Question 1

Due to menu costs, many firms in the economy will increase their output:
A)only after they raise the price at which they are willing to sell their output.
B)before raising the price at which they are willing to sell their output.
C)instead of raising the price at which they sell their output.
D)or raise the price at which they sell their output, but never both.

Accepted Answer

The answer of Due to menu costs, many firms in...

Question 2

Firms that face menu costs react to a sustained increase in demand by:
A)increasing output and then raising the price of their output.
B)charging higher prices, without necessarily increasing the amount of output they are willing to sell.
C)charging lower prices, while simultaneously increasing the amount of output they are willing to sell.
D)increasing output and then reducing the price of their output.

Accepted Answer

Firms facing menu costs may initially increase output to meet higher demand before raising prices, as changing prices frequently can be costly.

Question 3

A low rate of expected inflation tends to lead to a ___ rate of actual inflation and a high rate of expected inflation tends to lead to a ____ rate of actual inflation.
A)high; high
B)high; low
C)low; low
D)low; high

Accepted Answer

Households and businesses become accustomed to gradually rising prices so actual inflation seems to follow inflation expectations. Inflation expectations are built on recent past experiences.

Question 4

For a given inflation rate, if a stock market crash makes consumers less willing to spend, then the ______ shifts _____.
A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Accepted Answer

A stock market crash that makes consumers less willing to spend decreases overall demand in the economy, causing the aggregate demand curve to shift to the left.

Question 5

The AD curve can be shifted by:
A)both fiscal and monetary policy.
B)neither fiscal nor monetary policy.
C)fiscal policy only.
D)monetary policy only.

Accepted Answer

Monetary policy can shift the AD curve through changes in interest rates and the money supply, while fiscal policy can shift the AD curve through changes in government spending and taxation. Therefore, option A is the correct answer.

Question 6

Firms suddenly becoming pessimistic about future business prospects is an example of a ______ demand shock, which would shift the AD curve to the ______.
A)negative; left
B)positive; left
C)negative; right
D)positive; right

Accepted Answer

A negative demand shock occurs when firms become pessimistic about future business prospects, leading to reduced investment and spending, which shifts the aggregate demand (AD) curve to the left.

Question 7

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the ______ shifts _____.
A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Accepted Answer

Increased government spending, such as on military, raises overall demand in the economy, shifting the aggregate demand curve to the right.

Question 8

Inflation inertia is the result of the behavior of ____ and the existence of ______.
A)the central bank; automatic stabilizers
B)real and nominal interest rates; an output gap
C)autonomous aggregate demand; the Fed's policy reaction function
D)inflation expectations; long-term wage and price contracts

Accepted Answer

Inflation inertia is the result of the persistence of previously established inflation expectations, which are reinforced by long-term wage and price contracts. These contracts specify prices and wages for a period of time, often one year or more, and they limit the ability of firms and workers to adjust to changing market conditions. As a result, changes in aggregate demand and supply may not have an immediate effect on prices and inflation, leading to inflation inertia.

Question 9

For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase spending on new capital, then the ______ shifts _____.
A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Accepted Answer

When businesses increase spending on new capital due to bright economic prospects, it leads to an increase in aggregate demand, causing the aggregate demand curve to shift to the right.

Question 10

When actual output equals potential output there is ____ output gap and the rate of inflation will tend to ____.
A)an expansionary; increase
B)an expansionary; decrease
C)no; remain the same
D)a recessionary; increase

Accepted Answer

When actual output equals potential output, there is no output gap, meaning that the economy is operating at its full potential. In this situation, the rate of inflation is likely to remain stable rather than increasing or decreasing.

Question 11

The AS curve slopes upward because:
A)firms generally sell their products at preset prices.
B)relaxing the assumptions of the Keynesian model allows us to develop a more realistic model where firms no longer care about prices.
C)many firms raise their prices when aggregate demand has increased.
D)inflation is higher in goods-producing industries than service-producing industries.

Accepted Answer

The AS curve slopes upward because many firms raise their prices when aggregate demand increases, reflecting the positive relationship between the price level and the quantity of output supplied.

Question 12

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.
A)large; high
B)large; low
C)small; low
D)small; high

Accepted Answer

When expected inflation is high, workers and firms will anticipate future price increases and adjust their behavior accordingly. Workers will demand higher wages to keep up with the expected rise in prices, and firms will raise prices to cover their increased costs. This leads to a spiral of increasing wages and costs, which ultimately results in higher actual inflation. Therefore, option A (large increases in wages and costs and high actual inflation) is the correct choice.

Question 13

The aggregate supply curve shows the relationship between the amount of output firms want to produce and the ______.
A)nominal interest rate
B)real interest rate
C)unemployment rate
D)inflation rate

Accepted Answer

The aggregate supply curve shows the relationship between the amount of output firms want to produce and the inflation rate, as it reflects how changes in the price level affect the quantity of goods and services supplied.

Question 14

For a given inflation rate, if a resolution of international disputes leads to a cutback in government military spending, then the ______ shifts _____.
A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Accepted Answer

A cutback in government military spending reduces overall government expenditure, which decreases aggregate demand, shifting the aggregate demand curve to the left.

Question 15

For a given inflation rate, if a rise in the stock market makes consumers more willing to spend, then the ______ shifts _____.
A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Accepted Answer

A rise in the stock market increases consumer wealth, leading to increased spending, which shifts the aggregate demand curve to the right.

Question 16

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:
A)the inflation gap
B)inflation expectations.
C)inflation inertia.
D)potential inflation.

Accepted Answer

Inflation inertia refers to the tendency for inflation to change relatively slowly from year to year in industrial countries. It is caused by factors such as contracts with fixed prices, long-term wage agreements, and the time it takes for monetary policy to affect the economy.

Question 17

For a given inflation rate, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ______ shifts _____.
A)aggregate demand curve; right
B)aggregate demand curve; left
C)aggregate supply curve; left
D)aggregate supply curve; right

Accepted Answer

If businesses reduce their spending on new capital, then the aggregate demand curve will shift left. This is because aggregate demand is the total demand for goods and services in an economy, and if businesses are spending less on new capital, then they are demanding less goods and services.

Question 18

Inflation inertia is the tendency for inflation to:
A)equal zero.
B)change relatively slowly from year to year.
C)decrease when the Fed increases interest rates.
D)increase when the Fed decreases interest rates.

Accepted Answer

Inflation inertia refers to the tendency of inflation to change relatively slowly from year to year, as it reflects the persistence of past inflationary pressures. It is not directly affected by the Fed's interest rate decisions, therefore options C and D are not correct. The option A is not correct, as inflation can't be expected to always equal zero.

Question 19

An increase in the aggregate demand for goods and services will result in an increase in the amount of output firms are willing to produce, and this increase in output is accompanied by:
A)a decrease in the inflation rate.
B)an increase in the inflation rate.
C)a decrease in nominal GDP
D)an increase in potential GDP.

Accepted Answer

An increase in aggregate demand typically leads to higher output and higher prices, resulting in an increase in the inflation rate.

Question 20

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.
A)large; high
B)large; low
C)small; low
D)small; high

Accepted Answer

When expected inflation is low, there is less pressure on workers and firms to demand higher wages and prices, which leads to small increases in wages and costs. This, in turn, keeps actual inflation low.

Quiz 13: Aggregate Demand, Aggregate Supply, and Business Cycles

Due to menu costs, many firms in the economy will increase their output:

Firms that face menu costs react to a sustained increase in demand by:

A low rate of expected inflation tends to lead to a _ rate of actual inflation and a high rate of expected inflation tends to lead to a __ rate of actual inflation.

For a given inflation rate, if a stock market crash makes consumers less willing to spend, then the __ shifts _.

The AD curve can be shifted by:

Firms suddenly becoming pessimistic about future business prospects is an example of a demand shock, which would shift the AD curve to the .

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the __ shifts _.

Inflation inertia is the result of the behavior of and the existence of __.

For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase spending on new capital, then the __ shifts _.

When actual output equals potential output there is output gap and the rate of inflation will tend to .

The AS curve slopes upward because:

High expected inflation leads to increases in wages and costs and to actual inflation.

The aggregate supply curve shows the relationship between the amount of output firms want to produce and the ______.

For a given inflation rate, if a resolution of international disputes leads to a cutback in government military spending, then the __ shifts _.

For a given inflation rate, if a rise in the stock market makes consumers more willing to spend, then the __ shifts _.

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

For a given inflation rate, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the __ shifts _.

Inflation inertia is the tendency for inflation to:

An increase in the aggregate demand for goods and services will result in an increase in the amount of output firms are willing to produce, and this increase in output is accompanied by:

Low expected inflation leads to increases in wages and costs and to actual inflation.