Deck 12: The Determination of Aggregate Output, the Price Level, and the Interest Rate

Question 1

If the economy is operating on the relatively vertical segment of the aggregate supply curve,an increase in aggregate demand causes a ________ change in the price level and a ________ change in output.

A)small; small
B)big; big
C)big; small
D)small; big

Answer 1

C

Question 2

Refer to the information provided in Figure 12.1 below to answer the questions that follow.
Figure 12.1
Refer to Figure 12.1.Between the output levels of $500 billion and $1,000 billion,the relationship between the price level and output is

A)constant.
B)negative.
C)positive.
D)indeterminate.

Answer 2

C

Question 3

What determines the slope of the aggregate supply curve is

A)how fast the price of factors of production respond to changes in the price level.
B)how much more the economy can produce without any change in the price level.
C)how fast the output level changes after a technological advance.
D)none of the above

Answer 3

A

Question 4

Refer to the information provided in Figure 12.1 below to answer the questions that follow.
Figure 12.1
Refer to Figure 12.1.This economy reaches capacity at

A)$500 billion.
B)$1,000 billion.
C)$1,500 billion.
D)an output level that is indeterminate from this information because aggregate demand is not given.

Question 5

The aggregate supply curve

A)is the sum of the individual supply curves in the economy.
B)is a market supply curve.
C)embodies the same logic that lies behind an individual firm's supply curve.
D)relates output with the price level.

Question 6

The quantity of output supplied at different price levels is represented by the

A)production function.
B)aggregate demand curve.
C)aggregate supply curve.
D)aggregate expenditures curve.

Question 7

Refer to the information provided in Figure 12.2 below to answer the questions that follow.
Figure 12.2
Refer to Figure 12.2.Between the output levels of $300 billion and $600 billion,the relationship between the price level and output is

A)negative.
B)positive.
C)constant.
D)There is no relationship between the price level and output.

Question 8

If input prices changed at exactly the same rate as output prices,the aggregate supply curve would be

A)vertical.
B)upward sloping.
C)horizontal.
D)downward sloping.

Question 9

An increase in aggregate demand when the economy is operating at high levels of output is likely to result in

A)a large increase in both output and the overall price level.
B)an increase in the overall price level but little or no increase in output.
C)an increase in output but little or no increase in the overall price level.
D)little or no increase in either output or the overall price level.

Question 10

When the aggregate supply curve is horizontal,

A)many firms are likely to have excess capacity.
B)the economy is close to full capacity.
C)resources are being utilized at full capacity.
D)the prices level increases with additional production.

Question 11

Refer to the information provided in Figure 12.1 below to answer the questions that follow.
Figure 12.1
Refer to Figure 12.1.At aggregate output levels above $1,500 billion,firms in this economy are most likely experiencing

A)costs increasing as fast as output prices.
B)costs lagging behind increases in output prices.
C)costs falling as prices output increase.
D)costs rising faster than output prices.

Question 12

If the economy is operating way below capacity,an increase in aggregate demand causes a ________ change in the price level and ________ change in output.

A)big; big
B)big; small
C)small; big
D)small; small

Question 13

An increase in the price level is likely to increase the aggregate amount of output supplied in the short run because

A)interest rate is high in the short-run.
B)wages are sticky in the short-run.
C)wages change in the short-run.
D)the aggregate supply curve is vertical in the short-run.

Question 14

When the aggregate supply curve is vertical,which of the following is NOT true?

A)The economy is at capacity.
B)The economy is producing the maximum sustainable level of output.
C)Any increase in the price level will not cause an increase in aggregate output.
D)The economy is expanding quickly.

Question 15

A movement down the aggregate supply curve is caused by a(n)

A)decrease in aggregate supply.
B)increase in aggregate supply.
C)decrease in the price level.
D)increase in the price level.

Question 16

The graph that shows the relationship between the aggregate quantity of output supplied by all the firms in an economy and the overall price level is

A)the aggregate supply curve.
B)the aggregate production function.
C)the production possibilities frontier.
D)the aggregate demand curve.

Question 17

An increase in aggregate demand when the economy is operating at full capacity is likely to result in

A)an increase in both output and the overall price level.
B)an increase in output but no increase in the overall price level.
C)an increase in the overall price level but no increase in output.
D)no increase in either output or the overall price level.

Question 18

Refer to the information provided in Figure 12.2 below to answer the questions that follow.
Figure 12.2
Refer to Figure 12.2.This economy reaches capacity at

A)$300 billion.
B)$600 billion.
C)$900 billion.
D)an output level that is indeterminate from this information because aggregate demand is not given.

Question 19

When the economy is producing at full capacity,the aggregate supply curve becomes

A)horizontal.
B)downward sloping.
C)vertical.
D)upward sloping.

Question 20

Refer to the information provided in Figure 12.1 below to answer the questions that follow.
Figure 12.1
Refer to Figure 12.1.At aggregate output levels below $500 billion,this economy is most likely experiencing

A)rapid increases in the growth rate of the money supply.
B)a boom.
C)excess demand.
D)excess capacity.

Question 21

The rationale underlying policies to deregulate the economy is that these policies would

A)increase aggregate demand.
B)decrease short-run aggregate supply.
C)decrease aggregate demand.
D)increase short-run aggregate supply.

Question 22

Refer to the information provided in Figure 12.3 below to answer the questions that follow.
Figure 12.3
Refer to Figure 12.3.Hurricane Katrina destroyed a large portion of the infrastructure along the Gulf of Mexico coast.This caused

A)the short-run aggregate supply curve to shift from AS₁ to AS₂.
B)the short-run aggregate supply curve to shift from AS₁ to AS₀.
C)the economy to move from Point B to Point A along AS₁.
D)the economy to move from Point C to Point B along AS₁.

Question 23

If there is an increase in the percentage of employees whose wages adjust automatically with changes in the price level,the aggregate supply curve will become

A)steeper.
B)flatter.
C)horizontal.
D)vertical.

Question 24

Refer to the information provided in Figure 12.4 below to answer the questions that follow.
Figure 12.4
Refer to Figure 12.4.Suppose the economy is at Point A,an oil price increase could move the economy to Point

A)E.
B)B.
C)C.
D)D.

Question 25

Refer to the information provided in Figure 12.4 below to answer the questions that follow.
Figure 12.4
Refer to Figure 12.4.During the 1990s,many firms in the United States were investing in new capital.If the economy was originally at Point A,this would have caused a movement to Point

A)E.
B)B.
C)C.
D)D.

Question 26

Refer to the information provided in Figure 12.4 below to answer the questions that follow.
Figure 12.4
Refer to Figure 12.4.Suppose the economy is at Point A,an increase in aggregate demand moves the economy to Point

A)E.
B)B.
C)C.
D)D.

Question 27

If the United States were to pass legislation that would make it easier for people to emigrate to the United States,this would cause

A)the short-run aggregate supply curve to become nearly vertical at all levels of output.
B)the short-run aggregate supply curve to shift to the left.
C)the short-run aggregate supply curve to become flatter.
D)the short-run aggregate supply curve to shift to the right.

Question 28

Refer to the information provided in Figure 12.4 below to answer the questions that follow.
Figure 12.4
Refer to Figure 12.4.Suppose the economy is at Point A,an increase in the price level moves the economy to Point

A)E.
B)B.
C)C.
D)D.

Question 29

Refer to the information provided in Figure 12.3 below to answer the questions that follow.
Figure 12.3
Refer to Figure 12.3.During the 1980s,many firms in the United States were not investing in new capital.This would have caused

A)the short-run aggregate supply curve to shift from AS₁ to AS₀.
B)the short-run aggregate supply curve to shift from AS₁ to AS₂.
C)the economy to move from Point B to Point A along AS₁.
D)the economy to move from Point C to Point B along AS₁.

Question 30

Refer to the information provided in Figure 12.3 below to answer the questions that follow.
Figure 12.3
Refer to Figure 12.3.A decrease in aggregate supply is represented by

A)a movement from Point B to Point A along AS₁.
B)a movement from Point B to Point C along AS₁.
C)a shift from AS₁ to AS₂.
D)a shift from AS₁ to AS₀.

Question 31

An oil price increase would

A)increase aggregate demand.
B)decrease short-run aggregate supply.
C)decrease aggregate demand.
D)increase short-run aggregate supply.

Question 32

Refer to the information provided in Figure 12.3 below to answer the questions that follow.
Figure 12.3
Refer to Figure 12.3.An increase in aggregate supply is represented by

A)a movement from Point B to Point A along AS₁.
B)a movement from Point B to Point C along AS₁.
C)a shift from AS₁ to AS₂.
D)a shift from AS₁ to AS₀.

Question 33

If there is a decrease in the percentage of employees whose wages adjust automatically with changes in the price level,the aggregate supply curve will become

A)steeper.
B)flatter.
C)horizontal.
D)vertical.

Question 34

Coal is used as a source of energy in many manufacturing processes.Assume a long strike by coal miners reduced the supply of coal and increased the price of coal.This would cause

A)the short-run aggregate supply curve to shift to the right.
B)the short-run aggregate supply curve to become flatter.
C)the short-run aggregate supply curve to shift to the left.
D)the short-run aggregate supply curve to become nearly vertical at all levels of output.

Question 35

Which of the following would cause the short-run aggregate supply curve to shift to the right?

A)higher energy prices
B)an increase in taxes
C)increases in government regulation
D)retired workers reentering the labor force

Question 36

If the price level falls,the aggregate supply decreases as a result of the aggregate demand curve shifting left.

Question 37

An increase in the price of a key input in production,like oil,increases aggregate supply.

Question 38

Refer to the information provided in Figure 12.4 below to answer the questions that follow.
Figure 12.4
Refer to Figure 12.4.Which of the following causes the economy to move from Point A to Point E?

A)an oil embargo that increases the price of oil
B)technological progress
C)an influx of immigrants
D)an increase in the price level

Question 39

All of the following shift the short-run aggregate supply curve EXCEPT

A)a change in the price level.
B)a change in the price of oil.
C)a change in the price of raw material.
D)a change in wages as a result of a labor strike.

Question 40

If input prices change at exactly the same rate as output prices,the aggregate supply curve will be vertical.

Question 41

When the interest rate is high,planned investment is ________ so output is ________.

A)high; high
B)high; low
C)low; high
D)low; low

Question 42

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
Refer to Figure 12.5.Which of the following combinations would definitely increase the equilibrium interest rate?

A)government spending increases and the price level increases
B)government spending increases and the price level decreases
C)government spending decreases and the price level increases
D)government spending decreases and the price level decreases

Question 43

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
Refer to Figure 12.5.As a result of ________,the equilibrium interest rate increases and the equilibrium output level increases.

A)an increase in government spending
B)a decrease in government spending
C)an increase in the price level
D)a decrease in the price level

Question 44

An increase in government purchases shifts the ________ curve to the ________.

A)aggregate demand; left
B)aggregate supply; left
C)aggregate demand; right
D)aggregate supply; right

Question 45

An increase in the price level will cause a decrease in the aggregate amount of output supplied.

Question 46

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
Refer to Figure 12.5.As a result of ________,the equilibrium interest rate increases and the equilibrium output level decreases.

A)an increase in government spending
B)a decrease in government spending
C)an increase in the price level
D)a decrease in the price level

Question 47

The slope of the IS curve is ________ and the slope of the Fed rule is ________.

A)positive; positive
B)positive; negative
C)negative; positive
D)negative; negative

Question 48

The level of aggregate output demanded falls when the price level rises,because the resulting increase in the interest rate will lead to

A)higher investment spending and higher consumption spending.
B)lower investment spending and higher consumption spending.
C)higher investment spending and lower consumption spending.
D)lower investment spending and lower consumption spending.

Question 49

In an economy,when the price level falls,consumers and firms buy more goods and services.This relationship is represented by the

A)aggregate expenditures curve.
B)aggregate demand curve.
C)short-run aggregate supply curve.
D)long-run aggregate supply curve.

Question 50

Which of the following sequence of events follows an open market purchase by the Fed?

A)r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓
B)r↑ ⇒ I↑ ⇒ AE↓ ⇒ Y↑
C)r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑
D)r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↓

Question 51

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
Refer to Figure 12.5.An increase in the price level shifts the ________ to the ________.

A)Fed rule; right
B)IS curve; right
C)IS curve; left
D)Fed rule; left

Question 52

The aggregate demand curve shows that,ceteris paribus,

A)at higher price levels,total quantity of output demanded is higher.
B)at lower price levels,total quantity of output supplied is lower.
C)at lower price levels,total quantity of output demanded is higher.
D)at higher price levels,total quantity of output supplied is lower.

Question 53

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
Refer to Figure 12.5.An increase in government spending shifts the ________ to the ________.

A)IS curve; left
B)Fed rule; right
C)IS curve; right
D)Fed rule; left

Question 54

The aggregate demand curve shows a ________ relationship between ________ and aggregate output ________.

A)positive; the interest rate; demanded
B)negative; the price level; supplied
C)positive; the price level; demanded
D)negative; the price level; demanded

Question 55

The quantity of aggregate output demanded will fall if

A)government spending increases.
B)the price level increases.
C)Aggregate supply increases.
D)net taxes are reduced.

Question 56

Refer to the information provided in Figure 12.5 below to answer the questions that follow.
Figure 12.5
Refer to Figure 12.5.An increase in the Z factors shifts the ________ to the ________.

A)Fed rule; left
B)Fed rule; right
C)IS curve; left
D)IS curve; right

Question 57

Which of the following equations represents equilibrium in the goods market?

A)AE = I(r)
B)Y = AD + AS
C)Y = S + I
D)AE = C + I + G

Question 58

The aggregate demand curve

A)is an upward sloping curve.
B)is a downward sloping curve.
C)may slope upward or downward.
D)is horizontal.

Question 59

Which of the following sequence of events follows a rise in the discount rate?

A)r↓ ⇒ I↓ ⇒ AE↓ ⇒ Y↑
B)r↑ ⇒ I↓ ⇒ AE↓ ⇒ Y↓
C)r↓ ⇒ I↑ ⇒ AE↑ ⇒ Y↑
D)r↑ ⇒ I↑ ⇒ AE↑ ⇒ Y↑

Question 60

A decrease in taxes on business investments will increase aggregate supply.

Question 61

An increase in the price level shifts the IS curve to the left.

Question 62

The aggregate demand curve is the sum of all demand curves of all goods and services in the economy.

Question 63

If the combination r = 5% and Y = $100 billion is on the Fed rule line,we know that the combination r = 7% and Y = $100 billion would represent

A)the Fed rule shifting to the right.
B)the Fed rule shifting to the left.
C)a movement up the Fed rule.
D)a movement down the Fed rule.

Question 64

Other things equal,an increase in the Z factors shifts

A)the AD curve to the left.
B)the AD curve to the right.
C)the AS curve to the left.
D)the AS curve to the right.

Question 65

An increase in the price level cause aggregate demand to increase.

Question 66

________ shifts the IS curve to the left.

A)An increase in government spending
B)A decrease in government spending
C)A decrease in the price level
D)An increase in the Z factors

Question 67

If government spending increases,then the IS curve shifts to the right.

Question 68

A higher interest rate increases both planned investment and consumption spending.

Question 69

Other things equal,an increase in the price level ________ the equilibrium interest rate and ________ equilibrium output.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 70

The Federal Reserve's policy to "lean against the wind" means that

A)when output is high,the Fed sets a high interest rate.
B)when price levels are high,the Fed sets a low interest rate.
C)when output is low,the Fed sets a high interest rate.
D)when price levels are low,the Fed sets a high interest rate.

Question 71

The IS curve shows combinations of output and interest rates consistent with equilibrium in the goods market.

Question 72

Other things equal,an increase in government spending ________ the equilibrium interest rate and ________ equilibrium output.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 73

The Federal Reserve's policy to "lean against the wind" means that

A)interest rates are decreased as the economy expands.
B)reserve requirements are decreased as the economy expands.
C)reserve requirements are decreased significantly during an economic expansion.
D)interest rates are increased gradually as the economy expands.

Question 74

A decrease in government spending shifts aggregate demand to the left.

Question 75

________ shifts the Fed rule to the right.

A)An increase in government spending
B)A decrease in government spending
C)A decrease in the price level
D)An increase in the Z factors

Question 76

The aggregate demand curve shows that at higher price levels the total quantity of output demanded is greater.

Question 77

Other things equal,an increase in government spending shifts

A)the AD curve to the left.
B)the AD curve to the right.
C)the AS curve to the left.
D)the AS curve to the right.

Question 78

Other things equal,an increase in the Z factors ________ the equilibrium interest rate and ________ equilibrium output.

A)increases; increases
B)increases; decreases
C)decreases; increases
D)decreases; decreases

Question 79

________ shifts the Fed rule to the left.

A)An increase in government spending
B)A decrease in government spending
C)A decrease in the price level
D)An increase in the Z factors

Question 80

If the combination r = 10% and Y = $200 billion is on the IS curve,we know that the combination r = 10% and Y = $300 billion would represent

A)the IS curve shifting to the right.
B)the IS curve shifting to the left.
C)a movement up the IS curve.
D)a movement down the IS curve.