. 

      An increase in the available labor

    • B. 

      An increase in the available capital

    • C. 

      An increase in the available technology

    • D. 

      An increase in price expectations

    • E. 

      All of the above shift the long-run aggregate-supply curve

  • 19. 
    Which of the following is not a reason why the aggregate-demand curve slopes downward?
    • A. 

      The wealth effect

    • B. 

      The interest-rate effect

    • C. 

      The classical dichotomy/monetary neutrality effects

    • D. 

      The exchange-rate effect

    • E. 

      All of the above are reasons why the aggregate-demand curve slopes downward

  • 20. 
    In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to
    • A. 

      Shift short-run aggregate supply to the right

    • B. 

      Shift short-run aggregate supply to the left

    • C. 

      Shift aggregate demand to the right

    • D. 

      Shift aggregate demand to the left

    • E. 

      Shift long-run aggregate supply to the left

  • 21. 
    Which of the following statements is true regarding the long-run aggregate-supply curve?  The long-run aggregate-supply curve
    • A. 

      Shifts left when the natural rate of unemployment falls

    • B. 

      Is vertical because an equal change in all prices and wages leaves output unaffected

    • C. 

      Is positively sloped because price expectations and wages tend to be fixed in the long run

    • D. 

      Shifts right when the government raises the minimum wage

  • 22. 
    According to the wealth effect, aggregate demand slopes downward (negatively) because
    • A. 

      Lower prices increase the value of money holdings and consumer spending increases

    • B. 

      Lower prices decrease the value of money holdings and consumer spending decreases

    • C. 

      Lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases

    • D. 

      Lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls

  • 23. 
    The natural rate of output is the amount of real GDP produced
    • A. 

      When there is no employment

    • B. 

      When the economy is at the natural rate of investment

    • C. 

      When the economy is at the natural rate of aggregate demand

    • D. 

      When the economy is at the natural rate of unemployment

  • 24. 
    Suppose the price level falls.  Because of fixed nominal wage contracts, firms become less profitable and they cut back on production.  This is a demonstration of the
    • A. 

      Sticky-wage theory of the short-run aggregate-supply curve

    • B. 

      Sticky-price theory of the short-run aggregate-supply curve

    • C. 

      Misperceptions theory of the short-run aggregate-supply curve

    • D. 

      Classical dichotomy theory of the short-run aggregate-supply curve

  • 25. 
    Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production.  This is a demonstration of the
    • A. 

      Sticky-wage theory of the short-run aggregate-supply curve

    • B. 

      Sticky-price theory of the short-run aggregate-supply curve

    • C. 

      Misperceptions theory of the short-run aggregate-supply curve

    • D. 

      Classical dichotomy theory of the short-run aggregate-supply curve

  • 26. 
    Suppose the economy is initially in long-run equilibrium.  Then suppose there is a reduction in military spending due to the end of the Cold War.  According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?
    • A. 

      Prices rise; output rises

    • B. 

      Prices rise; output falls

    • C. 

      Prices fall; output falls

    • D. 

      Prices fall; output rises

  • 27. 
    Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending due to the end of the Cold War. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?
    • A. 

      Prices rise; output is unchanged from its initial value

    • B. 

      Prices fall; output is unchanged from its initial value

    • C. 

      Output rises; prices are unchanged from the initial value

    • D. 

      Output falls; prices are unchanged from the initial value

    • E. 

      Output and the price level are unchanged from their initial values

  • 28. 
    Suppose the economy is initially in love-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?
    • A. 

      Prices rise; output rises

    • B. 

      Prices rise; output falls

    • C. 

      Prices fall; output falls

    • D. 

      Prices fall; output rises

  • 29. 
    Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?
    • A. 

      Prices rise; output is unchanged from its initial value

    • B. 

      Prices fall; output is unchanged from its initial value

    • C. 

      Output rises; prices are unchanged from the initial value

    • D. 

      Output falls; prices are unchanged from the initial value

    • E. 

      Output and the price level are unchanged from their initial values

  • 30. 
    Stagflation occurs when the economy experiences
    • A. 

      Falling prices and falling output

    • B. 

      Falling prices and rising output

    • C. 

      Rising prices and rising output

    • D. 

      Rising prices and falling output

  • 31. 
    Which of the following events shifts the short-run aggregate-supply curve to the right?
    • A. 

      An increase in government spending on military equipment

    • B. 

      An increase in price expectations

    • C. 

      A drop in oil prices

    • D. 

      A decrease in the money supply

    • E. 

      None of the above

  • 32. 
    Suppose the economy is operating in a recession.  If policymakers wished to move output to its long-run natural rate, they should attempt to 
    • A. 

      Shift aggregate demand to the right

    • B. 

      Shift aggregate demand to the left

    • C. 

      Shift short-run aggregate supply to the right

    • D. 

      Shift short-run aggregate supply to the left

  • 33. 
    Suppose an economy is operating in a recession.  If policymakers allow the economy to adjust to the long-run natural rate on its own,
    • A. 

      People will reduce their price expectations and the short-run aggregate supply will shift left

    • B. 

      People will reduce their price expectations and the short-run aggregate supply will shift right

    • C. 

      People will raise their price expectations and aggregate demand will shift left

    • D. 

      People will reduce their price expectations and aggregate demand will shift right

  • 34. 
    According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause
    • A. 

      Prices to rise and output to rise

    • B. 

      Prices to fall and output to fall

    • C. 

      Prices to rise and output to remain unchanged

    • D. 

      Prices to fall and output to remain unchanged

  • 35. 
    Policy makers are said to "accommodate" an adverse supply shock if they
    • A. 

      Respond to the adverse supply shock by increasing aggregate demand, which further raises prices

    • B. 

      Respond to the adverse supply shock by decreasing aggregate demand, which lowers prices

    • C. 

      Respond to the adverse supply shock by decreasing short-run aggregate supply

    • D. 

      Fail to respond to the adverse supply shock and allow the economy to adjust on its own