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CHAPTER 11 aggregate demand and Aggregate Supply Topic 1. 2. 3. 4. 5. 6. 7. aggregate demand AD in relation to the AE model Aggregate supply Equilibrium, changes in equilibrium Downward wage and price inflexibility Multiplier with price level change AD-AS model in relation to AE model Last Word True-False Question numbers 1-16 17-27 28-57 58-127 128-136 137-140 141-148 149-150 151-166 ___________________________________________________________________________________________________ ___________________________________________________________________________________________________ Multiple Choice Questions aggregate demand 1. 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. 2. 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. 3. 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. Page 1 4. 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. 5. 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. 6. 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. 7. 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. 8. 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 . 9. "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. 10. The real-balances, interest-rate, and foreign purchases effects all help explain: A) why the aggregate demand curve is downsloping. B) why the aggregate supply curve is upsloping. C) shifts in the aggregate demand curve . D) shifts in the aggregate supply curve. Page 2 11. 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 the above 12. 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. 13. 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. 14. 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. 15. 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. 16. Which one of the following would not shift the aggregate demand curve ? A) a change in the price level B) depreciation of the international value of the dollar C) a decline in the interest rate at each possible price level D) an increase in personal income tax rates AD in relation to the AE model 17. The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things equal, in the aggregate expenditures model: A) changes in the price level have no effect on the equilibrium level of GDP. B) an increase in the price level increases the real value of wealth. Page 3 C) the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level. D) the level of aggregate expenditures and therefore the level of real GDP vary directly with the price level. 18. In deriving the aggregate demand curve from the aggregate expenditures model we note that: A) the real-balances effect is irrelevant to both models. B) a change in the price level will have no impact on the aggregate expenditures schedule. C) an increase (decrease) in the price levels shifts the aggregate expenditures schedule upward (downward). D) an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward). 19. An increase in aggregate expenditures resulting from a decrease in the price level is equivalent to a: A) rightward shift of the aggregate demand curve . B) leftward shift of the aggregate demand curve . C) movement downward along a fixed aggregate demand curve . D) decrease in aggregate supply. Use the following to answer questions 20-21: Page 4 20. Refer to the above diagrams. A decline in aggregate expenditures from AE2 to AE1 resulting from the realbalances, interest-rate effect, and foreign purchases effects would be depicted as: A) a movement from A to B along aggregate demand curve AD1. B) a movement from B to A along aggregate demand curve AD1. C) a shift of aggregate demand from AD1 to AD2. D) a shift of aggregate demand from AD2 to AD1. 21. Refer to the above diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE1 to AE2 would: A) move the economy from A to B along AD1. B) move the economy from B to A along AD1. C) increase aggregate demand from AD1 to AD2. D) decrease aggregate demand from AD2 to AD1. 22. An increase in net exports will shift the: A) aggregate expenditures curve upward and the aggregate demand curve rightward. B) aggregate expenditures curve upward and the aggregate demand curve leftward. C) aggregate expenditures curve downward and the aggregate demand curve rightward. D) aggregate expenditures curve downward and the aggregate demand curve leftward. 23. An increase in investment spending caused by higher expected rates of return will: A) shift the aggregate supply curve to the left. B) move the economy up along an existing aggregate demand curve . C) shift the aggregate demand curve to the left. D) shift the aggregate demand curve to the right. 24. An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to: A) a rightward shift of the aggregate demand curve in the AD-AS model. B) a leftward shift of the aggregate demand curve in the AD-AS model. C) a movement downward along a fixed aggregate demand curve in the AD-AS model. D) a decrease in aggregate supply in the AD-AS model. 25. When deriving the aggregate demand (AD) curve from the aggregate expenditure model, an increase in U.S. product prices would cause: A) an increase in the value of household wealth and reduced consumption expendtitures B) an increase in interest rates and lower investment expenditures C) an increase in exports and imports D) an increase in U.S. resource prices and an increase in aggregate supply. 26. Suppose that higher taxes on businesses reduce spending on plant and equipment. How will this affect the aggregate expenditure (AE) and the aggregate demand (AD) schedules? A) AE shifts up; AD shifts to the left B) AE shifts down; AD shifts to the left C) AE shifts up; AD shifts to the right D) AE shifts down; AD shifts to the right Page 5 27. All else equal, an increase in imports will shift the aggregate expenditures curve: A) upward and the aggregate demand curve rightward. B) upward and the aggregate demand curve leftward. C) downward and the aggregate demand curve rightward. D) downward and the aggregate demand curve leftward. Aggregate supply Use the following to answer questions 28-30: 28. Refer to the above diagram of an economy's aggregate supply curve. This economy would experience less than full-employment output in: A) range 1 only. B) range 1 and part of range 2. C) part of range 2 and all of range 3. D) range 3 only. 29. Refer to the above diagram of an economy's aggregate supply curve. This economy is experiencing fullcapacity output in: A) range 1 only. B) range 2 only. C) range 3 only. D) part of range 1 and all of range 2. 30. Refer to the above diagram of an economy's aggregate supply curve. The AS curve is upsloping in range 2: A) because per unit production costs rise as the real output first approaches and then surpasses its fullemployment level. B) because per unit production costs rise as real output first approaches and then surpasses its full-capacity level. C) because increases in the price level induce rightward shift s of the aggregate demand curve . D) for all of these reasons. 31. The aggregate supply curve: A) shows the various amounts of real output that businesses will produce at each price level. Page 6 B) is downsloping because real purchasing power increases as the price level falls. C) contains a vertical range where real output is variable and the price level is constant. D) is explained by the interest rate, real-balances, and foreign purchases effects. 32. The horizontal range of the aggregate supply curve: A) assumes constant resource prices. B) implies that output can be increased only by increasing the price level. C) assumes there are no unemployed resources in the economy. D) is explained by the law of increasing opportunity costs. 33. Other things equal, an improvement in productivity will: A) shift the aggregate demand curve to the left. B) shift the aggregate supply curve to the left. C) shift the aggregate supply curve to the right. D) increase the price level. 34. 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. 35. Other things equal, an outward shift of the production possibilities curve can be expected to: A) shift the aggregate supply curve rightward. B) shift the aggregate supply curve leftward. C) shift the aggregate demand curve leftward. D) increase the price level. E) do none of the above. Use the following to answer questions 36-39: Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $4. Answer the following question(s) on the basis of this information. 36. Refer to the above information. The level of productivity is: A) 20. B) 10. C) 5. D) 2. 37. The per unit cost of production in the economy described above is: A) $.50. B) $1. C) $2. D) $5. Page 7 38. Refer to the above information. All else being equal, if the price of each input increased from $4 to $6, productivity would: A) fall from 2 to 3. B) fall from .50 to .33. C) rise from 1 to 2. D) remain unchanged. 39. Refer to the above information. Given an increase in input price from $4 to $6, we would expect the aggregate: A) supply curve to shift to the left. B) supply curve to shift to the right. C) demand curve to shift to the left. D) demand curve to shift to the right. 40. Other things equal, if the international value of the 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. 41. 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 42. 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. Use the following to answer questions 43-45: Answer the next question(s) on the basis of the following information: An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labor to produce its total output of 640 units. Each unit of capital costs $10, each unit of raw materials, $4, and each unit of labor, $3. 43. Refer to the above information. The per unit cost of production in this economy is: A) $.05. B) $.10. C) $.50. D) $1.00. 44. Refer to the above information. If the per unit price of raw materials rises from $4 to $8 and all else remains constant, the per unit cost of production will rise by about: A) 100 percent. Page 8 B) 50 percent. C) 40 percent. D) 30 percent. 45. Refer to the above information. As a result of the change indicated in the previous question, the aggregate: A) supply curve would shift to the left. B) supply curve would shift to the right. C) demand curve would shift to the left. D) demand curve would shift to the right. 46. 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 input prices and resource productivity. 47. 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 48. Productivity measures: A) real output per unit of input. B) per unit production costs. C) the changes in real wealth caused by price level changes. D) the amount of capital goods used per worker. 49. 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 . 50. 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. 51. Monopoly or market power is the ability of a firm to: A) shift its demand curve to the right. B) shift its demand curve to the left. C) set its price. D) achieve economies of scale. Page 9 52. Other things equal, appreciation of the dollar: A) increases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. B) increases aggregate demand in the United States and may decrease aggregate supply by reducing the prices of imported resources. C) decreases aggregate demand in the United States and may increase aggregate supply by reducing the prices of imported resources. D) decreases aggregate demand in the United States and may reduce aggregate supply by increasing the prices of imported resources. 53. Other things equal, a reduction in personal and business taxes can be expected to: A) increase aggregate demand and decrease aggregate supply. B) increase both aggregate demand and aggregate supply. C) decrease both aggregate demand and aggregate supply. D) decrease aggregate demand and increase aggregate supply. 54. Other things equal, an improvement in productivity will: A) tend to increase the equilibrium price level. B) shift the aggregate supply curve to the left. C) shift the aggregate supply curve to the right. D) shift the aggregate demand curve to the left. Use the following to answer questions 55-57: Answer the next question(s) on the basis of the following information about the relationship between input quantities and real domestic output in a hypothetical economy: Input quantity 100 150 200 Real domestic output 200 300 400 55. The level of productivity in the above economy is: A) 2. B) .5. C) 4. D) 200. 56. If the price of each input is $5, the per unit cost of production in the above economy is: A) $5. B) $2.75. C) $2.50. D) $.40. 57. Suppose that the price of each input increased from $5 to $8. The per unit cost of production in the above economy would: Page 10 A) B) C) D) rise by $1.50 and the aggregate supply curve would shift to the right. rise by 60 percent and the aggregate supply curve would shift to the left. rise by 60 percent and the aggregate demand curve would shift to the left. fall by $1.50 and the aggregate demand curve would shift to the right. Equilibrium, changes in equilibrium 58. Graphically, demand-pull inflation is shown as a: A) rightward shift of the AD curve in the horizontal range of aggregate supply. B) rightward shift of the AS curve in the intermediate range of aggregate demand . C) leftward shift of AS curve in the intermediate range of aggregate demand . D) rightward shift of the AD curve in the intermediate or vertical ranges of aggregate supply. 59. Graphically, cost-push inflation is shown as a: A) leftward shift of the AD curve. B) rightward shift of the AS curve. C) leftward shift of AS curve. D) rightward shift of the AD curve. 60. Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is depicted by a: A) rightward shift of the aggregate demand curve along a fixed aggregate supply curve. B) rightward shift of the aggregate supply curve along a fixed aggregate demand curve . C) rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve. D) leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve. Use the following to answer questions 61-70: Price level AS AS2 AS1 AD1 P3 Price level AD2 AS1 AS2 b Price level AD2 AD1 P2 b a AD P1 P1 P2 P1 a c 0 Q2 Q1 Real domestic output GDP (A) 0 Q2 Q1 Real domestic output GDP (B) 0 Q1 Q2 Q3 Real domestic output GDP (C) 61. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. A recession is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only. D) panels (A) and (B). Page 11 62. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Cost-push inflation is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). 63. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Growth, fullemployment and relative price stability is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). 64. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, an increase in investment spending is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). 65. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, a decline in productivity is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). 66. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, a decline in net exports caused by a change in incomes abroad is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). 67. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, a decline in net exports caused by the foreign purchases effect of a price-level increase is depicted by the: A) shift of the AD curve in panel (A). B) move from point a to point b in panel (B). C) shift of the AS curve in panel (B). D) move from point a to point c in panel (C). 68. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, a decline in investment spending caused by the interest-rate effect of a price-level increase is depicted by the: A) shift of the AD curve in panel (A). B) shift of the AS curve in panel (B). C) move from point a to point b in panel (B). Page 12 D) move from point a to point c in panel (C). 69. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, a decrease in resource prices is depicted by: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (B) and (C). 70. Refer to the above diagrams. Assume that all curves have shifted as shown by the arrows. Other things equal, inflation is absent in: A) panel (A) only. B) panel (B) only. C) panel (C) only D) panels (A) and (C). Use the following to answer questions 71-77: Answer the next question(s) on the basis of the following aggregate demand and supply schedules for a hypothetical economy: Amount of real Price level output demanded (index value) $200 300 300 250 400 200 500 150 500 150 Amount of real output supplied $500 500 400 300 200 71. Refer to the above data. The vertical range of the aggregate supply curve is associated with price levels: A) 150 and 200. B) 150 and 300. C) 200 and 250. D) 250 and 300. 72. Refer to the above data. The equilibrium price level will be: A) 150. B) 200. C) 250. D) 300. 73. Refer to the above data. If the price level is 150 and producers supply $300 of real output: A) a shortage of real output of $200 will occur. B) a shortage of real output of $100 will occur. C) a surplus of real output of $300 will occur. D) neither a shortage nor a surplus of real output will occur. Page 13 74. Refer to the above data. The equilibrium quantity of real output for this economy is: A) in the intermediate range of aggregate supply. B) in the horizontal range of aggregate supply. C) equal to the full-capacity level of real output. D) in the vertical range of aggregate supply. 75. Refer to the above data. If the amount of real output demanded at each price level falls by $200, the equilibrium price level and equilibrium level of real domestic output will fall to: A) 250 and $200, respectively. B) 200 and $300, respectively. C) 150 and $300, respectively. D) 150 and $200, respectively. 76. Refer to the above data. The change in aggregate demand indicated in the previous question might have been caused by: A) an increase in net exports. B) a worsening of business expectations. C) an increase in consumer wealth. D) a decrease in the personal income tax. 77. Refer to the above data. Full-capacity output in this economy will occur at a real output level of: A) $500. B) $400. C) $300. D) $200. 78. The equilibrium price level and level of real output occur where: A) real output is at its highest possible level. B) exports equal imports. C) the price level is at its lowest level. D) the aggregate demand and supply curves intersect. 79. If aggregate demand increases and, as a result, real output and employment increase but the price level remains unchanged, we can assume that: A) the money supply has declined. B) aggregate demand intersects aggregate supply in the horizontal range of the aggregate supply curve. C) aggregate demand intersects aggregate supply in the intermediate range of the aggregate supply curve. D) aggregate demand intersects aggregate supply in the vertical range of the aggregate supply curve. 80. An increase in aggregate demand in the intermediate range of the aggregate supply curve will increase: A) employment, but the price level will be unchanged. B) the price level, but employment will be unchanged. C) both employment and the price level. D) employment, but reduce the price level. 81. An increase in aggregate demand in the vertical range of the aggregate supply curve will: A) increase the price level, but not affect the real output. Page 14 B) increase real output, but not affect the price level. C) decrease both real output and the price level. D) increase both real output and the price level. 82. During the Second World War, the aggregate demand curve : A) did not shift because the economy was already at full employment when the war began. B) did not shift although greatly increased investment spending shifted the aggregate supply curve to the right. C) remained in the horizontal range of the aggregate supply curve so that the price level remained constant while real output expanded greatly. D) shifted to the right into the vertical range of the aggregate supply curve and caused considerable inflation. 83. If aggregate demand intersects the aggregate supply curve in the intermediate range of aggregate supply, a leftward shift in the aggregate supply curve will cause: A) higher prices and no change in employment. B) a higher price level and lower employment. C) lower prices and higher employment. D) higher prices and higher employment. 84. If real output rises and the price level falls, this would likely be due to a: A) rightward shift of the aggregate demand curve . B) leftward shift of the aggregate demand curve . C) rightward shift of the aggregate supply curve. D) leftward shift of the aggregate demand curve . Use the following to answer questions 85-87: AS1 AS 2 Price level P1 AD1 0 AD2 Q1 Q2 Q3 Real domestic output 85. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. At the original equilibrium price and quantity, this Page 15 economy is experiencing: A) inflation. B) economic growth. C) full employment. D) less than full-capacity output. 86. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS 1 to AS2 could be caused by: A) a reduction in the price level. B) the increased availability of entrepreneurial talent. C) an increase in business taxes. D) the real-balances, interest-rate, and foreign purchases effects. 87. In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The changes in aggregate demand and supply in the above diagram produce: A) a higher price level. B) an expansion of real output and a stable price level. C) an expansion of real output and a higher price level. D) a decline in real output and a stable price level. Use the following to answer questions 88-92: AS1 AS0 G H Price level F E AD0 AD1 0 A B C Real domestic output 88. Refer to the above diagram. If the initial aggregate demand and supply curves are AD 0 and AS0, the equilibrium price level and level of real domestic output will be: A) F and C, respectively. B) G and B, respectively. C) F and A, respectively. D) E and B, respectively. Page 16 89. Refer to the above diagram. If the aggregate supply curve shifted from AS0 to AS1, we could say that: A) aggregate supply has increased, equilibrium output has decreased, and the price level has increased. B) aggregate supply has decreased, equilibrium output has decreased, and the price level has increased. C) an increase in the amount of output supplied has occurred. D) aggregate supply has increased and the price level has risen to G. 90. Refer to the above diagram. If aggregate supply is AS1 and aggregate demand is AD0, then: A) at any price level above G a shortage of real output would occur. B) F represents a price level that would result in a surplus of real output of AC. C) a surplus of real output of GH would occur. D) F represents a price level that would result in a shortage of real output of AC. 91. Refer to the above diagram. A shift in the aggregate demand curve from AD 1 to AD0 might be caused by a(n): A) decrease in aggregate supply. B) decrease in the amount of output supplied. C) increase in investment spending. D) decrease in net export spending. 92. Refer to the above diagram. Other things equal, a shift of the aggregate supply curve from AS 0 to AS1 might be caused by a(n): A) increase in government regulation. B) increase in aggregate demand . C) increase in productivity. D) decline in nominal wages. 93. 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. 94. Suppose the price level increases, but real output is unchanged. We can infer that: A) aggregate demand has increased in the horizontal range of the aggregate supply curve. B) aggregate demand has increased in the vertical range of the aggregate supply curve. C) aggregate supply has increased in the horizontal range of the aggregate demand curve . D) aggregate demand has decreased in the intermediate range of the aggregate supply curve. 95. 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. 96. We would expect a decline in personal and corporate income taxes to: A) shift the aggregate demand curve rightward. Page 17 B) decrease consumption and investment spending. C) decrease real output. D) shift the aggregate supply curve leftward. 97. 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 . 98. If personal taxes were decreased and input 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. 99. 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. Use the following to answer questions 100-102: AS Price level AD6 AD5 AD4 AD3 AD1 0 Real domestic output 100. Refer to the above diagram. The change in aggregate demand from AD1 to AD2: A) would increase real output but not the price level because this change occurs in the vertical range of the aggregate supply curve. Page 18 B) would increase real output but not the price level because this change occurs in the horizontal range of the aggregate supply curve. C) increases both the price level and the real output because it occurs in the intermediate range of the aggregate supply curve. D) might be caused by a decline in input prices. 101. Refer to the above diagram. The change in aggregate demand from AD3 to AD4: A) would increase real output but not the price level because this change occurs in the vertical range of the aggregate supply curve. B) would increase real output but not the price level because this change occurs in the horizontal range of the aggregate supply curve. C) increases both the price level and the real output because it occurs in the intermediate range of the aggregate supply curve. D) might be caused by an increase in labor productivity. 102. Refer to the above diagram. The change in aggregate demand from AD5 to AD6: A) would increase real output but not the price level because this change occurs in the horizontal range of the aggregate supply curve. B) would increase the price level but not real output because this change occurs in the vertical range of the aggregate supply curve. C) could not occur because real output is already at its absolute full-capacity level. D) might have been caused by a decline in investment or government spending which is unrelated to the price level. 103. 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 Use the following to answer questions 104-112: Use the following diagrams for the U.S. economy to answer the following questions. Page 19 104. Which of the above diagrams best portrays the effects of an increase in resource productivity? A) A B) B C) C D) D 105. Which of the above diagrams best portrays the effects of a decrease in the availability of key natural resources? A) A B) B C) C D) D 106. Which of the above diagrams best portrays the effects of an increase in foreign spending on U.S. products? A) A B) B C) C D) D 107. Which of the above diagrams best portrays the effects of an increase in consumer spending? A) A B) B C) C D) D 108. Which of the above diagrams best portrays an improvement in expected rates of return on investment? A) A Page 20 B) B C) C D) D 109. Which of the above diagrams best portrays the effects of declines in the incomes of U.S. trading partners? A) A B) B C) C D) D 110. Which of the above diagrams best portrays the effects of declines in the prices of imported resources? A) A B) B C) C D) D 111. Which of the above diagrams best portrays the effects of a substantial reduction in government spending? A) A B) B C) C D) D 112. Which of the above diagrams best portrays the effects of a dramatic increase in energy prices? A) A B) B C) C D) D Use the following to answer questions 113-122: Answer the next question(s) on the basis of the following table for a particular country in which C is consumption expenditures, Ig is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. Each question is independent of the other questions. (1) Price level 128 125 122 119 116 (2) C $18 20 22 24 26 (3) Ig $ 2 4 6 8 10 (4) G $3 3 3 3 3 (5) X $1 2 3 4 5 (6) M $5 4 3 2 1 (7) Real GDP 113. Refer to the above table. Which of the following schedules constitutes aggregate demand in this country? Page 21 P 128 125 122 119 116 (a) GDP 19 25 31 37 43 P 128 125 122 119 116 (b) GDP 23 27 31 35 39 P 128 125 122 119 116 (c) GDP 20 22 24 26 28 P 128 125 122 119 116 (d) GDP 34 37 40 43 46 114. Refer to the above table. The interest-rate effect of changes in the price level is shown by columns: A) (1) and (4) of the table. B) (5) and (6) of the table. C) (1) and (3) of the table. D) (2) and (4) of the table. 115. Refer to the above table. The real-balances effect of changes in the price level is: A) shown by columns (1) and (2) of the table. B) shown by columns (1) and (5) of the table. C) shown by columns (1) and (4) of the table. D) not shown by the data in the table. 116. Refer to the above table. If equilibrium real GDP is $31 billion in this country, its equilibrium price level will be: A) 128. B) 125. C) 122. D) 119. E) 116. 117. Refer to the above table. If the aggregate supply schedule graphs as a horizontal line at price level 119 in this country, its equilibrium level of real GDP will be: A) $37 billion. B) $35 billion. C) $26 billion. D) $43 billion. 118. Refer to the above table. If this nation's aggregate supply schedule graphs as a vertical line at the $25 billion level of real GDP, its price level will be: A) 128. B) 125. C) 122. D) 119. 119. Refer to the above table. If this nation's equilibrium price level is 125, its net exports will be: A) minus $4 billion. B) minus $2 billion. C) zero. D) $2 billion. Page 22 120. Refer to the above table. If the equilibrium level of real GDP is $43 billion in this country, its level of consumption will be: A) $20 billion. B) $22 billion. C) $24 billion. D) $26 billion. 121. Refer to the above table. A decline in the international value of the dollar would: A) increase the values in columns (5) and (6) and reduce aggregate demand . B) decrease the values in columns (5) and (6) and increase aggregate demand . C) decrease the values in column (5), increase the values in column (6), and reduce aggregate demand . D) increase the values in column (5), decrease the values in column (6), and increase aggregate demand . 122. Refer to the above table. A decrease in the interest rate would: A) increase the values in column (3) and increase aggregate demand . B) decrease the values in column (3) and increase aggregate demand . C) increase the values in column (2) and decrease aggregate demand . D) decrease the values in column (2) and decrease aggregate demand . Use the following to answer questions 123-127: AS Price level P2 P1 AD1 Q1 Q2 Q3 Real domestic output AD2 123. Refer to the above diagram. If equilibrium real output is Q2, then: A) aggregate demand is AD1. B) the equilibrium price level is P1. C) producers will supply output level Q1. D) the equilibrium price level is P2. 124. Refer to the above diagram. If the equilibrium price level is P1, then: A) aggregate demand is AD2. B) the equilibrium output level is Q3. C) the equilibrium output level is Q2. D) producers will supply output level Q1. Page 23 125. Refer to the above diagram. At the equilibrium price and quantity: A) aggregate demand exceeds aggregate supply. B) the amount of real output demanded and supplied are equal. C) aggregate demand equals aggregate supply. D) aggregate supply exceeds aggregate demand . 126. Refer to the above diagram. Which of the following would shift the aggregate demand curve from AD 2 to AD1? A) a decline in personal income tax rates B) an increase in the international value of the dollar C) an increase in government spending D) an upward revision of expected rates of return on investment projects 127. Refer to the above diagram. Suppose that aggregate demand increased from AD1 to AD2. For the price level to stay constant: A) the aggregate supply curve would have to shift rightward. B) the aggregate supply curve would have to shift leftward. C) real domestic output would have to remain constant. D) the aggregate supply curve would have to be vertical. Downward wage and price inflexibility 128. Which of the following is a true statement? A) firms and resource suppliers generally find it easier to reduce prices than to raise them. B) as the price level increases, interest rates will rise and therefore consumption and investment spending will also rise. C) an initial increase in aggregate demand may cause a further increase in aggregate demand because higher prices mean higher incomes. D) a decline in aggregate demand will primarily affect real output and employment because prices tend to be inflexible downward. 129. 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. 130. Efficiency wages are: A) above-market-wages that elicit so much added work effort that per-unit production costs are lower than at market wages. B) wage payments necessary to compensate workers for unpleasant or risky work conditions. C) usually less than market wages. D) relevant to macro economics because they explain rightward shift s in aggregate demand . 131. When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of: Page 24 A) B) C) D) the foreign purchases effect. inflexible product prices. wage contracts. the wealth effect. 132. 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. 133. 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. 134. When aggregate demand declines, the price level may remain constant, at lease for a time, because: A) firms individually fear that their price cut may set off a price war. B) menu costs rise. C) price cuts tend to increase efficiency wages. D) product markets are highly competitive. 135. Menu costs: A) increase during recession. B) decrease during recession. C) are the costs to firms of changing prices and communicating them to customers. D) are sunk costs and therefore should be disregarded. 136. The fear of unwanted price wars may explain why many firms are reluctant to: A) reduce wages when a decline in aggregate demand occurs. B) reduce prices when a decline in aggregate demand occurs. C) expand production capacity when an increase in aggregate demand occurs. D) provide wage increases when labor productivity rises. Multiplier with price level change Use the following to answer questions 137-138: Page 25 137. Refer to the above diagram. The full-strength multiplier is represented by a shift in aggregate demand from: A) AD2 to AD1 and a decline in real output from GDP2 to GDP1. B) AD2 to AD3 and an increase in real output from GDP2 to GDP'. C) AD1 to AD3 and an increase in real output from GDP1 to GDP'. D) AD3 to AD2 and a decrease in real output from GDP' to GDP2. 138. Refer to the above diagram. Over the GDP2 to GDP' range of real output, increases in aggregate demand produce price-level increases that : A) increase the size of the multiplier. B) represent cost-push inflation. C) reduce the size of the multiplier. D) result in a multiplier of zero. 139. If the economy is operating within the intermediate or vertical range of the aggregate supply curve, an increase in aggregate demand will produce: A) a decline in real GDP. B) the same sized multiplier as if the economy were in the horizontal range. C) a larger multiplier than if the economy were in the horizontal range. D) a smaller multiplier than if the economy were in the horizontal range. 140. The size of the multiplier associated with an initial increase in spending will be: A) the same whether or not inflation occurs. B) diminished if inflation occurs. C) zero if any increase in the price level occurs. D) enhanced if inflation occurs. AD-AS model in relation to AE model 141. Suppose an economy that has a MPC of .75 is experiencing a $20 billion recessionary gap (aggregate expenditures model) and is operating in the horizontal range of its aggregate supply curve (AD-AS model). Page 26 If this economy wishes to achieve its full-employment output, it must shift: A) its aggregate demand curve rightward by $20 billion. B) its aggregate supply curve rightward by $20 billion. C) both its aggregate demand curve and supply curve rightward by $20 billion. D) its aggregate demand curve rightward by $80 billion. 142. Suppose an economy that has a MPS of .2 is experiencing a $50 billion inflationary gap (aggregate expenditure model) and is operating in the vertical range of its aggregate supply curve (AD-AS model). If this economy wishes to return the price level to its previous level, it must shift its aggregate demand curve : A) leftward by $50 billion. B) rightward by $50 billion. C) leftward by $250 billion. D) leftward by $10 billion. 143. Assume that the MPC is .75 in an economy operating in the horizontal range of its aggregate supply curve. If GDP rises by $100 billion, we can conclude that the aggregate demand curve must have shifted rightward by: A) $25 billion. B) $50 billion. C) $100 billion. D) $150 billion. 144. Assume that the MPS is .1 in an economy that is operating in its horizontal range of aggregate supply. An increase in investment spending by $10 billion will shift the aggregate demand curve rightward by: A) $10 billion. B) $50 billion. C) $100 billion. D) $150 billion. 145. (Advanced analysis) Assume that the MPS is .33 in an economy that has an aggregate supply curve with a slope of 1. An increase in investment spending of $10 billion will shift the aggregate demand curve rightward by: A) $30 billion and increase real GDP by $15 billion. B) $30 billion and increase real GDP by $30 billion. C) $10 billion and increase real GDP by $30 billion. D) $10 billion and increase real GDP by $10 billion. 146. (Advanced analysis) Assume that the MPC is .8 in an economy that has an aggregate supply curve with a slope of 1. Also, suppose that the price level is flexible downward. A decrease in investment spending of $10 billion will shift the aggregate demand curve leftward by: A) $50 billion and decrease real GDP by $50 billion. B) $50 billion and decrease real GDP by $25 billion. C) $10 billion and decrease real GDP by $10 billion. D) $10 billion and decrease real GDP by $25 billion. 147. (Advanced analysis) Suppose that the equation for aggregate supply in an economy is P = 125 + 0(Q), where P is the price level and Q is real GDP. Also, suppose that the MPC is 0.9 and the initial level of real GDP is $400 billion. After an increase in investment of $20 billion, real GDP and the price level will be: A) $400 billion and 125. Page 27 B) $600 billion and 150. C) $420 billion and 100. D) $600 billion and 125. 148. (Advanced analysis) We can conclude from the previous question that the aggregate supply curve is: A) vertical. B) upsloping. C) horizontal. D) circular. Last Word Questions 149. (Last Word) In recent years: A) unemployment rates in Europe have been higher than in the United States. B) the natural rate of unemployment in Europe has fallen sharply. C) Europe has had strong aggregate demand and low unemployment rates. D) European nations have greatly reduced their unemployment rates by reducing minimum wages, welfare benefits, and government restrictions against firing workers. 150. (Last Word) It is unclear whether: A) high European rates of inflation reflect demand-pull or cost-push forces. B) high European rates of poverty can be reduced by by higher transfer payments. C) high European unemployment rates have resulted from high natural rates of unemployment or insufficient aggregate demand . D) European trade deficits stimulate or retard the European economies. True/False Questions 151. The interest-rate effect is one of the determinants of aggregate demand . 152. Other things equal, an increase in productivity will shift the aggregate supply curve rightward. 153. An increase in wealth from a substantial increase in stock prices will move the economy along a fixed aggregate demand curve . 154. In order to study the macroeconomy we must combine the prices and quantities generated in single-product markets into broad aggregates. 155. An outward increase in the production possibilities curve shifts the aggregate supply curve rightward. 156. An increase in imports (independently of a change in our price level) will increase both aggregate supply and aggregate demand . Page 28 157. An increase in business excise taxes will shift the aggregate supply curve leftward. 158. A decrease in per unit production costs will shift the aggregate supply curve leftward. 159. Unemployment and inflation can coexist. 160. The shape of the aggregate supply curve is determined by what happens to aggregate demand as real output expands. 161. The vertical range of the aggregate supply curve is called the unemployment range. 162. The horizontal range of the aggregate supply curve is called the full-capacity range. 163. During the Great Depression of the 1930s the economy was operating within the horizontal range of the aggregate supply curve. 164. During the Second World War the economy was operating within the vertical range of the aggregate supply curve. 165. The real-balances effect indicates that inflation makes the public feel wealthier and they therefore spend more out of their current incomes. 166. In locating a particular aggregate demand curve it is assumed that the money supply is fixed. Page 29 Answer Key -- chapter 11 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. 21. 22. 23. 24. 25. 26. 27. 28. 29. 30. 31. 32. 33. 34. 35. 36. 37. 38. 39. 40. 41. 42. 43. 44. 45. 46. 47. 48. 49. 50. 51. 52. 53. 54. D C C D C B D D B A D C C B A A C D C B C A D A B B D B C A A A C B A D C D A B C D B D A D D A B B C C B C Page 30 55. 56. 57. 58. 59. 60. 61. 62. 63. 64. 65. 66. 67. 68. 69. 70. 71. 72. 73. 74. 75. 76. 77. 78. 79. 80. 81. 82. 83. 84. 85. 86. 87. 88. 89. 90. 91. 92. 93. 94. 95. 96. 97. 98. 99. 100. 101. 102. 103. 104. 105. 106. 107. 108. 109. 110. A C B D C C D B C C B A B C C D D B A A C B A D B C A D B C D B B A B D C A B B A A B A A B C B C A B C C C D A Page 31 111. 112. 113. 114. 115. 116. 117. 118. 119. 120. 121. 122. 123. 124. 125. 126. 127. 128. 129. 130. 131. 132. 133. 134. 135. 136. 137. 138. 139. 140. 141. 142. 143. 144. 145. 146. 147. 148. 149. 150. 151. 152. 153. 154. 155. 156. 157. 158. 159. 160. 161. 162. 163. 164. 165. 166. D B A C A C A B B D D A D D B B A D D A C B A A C B A C D B D C C C A B D C A C False True False True True False True False True False False False True True False True Page 32

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