Mac - Tut 8 Aggregate Demand and Aggregate Supply

Macro Tut 7: Aggregate Demand and Aggregate Supply
Multiple Choice
Identify the choice that best completes the statement or answers the question.
1. When we say that economic fluctuations are “irregular and unpredictable,” we mean that
a. the relationship between output and unemployment is erratic and difficult to characterize.
b. when one macroeconomic variable that measures income or spending is falling, other
macroeconomic variables that measure income or spending are likely to be rising.
c. recessions do not occur at regular intervals.
d. All of the above are correct.
2. Real GDP
a. is the current dollar value of all goods produced by the citizens of an economy within a
given time.
b. measures economic activity and income.
c. is used primarily to measure long-run changes rather than short-run fluctuations.
d. All of the above are correct.
3. As recessions begin, production
a. and unemployment both rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment both fall.
4. The classical model is appropriate for analysis of the economy in the
a. long run, since evidence indicates that money is not neutral in the long run.
b. long run, since real and nominal variables are essentially determined separately in the long
run.
c. short run, provided money is not neutral.
d. short run, provided real and nominal variables are highly intertwined.
5. Most economists believe that money neutrality holds

a. in the short run but not the long run.
b. in the long run but not the short run.
c. in both the short run and the long run.
d. in neither the short run nor the long run.
6. The aggregate demand and aggregate supply graph has

a. the price level on the horizontal axis. The price level can be measured by the GDP
deflator.
b. the price level on the horizontal axis. The price level can be measured by real GDP.
c. the price level on the vertical axis. The price level can be measured by the GDP deflator.
d. the price level on the vertical axis. The price level can be measured by GDP.
7. The model of aggregate demand and aggregate supply explains the relationship between
a. the price and quantity of a particular good.
b. unemployment and output.
c. wages and employment.
d. real GDP and the price level.
Page 1 of 4
8. The curve that shows the quantity of goods and services that firms produce and sell
a. as it relates to the quantity of goods and services that buyers want to buy is called the
aggregate-demand curve.
b. as it relates to the quantity of goods and services that buyers want to buy is called the
aggregate-supply curve.
c. as it relates to the overall price level is called the aggregate-demand curve.
d. as it relates to the overall price level is called the aggregate-supply curve.
9. When the price level falls the quantity of

a. consumption goods demanded rises, while the quantity of net exports demanded falls.
b. consumption goods demanded and the quantity of net exports demanded both rise.
c. consumption goods demanded and the quantity of net exports demanded both fall.
d. consumption goods demanded falls, while the quantity of net exports demand rises.
10. The effect of an increase in the price level on the aggregate-demand curve is represented by a
a. shift to the right of the aggregate-demand curve.
b. shift to the left of the aggregate-demand curve.
c. movement to the left along a given aggregate-demand curve.
d. movement to the right along a given aggregate-demand curve.
11. Other things the same, an increase in the price level makes consumers feel
a. less wealthy, so the quantity of goods and services demanded falls.
b. less wealthy, so the quantity of goods and services demanded rises.
c. more wealthy, so the quantity of goods and services demanded rises.
d. more wealthy, so the quantity of goods and services demanded falls.
12. Other things the same, an increase in the price level induces people to hold
a. less money, so they lend less, and the interest rate rises.
b. less money, so they lend more, and the interest rate falls.
c. more money, so they lend more, and the interest rate falls.
d. more money, so they lend less, and the interest rate rises.
13. Other things the same, when the price level falls, interest rates
a. rise, which means consumers will want to spend more on homebuilding.
b. rise, which means consumers will want to spend less on homebuilding.
c. fall, which means consumers will want to spend more on homebuilding.
d. fall, which means consumers will want to spend less on homebuilding.
14. Other things the same, as the price level falls, which of the following increases?
a. lending and investment spending
b. lending, but not investment spending
c. investment spending, but not lending
d. neither investment spending nor lending
15. Other things the same, as the price level rises, the real value of a dollar
a. rises, and interest rates rise.
b. rises, and interest rates fall.
c. falls, and interest rates rise.
d. falls, and interest rates fall.
16. Other things the same, the aggregate quantity of goods demanded in the U.S. increases if
a. real wealth falls.
b. the interest rate rises.
c. the dollar depreciates.
d. None of the above is correct.
Page 2 of 4
17. Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce
people to desire
a. decreased consumption, shown as a movement to the left along a given aggregate-demand
curve.
b. increase consumption, shown as a movement to the right along a given aggregate-demand
curve.
c. decreased consumption, shifting the aggregate-demand curve to the left.
d. increased consumption, shifting the aggregate-demand curve to the right.
18. When taxes decrease, consumption

a. decreases as shown by a movement to the left along a given aggregate-demand curve.
b. decreases as shown by a shift of the aggregate demand curve to the left.
c. increases as shown by a movement to the right along a given aggregate-demand curve.
d. increases as shown by a shift of the aggregate demand curve to the right.
19. Other things the same, an increase in the amount of capital firms wish to purchase would
initially shift
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
20. The Central Bank of Wiknam increases the money supply at the same time the Parliament of
Wiknam passes a new investment tax credit. Which of these policies shift aggregate demand to the
right?
a. both the money supply increase and the investment tax credit
b. the money supply increase but not the investment tax credit
c. the investment tax credit but not the money supply increase
d. neither the investment tax credit nor the money supply increase
PROBLEM
Problem 1: Suppose an economy is in long-run equilibrium.
a. Use the model of aggregate demand and aggregate supply to illustrate the initial equilibrium (call
it point A). Be sure to include both short-run and long-run aggregate supply
b. The central bank raises the money supply by 5 percent. Use your diagram to show what happens
to output and the price level as the economy moves from the initial to the new short-run equilib-
rium (call it point B)
c. Now show the new long-run equilibrium (call it point C). What causes the economy to move
from point B to point C?
d. According to the sticky-wage theory of aggregate supply, how do nominal wages at point A
compare to nominal wages at point B? How do nominal wages at point A compare to nominal
wages at point C?
e. According to the sticky-wage theory of aggregate supply, how do real wages at point A com-
pare to real wages at point B? How do real wages at point A compare to real wages at point C?
f. Judging by the impact of the money supply on nominal and real wages, is this analysis consistent
with the proposition that money has real effects in the short run but is neutral in the long run?
Page 3 of 4
Problem 2:
Explain whether each of the following events shifts the short-run aggregate-supply curve, the aggre-
gate-demand curve, both, or neither. For each event that does shift a curve, draw a diagram to illustrate
the effect on the economy.
a. Households decide to save a larger share of their income.
b. Florida orange groves suffer a prolonged period of below-freezing temperatures.
c. Increased job opportunities overseas cause many people to leave the country.
Problem 3:
In economy A, all workers agree in advance on the nominal wages that their employers will pay them. In
economy B, half of all workers have these nominal wage contracts, while the other half have indexed
employment contracts, so their wages rise and fall automatically with the price level.
a. According to the sticky-wage theory of aggregate supply, which economy has a more steeply sloped
short-run aggregate supply curve?
b. In which economy would a 5 percent increase in the money supply have a larger impact on output?
c. In which economy would it have a larger impact on the price level? Explain.
Page 4 of 4

Mac - Tut 8 Aggregate Demand and Aggregate Supply

Uploaded by

Copyright:

Available Formats

Mac - Tut 8 Aggregate Demand and Aggregate Supply

Uploaded by

Document Information

Original Description:

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Mac - Tut 8 Aggregate Demand and Aggregate Supply

Uploaded by

Copyright:

Available Formats

Macro Tut 7: Aggregate Demand and Aggregate Supply

5. Most economists believe that money neutrality holds

6. The aggregate demand and aggregate supply graph has

9. When the price level falls the quantity of

18. When taxes decrease, consumption

a. Households decide to save a larger share of their income.

b. Florida orange groves suffer a prolonged period of below-freezing temperatures.

You might also like