Can You Really Pass This Macroeconomics Test? Trivia Quiz

Explanation
The explanation for the given correct answer is that the aggregate demand-aggregate supply model is indeed a variable-price-level model. This means that it allows for the analysis of changes in both real GDP and the price level at the same time. In this model, changes in aggregate demand, which represents the total spending in the economy, can lead to changes in both output (real GDP) and prices. Therefore, it is true that the aggregate demand-aggregate supply model allows for the analysis of simultaneous changes in real GDP and the price level.

Explanation
The aggregate demand curve slopes downward because as the price level increases, the quantity of goods and services demanded decreases. This is due to the wealth effect, where higher prices reduce the purchasing power of consumers and businesses, leading to a decrease in consumption and investment. Additionally, the interest rate effect plays a role, as higher prices lead to higher interest rates, which in turn discourage borrowing and spending. Finally, the international trade effect suggests that higher prices make domestic goods relatively more expensive compared to foreign goods, leading to a decrease in exports and an increase in imports.

Explanation
A fall in the price level increases the real value of financial assets with fixed money values because the purchasing power of money increases. This means that individuals who hold these assets will have more wealth in real terms. As a result, they are likely to feel wealthier and more confident in their financial situation, leading to increased spending. This increased spending can have a positive impact on the overall economy. Therefore, the statement is true.

Explanation
A fall in the price level actually increases the demand for money in the economy because people need more money to purchase the same amount of goods and services. This increased demand for money leads to a decrease in interest rates, not an increase. Therefore, the statement is false.

Explanation
A rise in the price level of an economy (relative to the foreign price levels) tends to decrease that economy's exports and increase its imports of goods and services. This is because when the price level increases, the cost of goods and services produced in that economy becomes relatively higher compared to foreign countries. As a result, foreign consumers are less likely to purchase goods and services from that economy, leading to a decrease in exports. At the same time, domestic consumers are more likely to purchase cheaper goods and services from foreign countries, leading to an increase in imports. Therefore, the statement is false.

Explanation
This statement is true because when the price level increases, the purchasing power of consumers decreases, leading to a decrease in their wealth. As a result, consumers have less disposable income to spend on goods and services, causing a decrease in the consumption schedule.

Explanation
A change in AD is not caused by a change in the price level, but rather by factors such as changes in consumer spending, investment, government spending, or net exports. The price level may have an impact on AD indirectly through its effect on consumer purchasing power or business costs, but it is not the direct cause of changes in aggregate demand. Therefore, the statement is false.

Explanation
A fall in excess capacity, or unused existing capital goods, will actually increase the demand for new capital goods. When there is excess capacity, it means that the existing capital goods are not being fully utilized, leading to lower production levels. In order to meet the demand for increased production, businesses will need to invest in new capital goods, thus increasing aggregate demand (AD). Therefore, the statement is false.

Explanation
The real balances effect is not one of the determinants of AD. The determinants of aggregate demand (AD) include factors such as consumption, investment, government spending, and net exports. The real balances effect refers to the impact of changes in the price level on the purchasing power of consumers' wealth and their subsequent spending. While it is related to AD, it is not considered one of its determinants.

Explanation
A high level of household indebtedness does not necessarily lead to an increase in consumer spending and aggregate demand (AD). In fact, it can have the opposite effect. When households have a high level of debt, they may be more cautious and reduce their spending in order to pay off their debts. This decrease in consumer spending can then lead to a decrease in aggregate demand. Therefore, the statement that a high level of household indebtedness will tend to increase consumer spending and AD is false.

Explanation
Appreciation of the dollar relative to foreign currencies will tend to decrease new exports and AD. When the dollar appreciates, it becomes more expensive for foreign buyers to purchase goods and services from the country, making exports more expensive. This can lead to a decrease in demand for exports and a decrease in aggregate demand (AD) as a result. Therefore, the statement is false.

Explanation
The aggregate supply curve does not have a down sloping range. In fact, it is typically depicted as an upward sloping curve, indicating that as the price level increases, firms are willing to supply more output. This is because higher prices lead to higher profits and incentivize firms to increase production. However, in the long run, the aggregate supply curve becomes vertical, indicating that the level of output is determined by factors such as technology, resources, and institutions, rather than the price level.

Explanation
When the determinants of AS (Aggregate Supply) change, they can impact the per-unit production cost, which in turn affects the overall AS. This is because changes in factors such as input prices, wages, technology, and government regulations can affect the cost of producing goods and services. If these determinants increase the per-unit production cost, it will lead to a decrease in aggregate supply. Conversely, if the determinants decrease the per-unit production cost, it will result in an increase in aggregate supply. Therefore, the statement "When the determinants of AS change, they alter the per-unit production cost and thereby AS" is true.

Explanation
Productivity is indeed a measure of real output per unit of input. It quantifies the efficiency and effectiveness of a production process by evaluating the amount of output generated relative to the amount of input used. This measure helps to assess the overall performance and efficiency of a system, whether it is a manufacturing process, an individual worker, or an entire organization. Therefore, the statement "Productivity is a measure of real output per unit of input" is true.

Explanation
A change in the degree of market power or monopoly power held by sellers of resources can affect input prices and AS. This is because sellers with more market power can manipulate input prices to their advantage, leading to an increase in costs for businesses and a decrease in aggregate supply. On the other hand, if sellers have less market power, input prices may decrease, resulting in lower costs for businesses and an increase in aggregate supply. Therefore, the statement is true.

Explanation
The per-unit production cost is calculated by dividing the total input cost by the number of units of output. This allows businesses to determine how much it costs to produce each individual unit of a product or service. By knowing the per-unit production cost, companies can make informed decisions about pricing, profitability, and efficiency. Therefore, the statement that per-unit production cost is determined by dividing total input cost by units of output is true.

Explanation
At the equilibrium price level, the real domestic output purchased is equal to the real domestic output produced because in a market equilibrium, the quantity demanded equals the quantity supplied. This means that all the goods and services produced are being purchased by consumers, resulting in a balance between production and consumption. Therefore, the statement is true.

Explanation
In the intermediate range on the AS curve, an increase in AD will increase both the price level and the real domestic output. This is because in the intermediate range, the economy is operating below full employment but above the level of potential output. When AD increases, it stimulates an increase in production and employment, leading to an increase in real domestic output. At the same time, the increased demand puts upward pressure on prices, causing the price level to rise. Therefore, both the price level and real domestic output increase in the intermediate range.

Explanation
An increase in aggregate demand (AD) will have an effect on the real equilibrium GDP of the economy. When AD increases, it leads to an increase in both output and prices in the short run. This means that the real equilibrium GDP will also increase. Therefore, the statement that an increase in AD will have no effect on the real equilibrium GDP is false.

Explanation
This statement is false because an increase in the price level resulting from an increase in aggregate demand (AD) does not necessarily lead to a greater increase in equilibrium real GDP. In fact, it can lead to a decrease in real GDP if the increase in price level outpaces the increase in AD. Additionally, other factors such as supply shocks or changes in government policies can also affect the relationship between price level and real GDP. Therefore, the statement is not universally true.

Explanation
Inflation does have an effect on the strength of the multiplier. The multiplier effect refers to the increase in overall economic activity that occurs when a change in spending by one person or entity leads to additional spending by others. Inflation can reduce the purchasing power of consumers, leading to a decrease in spending and a weaker multiplier effect. Conversely, low inflation or deflation can increase purchasing power and strengthen the multiplier effect. Therefore, the statement that inflation has no effect on the strength of the multiplier is false.

Explanation
Fears of price wars tend to make the price level less flexible rather than more flexible. When businesses anticipate price wars, they may be hesitant to lower their prices as they fear it will lead to a race to the bottom. This can result in a less flexible price level as businesses are reluctant to adjust their prices downward. Therefore, the statement is false.

Explanation
An increase in aggregate supply (AS) means that businesses are producing more goods and services. This leads to an increase in the equilibrium real domestic output, as there are more goods and services available in the economy. Additionally, an increase in AS can also lead to an increase in the full-employment output, which is the level of output the economy can sustain in the long run without causing inflation. Therefore, it is true that an increase in AS increases both the equilibrium real domestic output and the full-employment output of the economy.