4.4.4Test (CST): The AD/AS Model

Which of the following will shift the AD curve to the right?

A cut in income tax rates

When the U.S. government increased its spending during the Great Depression, there was no resulting inflation because:

All of these

If there are price controls on wages and input prices:

All of these.

When price level (inflation) in the United States rises:

Americans tend to demand more foreign goods and services.

Which of the following is not an effect of an increasing price level (inflation)?

An increase in aggregate supply

The aggregate supply curve has a significantly different curve or arc to it than the aggregate demand curve. What is one of the key reasons for the different shape of the aggregate supply curve?

As an economy gets closer to full production capacity, even small increases in production become very expensive, so prices have to rise much higher for each increase in production.

How will a decrease in AS affect nominal GDP?

Either an increase or a decrease

Which of the following will cause a decrease in aggregate supply?

Legislation limiting the workweek to 38 hours

Which of the following statements is true about "cost-push" inflation?

Output will decrease as a result.

Some say environmental regulations on businesses make production more costly. Others argue that these regulations, though costly, also make producers look for opportunities to reduce waste in production processes and might result in a cleaner environment and better production processes. If this second point of view is correct, how do new regulations affect the economy?

Regulations will have an indeterminate effect on output and price levels.

When the economy is in a severe recession, an increase in aggregate demand will lead to:

a big increase in real GDP and a smaller increase in the price level.

Stagflation is caused by:

a decrease in aggregate supply.

If an economy is at full employment, an income tax cut will result in:

a higher price level and more output in the short run, but only a higher price level in the long run.

The total quantity of goods and services demanded by households, firms, foreigners, and government at varying price levels is:

aggregate demand.

If the government cuts income taxes and the result is a big increase in output and a small increase in the price level, then at both the original and new economic equilibrium points the:

aggregate supply curve must be relatively flat.

A shock that decreases input prices but doesn't increase the full-employment level of output will result in:

greater output in the short run and no change in the price level in the long run.

Innovations in fields such as industrial machinery have the effect of:

increasing output because they reduce the costs of production.

In the AD/AS model, when the price level (inflation) increases:

interest rates rise because the real amount of money people want to borrow rises.

According to the interest rate effect, as the price level:

rises, interest rates rise, and people buy less.

In the AD/AS model, the:

short-run aggregate supply curve is vertical at the full-capacity level of real GDP.

The aggregate demand curve:

shows the level of real GDP purchased in the economy at different possible price levels during a period of time.

An increase in oil prices will shift the aggregate:

supply curve leftward.

As an economy approaches the full-employment level of RGDP:

the AS curve becomes very steep, but not quite vertical.

If oil firms find a new method for obtaining oil from dry and depleted oil fields, we will see:

the AS curve shift to the right.

Stagflation describes a situation in which:

the unemployment rate is high and the inflation rate is high.

Aggregate supply increases when:

wage rates or interest rates decrease and the economy's price level remains unchanged.

An economy that isn't at full employment will move toward long-run equilibrium as long as:

wages are free to rise or fall.

Which of the following statements is true about "demand-pull" inflation?

Wages will rise as the economy moves toward long-run equilibrium.

If Canada is the most important trading partner of the United States, what effect will stagflation in Canada have on aggregate demand in the U.S.?

The effect will be indeterminate.

The U.S. federal government can spend money in a variety of ways. For example, the government could build a major new naval training facility in the landlocked state of West Virginia, or improve the nation's transportation and communication systems. Suppose RGDP is below the full-employment level. If the government spends the same amount of money on either project, how will the results differ if the government chooses to improve the country's transportation and communication systems rather than build a naval base in West Virginia?

The increase in RGDP will be greater, and the increase in the price level will be smaller.