Question 1

Classical economists believe that prices are ____ and that recessions will be relatively ____.
A) inflexible; long
B) inflexible; brief
C) flexible; brief
D) flexible; long

Accepted Answer

Classical economists believe that prices are flexible, allowing markets to adjust quickly and making recessions brief.

Question 2

Discuss the difference between an increase in the aggregate demand curve and an increase in the quantity of real GDP demanded.Include discussion of how the price level relates to each event.

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Question 3

Say's law dictates that:
A) demand creates its own supply.
B) supply creates its own demand.
C) output prices are inflexible.
D) wages are inflexible.

Accepted Answer

Say's law states that supply creates its own demand, meaning that the production of goods and services generates income, which in turn creates demand for those same goods and services. This concept is often used to argue against the idea of demand-side economics, which suggests that government intervention in stimulating demand can boost economic growth.

Question 4

How will firms react to rising output price levels? What reactions can they expect from their employees and suppliers over time?

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Question 5

What are the major factors that determine investment,and what impact does each have on aggregate demand?

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Question 6

The aggregate demand curve portrays the relationship between price level and real GDP.What are the three reasons this relationship is a negative or inverse relationship? Provide brief illustrations of each.

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Question 7

Describe the difference between a microeconomic demand curve and an aggregate demand curve.

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Question 8

Identify four changes in the economy that would cause the aggregate demand curve to decrease (shift to the left).

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Question 9

Keynes believed that prices were ____ and that recessions would be relatively ____.
A) inflexible; long
B) inflexible; brief
C) flexible; brief
D) flexible; long

Accepted Answer

Keynes believed that prices were inflexible, meaning that they did not adjust easily or quickly to changes in supply and demand. He also believed that recessions would be relatively long, rather than brief, because of this inflexibility in prices. Therefore, the best choice is A, which reflects both of these beliefs.

Question 10

What would happen to the short-run and long-run aggregate supply curves if the capital stock grew and available supplies of natural resources expanded over the same period of time?

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Question 11

What happens to aggregate demand if the demand for consumption goods decreases? If the demand for investment goods increases?

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Question 12

Why do wage increases along with increases of other input prices impact the short-run aggregate supply but not the long-run aggregate supply,unless they reflect permanent reductions in the supply of those inputs?

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Question 13

If the price of oil increased by 15 percent when oil producers believed that other prices were rising 10 percent over the same period,what would happen to the quantity of real output supplied by the oil industry?

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Question 14

Greater and more extensive government regulations of safety standards and environmental controls will have what effect on short-run and long-run aggregate supply?

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Question 15

Explain how changes in the stock of capital affect aggregate supply.

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Question 16

Keynesian economists believe that the economy will:
A) return to the full-employment level of output very quickly.
B) return to the full-employment level of output eventually.
C) not return to the full-employment level of output unless the government intervenes.
D) not return to the full-employment level of output unless interest rates increase.

Accepted Answer

Keynesian economists argue that without government intervention, the economy may not return to full employment due to rigidities and insufficient demand.

Question 17

The notion that "supply creates its own demand" is known as:
A) Say's law.
B) sticky wages.
C) a Keynesian argument
D) animal spirits.

Accepted Answer

Say's law states that production and supply of goods and services create their own demand, as people require income from producing these goods and services in order to purchase other goods and services. This idea has been widely debated among economists, but it is generally associated with classical economics and the views of Jean-Baptiste Say.

Question 18

Explain why the short-run supply curve is not vertical,but the long-run aggregate supply curve is vertical.

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Question 19

What is the natural level of output?

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Question 20

What role do imports play in aggregate demand? Under which conditions will changes in imports expand aggregate demand? Reduce aggregate demand?

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Quiz 22: Aggregate Demand and Aggregate Supply

Classical economists believe that prices are and that recessions will be relatively .