Practice Question Chapter 11

A decrease in aggregate demand will cause A. prices to fall according to classical​ economists, and unemployment to increase according to Keynes. B. aggregate supply to fall according to classical​ economists, and prices to fall according to Keynes. C. prices to fall and unemployment to increase according to both classical economists and Keynes. D. aggregate supply to fall according to​ Keynes, and unemployment to increase according to classical economists.

A

A decrease in aggregate demand will cause A. prices to fall according to classical​ economists, and unemployment to increase according to Keynes. B. prices to fall and unemployment to increase according to both classical economists and Keynes. C. aggregate supply to fall according to classical​ economists, and prices to fall according to Keynes. D. aggregate supply to fall according to​ Keynes, and unemployment to increase according to classical economists.

A

A stronger U.S. dollar leads to​ ________ in SRAS and​ ________ in AD simultaneously. A. a rightward​ shift; a leftward shift B. a rightward​ shift; a rightward shift C. a leftward shift​ ; a rightward shift D. a leftward​ shift; a leftward shift

A

If the equilibrium level of real GDP per year is greater than the​ full-employment level of​ GDP, then A. an inflationary gap occurs. B. a recessionary gap occurs. C. the economy expands the level of real GDP. D. the economy is at full employment with no price changes.

A

In the classical​ model, an increase in aggregate demand will cause A. an increase in price level. B. a decrease in price level. C. an increase in actual​ output, or Gross Domestic Product​ (GDP). D. a decrease in actual​ output, or Gross Domestic Product​ (GDP).

A

Keynes argued that I. Capitalism did not always lead to full employment. II. Nominal prices were more important than relative prices. A. I only B. II only C. Both I and II D. Neither I nor II

A

The Keynesian model is basically A. a shortminusrun theory. B. not a theory about the economy. C. a longminusrun theory. D. a combination of longminus and shortminusrun theories.

A

The classical model assumes that A. wages and prices are flexible. B. people have money illusion. C. wages are flexible but prices are not. D. imperfect competition predominates in most markets.

A

The gap that exists when equilibrium real Gross Domestic Product​ (GDP) is less than full employment real Gross Domestic Product​ (GDP) is called​ a(n) A. recessionary gap. B. inflationary gap. C. employment gap. D. supply gap.

A

The idea that supply creates its own demand is known as A. ​Say's law. B. the law of diminishing returns. C. ​Keynes' law. D. ​Murphy's law

A

The​ short-run aggregate supply curve is horizontal if A. there are unutilized resources in the economy. B. resources were fully utilized. C. there are high inflation rates. D. resources are perfectly adaptable between production processes.

A

Which of the following is a true​ statement? A. Classical economists believed price adjusted more than output when aggregate demand​ fell, while Keynes argued real GDP adjusted more than prices. B. A decrease in aggregate demand was not possible according to the classical economists but was possible according to Keynes. C. Classical economists believed real GDP adjusted more than prices when aggregate demand​ fell, while Keynes argued that prices adjusted more than output. D. A decrease in aggregate demand has no​ short-run effects according to the classical economists but had significant effects according to Keynes.

A

Which of the following will cause a recessionary​ gap? A. a reduction in aggregate demand B. an increase in aggregate demand C. a discovery of a new raw material D. a temporary reduction in the price of oil

A

With the Keynesian​ model, to understand the determination of income and employment it is necessary to understand A. how aggregate demand is determined. B. how interest rates are determined. C. how aggregate supply is determined. D. how​ long-run aggregate supply is determined.

A

With the Keynesian​ model, to understand the determination of income and employment it is necessary to understand A. how aggregate demand is determined. B. how​ long-run aggregate supply is determined. C. how interest rates are determined. D. how aggregate supply is determined.

A

A stronger U.S. dollar leads to​ ________ in SRAS and​ ________ in AD simultaneously. A. a rightward​ shift; a leftward shift B. a rightward​ shift; a rightward shift C. a leftward​ shift; a leftward shift D. a leftward shift​ ; a rightward shift

AC

An individual who suffers from money illusion will A. concentrate on relative prices. B. feel that the same percentage increase in prices and income improves his economic position. C. never be fooled by the impact of price changes on the purchasing power of income. D. only be concerned about the prices of a few goods.

B

Economic growth due to labor force expansion or capital investments will result in I. A leftward shift of​ short-run aggregate supply. II. A rightward shift in​ long-run aggregate supply. A. I only B. II only C. Both I and II D. Neither I nor II

B

Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product​ (GDP) to be​ "too low," then an appropriate policy action would be to A. do​ nothing, because the economy is​ self-adjusting. B. raise government​ spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product​ (GDP) with little or no inflationary consequences. C. increase​ taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product​ (GDP) with little or no inflationary consequences. D. reduce the money​ stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.

B

One possible result of a fall in aggregate demand coupled with a stable​ short-run aggregate supply is A. an economic expansion. B. a recession. C. an increase in employment levels. D. a rise in the stock market.

B

The original Keynesian economic theory states that A. the​ short-run aggregate supply​ (SRAS) curve is always vertical. B. many​ prices, including​ wages, would not decline even when aggregate demand decreases. C. the economy naturally​ self-regulates so as to attain full employment at its equilibrium. D. wages tend to fall more quickly than the overall price level.

B

Which of the following is NOT an assumption of the classical​ model? A. People are motivated by the own​ self-interest. B. Wages and prices are fixed. C. Buyers react to changes in relative prices. D. Pure competition exists.

B

Which of the following is NOT an event that causes BOTH the​ short-run aggregate supply​ (SRAS) curve and the​ long-run aggregate supply​ (LRAS) curve to​ shift? A. A change in an​ economy's labor supply B. A temporary change in the price of a key input C. Technological changes D. A change in an​ economy's endowments of the factors of production

B

A recessionary gap is the amount by which A. the​ short-run equilibrium level nominal GDP is above the​ short-run real GDP. B. total planned real expenditures exceed total planned production in the long run. C. the​ short-run equilibrium level of real GDP is below the​ full-employment level of real GDP. D. the​ short-run equilibrium level nominal GDP is below the​ short-run real GDP.

C

According to the Keynesian​ model, the​ short-run aggregate supply​ (SRAS) curve is horizontal when A. there are no unemployed resources and wages do not change when prices change. B. prices react to an aggregate demand shock but real Gross Domestic Product​ (GDP) does not. C. there are unemployed resources and prices do not fall when aggregate demand falls. D. real Gross Domestic Product​ (GDP) is at full capacity but prices are not flexible.

C

According to the Keynesian​ model, the​ short-run aggregate supply​ (SRAS) curve is horizontal when A. there are no unemployed resources and wages do not change when prices change. B. real Gross Domestic Product​ (GDP) is at full capacity but prices are not flexible. C. there are unemployed resources and prices do not fall when aggregate demand falls. D. prices react to an aggregate demand shock but real Gross Domestic Product​ (GDP) does not.

C

In the Keynesian​ model, an aggregate demand shock A. will cause the aggregate demand curve to​ shift, leading to a change in the price level but not real GDP. B. will not lead to a shift of the aggregate demand curve. C. will cause the aggregate demand curve to​ shift, leading to a change in the price level and real GDP. D. will cause the aggregate demand curve to​ shift, leading to a change in real GDP but not the price level.

C

In the classical​ model, aggregate demand and aggregate supply will A. intersect at less than full employment. B. not exist. C. intersect at the point of full employment. D. not intersect.

C

Inflation that is caused solely by an increase in aggregate demand is called A. demand-push inflation. B. cost-pull inflation. C. demand-pull inflation. D. cost-push inflation.

C

John Maynard Keynes developed his economic theories in the A. 1900s. B. 1900s. C. 1930s. D. 1890s.

C

Keynesian economics predicts that if government policy makers deem current equilibrium real Gross Domestic Product​ (GDP) to be​ "too low," then an appropriate policy action would be to A. increase​ taxes, thereby causing aggregate demand to increase and inducing a rise in real Gross Domestic Product​ (GDP) with little or no inflationary consequences. B. do​ nothing, because the economy is​ self-adjusting. C. raise government​ spending, thereby increasing aggregate demand and pushing up real Gross Domestic Product​ (GDP) with little or no inflationary consequences. D. reduce the money​ stock, thereby causing aggregate demand to decrease and inducing a rise in fall in the price level that generates an increase in total planned expenditures.

C

Real GDP is​ ________ determined in the classical model and​ ________ determined in the Keynesian model. A. ​supply; supply B. ​demand; demand C. ​supply; demand D. ​demand; supply

C

The Keynesian​ short-run aggregate supply​ (SRAS) curve A. shows that real Gross Domestic Product​ (GDP) will increase only if the price level increases. B. assumes a​ full-employment level of real Gross Domestic Product​ (GDP). C. is horizontal. D. does not reflect any changes in nominal Gross Domestic Product​ (GDP).

C

The classical model assumes that A. wages are flexible but prices are not. B. people have money illusion. C. wages and prices are flexible. D. imperfect competition predominates in most markets.

C

The gap that exists whenever​ short-run equilibrium real GDP per year is less than fullminusemployment real GDP as shown by the position of the​ long-run aggregate supply curve is A. the​ short-run aggregate supply curve. B. an inflationary gap. C. a recessionary gap. D. money illusion.

C

The inflation associated with the oil price shocks in the 1970s after OPEC restricted the supply of oil is an example of A. ​demand-pull inflation due to a supply shock. B. ​cost-push inflation due to a demand shock. C. ​cost-push inflation due to a supply shock. D. ​demand-pull inflation due to a demand shock.

C

The significant increases in oil prices during the late 2000s was an example of A. an aggregate supply shock that reduced the price level and increased the rate of growth of real Gross Domestic Product​ (GDP). B. an aggregate demand shock that increased the price level and increased the rate of growth of real Gross Domestic Product​ (GDP). C. an aggregate supply shock that increased the price level and reduced the rate of growth of real Gross Domestic Product​ (GDP). D. an aggregate demand shock that reduced the price level and reduced the rate of growth of real Gross Domestic Product​ (GDP).

C

A key component of the Keynesian model is that A. people are not fooled by money illusion. B. prices are flexible. C. wages are flexible. D. prices are sticky.

D

A key component of the Keynesian model is that A. prices are flexible. B. wages are flexible. C. people are not fooled by money illusion. D. prices are sticky.

D

A recessionary gap is the amount by which A. the​ short-run equilibrium level nominal GDP is above the​ short-run real GDP. B. the​ short-run equilibrium level nominal GDP is below the​ short-run real GDP. C. total planned real expenditures exceed total planned production in the long run. D. the​ short-run equilibrium level of real GDP is below the​ full-employment level of real GDP.

D

Classical economists assumed that A. prices were flexible. B. individuals did not suffer from money illusion. C. wages were flexible. D. all of the above

D

If aggregate demand and nominal GDP increase while the price level is​ constant, we would conclude that A. the economy is already at full employment. B. the aggregate supply curve is upward sloping. C. the aggregate demand curve is vertical. D. the aggregate supply curve is horizontal.

D

In an economic​ downturn, sticky wages and prices reduce the​ economy's speed of adjustment because A. they cause deflation. B. union workers would likely quit and look for work elsewhere. C. hyperinflation will likely occur. D. businesses are unable to adjust quickly to changes in aggregate demand.

D

In an economic​ downturn, sticky wages and prices reduce the​ economy's speed of adjustment because A. union workers would likely quit and look for work elsewhere. B. they cause deflation. C. hyperinflation will likely occur. D. businesses are unable to adjust quickly to changes in aggregate demand.

D

In the classical​ model, an increase in aggregate demand will cause A. a decrease in price level. B. an increase in actual​ output, or Gross Domestic Product​ (GDP). C. a decrease in actual​ output, or Gross Domestic Product​ (GDP). D. an increase in price level.

D

Real GDP is​ ________ determined in the classical model and​ ________ determined in the Keynesian model. A. ​demand; demand B. ​supply; supply C. ​demand; supply D. ​supply; demand

D

The​ short-run aggregate supply curve is horizontal if A. resources were fully utilized. B. there are high inflation rates. C. resources are perfectly adaptable between production processes. D. there are unutilized resources in the economy.

D

Which of the following would increase aggregate​ supply? A. a reduction in input prices B. a discovery of new raw materials C. increased training and education D. all of the above

D