Question 1

The aggregate demand and aggregate supply model helps us to understand both short-run economic fluctuations and how the economy moves from the short to the long run.

Accepted Answer

The aggregate demand and aggregate supply model is a key tool for macroeconomic analysis and can be used to explain both short-run business cycles and the long-run growth of the economy.

Question 2

Most economists believe that classical theory describes the world in the short run but not in the long run.

Accepted Answer

Most economists actually believe the opposite - that classical theory describes the world in the long run but not in the short run. This is because classical theory assumes that prices and wages are flexible and will eventually adjust to their equilibrium levels, while in the short run they may be sticky and prevent the economy from reaching full employment.

Question 3

A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate demand curve slopes downward.

Accepted Answer

When the price level decreases, consumers can buy more goods and services with their income, which makes them feel wealthier. This leads to an increase in consumer spending and aggregate demand. Therefore, the aggregate demand curve slopes downward as the price level decreases.

Question 4

Most economist agree that money changes real GDP in both the short and long run.

Accepted Answer

Most economists agree that money changes real GDP in the short run due to price and wage stickiness, but in the long run, changes in the money supply only affect nominal variables like the price level, leaving real GDP unchanged according to the classical dichotomy.

Question 5

Other things the same, as the price level falls, the exchange rate rises. A rise in the exchange rate leads to a decrease in net exports.

Accepted Answer

The answer of Other things the same, as the price...

Question 6

An increase in the money supply causes output to rise in the long run.

Accepted Answer

While an increase in the money supply may temporarily boost output by increasing consumer spending, in the long run it can lead to inflation and reduce the value of the currency, ultimately leading to a decrease in output.

Question 7

The aggregate-demand curve shows the quantity of domestic goods and services that households, firms, the government, and customers abroad want to buy at each price level.

Accepted Answer

The aggregate-demand curve is a graphical representation of the total amount of goods and services that all sectors of the economy want to buy at each price level.

Question 8

Most macroeconomic variables that measure some type of income, spending, or production fluctuate closely together.

Accepted Answer

This is known as the macroeconomic identity or national income identity, which shows that income equals spending equals production. This is one of the fundamental principles of macroeconomics.

Question 9

Recessions occur at irregular intervals and are almost impossible to predict with much accuracy.

Accepted Answer

Recessions are known to occur at unpredictable intervals, making it difficult to predict when they will occur with accuracy.

Question 10

Because economists understand what things change GDP, they can predict recessions with a fair amount of accuracy.

Accepted Answer

While economists can use various indicators to try to predict recessions, there are many factors that they cannot fully account for or predict, making it difficult to accurately forecast when a recession will occur.

Question 11

According to classical macroeconomic theory, changes in the money supply change real GDP but not the price level.

Accepted Answer

According to classical macroeconomic theory, changes in the money supply only affect the price level in the long run, while real GDP remains constant.

Question 12

Although wages, incomes, and interest rates are most often discussed in nominal terms, what matters most are their real values.

Accepted Answer

Nominal values only reflect the current prices, while real values take inflation into account and reflect the purchasing power of wages, incomes, and interest rates. Therefore, real values are more relevant in terms of economic analysis and decision-making.

Question 13

Like real GDP, investment fluctuates, but it fluctuates much less than real GDP.

Accepted Answer

Investment is known to be more volatile than real GDP, meaning it fluctuates more frequently and to a greater extent.

Question 14

The recessions associated with the business cycle come at regular intervals.

Accepted Answer

The business cycle is not a predictable or regular pattern, so the recessions associated with it do not necessarily come at regular intervals. The timing and severity of each recession can vary depending on a variety of economic, social, and political factors.

Question 15

The logic of the exchange-rate effect begins with a change in the price level changing the interest rate.

Accepted Answer

The logic of the exchange-rate effect starts with a change in the price level affecting the interest rate, which then affects the exchange rate.

Question 16

A change in the money supply changes only nominal variables in the long run.

Accepted Answer

In the long run, changes in the money supply do not affect real variables such as output, employment, or productivity, but only affect nominal variables such as prices and wages. This is known as the neutrality of money in the long run.

Question 17

When output rises, unemployment falls.

Accepted Answer

This is a commonly accepted principle in macroeconomics called Okun's law. As output (GDP) increases, firms may need to hire additional workers to meet the increased demand for their goods and services, leading to a decrease in unemployment. Conversely, a decrease in output may lead to firms laying off workers and an increase in unemployment.

Question 18

Other things the same, a decrease in the price level makes the interest rate decrease, which leads to a depreciation of the dollar in the market for foreign-currency exchange.

Accepted Answer

A decrease in the price level leads to a decrease in the demand for money, which in turn leads to a decrease in the interest rate. A lower interest rate reduces the attractiveness of domestic assets to foreign investors, leading to a decrease in demand for the domestic currency and depreciation in the foreign exchange market.

Question 19

According to classical macroeconomic theory, changes in the money supply change nominal but not real variables.

Accepted Answer

Classical macroeconomic theory assumes that changes in the money supply only affect nominal variables, such as prices and wages, but not real variables, such as output and employment. This is because classical theory assumes that changes in the money supply will eventually be offset by changes in prices and wages, resulting in no real changes in the economy. This theory has been challenged by more recent macroeconomic models, such as Keynesian and monetarist theories, which suggest that changes in the money supply can have real effects on the economy, particularly in the short run.

Question 20

The explanations for the slopes of the aggregate demand and short-run aggregate supply curves are the same as the explanations for the slopes of demand and supply curves for specific goods and services.

Accepted Answer

The slopes of the aggregate demand and short-run aggregate supply curves are based on different economic principles than those for individual goods and services. Aggregate demand slopes downward due to the wealth effect, interest rate effect, and exchange rate effect, while the short-run aggregate supply curve slopes upward due to factors like wage rates, input prices, and productivity, which differ from the simple supply and demand dynamics of individual goods and services.

Quiz 33: Aggregate Demand and Aggregate Supply