Chapter 12: Aggregate Demand and Aggregate Supply

An economic policy maker would rank a ________ shock as the MOST preferred type. 1.) positive demand 2.) negative demand 3.) positive supply 4.) negative supply

3.) positive supply

An aggregate output level lower than potential output means there will be: 1.) high interest rates 2.) low unemployment 3.) high unemployment 4.) high inflation

3.) high unemployment

As a result of a sharp decrease in aggregate demand between 1929 and 1933, the unemployment rate changes from ________ in 1929 to _________ in 1933. 1.) 25%; 0% 2.) 40%; 5% 3.) 0%; 3% 4.) 3%; 25%

4.) 3%; 25%

Look at the figure AD-AS Model II. If nominal wages fall, in the short run the _______ curve will shift to the _______. 1.) LRAS; right 2.) SRAS; left 3.) AD; right 4.) SRAS; right

4.) SRAS; right

Look at the figure Policy Alternatives. In panel (b), the economy is initially in short-run equilibrium at real GDP level Y1 and price level P2. If the government decides to intervene, it will most likely: 1.) decrease its spending 2.) increase taxes 3.) increase its spending 4.) decrease the quantity of money

3.) increase its spending

Changes in short-run aggregate supply can be caused by changes in:

commodity prices.

A decrease in the supply of money shifts the aggregate _______ curve to the ________. 1.) demand; left 2.) supply; right 3.) demand; right 4.) supply; left

1.) demand; left

The aggregate supply curve shows the relationship between the aggregate price level and the aggregate: 1.) money supply 2.) output supplied 3.) employment 4.) unemployment rate

2.) output supplied

Look at the figure An Increase in Aggregate Demand. Because of the pressures of the short-run equilibrium at Y2 and P2: 1.) unemployment will decrease 2.) the SRAS curve will shift to the left 3.) LRAS will shift to the right 4.) the SRAS will shift to the right

2.) the SRAS curve will shift to the left

If actual GDP is less than potential output, then the economy is: 1.) in an inflationary gap 2.) at full employment 3.) in a long-run equilibrium 4.) in a recessionary gap

4.) in a recessionary gap

A negative short-run supply shock ______ aggregate output and __________ the aggregate price level. 1.) reduces; reduces 2.) increases; increases 3.) reduces; increases 4.) increases; reduces

3.) reduces; increases

Aggregate demand will increase in all of the following cases EXCEPT when: 1.) government purchases of goods rise 2.) household wealth rises but prices are constant 3.) the quantity of money increases 4.) interest rates increases

4.) interest rates increases

Look at the figure AD-AS Model I. If the economy is at point X, nominal wages _______, and the _______ curve shifts _______ until the economy reaches long-run equilibrium. 1.) fall; short-run aggregate supply; right 2.) fall; short-run aggregate supply; left 3.) fall; aggregate demand; left 4.) rise; aggregate demand; right

1.) fall; short-run aggregate supply; right

Using monetary policy to address a recessionary gap caused by a supply shock involves ________ to ________. 1.) increasing interest rates; decrease investment spending 2.) decreasing interest rates; lower the aggregate price level 3.) decreasing the money supply; lower the aggregate price level 4.) increasing the money supply; lower the unemployment rate

4.) increasing the money supply; lower the unemployment rate

Changes in aggregate demand can be caused by changes in:

government spending.

In the late 1970s, the U.S. economy slid to the _______ along the aggregate curve. 1.) left; supply 2.) left; demand 3.) right; demand 4.) right; supply

2.) left; demand

A simultaneous rise in productivity and nominal wages would shift the short-run aggregate supply curve to the: 1.) right if the cost per unit of output rises 2.) left if the cost per unit of output falls 3.) right if the rise in nominal wages is larger than the rise in productivity 4.) left if the rise in nominal wages is larger than the rise in productivity

4.) left if the rise in nominal wages is larger than the rise in productivity

During the Great Depression, the United States moved to the ________ along its ________ curve. 1.) left; aggregate demand 2.) right; aggregate demand 3.) right; short-run aggregate supply 4.) left; short-run aggregate supply

4.) left; short-run aggregate supply

Which of the following will shift the short-run aggregate supply curve to the RIGHT?

a widespread decrease in commodity prices

Suppose the economy is operating in long-run equilibrium and a positive demand shock hits. We expect a short-run increase in real GDP and the price level and in long-run a_____ real GDP and _____ the price level.

decrease; increase

In the long run, as the economy self-corrects, a decrease in aggregate demand, all other things unchanged, will cause the price level to _____ and potential output to _____.

fall; remain stable

Aggregate demand will increase if:

the public becomes more optimistic.

A positive demand shock leads to: 1.) higher prices and lower output 2.) higher prices and higher employment 3.) lower prices and lower output 4.) higher prices and higher unemployment

2.) higher prices and higher employment

If membership in labor unions falls, production costs will: 1.) increase, and SRAS will shift to the left, decreasing equilibrium GDP and increasing the aggregate price level. 2.) not change and AD will shift to the right, increasing equilibrium GDP and aggregate price level. 3.) fall and SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level. 4.) fall, there will be a downward movement along SRAS, equilibrium GDP will increase, and aggregate price level will fall.

3.) fall and SRAS will shift to the right, increasing equilibrium GDP and lowering the aggregate price level.

If the economy is in a recessionary gap: 1.) nominal wages will rise, SRAS will shift to the left, and the economy will eventually restore itself 2.) it will remain in a recession forever without any kind of government intervention 3.) nominal wages will fall and SRAS will shift to the right until the economy is at full employment 4.) AD will shift to the right and prices of goods will rise until the economy goes back to producing potential output

3.) nominal wages will fall and SRAS will shift to the right until the economy is at full employment

Look at the figure Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a), it is in: 1.) full employment 2.) a liquidity trap 3.) stagflation 4.) an inflationary gap

3.) stagflation

The aggregate demand curve is negatively sloped because of: 1.) the elasticity effect of an aggregate price level change 2.) the fiscal policy effect 3.) the wealth effect of an aggregate price level change 4.) the substitution effect of an aggregate price level change

3.) the wealth effect of an aggregate price level change

_________ will shift the aggregate demand curve. 1.) An interest rate effect of an aggregate price level change 2.) A demand expectation 3.) A wealth effect of an aggregate price level change 4.) A demand shock

4.) A demand shock

Look at the figure The Multiplier. If this economy is at Y1 and investment spending increases: 1.) AD1 will shift to the left, reflating a multiplied decrease in real GDP at every price level 2.) a downward movement along the AD1 will take place, reflecting a decrease in the price level 3.) an upward movement along the AD1 will take place, reflecting an increase in the price level 4.) AD1 will shift to the right, reflecting a multiplied increase in real GDP at every price level.

4.) AD1 will shift to the right, reflecting a multiplied increase in real GDP at every price level.

Look at the figure AD-AS Model II. If there is a significant increase in government spending, in the short run the ________ curve will shift to the ________. 1.) AD; left 2.) SRAS; right 3.) SRAS; left 4.) AD; right

4.) AD; right

In the short run, the equilibrium price level and the equilibrium level of total output are determined by the intersection of: 1.) potential output and LRAS 2.) LRAS and aggregate demand 3.) LRAS and SRAS 4.) SRAS and aggregate demand

4.) SRAS and aggregate demand

Look at the figure AD-AS Model II. Which of the following will raise the price level? 1.) SRAS curve shifts to the right 2.) The economy moves down the aggregate demand curve 3.) AD curve shifts to the left 4.) SRAS curve shifts to the left

4.) SRAS curve shifts to the left

Look at the figure Policy Alternatives. If the economy is in equilibrium at Y1 in panel (b), it is in: 1.) an inflationary gap 2.) full employment 3.) simultaneous short-run and long-run equilibrium 4.) a recessionary gap

4.) a recessionary gap

A rise in labor productivity will most likely result in: 1.) an increase in aggregate demand 2.) a decrease in aggregate supply 3.) a decrease in aggregate demand 4.) an increase in aggregate supply

4.) an increase in aggregate supply

A recessionary gap can be closed by _________ wages that shift the ________. 1.) falling; LRAS curve rightward 2.) falling; SRAS curve leftward 3.) rising; SRAS curve rightward 4.) falling; SRAS curve rightward

4.) falling; SRAS curve rightward

The three consequences of the decline in demand during the Great Depression were ______ prices, _______ output, and a surge in unemployment. 1.) rising; increasing 2.) rising; declining 3.) falling; increasing 4.) falling; declining

4.) falling; declining

The aggregate demand curve shows the relationship between the aggregate price level and (the) aggregate: 1.) productivity 2.) quantity of output demanded by businesses only 3.) unemployment rate 4.) quantity of output demanded by households, businesses, the government, and the rest of the world

4.) quantity of output demanded by households, businesses, the government, and the rest of the world

An increase in the minimum wage would likely: 1.) shift the short-run aggregate supply curve to the right 2.) cause a movement down the short-run aggregate supply curve from right to left 3.) cause a movement up the short-run aggregate supply curve from left to right 4.) shift the short-run aggregate supply curve to the left

4.) shift the short-run aggregate supply curve to the left

Potential output is the level of real GDP that: 1.) occurs when the economy has only cyclical unemployment 2.) occurs when the actual rate of unemployment is zero 3.) the economy would produce if all prices, including nominal wages, were sticky 4.) the economy would produce if all prices, including nominal wages, were fully flexible

4.) the economy would produce if all prices, including nominal wages, were fully flexible

The long-run supply curve illustrates how the aggregate output supplied is _________ the aggregate price level. 1.) a one-to-one correspondence with 2.) positively related to 3.) negatively related to 4.) unrelated to

4.) unrelated to

Look at the figure Aggregate Supply Movements. Which statement is CORRECT? 1.) An increase in the price level is responsible for pushing the curve to the right 2.) Short-run aggregate supply has increased 3.) Short-run aggregate supply has decreased 4.) A decrease in the price level is responsible for pushing the short-run aggregate supply curve to the right

2.) Short-run aggregate supply has increased

Look at the figure Shift of the Aggregate Demand Curve. A movement from point C on AD2 to point A on AD1 may have been the result of: 1.) lower interest rates 2.) an increase in investment spending following optimistic GDP forecasts 2.) a decrease in investment spending following pessimistic GDP forecasts 4.) decreases in the taxes paid by businesses

2.) a decrease in investment spending following pessimistic GDP forecasts

All of the following will increase potential output EXCEPT: 1.) technological innovation 2.) a decrease in the aggregate price level 3.) an increase in human capital 4.) an increase in physical capital

2.) a decrease in the aggregate price level

A recessionary gap occurs when: 1.) potential output is below aggregate output 2.) aggregate output is below potential output 3.) aggregate output is above potential output 4.) potential output is receding

2.) aggregate output is below potential output

A shift to the right of the short-run aggregate supply curve may be caused by: 1.) an increase in the price of inputs 2.) an increase in productivity 3.) an increase in wages 4.) a decrease in productivity

2.) an increase in productivity

Look at the figure Inflationary and Recessionary Gaps. If the economy is in short-run equilibrium at Y1 in panel (b), the economy is in: 1.) a high level of unemployment 2.) an inflationary gap 3.) a recessionary gap 4.) simultaneous short-run and long-run equilibrium

2.) an inflationary gap

As a recessionary gap self-corrects, the equilibrium price level _______ and the equilibrium real output _________. 1.) rises; decreases 2.) falls; increases 3.) rises; increases 4.) falls; decreases

2.) falls; increases

The short-run aggregate supply curve slopes upward because a ________ aggregate price level leads to ________. 1.) lower; higher profit and higher productivity. 2.) higher; higher output, since most production costs are fixed in the short run 3.) higher; lower output as costs of production increase 4.) lower; higher output, since production costs tend to fall in the short run

2.) higher; higher output, since most production costs are fixed in the short run

Look at the figure Shift of the Aggregate Demand Curve. A movement from point A on AD1 to point C on AD2 could have resulted from a(n): 1.) higher price level 2.) increase in the total quantity of consumer goods and services demanded 3.) significant decrease in the consumers' income 4.) lower price level

2.) increase in the total quantity of consumer goods and services demanded

An inflationary gap caused by a demand shock can be addressed by _______ to ________. 1.) raising government spending; lower the unemployment rate 2.) lowering government spending; lower the aggregate price level 3.) lowering taxes; lower the aggregate price level 4.) raising taxes; lower the unemployment rate

2.) lowering government spending; lower the aggregate price level

A decrease in aggregate demand is seen as a(n) ________ the aggregate demand curve. 1.) shift to the right in 2.) shift to the left in 3.) downward movement along 4.) upward movement along

2.) shift to the left in

Which of the following is TRUE with respect to short-run and long-run aggregate supply? 1.) If the economy is on the long-run aggregate supply curve, it cannot also be on the short-run aggregate supply curve 2.) If the economy is on the short-run aggregate supply curve, it cannot also be on the long-run aggregate supply curve 3.) The economy can be on both curves simultaneously 4.) The economy can never rest on both curves simultaneously

3.) The economy can be on both curves simultaneously

Look at the figure Policy Alternatives. If the economy is in equilibrium at Y1 in panel (a) and the government does not intervene, the results will likely be: 1.) no change in AD or SRAS 2.) a shift of AD1 to the left 3.) a shift of SRAS1 to SRAS2 4.) a shift of LRAS to the left

3.) a shift of SRAS1 to SRAS2

Look at the figure Inflationary and Recessionary Gaps. The intersection of AD with SRAS in panel (b) indicates: 1.) a long-run equilibrium 2.) stagflation 3.) a short-run equilibrium 4.) that unemployment is too high

3.) a short-run equilibrium

The economy is in a recession. The desired FISCAL policy is: 1.) a decrease in government transfer payments 2.) a decrease in interest rates 3.) an increase in the government purchases of goods and services 4.) an increase in tax rates

3.) an increase in the government purchases of goods and services

Stagflation may result from: 1.) a decrease in the price of oil 2.) a decrease in the supply of money 3.) an increase in the price of oil 4.) an increase in the supply of money

3.) an increase in the price of oil

An increase in aggregate demand will generate ________ in real GDP and ________ in the price level in the short run. 1.) an increase; no change 2.) no change; an increase 3.) an increase; an increase 4.) a decrease; no change

3.) an increase; an increase

The short-run aggregate supply curve will shift to the left if: 1.) the aggregate price level falls 2.) tax revenues fall 3.) commodity prices rise 4.) productivity increases

3.) commodity prices rise

The short run in macroeconomic analysis is a period: 1.) in which interest rates are fixed 2.) in which wages become fully flexible 3.) in which many production costs can be taken as fixed 4.) of two months, and the long run is more than 12 months

3.) in which many production costs can be taken as fixed

Suppose the equilibrium aggregate price level and the equilibrium level of real GDP are both rising. This is probably the effect of a(n) ________ in aggregate _______. 1.) decrease; demand 2.) increase; supply 3.) increase; demand 4.) decrease; supply

3.) increase; demand

Look at the figure Aggregate Supply. If the economy is at point E, nominal wages will _______, and the short-run aggregate supply curve will shift _______ until actual potential is _________ potential output. 1.) increase; right; greater than 2.) decrease; right; less than 3.) increase; left; equal to 4.) decrease; right; equal to

3.) increase; left; equal to

According to the wealth effect, when prices decrease, the purchasing power of assets _______ and consumer spending ________. 1.) increases; decreases 2.) decreases; decreases 3.) increases; increases 4.) decreases; increases

3.) increases; increases

Suppose that the economy is in long-run macroeconomic equilibrium and aggregate demand increases. As the economy moves to short-run macroeconomic equilibrium, there is a(n) ________ gap with _______. 1.) recessionary; low inflation 2.) recessionary; high inflation 3.) inflationary; low unemployment 4.) inflationary; high unemployment

3.) inflationary; low unemployment

Look at the figure Inflationary and Recessionary Gaps. Yp in panel (b): 1.) indicates a recessionary gap 2.) indicates a decrease in aggregate demand 3.) is potential output 4.) is associated with considerable unemployment

3.) is potential output

Suppose that the stock market crashes, which causes a large decrease in the value of many households' financial assets. The most likely outcome is a _________ the aggregate demand curve. 1.) movement up 2.) movement down 3.) left-shift in 4.) right-shift in

3.) left-shift in

The aggregate demand curve would shift to the left for all the following reasons EXCEPT: 1.) a fall in consumers' wealth 2.) a decrease in the amount of money in circulation 3.) lower labor productivity 4.) more pessimistic consumer expectations

3.) lower labor productivity

Suppose that consumer expectations improve. The aggregate demand curve will undergo a: 1.) movement upward 2.) movement downward 3.) shift the right 4.) shift to the left

3.) shift the right

According to the short-run aggregate supply curve, when the _____ rises, the quantity of aggregate output _____ rises.

aggregate price level; supplied

All of the following are examples of fiscal policy EXCEPT:

reducing the interest rate by increasing the money supply.

Suppose the economy is in an inflationary gap so that SRAS1 intersects AD2. The size of the gap is equal to: 1.) Y1 - Yp 2.) Y1 3.) Yp - Y2 4.) Y1 - Y2

1.) Y1 - Yp

In general, a change in the price level, all other things unchanged, causes: 1.) a movement along the aggregate demand curve 2.) both a movement along the aggregate demand curve and a shift in the curve 3.) a shift of the aggregate demand curve 4.) no change in the purchasing power of assets

1.) a movement along the aggregate demand curve

When short-run aggregate supply increases, it means that the short-run aggregate supply curve shifts to the _____ and the quantity of aggregate output that producers are willing to supply _____.

right; increases

In the long run, the economy is:

self-correcting, as prices of goods that are sticky in the short run become very flexible in the long run and thus move the economy to full employment.

In 2008 the Federal Reserve was facing:

stagflation

A general decrease in wages will result primarily in the ________ curve shifting to the _______. 1.) aggregate demand; right 2.) aggregate demand; left 3.) short-run aggregate supply; left 4.) short-run aggregate supply; right

4.) short-run aggregate supply; right

_____ would likely shift the short-run aggregate supply curve to the left.

An increase in the price of oil

Nominal wages are sticky because:

wages are slow to rise when there are labor shortages and slow to fall even when the level of unemployment is significant.

According to the long-run aggregate supply curve, when _____, the quantity of aggregate output supplied _____.

the aggregate price level rises; does not change

The wealth effect is reflected in:

the downward slope in aggregate demand.

Look at the figure Shifts of the AD-AS Curves. An increase in wages in the short run is illustrated by: 1.) panel (d) 2.) panel (a) 3.) panel (c) 4.) panel (b)

1.) panel (d)

Profit per unit equals: 1.) price per unit minus cost per unit 2.) cost per unit minus price per unit 3.) price per unit minus the nominal wage rate 4.) price per unit divided by cost per unit

1.) price per unit minus cost per unit

If there is an inflationary gap, nominal wages _______, and the _________ curve shifts ________ until the economy reaches long-run equilibrium. 1.) rise; short-run aggregate supply; left 2.) fall; aggregate demand; left 3.) fall; sort-run aggregate supply; right 4.) rise; aggregate demand; right

1.) rise; short-run aggregate supply; left

Look at the figure An Increase in Aggregate Demand. Assume that the economy is initially in long-run equilibrium at Yp and P1. Now suppose that there is an increase in the level of government purchases at each price level. This will: 1.) shift the aggregate demand curve from AD1 to AD2 2.) lead to increased output and a decrease in the price level 3.) shift the aggregate demand curve from AD2 to AD1 4.) lead to decreased output and a decreased price level

1.) shift the aggregate demand curve from AD1 to AD2

Producing a short-run level of aggregate output that exceeds the economy's potential output results in a(n) _______ adjustment in ________. 1.) upward; nominal wages 2.) downward; nominal wages 3.) downward; production costs 4.) downward; profits per unit of output

1.) upward; nominal wages

The wealth effect suggests: 1.) a negative relationship between the price level and consumption spending 2.) that price level changes do not affect real wealth 3.) a positive relationship between the price level and consumption spending 4.) that when the price level increases, the real value of money increases also

1.) a negative relationship between the price level and consumption spending

Policy can offset the effects of all of the following shocks EXCEPT: 1.) a negative supply shock by increasing money supply 2.) a positive demand shock by decreasing government spending 3.) a positive demand shock by increasing taxes 4.) a negative demand shock by cutting taxes

1.) a negative supply shock by increasing money supply

Look at the figure Inflationary and Recessionary Gaps. In panel (a), an expansionary policy designed to move the economy from Y1 to Yp would attempt to shift the: 1.) aggregate demand curve to the right by increasing aggregate demand 2.) SRAS curve to the left 3.) aggregate demand curve to the left by increasing aggregate demand 4.) LRAS curve to the left

1.) aggregate demand curve to the right by increasing aggregate demand

If the Fed increases the quantity of money in circulation, interest rates ________, investment spending ________, and the aggregate demand curve shifts to the ________. 1.) decrease; increases; right 2.) increase; increases; right 3.) decrease; increases; left 4.) increase; decreases; left

1.) decrease; increases; right

Changes in aggregate demand can be caused by changes in: 1.) government spending 2.) business costs 3.) raw materials costs 4.) wages

1.) government spending

When the price level increases, firms in perfectly competitive markets will: 1.) increase output 2.) decrease output 3.) decrease output and increase the price 4.) increase output and decrease the price

1.) increase output

If the price level falls by 10%, the purchasing power of $10,000 will: 1.) increase to $11,000 2.) decrease to $1,000 3.) decrease to $9,000 4.) remain constant

1.) increase to $11,000

The interest rate effect if the tendency for changes in the price level to affect: 1.) interest rates and thus the quantity of investment spending and consumption 2.) the quantity of investment demanded and thus interest rates 3.) real incomes and lead to shifts in potential output 4.) export demand and thus aggregate demand

1.) interest rates and thus the quantity of investment spending and consumption

The economic slump in the 1970s looked different from the slump at the beginning of the Great Depression because it was: 1.) largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil 2.) the direct result of a contractionary monetary policy 3.) the result of a lack of confidence that led businesses and consumers to spend less 4.) the result of solely of a negative demand shock

1.) largely caused by events in the Middle East that led to sudden cuts in world oil production and soaring prices for oil

Look at the figure Policy Alternatives. Assume that the economy depicted in panel (a) is in short-run equilibrium with AD1 and SRAS1. If the economy is left to correct itself: 1.) lower wages will result in a gradual shift from SRAS1 to SRAS2 2.) real interest rates will fall, which will shift SRAS rightward 3.) the aggregate demand curve will shift leftward 4.) long-run equilibrium will be established at Yp and P3

1.) lower wages will result in a gradual shift from SRAS1 to SRAS2

Look at the figure Shifts of the AD-AS Curves. A short-run increase in net exports is illustrated by: 1.) panel (a) 2.) panel (d) 3.) panel (b) 4.) panel (c)

1.) panel (a)