ECON CHAPTER 12

In which of the following sets of circumstances can we confidently expect inflation? A. aggregate supply and aggregate demand both increase B. aggregate supply and aggregate demand both decrease C. aggregate supply decreases and aggregate demand increases D. aggregate supply increases and aggregate demand decreases

C

The equilibrium price level and equilibrium level of real GDP occur at the intersection of the aggregate demand curve and the aggregate supply curve. A. true B. false

A

An increase in wealth from a substantial increase in stock prices will move the economy along a fixed aggregate demand curve. A. true B. false

B

The aggregate supply curve (short-run): A. graphs as a horizontal line. B. is steeper above the full-employment output than below it. C. slopes downward and to the right. D. presumes that changes in wages and other resource prices match changes in the price level.

B

The interest-rate effect is one of the determinants of aggregate demand. A. true B. false

B

The price level in the United States is more flexible downward than upward. A. true B. false

B

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial spending because of the: A. net export effect. B. wealth effect. C. real-balances effect. D. multiplier effect.

D

An increase in net exports will shift the AD curve to the: A. left by a multiple of the change in investment. B. left by the same amount as the change in investment. C. right by the same amount as the change in investment. D. right by a multiple of the change in investment.

D

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift: A. leftward by $40 billion at each price level. B. rightward by $20 billion at each price level. C. rightward by $40 billion at each price level. D. leftward by $20 billion at each price level.

A

If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity supplied, we would expect: A. inflation to occur. B. the aggregate demand curve to shift rightward. C. the aggregate demand curve to shift leftward. D. the aggregate supply curve to shift leftward.

A

Which of the following would most likely shift the aggregate demand curve to the right? A. An increase in stock prices that increases consumer wealth. B. Increased fear that a recession will cause workers to lose their jobs. C. An increase in personal income tax rates. D. A reduction in household borrowing because of tighter lending practices.

A

A decrease in per unit production costs will shift the aggregate supply curve leftward. A. true B. false

B

The determinants of aggregate demand: A. explain why the aggregate demand curve is downsloping. B. explain shifts in the aggregate demand curve. C. demonstrate why real output and the price level are inversely related. D. include input prices and resource productivity.

B

The real-balances effect indicates that inflation makes the public feel wealthier and they therefore spend more out of their current incomes. A. true B. false

B

When aggregate demand declines, many firms may reduce employment rather than wages because wage reductions may: A. reduce per unit production costs. B. reduce worker morale and work effort, and thus lower productivity. C. increase the firms' cost of raising financial capital. D. reduce the demands for their products.

B

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift: A. leftward by $50 billion at each price level. B. rightward by $10 billion at each price level. C. rightward by $50 billion at each price level. D. leftward by $40 billion at each price level.

C

An increase in input productivity will: A. shift the aggregate supply curve leftward. B. reduce the equilibrium price level, assuming downward flexible prices. C. reduce the equilibrium real output. D. reduce aggregate demand.

B

The interest-rate effect suggests that: A. a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B. an increase in the price level will increase the demand for money, reduce interest rates, and decrease consumption and investment spending. C. an increase in the price level will increase the demand for money, increase interest rates, and decrease consumption and investment spending. D. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending.

C

Per-unit production cost is: A. real output divided by inputs. B. total input cost divided by units of output. C. units of output divided by total input cost. D. a determinant of aggregate demand.

B

In locating a particular aggregate demand curve it is assumed that the money supply is fixed. A. true B. false

A

Other things equal, if the national incomes of the major trading partners of the United States were to rise, the U.S.: A. aggregate demand curve would shift to the right. B. aggregate supply curve would shift to the left. C. aggregate supply curve would shift to the right. D. aggregate demand curve would shift to the left.

A

The aggregate supply curve (short-run): A. slopes downward and to the right. B. graphs as a vertical line. C. slopes upward and to the right. D. graphs as a horizontal line.

C

Which of the following would not shift the aggregate supply curve? A. an increase in labor productivity B. a decline in the price of imported oil C. a decline in business taxes D. an increase in the price level

D

We would expect a decline in personal and corporate income taxes to: A. shift the aggregate demand curve rightward. B. decrease consumption and investment spending. C. decrease real output. D. shift the aggregate supply curve leftward.

A

An increase in imports (independent of a change in the U.S. price level) will increase both U.S. aggregate supply and U.S. aggregate demand. A. true B. false

B

Prices and wages tend to be: A. flexible both upward and downward. B. inflexible both upward and downward. C. flexible downward, but inflexible upward. D. flexible upward, but inflexible downward.

D

Prices and wages tend to be: A. flexible both upward and downward. B. inflexible both upward and downward. C. flexible downward, but inflexible upward. D. flexible upward, but inflexible downward.

D

If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect: A. aggregate demand to decrease and aggregate supply to increase. B. both aggregate demand and aggregate supply to decrease. C. both aggregate demand and aggregate supply to increase. D. aggregate demand to increase and aggregate supply to decrease.

A

An increase in imports (independent of a change in the U.S. price level) will increase both U.S. aggregate supply and U.S. aggregate demand. A. true B. false

B

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will: A. increase the amount of U.S. real output purchased. B. increase U.S. imports and decrease U.S. exports. C. increase both U.S. imports and U.S. exports. D. decrease both U.S. imports and U.S. exports.

B

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A. real-balances, interest-rate, and foreign purchases effects. B. determinants of aggregate supply. C. determinants of aggregate demand. D. sole determinants of the equilibrium price level and the equilibrium real output.

C

Shifts in the aggregate supply curve are caused by changes in: A. consumption spending. B. the quantity of real output demanded. C. the quantity of real output supplied. D. one or more of the determinants of aggregate supply.

D

The determinants of aggregate supply: A. are consumption, investment, government, and net export spending. B. explain why real domestic output and the price level are directly related. C. explain the three distinct ranges of the aggregate supply curve. D. include resource prices and resource productivity.

D

The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will: A. shift the aggregate demand curve leftward. B. shift the aggregate supply curve leftward. C. decrease U.S. exports and increase U.S. imports. D. increase U.S. exports and decrease U.S. imports.

D

Which of the following explains why the aggregate demand schedule is downward sloping? A. the real-balances effect B. the interest-rate effect C. the foreign purchases effect D. all of these

D

Which of the following would most likely reduce aggregate demand (shift the AD curve to the left)? A. A reduced amount of excess capacity. B. Increased government spending on military equipment. C. An appreciation of the U.S. dollar. D. Increased consumer optimism regarding future economic conditions.

C

Which one of the following would increase per unit production cost and therefore shift the aggregate supply curve to the left? A. a reduction in business taxes B. production bottlenecks occurring when producers near full plant capacity C. an increase in the price of imported resources D. deregulation of industry

C

The aggregate supply curve (short-run) is upsloping because: A. wages and other resource prices match changes in the price level. B. the price level is flexible upward but inflexible downward. C. per-unit production costs rise as the economy moves toward and beyond its full-employment real output. D. wages and other resource prices are flexible upward but inflexible downward.

C

The aggregate supply curve: A. is explained by the interest rate, real-balances, and foreign purchases effects. B. gets steeper as the economy moves from the top of the curve to the bottom of the curve. C. shows the various amounts of real output that businesses will produce at each price level. D. is downsloping because real purchasing power increases as the price level falls.

C

A negative GDP gap can be caused by either a decrease in aggregate demand or a decrease in aggregate supply. A. true B. false

A

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium: A. output would rise. B. output would fall. C. price level would necessarily fall. D. price level would necessarily rise.

A

A rightward shift in the aggregate supply curve is best explained by an increase in: A. business taxes. B. productivity. C. nominal wages. D. the price of imported resources.

B

If aggregate demand increases and aggregate supply decreases, the price level: A. will decrease, but real output may either increase or decrease. B. will increase, but real output may either increase or decrease. C. and real output will both increase. D. and real output will both decrease.

B

If the price level increases in the United States relative to foreign countries, then American consumers will purchase more foreign goods and fewer U.S. goods. This statement describes: A. the output effect. B. the foreign purchases effect. C. the real-balances effect. D. the shift-of-spending effect.

B

In an effort to avoid recession, the government implements a tax rebate program, effectively cutting taxes for households. We would expect this to: A. affect neither aggregate supply nor aggregate demand. B. increase aggregate demand. C. reduce aggregate demand. D. reduce aggregate supply.

B

Other things equal, a decrease in the real interest rate will: A. expand investment and shift the AD curve to the left. B. expand investment and shift the AD curve to the right. C. reduce investment and shift the AD curve to the left. D. reduce investment and shift the AD curve to the right.

B

Other things equal, if the U.S. dollar were to depreciate, the: A. aggregate demand curve would remain fixed in place. B. aggregate supply curve would shift to the left. C. aggregate supply curve would shift to the right. D. aggregate demand curve would shift to the left.

B

Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate: A. demand curve will shift leftward. B. supply curve will shift rightward. C. supply curve will shift leftward. D. expenditures curve will shift downward.

B

The aggregate demand curve is: A. vertical if full employment exists. B. horizontal when there is considerable unemployment in the economy. C. downsloping because of the interest-rate, real-balances, and foreign purchases effects. D. downsloping because production costs decrease as real output rises.

C

The interest-rate and real-balances effects are important because they help explain: A. rightward and leftward shifts of the aggregate demand curve. B. why fiscal policy cannot be used effectively to curb inflation. C. the shape of the aggregate demand curve. D. the shape of the aggregate supply curve.

C

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of: A. the foreign purchases effect. B. inflexible product prices. C. wage contracts. D. the wealth effect.

C

Which of the following is incorrect? A. As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and U.S. imports rise. B. As the price level falls, the demand for money declines, the interest rate declines, and interest-rate sensitive spending increases. C. When the price level increases, real balances increase, businesses and households find themselves wealthier and therefore increase their spending. D. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level.

C

Suppose that technological advancements stimulate $20 billion in additional investment spending. If the MPC = 0.6, how much will the change in investment increase aggregate demand? A. $12 billion. B. $20 billion. C. $33.3 billion. D. $50 billion.

D

The aggregate demand curve: A. is upsloping because a higher price level is necessary to make production profitable as production costs rise. B. is downsloping because production costs decline as real output increases. C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output that will be purchased at each possible price level.

D

The foreign purchases effect: A. shifts the aggregate demand curve rightward. B. shifts the aggregate demand curve leftward. C. shifts the aggregate supply curve rightward. D. moves the economy along a fixed aggregate demand curve.

D

A decrease in aggregate demand will cause a greater decline in real output the: A. less flexible is the economy's price level. B. more flexible is the economy's price level. C. steeper is the economy's AS curve. D. larger is the economy's marginal propensity to save.

A

An increase in business excise taxes will shift the aggregate supply curve leftward. A. true B. false

A

Other things equal, an increase in productivity will shift the short-run aggregate supply curve rightward. A. true B. false

A

When aggregate demand declines, some firms may reduce employment rather than wages because wage reductions may: A. not be possible due to the minimum wage law. B. increase the cost of raising money capital. C. reduce the demands for their products. D. may set off a price war.

A

The aggregate supply curve (short-run) slopes upward and to the right because: A. changes in wages and other resource prices completely offset changes in the price level. B. the price level is flexible upward but inflexible downward. C. supply creates its own demand. D. wages and other resource prices adjust only slowly to changes in the price level.

D

The graphical relationship between the price level and the amount of real GDP that businesses will offer for sale is known as the: A. aggregate demand curve. B. investment supply curve. C. investment demand curve. D. aggregate supply curve.

D

The real-balances effect indicates that: A. an increase in the price level will increase the demand for money, increase interest rates, and reduce consumption and investment spending. B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending.

D