Aggregate Demand - Quiz One [ncea Level Two Economics] | Attempts: 117

1.

Aggregate demand [AD] is the total demand for final goods and services in the economy at a given time and price level. It is called 'economic activity'

A.

True
B.

False

Correct Answer
A. True

Explanation
The correct answer is true because aggregate demand refers to the total demand for final goods and services in an economy at a specific time and price level. It represents the overall economic activity in the country.

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2.

The Aggregate Demand [AD] and Aggregate Supply [AS] economic model is used to:

A.

Provide insights into the operation of an economy.
B.

Make me really confused.
C.

Help pay John Key's salary.
D.

Aid in understanding changes in the price level [inflation], real output [GDP], employment, and unemployment.
E.

Predict when the All Blacks will win the next rugby world cup.

Correct Answer(s)
A. Provide insights into the operation of an economy.
D. Aid in understanding changes in the price level [inflation], real output [GDP], employment, and unemployment.

Explanation
The correct answer is "Provide insights into the operation of an economy" and "Aid in understanding changes in the price level [inflation], real output [GDP], employment, and unemployment." The Aggregate Demand and Aggregate Supply economic model is a tool used by economists to analyze and understand how changes in the overall demand and supply of goods and services in an economy affect various economic variables such as inflation, GDP, employment, and unemployment. It provides insights into the functioning of an economy and helps in understanding the relationships between different economic factors.

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3.

Yf on the Aggregate Demand [AD] and Aggregate Supply [AS] economic model, tells us that there is full employment and all resources are fully employed, and firms are working to their capacity.

A.

True
B.

False

Correct Answer
A. True

Explanation
The statement is true because in the aggregate demand and aggregate supply model, when there is full employment and all resources are fully employed, it means that the economy is operating at its maximum potential. This implies that firms are utilizing all available resources and producing at their maximum capacity, leading to optimal economic output.

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4.

What is a deflationary [recessionary] gap?

A.

A really pumping economy.
B.

Buy more balloons to inflate.
C.

Equilibrium income, employment and output is below the full employment [Yf]

Correct Answer
C. Equilibrium income, employment and output is below the full employment [Yf]

Explanation
A deflationary [recessionary] gap occurs when the equilibrium income, employment, and output in an economy are below the full employment level. This means that the economy is not operating at its maximum potential and there is a gap between the actual output and the potential output. This situation is characterized by high unemployment rates, low consumer spending, and overall economic stagnation.

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5.

What does Aggregate Demand consist of? Remember the formula: C + I + G + (X-M)

A.

Total consumption spending by consumers.
B.

Total costs of production.
C.

Total appreciating and depreciating exchange rate.
D.

Total investment spending by firms and Government.
E.

Net productivity gains.
F.

Total Government spending.
G.

Net Exports [Exports - Imports]

Correct Answer(s)
A. Total consumption spending by consumers.
D. Total investment spending by firms and Government.
F. Total Government spending.
G. Net Exports [Exports - Imports]

Explanation
Aggregate Demand consists of total consumption spending by consumers, total investment spending by firms and government, total government spending, and net exports (exports - imports).

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6.

What will cause Aggregate Demand to shift to the left?

A.

Consumption spending decreases due to income tax increasing.
B.

The costs of production fall (decrease in wages).
C.

Investment spending decreases due to a lack of business confidence.
D.

The Government has a budget surplus and spends less than it receives in revenue.
E.

An appreciating exchange rate reduces the cost of importing raw materials.
F.

An increase in productivity due to new technology or a better educated workforce.
G.

Net exports fall.
H.

Decrease in indirect taxes such as GST.

Correct Answer(s)
A. Consumption spending decreases due to income tax increasing.
C. Investment spending decreases due to a lack of business confidence.
D. The Government has a budget surplus and spends less than it receives in revenue.
G. Net exports fall.

Explanation
Aggregate Demand will shift to the left if consumption spending decreases due to income tax increasing because individuals will have less disposable income to spend on goods and services. Investment spending will also decrease due to a lack of business confidence, as businesses will be less willing to make long-term investments. Additionally, if the government has a budget surplus and spends less than it receives in revenue, this will lead to a decrease in government spending, which will further reduce aggregate demand. Finally, if net exports fall, this means that the value of exports is decreasing or the value of imports is increasing, which will also lead to a decrease in aggregate demand.

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7.

Shifts in the Aggregate Demand curve depend on the level of 'spending' by major sectors of the economy.

A.

True
B.

False

Correct Answer
A. True

Explanation
The statement is true because shifts in the Aggregate Demand curve are influenced by the level of spending by major sectors of the economy. When sectors like households, businesses, government, and foreign entities increase their spending, it leads to an increase in aggregate demand, resulting in a rightward shift of the curve. Conversely, if spending decreases, it leads to a decrease in aggregate demand and a leftward shift of the curve. Therefore, the level of spending by major sectors has a direct impact on shifts in the Aggregate Demand curve.

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8.

Interest rate changes have a major imapct on the Aggregate Demand curve because they influence the level of spending by households and investments by firms.

A.

True
B.

False

Correct Answer
A. True

Explanation
Interest rate changes can have a significant impact on the Aggregate Demand curve because they affect the cost of borrowing for households and firms. When interest rates decrease, borrowing becomes cheaper, which encourages households to increase their spending on goods and services and firms to invest more in new projects. This leads to an increase in aggregate demand, as both consumption and investment spending rise. Conversely, when interest rates increase, borrowing becomes more expensive, leading to a decrease in spending and investment, which in turn reduces aggregate demand. Therefore, it is true that interest rate changes have a major impact on the Aggregate Demand curve.

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9.

What is an inflationary gap?

A.

Equilibrium income, output, and employment is above the full employment level of income, output, and employment.
B.

Economic bliss.
C.

The economy is operating at a level of output beyond its long-run capacity.
D.

Firms may produce the required quantity by working longer hours and paying overtime to workers.
E.

Dial 0800 John Key.

Correct Answer(s)
A. Equilibrium income, output, and employment is above the full employment level of income, output, and employment.
C. The economy is operating at a level of output beyond its long-run capacity.
D. Firms may produce the required quantity by working longer hours and paying overtime to workers.

Explanation
The correct answer is that an inflationary gap occurs when equilibrium income, output, and employment are above the full employment level. This means that the economy is operating at a level of output beyond its long-run capacity. In order to meet the increased demand, firms may produce the required quantity by working longer hours and paying overtime to workers.

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10.

In response to an inflationary gap, wages will be forced upwards as firms compete for scarce labour [remember all resources are fully employed]. This will force the AS curve to shift to AS1, which is the long run Aggregate Supply curve or vertical at Yf. Thus, the inflationary gap will be eliminated.

A.

True
B.

False

Correct Answer
A. True

Explanation
In response to an inflationary gap, firms will compete for scarce labor, leading to an increase in wages. This increase in wages will cause the aggregate supply (AS) curve to shift to AS1, which represents the long-run aggregate supply curve. The long-run aggregate supply curve is vertical at the full employment level of output (Yf). Therefore, the inflationary gap will be eliminated as the economy adjusts to full employment.

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