Deck 12: The Aggregate-Demandaggregate-Supply Model

Question 1

Government spending consitutues about_____ of U.S.economy's aggregate demand.

A)1/10
B)1/6
C)1/4
D)1/2

Answer 1

1/6

Question 2

A rise in income will cause consumer spending to

A)decline.
B)not change.
C)rise.
D)fall at first, then rise later.

Answer 2

C

Question 3

The largest component of aggregate demand is

A)net exports.
B)government spending.
C)investment.
D)consumption.

Answer 3

D

Question 4

Aggregate supply tells us

A)the amount of goods and services being purchased in an economy.
B)the amount of goods and services being produced in an economy.
C)the total amount of physical capital in an economy.
D)the total amount of investments in an economy.

Question 5

The aggregate-demand curve shows the combinations of_____and____that are consistent with equilibrium in the market for goods and services and the market for money.

A)the price level; output
B)the price level; the real interest rate
C)the real interest rate; the money supply
D)the money supply; output and

Question 6

A rise in the real interest rate will cause consumer spending to

A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.

Question 7

A rise in the real interest rate, everything else remaining unchanged, will cause business investment spending to

A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.

Question 8

A rise in wealth, everything else remaining unchanged, will cause household investment in housing to

A)decline.
B)not change.
C)rise.
D)fall at first, then rise later.

Question 9

Investment spending on physical capital is about ______of aggregate demand.

A)1/10
B)1/6
C)1/4
D)1/2

Question 10

Purchases of new houses are part of

A)net exports.
B)government spending.
C)investment.
D)consumption.

Question 11

With the price level measured on the vertical axis and output measured on the horizontal axis, the aggregate-demand curve

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

Question 12

Which of the following equations is true of aggregate demand?

A)Aggregate demand = consumption + investment - government spending - net exports
B)Aggregate demand = consumption - investment - government spending - net exports
C)Aggregate demand = consumption + investment + government spending + net exports
D)Aggregate demand = consumption - investment + government spending + net exports

Question 13

Which of the following is an investment spending?

A)Purchase of stocks
B)Purchase of bonds
C)Purchase of office building
D)Purchase of refrigerator by a household

Question 14

A rise in the real interest rate, everything else remaining unchanged, will cause household investment in housing to

A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.

Question 15

The total amount of physical capital in all firms and households is called the

A)human capital.
B)capital stock.
C)household income.
D)physical product.

Question 16

A rise in the incomes of foreign consumers, everything else remaining unchanged, causes net exports to

A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.

Question 17

A rise in the incomes of domestic consumers causes net exports to

A)decline.
B)not change.
C)rise.
D)rise at first, then decline later.

Question 18

Aggregate demand tells us

A)the amount of goods and services being purchased in an economy.
B)the amount of goods and services being produced in an economy.
C)the total demand for labor in an economy.
D)the total demand for capital in an economy.

Question 19

A rise in future consumption spending, everything else remaining unchanged, will cause business investment spending to

A)decline.
B)not change.
C)rise.
D)fall at first, then rise later.

Question 20

Consumption spending is about_____ of aggregate demand.

A)2/3
B)1/2
C)3/4
D)5/6

Question 21

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in taxes causes ____to _____in the short run.

A)output; increase
B)output; decline
C)output; remain unchanged
D)government spending; increase

Question 22

Which of the following is true of an economy at full employment?

A)There is no job turnover in the economy.
B)The unemployment rate in the economy is equal to the natural rate of unemployment.
C)The economy's labor and capital are not fully utilized.
D)An increase in price level increases the full-employment level of output.

Question 23

In the aggregate demand-aggregate supply model, a decrease in the expected price level, everything else remaining unchanged, causes _____to_____ in the short run.

A)output; increase
B)output; decline
C)output; remain unchanged
D)inflation; increase

Question 24

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in production costs shifts the _____curve to the _____.

A)long-run aggregate supply; right
B)long-run aggregate supply; left
C)short-run aggregate supply; right
D)short-run aggregate supply; left

Question 25

The amount of output produced when the unemployment rate equals the natural rate of employment in an economy is called_____ output.

A)natural
B)aggregate
C)full-employment
D)long-run

Question 26

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in taxes causes the____ curve to shift_____ .

A)short-run aggregate-supply; right
B)short-run aggregate-supply; left
C)aggregate-demand; left
D)aggregate-demand; right

Question 27

In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in labor force shifts the____ to the_______ .

A)long-run aggregate supply; right
B)aggregate demand; right
C)short-run aggregate supply; left
D)aggregate demand; left

Question 28

The nominal interest rate in an economy decreases when

A)the aggregate demand curve shifts to the left.
B)the money supply curve shifts to the left.
C)the aggregate supply curve shifts to the right.
D)the money demand curve shifts to the left.

Question 29

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in capital stock shifts the_____ to the_____ .

A)long-run aggregate supply; right
B)aggregate demand; right
C)short-run aggregate supply; left
D)aggregate demand; left

Question 30

When all capital and labor are fully utilized, the economy is said to be

A)at the peak of the business cycle.
B)experiencing an expansion.
C)at full employment.
D)sustainable.

Question 31

A rise in the price level, everything else remaining unchanged, causes short-run aggregate supply to

A)decline.
B)not change.
C)increase.
D)rise at first, then decline later.

Question 32

Which of the following is an assumption of the aggregate demand-aggregate supply model?

A)Capital stock cannot be varied in the short run.
B)An economy is always at full-employment level in the short run.
C)Producers are reluctant to change prices of their products even in the long run.
D)Long-run aggregate supply curve slopes upward.

Question 33

In the aggregate demand-aggregate supply model, an increase in the expected price level, everything else remaining unchanged, causes the _____curve to shift_____ .

A)short-run aggregate supply; right
B)short-run aggregate supply; left
C)aggregate-demand; left
D)aggregate-demand; right

Question 34

When the price level in an economy declines

A)the demand for money in the economy increases.
B)the nominal interest rate in the economy increases.
C)the total consumption in the economy reduces.
D)the aggregate demand in the economy increases.

Question 35

If there is a significant drop in business optimism in an economy

A)the economy's long-run aggregate supply curve shifts to the right.
B)the economy's aggregate demand curve shifts to the left.
C)the labor supply in the economy increases in the long run.
D)the capital stock in the economy increases in the long run.

Question 36

A rise in the price level in an economy

A)shifts its long-run aggregate supply curve to the right.
B)shifts its long-run aggregate supply curve to the left.
C)does not have any effect on its long-run aggregate supply.
D)does not have any effect on its aggregate demand.

Question 37

With the price level on the vertical axis and output on the horizontal axis, the short-run aggregate-supply curve

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

Question 38

The unemployment rate reflecting normal job turnover is called

A)the natural rate of unemployment.
B)the non-accelerating investment rate of unemployment (NAIRU).
C)frictional unemployment.
D)structural unemployment.

Question 39

With the price level measured on the vertical axis and output measured on the horizontal axis, the long-run aggregate-supply curve

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

Question 40

Full-employment output is the amount of output produced when the economy is

A)in recession.
B)above the natural rate of unemployment.
C)utilizing all of its labor and capital.
D)in equilibrium.

Question 41

In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in government spending shifts the ____curve to the_____ .

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

Question 42

If the Fed does not change its monetary policy in an economy that is producing an output lower than the full- employment level of output, the short-run aggregate supply curve will eventually shift____, and the price level will_____.

A)left; increase
B)left; decline
C)right; decline
D)right; increase

Question 43

According to_____ , people use all available information in making their economic decisions.

A)Keynesian theory
B)monetarist theory
C)the Lucas critique
D)the theory of rational expectations

Question 44

The argument that a change in policy systematically alters the structure of econometric models is known as the

A)Keynesian cross.
B)cross-equation restriction.
C)Lucas critique.
D)endogeneity principle.

Question 45

If an economy is in a recession, with output below its full-employment level, a(n)_____ return the economy to its long-run equilibrium, which would cause the price level to_____

A)expansionary; increase
B)expansionary; decline
C)contractionary; decline
D)contractionary; increase

Question 46

The development of the large structural macroeconomic models was spearheaded by _____economists.

A)Keynesian
B)classical
C)Ricardian
D)institutional

Question 47

If there is no policy action in an economy that is producing an output below its full-employment level, then

A)the output returns to full-employment level quickly.
B)the price level declines slowly.
C)the price level rises quickly.
D)the output stays below full-employment for a short period, then rises quickly.

Question 48

Suppose business firms collectively become pessimistic about prospects for future profits because of continued worries about terrorism.Explain how this would affect investment, aggregate demand, output, and the price level in the short run and the long run.

Question 49

In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in money supply shifts the____ curve to the _____.

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

Question 50

Macroeconomic models from the 1950s and 1960s that consist of hundreds of equations that describe the economy in great detail are called

A)real business-cycle models.
B)large, structural macroeconomic models.
C)VARs.
D)structural VARs.

Question 51

One of the reasons that led to the inconsistency of the large structural macroeconomic models was

A)that endogenous variables such as foreign output were treated as exogenous.
B)that all equations were estimated together to test their interrelations with one another.
C)that individual equations were estimated in isolation with one another.
D)that exogenous variables such as level of technology were treated as endogenous.

Question 52

The_____ believe that an economy will adjust on its own without any government policy interventions.

A)Keynesians
B)classical economists
C)monetarists
D)institutional economists

Question 53

The_____ believe that it takes a long time for prices and wages to change to restore equilibrium in an economy.

A)Keynesians
B)classical economists
C)monetarists
D)institutional economists

Question 54

Suppose an economy is producing an output above its full-employment level.To return the economy to long-run equilibrium, a(n) _____monetary policy can be used, which would cause the price level to ____.

A)expansionary; increase
B)expansionary; decline
C)contractionary; decline
D)contractionary; increase

Question 55

Which of the following is a difference in the views of Keynesian and classical economists?

A)Keynesians believe that prices and wages adjust quickly, whereas the classicals believe they adjust slowly.
B)Keynesians believe that policymakers have full knowledge about the state of an economy, whereas the classicals believe they don't.
C)Keynesians believe that policymakers cannot offset shocks to an economy, whereas the classicals believe they can.
D)Keynesians believe that most shocks to an economy are to long-run aggregate supply, whereas the classicals believe the shocks are to aggregate demand.

Question 56

A key failure of large structural macroeconomic models, according to the theory of rational expectations, is that the models assumed that expected inflation is independent of

A)monetary policy.
B)past inflation.
C)interest rates.
D)aggregate demand.

Question 57

If an economy is in a recession, with output below its full-employment level, a(n) ______ to return the economy to its long-run equilibrium, which would cause the price level to_____

A)expansionary; increase
B)expansionary; decline
C)contractionary; decline
D)contractionary; increase

Question 58

Suppose ATM costs increased because of additional security required to prevent electronic fraud.Explain how this would affect money demand, aggregate demand, output, and the price level in the short run and the long run.

Question 59

In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate _____, whereas the real interest rate ______if fiscal policy is used.

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

Question 60

Answer the questions below.
a.Suppose the economy is initially in long-run equilibrium in the AD-AS model.Draw a diagram showing long-run equilibrium, including the AD, LRAS, and SRAS curves.

b.Now suppose stock prices decline sharply.Draw a new diagram showing the AD, LRAS, and SRAS curves.How have the level of output and the price level changed? What happens to consumption spending and investment spending?

c.Redraw your diagram from part b, then draw new lines to show what would happen if the Fed changed monetary policy to return the economy to full-employment equilibrium.Does the money supply increase or decrease? Which curve (AD, LRAS, or SRAS) shifts as a result of the Fed's policy change? What happens to the price level and level of output compared with what they were in part b? What happens to consumption spending and investment spending compared with what they were in part b?

Question 61

Describe the arguement put forward by the Nobel laurete Robert E.Lucas about the flaws in the large structural macroeconomic models.

Question 62

Describe what monetary policymakers should do if they want to keep the price level in an economy permanently low.?

Question 63

Suppose increased costs for security raised the costs of production for all firms.Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.

Question 64

Describe the effect of expansionary monetary policy in a recession.Contrast the results with no monetary policy action.

Question 65

Suppose another breakthrough in computer technology greatly increases total factor productivity.Explain how this would affect aggregate supply, output, and the price level in the short run and the long run.