Question 1

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Accepted Answer

A) True 
 B)False

Question 2

According to the interest rate effect, aggregate demand slopes downward (negatively)  because lower prices

Accepted Answer

A)  increase money holdings, decrease lending, interest rates rise, and investment spending falls.
B)  increase the value of money holdings and consumer spending increases.
C)  decrease the value of money holdings and consumer spending decreases.
D)  reduce money holdings, increase lending, interest rates fall, and investment spending increases.E) All of the above
F) A) and B)

Question 3

To say that nominal prices are sticky means

Accepted Answer

A)  the average price level seldom changes.
B)  relative prices seldom change.
C)  it takes at least one year for prices to change to a new equilibrium level.
D)  it takes time for prices to adjust to equilibrium.E) A) and B)
F) None of the above

Question 4

Suppose the economy is initially in long run equilibrium.Then suppose there is a drought that destroys much of the wheat crop.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Accepted Answer

A)  Prices rise; output falls.
B)  Prices fall; output rises.
C)  Prices rise; output rises.
D)  Prices fall; output falls.E) B) and C)
F) A) and B)

Question 5

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Accepted Answer

A) True 
 B)False

Question 6

The long run effect of an increase in government spending that shifts the economy's aggregate demand curve to the right is to raise

Accepted Answer

A)  both real output and the price level.
B)  real output and lower the price level.
C)  real output and leave the price level unchanged.
D)  the price level and leave real output unchanged.E) A) and C)
F) C) and D)

Question 7

Investment is a particularly volatile component of spending across the business cycle.

Accepted Answer

A) True 
 B)False

Question 8

The short run effect of an increase in aggregate demand is an increase in output and an increase in the price level.

Accepted Answer

A) True 
 B)False

Question 9

If there is speculation that the economy will soon enter a recession, which means that our incomes will probably fall, then the immediate effect on the economy now will be that the

Accepted Answer

A)  aggregate supply curve will shift to the left.
B)  aggregate demand curve will shift to the right.
C)  price level will rise and real output will rise.
D)  price level will fall and real output will fall.E) All of the above
F) C) and D)

Question 10

What do most economists believe concerning the relation between the price level and real output?

Accepted Answer

Most economists believe that in the long...

Question 11

The wealth effect, interest rate effect, and foreign trade effect all explain why the

Accepted Answer

A)  aggregate supply curve is horizontal.
B)  aggregate supply curve is vertical.
C)  aggregate supply curve is upward sloping.
D)  aggregate demand curve is downward sloping.E) A) and D)
F) A) and B)

Question 12

An increase in price expectations shifts the long run aggregate supply curve to the left.

Accepted Answer

A) True 
 B)False

Question 13

Which of the following is correct?

Accepted Answer

A)  Short run fluctuations in economic activity happen only in developing countries.
B)  During economic contractions most firms experience rising sales.
C)  Recessions come at regular intervals and are easy to predict.
D)  When real GDP falls, the rate of unemployment rises.E) None of the above
F) B) and C)

Question 14

Suppose the price level falls but because of fixed nominal wage contracts, the real wage rises and firms cut back on production.This is a demonstration of the

Accepted Answer

A)  sticky wage theory of the short run aggregate supply curve.
B)  classical dichotomy theory of the short run aggregate supply curve.
C)  misperceptions theory of the short run aggregate supply curve.
D)  sticky price theory of the short run aggregate supply curve.E) B) and D)
F) A) and D)

Question 15

Which of the following events shifts the short run aggregate supply curve to the right?

Accepted Answer

A)  A decrease in the money supply.
B)  A drop in oil prices.
C)  An increase in government spending on military equipment.
D)  None of these answers.
E)  An increase in price expectations.F) All of the above
G) None of the above

Question 16

Suppose the economy is initially in long run equilibrium.Then suppose there is an increase in military spending due to rising international tensions.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Accepted Answer

A)  Prices fall; output rises.
B)  Prices fall; output falls.
C)  Prices rise; output falls.
D)  Prices rise; output rises.E) A) and D)
F) All of the above

Question 17

According to the wealth effect, aggregate demand slopes downward (negatively)  because lower prices

Accepted Answer

A)  increase the value of money holdings and consumer spending increases.
B)  decrease the value of money holdings and consumer spending decreases.
C)  reduce money holdings, increase lending, interest rates fall, and investment spending increases.
D)  increase money holdings, decrease lending, interest rates rise, and investment spending falls.E) C) and D)
F) A) and B)

Question 18

Policy makers are said to "accommodate" an adverse supply shock if they

Accepted Answer

A)  fail to respond to the adverse supply shock and allow the economy to adjust on its own.
B)  respond to the adverse supply shock by decreasing aggregate demand, which lowers prices.
C)  respond to the adverse supply shock by decreasing short run aggregate supply.
D)  respond to the adverse supply shock by increasing aggregate demand, which further raises prices.E) A) and B)
F) A) and C)

Question 19

In the long run, an increase in government spending tends to increase output and prices.

Accepted Answer

A) True 
 B)False

Question 20

Most economists believe that money neutrality holds

Accepted Answer

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.E) B) and C)
F) A) and D)

Exam 15: Aggregate Demand and Aggregate Supply

Which of the following is correct?

Correct AnswerverifiedShow Answer

Suppose the economy is initially in long run equilibrium.Then suppose there is a drought that destroys much of the wheat crop.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Correct AnswerverifiedShow Answer

Which of the following events shifts the short run aggregate supply curve to the right?

Correct AnswerverifiedShow Answer

According to the wealth effect, aggregate demand slopes downward (negatively) because lower prices

Correct AnswerverifiedShow Answer

According to the interest rate effect, aggregate demand slopes downward (negatively) because lower prices

Correct AnswerverifiedShow Answer

The misperceptions theory explains why the long run aggregate supply curve is downward sloping.

Correct AnswerverifiedShow Answer

Suppose the price level falls but because of fixed nominal wage contracts, the real wage rises and firms cut back on production.This is a demonstration of the

Correct AnswerverifiedShow Answer

One reason that the aggregate demand slopes downward is the wealth effect: a decrease in the price level increases the value of money holdings and consumer spending rises.

Correct AnswerverifiedShow Answer

The wealth effect, interest rate effect, and foreign trade effect all explain why the

Correct AnswerverifiedShow Answer

Policy makers are said to "accommodate" an adverse supply shock if they

Correct AnswerverifiedShow Answer

The short run effect of an increase in aggregate demand is an increase in output and an increase in the price level.

Correct AnswerverifiedShow Answer

Investment is a particularly volatile component of spending across the business cycle.

Correct AnswerverifiedShow Answer

Most economists believe that money neutrality holds

Correct AnswerverifiedShow Answer

If there is speculation that the economy will soon enter a recession, which means that our incomes will probably fall, then the immediate effect on the economy now will be that the

Correct AnswerverifiedShow Answer

Suppose the economy is initially in long run equilibrium.Then suppose there is an increase in military spending due to rising international tensions.According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run?

Correct AnswerverifiedShow Answer

The long run effect of an increase in government spending that shifts the economy's aggregate demand curve to the right is to raise

Correct AnswerverifiedShow Answer

To say that nominal prices are sticky means

Correct AnswerverifiedShow Answer

An increase in price expectations shifts the long run aggregate supply curve to the left.

Correct AnswerverifiedShow Answer

What do most economists believe concerning the relation between the price level and real output?

Correct AnswerverifiedMost economists believe that in the long...View AnswerShow Answer

In the long run, an increase in government spending tends to increase output and prices.

Correct AnswerverifiedShow Answer

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Most economists believe that in the long...
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Correct Answer
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