Economics, 5th Ed.: Aggregate Demand and Aggregate Supply

Aggregate Demand and Aggregate Supply

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1. Which of the following correctly describes the difference between real GDP and aggregate demand?: a. Real GDP is the total quantity of goods and services produced in the domestic economy in a given time period, while aggregate demand is the relationship between the average price level and the quantity demanded of all goods and services demanded.
b. Aggregate demand is the total quantity of goods and services produced in the domestic economy in a given time period, while real GDP is the relationship between the average price level and the quantity demanded of all goods and services.
c. Real GDP is made up of government purchases, business investment, and net exports, while aggregate demand is another name for domestic consumption expenditures.
d. None of the above.

2. Why is the aggregate demand curve downward-sloping?: a. The real balances effect: Consumers spend more on goods and services when the price level falls because lower prices increase consumer purchasing power or monetary wealth.
b. The creeping inflation effect: As the price level rises, consumers fail to recognize that prices are higher, and consequently they fail to reduce expenditures on goods and services.
c. The consumer-push effect: At less than full employment, a higher price level increases real output demanded as consumers rush to accrue material wealth before the price level drops.
d. None of the above.

3. Which of the following correctly describes the interest-rate effect?: a. If the price level decreases, consumer purchasing power increases, the demand for credit falls, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
b. If the price level decreases, consumers save more than before, the supply of credit increases, interest rates fall, debt-financed borrowing increases, and real GDP demanded increases.
c. If the price level decreases, consumer purchasing power decreases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.
d. If the price level decreases, consumer purchasing power increases, the demand for credit rises, interest rates rise, debt-financed borrowing decreases, and real GDP demanded falls.

4. Fill in the blank: The __________ effect contributes to a downward-sloping aggregate demand curve. When the U.S. price level rises, U.S. goods become relatively more expensive than foreign goods, and the quantity of real GDP demanded declines because both Americans and foreigners buy fewer U.S. goods. The reverse holds when the U.S. price level falls.: a. purchasing power.
b. sticky wages.
c. international trade.
d. producer misconception.

5. What is the difference between a change in the quantity of real GDP demanded and a change in aggregate demand?: a. A change in real GDP demanded can only occur if a factor other than the price level, such as government purchases, were to change.
b. A change in aggregate demand can only occur if a factor other than the price level, such as government puchases, were to change.
c. A change in real GDP demanded occurs when spending increases at a given price level.
d. Both (a) and (c) above.

6. Fill in the blank: An increase in _________ results in a rightward shift in the aggregate demand curve.: a. the price level.
b. import purchases.
c. interest rates.
d. Investment expenditures.

7. Which of the following factors will reduce current consumption?: a. Rising wealth.
b. Rising expectations of a higher price level in the future.
c. Rising interest rates.
d. Rising disposable income.

8. Which of the following factors will increase current investment?: a. Falling interest rates.
b. Falling expectations regarding future sales and revenues.
c. Falling profit expectations for the future due to rising business taxes.
d. Both (b) and (c) above.

9. Which of the following will increase net exports?: a. Rising real income in the U.S. and falling real income in foreign countries.
b. Rising imports and falling exports.
c. Rising value (appreciation) of foreign currencies relative to the U.S. dollar.
d. Rising value (appreciation) of the U.S. dollar relative to foreign currencies.

10. Which of the following correctly describes the aggregate supply curve?: a. A curve that shows the level of real GDP demanded at various price levels.
b. A curve that shows the level of real GDP produced at various price levels.
c. A curve that shows the quantity supplied by firms in a market at various product prices, such as the supply of oranges in the oranges market.
d. None of the above.

11. Which of the following provides a consistent economic explanation for sticky wages?: a. Wages fluctuate upward and downward in the competitive labor market based on prevailing supply and demand conditions.
b. Recent empirical research suggests that while nominal wages rarely rise, it is very common for them to fall during recessions.
c. While real wages usually rise during periods of accelerating inflation, nominal wages usually remain constant.
d. Wages may be inflexible because of union contracts that lock in wages for up to three years.

12. Fill in the blank: This is the sticky ________ explanation for an upward-sloping short-run aggregate supply (SRAS). Some firms will not reduce their price when aggregate demand declines (perhaps due to high menu costs). These firms will not be able to sell as much output when the aggregate price level declines, and so they will reduce their output level.: a. wages.
b. producer.
c. prices.
d. wicket.

13. Fill in the blank: Higher _________ will cause the short-run aggregate supply (SRAS) to shift rightward.: a. wage rates.
b. prices of non-labor inputs.
c. net exports.
d. labor productivity.

14. Which of the following supply shocks will cause the short-run aggregate supply (SRAS) to shift rightward?: a. A major increase in the supply of oil.
b. A major decrease in the supply of oil.
c. Bad weather that wipes out the wheat crop in the U.S.
d. Imposition of a national minimum wage of $20 per hour.

15. Which of the following correctly describes the circumstance that generates the short-run equilibrium price level and real output level in the economy?: a. When aggregate quantity demanded is maximized.
b. When short-run aggregate supply minus aggregate demand equals the price level.
c. When the U.S. budget is balanced.
d. When the price level is such that quantity demanded of real GDP equals short-run quantity supplied of real GDP.

16. Suppose that a short-run equilibrium in the economy is eliminated by a new short-run equilibrium that features a higher price level and a higher level of real GDP. Which one of the following could have generated this change?: a. An increase in wages
b. A decline in government purchases.
c. An increase in consumption spending.
d. An increase in labor productivity.

17. Suppose that a short-run equilibrium in the economy is displaced by a new short-run equilibrium that features a lower price level and a higher level of real GDP. Which one of the following could have generated this change?: a. An increase in wages.
b. A decline in government purchases.
c. An increase in consumption spending.
d. An increase in labor productivity.

18. Fill in the blank: According to economist Christina Romer, the Great Depression can be viewed as an effect of _________________.: a. an increase in aggregate demand.
b. a decrease in aggregate demand.
c. an increase in aggregate supply.
d. a decrease in aggregate supply.

19. Given the shape of the long-run aggregate supply (LRAS) curve, what will be the long-run implications of a government policy of continually increasing aggregate demand?: a. An increase in the full employment level of real GDP and no change in the price level.
b. An increase in the full employment level of real GDP and a rising price level.
c. No change in the full employment level of real GDP and a rising price level.
d. None of the above.

20. Fill in the blank: The level of real GDP that the economy produces in long-run equilibrium is __________.: a. the Natural Real GDP.
b. the Sticky Real GDP.
c. the same as in a short-run equilibrium.
d. both (b) and (c) above.