Question 1

Suppose an economy is in recession. If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? Create a chart to depict an economy in recession.

Accepted Answer

The graph below depicts an economy in a recession. The short-run aggregate supply curve is AS₁ and the economy is in equilibrium at point A, which is to the left of the long-run aggregate supply curve. If policymakers take no action, the economy will return to the long-run aggregate supply curve over time since the actual price level will be below the price level that people expected. Individuals will eventually correct their expectations about the price level. As they do so, prices and wages will adjust accordingly, shifting the aggregate supply curve to the right to AS₂. The economy's new equilibrium is at point B. The rightward shift in aggregate supply eventually causes output to rise back to the natural rate.

Question 2

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 C)

Question 3

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 expectationsF) A) and E)
G) All of the above

Question 4

Which of the following is not a determinant of long-run aggregate supply?

Accepted Answer

A)   the level of skills in the workforce
B)   the price level
C)   technology
D)   the quantity of capitalE) A) and B)
F) A) and C)

Question 5

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

Accepted Answer

When the price level increases, the purc...

Question 6

Which of the following will cause stagflation?

Accepted Answer

A)   an increase in the money supply (which shifts the economy's aggregate demand curve to the right) .
B)   an increase in oil prices (which shifts the economy's aggregate supply curve to the left) .
C)   a decrease in the money supply (which shifts the economy's aggregate demand curve to the right) .
D)   technical progress (which shifts the economy's aggregate supply curve to the right) .E) A) and B)
F) A) and C)

Question 7

Make a list of things that would shift the long-run aggregate supply curve to the right.

Accepted Answer

Examples (or variations) include increas...

Question 8

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

Accepted Answer

A) True 
 B)False  False

Question 9

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 long run?

Accepted Answer

A)   Output falls; prices are unchanged from the initial value.
B)   Prices fall; output is unchanged from its initial value.
C)   Output and the price level are unchanged from their initial values.
D)   Prices rise; output is unchanged from its initial value.
E)   Output rises; prices are unchanged from the initial value.F) A) and D)
G) A) and E)

Question 10

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) A) and D)
F) B) and D)

Question 11

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run?

Accepted Answer

A)   Output rises; prices are unchanged from the initial value.
B)   Output and the price level are unchanged from their initial values.
C)   Output falls; prices are unchanged from the initial value.
D)   Prices fall; output is unchanged from its initial value.
E)   Prices rise; output is unchanged from its initial value.F) A) and C)
G) All of the above

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

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) A) and C) D

Question 14

Which of the following would not cause a shift in the long-run aggregate supply curve? An increase in:

Accepted Answer

A)   the available capital
B)   the available labour
C)   the available technology
D)   price expectationsE) A) and D)
F) B) and C)

Question 15

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) All of the above
F) A) and B)

Question 16

Most economists believe that classical macroeconomic theory is a good description of the economy

Accepted Answer

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.E) All of the above
F) A) and B)

Question 17

According to classical macroeconomic theory, changes in the money supply affect

Accepted Answer

A)   nominal variables and real variables.
B)   nominal variables, but not real variables.
C)   real variables, but not nominal variables.
D)   neither nominal nor real variables.E) B) and C)
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) All of the above
F) A) and B)

Question 19

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 20

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) B) and D)
F) C) and D)

Exam 33: Aggregate Demand and Aggregate Supply

Suppose an economy is in recession. If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? Create a chart to depict an economy in recession.

Most economists believe that money neutrality holds

Correct Answer
verified

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

Correct Answer
verified

Which of the following is not a determinant of long-run aggregate supply?

Correct Answer
verified

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

Correct Answer
verified
When the price level increases, the purc...
View Answer

Which of the following will cause stagflation?

Correct Answer
verified

Make a list of things that would shift the long-run aggregate supply curve to the right.

Correct Answer
verified
Examples (or variations) include increas...
View Answer

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

Correct Answer
verified
False

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 long run?

Correct Answer
verified

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

Correct Answer
verified

Correct Answer
verified

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

Correct Answer
verified

To say that nominal prices are sticky means

Correct Answer
verified
D

Which of the following would not cause a shift in the long-run aggregate supply curve? An increase in:

Correct Answer
verified

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 Answer
verified

Most economists believe that classical macroeconomic theory is a good description of the economy

Correct Answer
verified

According to classical macroeconomic theory, changes in the money supply affect

Correct Answer
verified

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

Correct Answer
verified

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 Answer
verified

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

Correct Answer
verified

Exam 33: Aggregate Demand and Aggregate Supply

Suppose an economy is in recession. If the government does nothing, what ensures that the economy still eventually gets back to the natural rate of output? Create a chart to depict an economy in recession.

Most economists believe that money neutrality holds

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Which of the following is not a determinant of long-run aggregate supply?

Correct AnswerverifiedShow Answer

Explain how an increase in the price level changes interest rates. How does this change in interest rates lead to changes in investment and net exports?

Correct AnswerverifiedWhen the price level increases, the purc...View AnswerShow Answer

Which of the following will cause stagflation?

Correct AnswerverifiedShow Answer

Make a list of things that would shift the long-run aggregate supply curve to the right.

Correct AnswerverifiedExamples (or variations) include increas...View AnswerShow Answer

Economists refer to fluctuations in output as the "business cycle" because movements in output are regular and predictable.

Correct AnswerverifiedFalse

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 long run?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

To say that nominal prices are sticky means

Correct AnswerverifiedD

Which of the following would not cause a shift in the long-run aggregate supply curve? An increase in:

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

Most economists believe that classical macroeconomic theory is a good description of the economy

Correct AnswerverifiedShow Answer

According to classical macroeconomic theory, changes in the money supply affect

Correct AnswerverifiedShow Answer

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

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

Correct Answer
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Correct Answer
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Correct Answer
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Correct Answer
verified
When the price level increases, the purc...
View Answer

Correct Answer
verified

Correct Answer
verified
Examples (or variations) include increas...
View Answer

Correct Answer
verified
False

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Correct Answer
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Correct Answer
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D

Correct Answer
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Correct Answer
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Correct Answer
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