Review Questions Chapter 13

1. The aggregate demand curve slopes _____ and has _____ on the vertical axis.

A) downward; output

B) downward; the price level

C) upward; output

D) upward; the price level

2. Because of the wealth effect, a rising aggregate price level ____ the purchasing power of wealth and

therefore _____ output demanded.

A) increases; increases

B) increases; reduces

C) reduces; increases

D) reduces; reduces

3. A falling aggregate price level ____ demand for a country's exports and therefore _____ output

demanded.

A) increases; increases

B) increases; reduces

C) reduces; increases

D) reduces; reduces

4. A rising aggregate price level _______ an economy's interest rates and therefore _____ output

demanded.

A) increases; increases

B) increases; reduces

C) reduces; increases

D) reduces; reduces

5. Increased taxes will shift the aggregate demand curve to the _____ and _____ output demanded.

A) left; decrease

B) left; increase

C) right; increase

D) right; decrease

6. A stronger dollar will shift the U.S. aggregate demand curve to the _____ and _____ output

demanded.

A) left; decrease

B) left; increase

C) right; increase

D) right; decreas

7. A(n) __________ in government spending, a __________ domestic currency, and ________ interest

rates will shift a country's aggregate demand to the left.

A) decrease; stronger; higher

B) increase; weaker; higher

C) increase; stronger; lower

D) decrease; weaker; lower

8. Which of the following is NOT a reason the aggregate demand curve is negatively sloped?

A) income effect

B) wealth effect

C) impact on exports

D) the interest rate effects

9. The ______ effect is a reason for the negative slope of the aggregate demand curve.

A) income

B) substitution

C) interest rate

D) multiplier

10. Which of the following events causes a decrease in aggregate demand?

A) consumer confidence improves

B) taxes increase

C) interest rates fall

D) government spending increases

11. The aggregate demand curve displays:

A) real GDP demanded at various price levels.

B) nominal GDP versus real GDP.

C) GDP demanded at various investment levels.

D) the business cycle.

12. The output of all the goods and services demanded in an economy at various price levels is called:

A) the quantity-price locus.

B) aggregate demand.

C) economic production.

D) the price-output curve.

13. Which of the following would NOT cause a shift in the aggregate demand curve?

A) a change in consumption spending

B) a change in the price level

C) a change in investment

D) a change in net exports

14. Other things equal, when the U.S. aggregate price level falls, U.S. exports _______ and U.S. imports

________.

A) fall; rise

B) fall; fall

C) rise; fall

D) rise; rise

15. When the price of a given product declines, the consumer's spendable income rises because it takes

less income to purchase the same quantity. This is called the:

A) net export effect.

B) income effect.

C) substitution effect.

D) interest effect.

16. At high domestic price levels compared to other countries, Americans:

A) sell more exports.

B) buy more imported goods.

C) buy the same amount of foreign goods.

D) try to buy American.

17. An increase in net export spending will result in a(n):

A) increase in aggregate demand.

B) increase in aggregate supply.

C) decrease in aggregate supply.

D) decrease in aggregate demand.

18. Suppose the government raises income taxes, so consumers have less take-home pay. This policy

action will cause a(n):

A) increase in aggregate demand. B) decrease in aggregate demand.

C) increase in short-run aggregate supply. D) decrease in short-run aggregate supply.

19. ________ taxes and ________ interest rates in the United States, along with ___________ incomes in

other countries, will shift the U. S. aggregate demand curve to the right.

A) Decreasing; rising; rising B) Increasing; falling, rising

C) Decreasing; falling, rising D) Decreasing; falling, falling

20. If the national incomes of foreign countries fall at the same time the dollar appreciates, then in the

United States the aggregate demand curve:

A) shifts to the right.

B) shifts to the left.

C) remains unchanged.

D) does not shift, but there is movement up along it.

21. In the short run, the aggregate supply curve is ____ because input prices are _____.

A) positively sloped; not completely flexible

B) positively sloped; completely flexible

C) vertical; not completely flexible

D) vertical; completely flexible

22. In the long run, attempts to expand beyond an economy's natural rate of unemployment tend to

result in:

A) increased inflation.

B) increased output.

C) both increased output and increased inflation.

D) neither increased output nor increased inflation.

23. Which are determinants of short-run aggregate supply?

A) changes in government spending, taxes, and business and inflationary expectations

B) changes in input prices, taxes, and business and inflationary expectations

C) changes in education, taxes, and business and inflationary expectations

D) changes in input prices, taxes, and technology

24. If oil prices decrease, the short-run aggregate supply curve shifts _____ and output supplied will be

_____.

A) left; increased

B) left; reduced

C) right; increased

D) right; reduced

25. A(n) _______ in oil prices and a(n) _______ in taxes will shift short-run aggregate supply to the left.

A) increase; increase

B) increase; reduction

C) reduction; increase

D) reduction; reduction

26. Aggregate supply shifts to the left when:

A) input prices rise.

B) subsidies are higher.

C) inflation expectations are lower.

D) there is a decrease in burdensome regulations.

27. The _____ is vertical at full employment.

A) short-run aggregate supply curve

B) long-run aggregate supply curve

C) short-run aggregate demand curve

D) long-run aggregate demand curve

28. A breakthrough in solar energy research that halves the cost of electricity will:

A) have no effect on the aggregate supply curve.

B) shift the aggregate supply curve to the right.

C) shift the aggregate supply curve to the left.

D) cause the aggregate supply curve to become vertical.

29. If a pill is discovered that allows people to work twice as fast as they would ordinarily work, then

the aggregate supply curve will:

A) shift to the left.

B) shift to the right.

C) not change.

D) become vertical.

30. Which of the following will shift the aggregate supply curve to the right?

A) the development of a cartel in the production of soybeans

B) an increase in corporate taxes

C) increased investment in human capital

D) an increase in the price of garbage collection

Reference: Ref 9-3

Figure: Determining SRAS Shifts

31. (Figure: Determining SRAS Shifts) If there is a decrease in input prices, the short-run aggregate

supply curve will shift from SRAS0 to _____ and the price level will become _____.

A) SRAS1; P0

B) SRAS1; P1

C) SRAS2; P1

D) SRAS2; P2

32. (Figure: Shifting the AD and SRAS)

Starting in long-run equilibrium when the aggregate demand curve is AD0 and the short-run aggregate

supply curve is SRAS0, if there is a supply shock, such as a drastic increase in the price of oil, this will

cause _____ and a movement to a short-run equilibrium at point _____.

A) a leftward shift in AD1; a

B) a rightward shift in AD1; c

C) a rightward shift in SRAS2; c

D) a leftward shift in SRAS2; a

33) In the dynamic aggregated demand and aggregate supply model, if AD shifts faster than AS

A) inflation occurs. B) disinflation occurs. C) stagflation occurs. D) deflation occurs.

Figure 13-4

34) Refer to Figure 13-4. In the figure above, LRAS1 and SRAS1 denote LRAS and SRAS in year 1, while

LRAS2 and SRAS2 denote LRAS and SRAS in year 2. Given the economy is at point A in year 1, what is

the growth rate in potential GDP in year 2?

A) 8% B) 9.1% C) 10% D) 12%

35) The international trade effect states that

A) an increase in the price level will lower net exports.

B) an increase in the price level will raise exports.

C) an increase in the price level will lower imports.

D) an increase in the price level will raise net exports.

36) Which of the following is one explanation as to why the aggregate demand curve slopes downward?

A) Decreases in the price level raise the interest rate and increase consumption spending.

B) Decreases in the U.S. price level relative to the price level in other countries lower net exports.

C) Decreases in the price level raise the interest rate and increase investment spending.

D) Decreases in the price level raise real wealth and increase consumption spending.

37) Spending on the war in Afghanistan is essentially categorized as government purchases. How do

increases in spending on the war in Afghanistan affect the aggregate demand curve?

A) They will move the economy down along a stationary aggregate demand curve.

B) They will shift the aggregate demand curve to the left.

C) They will move the economy up along a stationary aggregate demand curve.

D) They will shift the aggregate demand curve to the right.

38) If the U.S. dollar decreases in value relative to other currencies, how does this affect the aggregate

demand curve?

A) This will shift the aggregate demand curve to the left.

B) This will shift the aggregate demand curve to the right.

C) This will move the economy down along a stationary aggregate demand curve.

D) This will move the economy up along a stationary aggregate demand curve.

39) Suppose the U.S. GDP growth rate is faster relative to other countries' GDP growth rates. This will

A) move the economy down along a stationary aggregate demand curve.

B) shift the aggregate demand curve to the left.

C) move the economy up along a stationary aggregate demand curve.

D) shift the aggregate demand curve to the right.

40) If stricter immigration laws are imposed and many foreign workers in the United States are forced to

go back to their home countries,

A) we will move up along the long-run aggregate supply curve.

B) we will move down along the long-run aggregate supply curve.

C) the long-run aggregate supply curve will shift to the right.

D) the long-run aggregate supply curve will shift to the left.

41) On the long-run aggregate supply curve,

A) a decrease in the price level increases the aggregate quantity of GDP supplied.

B) a decrease in the price level has no effect on the aggregate quantity of GDP supplied.

C) a decrease in the price level decreases the aggregate quantity of GDP supplied.

D) a decrease in the price level decreases the level of potential GDP.

42) Workers expect inflation to rise from 3% to 5% next year. As a result, this should

A) move the economy down along a stationary short-run aggregate supply curve.

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

C) shift the short-run aggregate supply curve to the right.

D) move the economy up along a stationary short-run aggregate supply curve.

43) Long-run macroeconomic equilibrium occurs when

A) structural and frictional unemployment equals zero.

B) aggregate demand equals short-run aggregate supply and they intersect at a point on the long-run

supply curve.

C) output is above potential GDP.

D) aggregate demand equals short-run aggregate supply.

44) An increase in aggregate demand results in a(n) ________ in the ________.

A) recession; long run B) expansion; short run

C) recession; short run D) expansion; long run

45) An increase in aggregate demand causes an increase in ________ only in the short run, but causes an

increase in ________ in both the short run and the long run.

A) real GDP; real GDP B) real GDP; the price level

C) the price level; real GDP D) the price level; the price level

46) A decrease in aggregate demand in the economy will have what effect on macroeconomic equilibrium

in the long run?

A) The price level will rise, and the level of GDP will fall.

B) The price level will fall, and the level of GDP will be unaffected.

C) The price level will rise, and the level of GDP will be unaffected.

D) The price level will fall, and the level of GDP will fall.

47) If the short-run aggregate supply increases by less than the long-run aggregate supply, then, at the

short-run equilibrium,

A) GDP will be above potential GDP. B) GDP will be below potential GDP.

C) GDP will be equal to potential GDP. D) aggregate demand will increase.

48) Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP. Which of the

following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

A) Prices will increase.

B) Output will decrease.

C) Unemployment will rise.

D) Short-run aggregate supply will shift to the right.

49) Why does the short-run aggregate supply curve shift to the right in the long run, following a decrease

in aggregate demand?

A) Workers and firms adjust their expectations of wages and prices downward and they accept lower

wages and prices.

B) Workers and firms adjust their expectations of wages and prices upward and they push for higher

wages and prices.

C) Workers and firms adjust their expectations of wages and prices downward and they push for higher

wages and prices.

D) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages

and prices.

Figure 13-3

50) Refer to Figure 13-3. Suppose the economy is at point C. If government spending decreases in the

economy, where will the eventual long-run equilibrium be?

A) A B) B C) C D) D