Macroeconomics [ch. 20]

35 Questions
Macroeconomics Quizzes & Trivia

Aggregate Demand & Aggregate Supply

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Questions and Answers
  • 1. 
    Over the last 50 years, U.S. real GDP has grown at about 5 percent per year
    • A. 

      True

    • B. 

      False

  • 2. 
    Investment is a particularly volatile component of spending across the business cycle
    • A. 

      True

    • B. 

      False

  • 3. 
    An increase in price expectations shifts the long-run aggregate-supply curve to the left
    • A. 

      True

    • B. 

      False

  • 4. 
    If the classical dichotomy and monetary neutrality hold in the long run, then the long-run aggregate-supply curve should be vertical
    • A. 

      True

    • B. 

      False

  • 5. 
    Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable
    • 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. 
    If the Federal Reserve increases the money supply, the aggregate-demand curve shifts to left
    • A. 

      True

    • B. 

      False

  • 8. 
    The misperceptions theory explains why the long-run aggregate-supply curve is downward sloping
    • 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. 
    • 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. 
    • 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. 
    • 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. 
    • 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. 
    • 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. 
    • A. 

      Prices rise; output rises

    • B. 

      Prices rise; output falls

    • C. 

      Prices fall; output falls

    • D. 

      Prices fall; output rises

  • 27. 
    • 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. 
    • 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. 
    • 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. 
    • 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