CHAP SOL 33
AD_AS MODEL
Part 1: Multiple choices:
1. Which of the following explains why production rises in most years?
a. increases in the labor force
b.increases in the capital stock
c. advances in technological knowledge
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 33-1
TOP: Growth MSC: Definitional
2. A short period of falling incomes and rising unemployment is called a
a. depression.
b.recession.
c. expansion.
d. business cycle.
ANS: B
PTS: 1
DIF: 1
REF: 33-1
TOP: Business cycle
MSC: Definitional
3. Which of the following is correct?
a. Economic fluctuations are easily predicted by competent economists.
b.Recessions have never occurred very close together.
c. Other measures of spending, income, and production do not fluctuate closely with
real GDP.
d. None of the above is correct.
ANS: D
PTS: 1
DIF: 1
REF: 33-1
TOP: Business cycle
MSC: Definitional
4. Most economists use the aggregate demand and aggregate supply model primarily to
analyze
a. short-run fluctuations in the economy.
b.the effects of macroeconomic policy on the prices of individual goods.
c. the long-run effects of international trade policies.
d. productivity and economic growth.
ANS: A
PTS: 1
DIF: 1
REF: 33-1
TOP: Aggregate demand and supply model MSC: Interpretive
5. Real GDP
a. moves in the same direction as unemployment.
b.is not adjusted for inflation.
c. also measures real income.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 33-1
TOP: Real GDP
MSC: Definitional
6. Historically, the change in real GDP during recessions has been
a. mostly a change in investment spending.
b.mostly a change in consumption spending.
c. about equally divided between consumption and investment spending.
d. sometimes mostly a change in consumption and sometimes mostly a change in
investment.
ANS: A
PTS: 1
DIF: 1
REF: 33-1
TOP: Investment and the business cycle
MSC: Definitional
7. Investment is a
a. small part of real GDP, so it accounts for a small share of the fluctuation in real
GDP.
b.small part of real GDP, yet it accounts for a large share of the fluctuation in real
GDP.
c. large part of real GDP, so it accounts for a large share of the fluctuation in real
GDP.
d. large part of real GDP, yet it accounts for a small share of the fluctuation in real
GDP.
ANS: B
PTS: 1
DIF: 1
REF: 33-1
TOP: Investment and the business cycle
MSC: Definitional
8. According to classical macroeconomic theory, changes in the money supply affect
a. real GDP and the price level.
b.real GDP but not the price level.
c. the price level, but not real GDP.
d. neither the price level nor real GDP.
ANS: C
PTS: 1
DIF: 2
REF: 33-2
TOP: Classical theory
MSC: Definitional
9. Most economists believe that classical macroeconomic theory is a good description of
the world
a. in neither the short nor long run.
b.in the short run and in the long run.
c. in the short run, but not in the long run.
d. in the long run, but not in the short run.
ANS: D
PTS: 1
DIF: 1
REF: 33-2
TOP: Classical theory
MSC: Definitional
10.The model of short-run economic fluctuations focuses on the price level and
a. real GDP.
b.economic growth.
c. the neutrality of money.
d. None of the above is correct.
ANS: A
PTS: 1
DIF: 1
REF: 33-2
TOP: Aggregate demand and supply model MSC: Definitional
11. Which of the sentences concerning the aggregate demand and aggregate supply
model is correct?
a. The aggregate demand and supply model is nothing more than a large version of
the model of market demand and supply.
b.The price level and quantity of output adjust to bring aggregate demand and
supply into balance.
c. The aggregate supply curve shows the quantity of goods and services that
households, firms, and the government want to buy at each price.
d. All of the above are correct.
ANS: B
PTS: 1
DIF: 1
REF: 33-2
TOP: Aggregate demand and supply model MSC: Interpretive
12. The aggregate demand curve
a. has a slope that is explained in the same way as the slope of the demand curve for
a particular product.
b.is vertical in the long run.
c. shows an inverse relation between the price level and the quantity of all goods and
services demanded.
d. All of the above are correct.
ANS: C
PTS: 1
DIF: 1
REF: 33-3
TOP: Aggregate demand slope
MSC: Definitional
13. As the price level rises
a. people will want to buy more bonds, so the interest rate rises.
b.people will want to buy fewer bonds, so the interest rate falls.
c. people will want to buy more bonds, so the interest rate falls.
d. people will want to buy fewer bonds, so the interest rate rises.
ANS: D
PTS: 1
DIF: 2
REF: 33-3
TOP: Interest-rate effect
MSC: Analytical
14. Which of the following is included in the aggregate demand for goods and services?
a. consumption demand
b.investment demand
c. net exports
d. All of the above are correct.
ANS: D
PTS: 1
DIF: 1
REF: 33-3
TOP: Aggregate demand
MSC: Definitional
15. The wealth effect, interest rate effect, and exchange rate effect are all explanations
for
a. the slope of short-run aggregate supply.
b.the slope of long-run aggregate supply.
c. the slope of the aggregate demand curve.
d. everything that makes the aggregate demand curve shift.
ANS: C
PTS: 1
DIF: 1
REF: 33-3
TOP: Aggregate demand slope
MSC: Definitional
16. Other things the same, as the price level rises, the real value of money
a. and the exchange rate rise.
b.and the exchange rate fall.
c. rises and the exchange rate falls.
d. falls and the exchange rate rises.
ANS: D
PTS: 1
DIF: 2
REF: 33-3
TOP: Interest-rate effect | Exchange-rate effect
MSC: Analytical
17. 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.
ANS: A
PTS: 1
DIF: 1
REF: 33-3
TOP: Aggregate demand slope
MSC: When Interpretive
18. the dollar depreciates, U.S.
a. exports and imports increase.
b.exports increase, while imports decrease.
c. exports decrease, while imports increase.
d. exports and imports decrease.
ANS: B
PTS: 1
DIF: 2
REF: 33-3
TOP: Exchange-rate effect MSC: Definitional
19. A decrease in U.S. interest rates leads to
a. a depreciation of the dollar that leads to greater net exports.
b.a depreciation of the dollar that leads to smaller net exports.
c. an appreciation of the dollar that leads to greater net exports.
d. an appreciation of the dollar that leads to smaller net exports.
ANS: A
PTS: 1
DIF: 2
REF: 33-3
TOP: Exchange-rate effect MSC: Analytical
20. Suppose a stock market boom makes people feel wealthier . The increase in wealth
would cause people to desire
a. increased consumption, which shifts the aggregate demand curve right.
b.increased consumption, which shifts the aggregate demand curve left.
c. decreased consumption, which shifts the aggregate demand curve right.
d. decreased consumption, which shifts the aggregate demand curve left.
ANS: A
PTS: 1
DIF: 1
REF: 33-3
TOP: Aggregate demand shifts | Stock market
MSC: Applicative
21. The Central Bank of Libertina increases the money supply at the same time the
Parliament of Libertina passes a new investment tax credit. Consider the effects of
these policies on the Libertinian economy. The money supply increase
a. and the investment tax credit each cause aggregate demand to shift right.
b.and the investment tax credit each cause aggregate demand to shift left.
c. causes aggregate demand to right, while the investment tax credit causes
aggregate demand to shift left.
d. causes aggregate demand to shift left, while the investment tax credit causes the
aggregate demand curve to shift right.
ANS: A
PTS: 1
DIF: 2
REF: 33-3
TOP: Aggregate demand shifts | Money supply | Investment-tax credit
MSC:
Applicative
22. Imagine that businesses in general believe that the economy is likely to head into
recession and so they reduce capital purchases. Their reaction would initially shift
a. aggregate demand right.
b.aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
ANS: B
PTS: 1
DIF: 2
REF: 33-3
TOP: Aggregate demand shifts | Investment MSC: Applicative
23. When taxes increase, consumption
a. decreases as shown by a movement to the left along a given aggregate demand
curve.
b.decreases as shown by shifting aggregate demand to the left.
c. increases as shown by shifting aggregate supply the left.
d. None of the above is correct.
ANS: B
PTS: 1
DIF: 2
REF: 33-3
TOP: Aggregate demand shifts | Taxes
MSC: Applicative
24. The aggregate supply curve is upward sloping in
a. the short and long run.
b.neither the short nor long run.
c. the long run, but not the short run.
d. the short run, but not the long run.
ANS: D
PTS: 1
DIF: 1
REF: 33-4
TOP: Short-run aggregate supply
MSC: Definitional
25. Which of the following is correct?
a. The short-run, but not the long-run, aggregate supply curve is consistent with the
idea that nominal variables do not affect real variables.
b.The long-run, but not the short-run, aggregate supply curve is consistent with the
idea that nominal variables do not affect real variables.
c. The long-run and short-run supply curves are both consistent with the idea that
nominal variables affect real variables.
d. Neither the long-run nor the short-run aggregate supply curve is consistent with
the idea that nominal variables affect real variables.
ANS: B
PTS: 1
DIF: 1
REF: 33-4
TOP: Long-run aggregate supply
MSC: Definitional
26. Which of the following would shift the long-run aggregate supply curve to the
right?
a. an increase in the actual price level
b.an increase in the money supply
c. increased international trade
d. None of the above is correct.
ANS: C
PTS: 1
DIF: 2
REF: 33-3
TOP: Long-run aggregate supply shifts
MSC: Analytical
27. Other things the same, if workers and firms expected prices to rise by 2 percent but
instead they rise by 3 percent, then
a. employment and production rise.
b.employment rises and production falls.
c. employment falls and production rises.
d. employment and production fall.
ANS: A
PTS: 1
DIF: 2
REF: 33-4
TOP: Sticky-wage theory
MSC: Applicative
28. The sticky-price theory of the short-run aggregate supply curve says that when the
price level is higher than expected, some firms will have
a. higher than desired prices which increases their sales.
b.higher than desired prices which depresses their sales.
c. lower than desired prices which increases their sales.
d. lower than desired prices which depresses their sales.
ANS: C
PTS: 1
DIF: 2
REF: 33-4
TOP: Sticky-price theory
MSC: Analytical
29. According to the misperceptions theory of the short-run aggregate supply curve, if a
firm thought that inflation was going to be 4 percent and actual inflation was 2
percent, then the firm would believe that the relative price of what they produce had
a. increased, so they would increase production.
b.increased, so they would decrease production.
c. decreased, so they would increase production.
d. decreased, so they would decrease production.
ANS: D
PTS: 1
DIF: 2
REF: 33-4
TOP: Misperceptions theory MSC: Applicative
30. Which of the following will cause stagflation?
a. an increase in the money supply
b.an increase in oil prices
c. a decrease in the money supply
d. technical progress
ANS: B
PTS: 1
DIF: 1
REF: 33-5
TOP: Stagflation
MSC: Applicative
PART 2
Refer to the graph:
An increase in the money supply would move the economy from C to what point in
short run and long run? Discuss?
Sol:
Short run:
MS increase => AD will increase and shift to the right. => Output will increase.
Economy will go from point C to point B.
Price level would increase.
Long run:
Overtime, SRAS shifts to the left.
LRAS cut AD2 at point A.
(the economy moves from point B to point A)
We have same output
Price level continues to increase.