Question 1

When the price level rises unexpectedly, some businesses may mistake part of the increase for an increase in the price of their product relative to others and so decrease their production.

Accepted Answer

The answer of When the price level rises unexpectedly, some...

Question 2

Aggregate demand shifts to the left if the money supply increases.

Accepted Answer

The statement is false. An increase in the money supply would actually cause aggregate demand to shift to the right, as there is more money available for spending and investment.

Question 3

Because the price level does not affect the long-run determinants of real GDP, the long-run aggregate-supply is vertical.

Accepted Answer

The long-run determinants of real GDP include factors such as technology, capital, and labor. These factors are not affected by changes in the price level. Therefore, in the long run, changes in the price level do not affect the level of real GDP and the long-run aggregate supply curve is vertical.

Question 4

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP are caused by changes in both aggregate demand and aggregate supply. Shifts in aggregate demand, such as changes in consumer spending or government policy, can lead to changes in real GDP. Shifts in aggregate supply, such as changes in technology or labor productivity, can also impact real GDP.

Question 5

We can explain continued increases in both output and the price level by supposing that only aggregate demand shifted right over time.

Accepted Answer

While a rightward shift in aggregate demand can explain an increase in both output and the price level in the short run, over time, increases in the price level with continued output growth would likely also require shifts in aggregate supply to sustain the growth without leading to excessive inflation.

Question 6

All explanations for the upward slope of the short-run aggregate supply curve suppose that the quantity of output supplied increases when the actual price level exceeds the expected price level.

Accepted Answer

This is a fundamental assumption behind all explanations for the upward slope of the short-run aggregate supply curve, including the sticky-wage model, the sticky-price model, and the misperceptions model. In each of these models, firms face costs that are partially based on expected prices, and therefore they are only willing to supply more output at higher actual prices if those prices exceed their expectations.

Question 7

If speculators bid up the value of the dollar in the market for foreign-currency exchange, U.S. aggregate demand would shift to the left.

Accepted Answer

When speculators bid up the value of the dollar, it becomes stronger compared to other currencies. This makes U.S. goods more expensive for foreign buyers, reducing exports. At the same time, imports become cheaper for U.S. consumers, leading to a decrease in domestic production and a shift of the U.S. aggregate demand to the left.

Question 8

An increase in the money supply causes the interest rate to fall, investment spending to rise, and aggregate demand to shift right.

Accepted Answer

When the money supply increases, the supply of loanable funds increases and the interest rate falls. This leads to an increase in investment spending because borrowing becomes less expensive. As a result, aggregate demand shifts to the right as both consumption and investment spending increase.

Question 9

An increase in the expected price level shifts the short-run aggregate supply curve to the right.

Accepted Answer

An increase in the expected price level would lead to a decrease in short-run aggregate supply, since firms would expect to earn higher profits at any given level of output and would therefore increase the cost of production.

Question 10

An increase in the money supply shifts the long-run aggregate supply curve to the right.

Accepted Answer

An increase in the money supply may lead to short-term shifts in the aggregate supply curve, but in the long run, the aggregate supply curve is determined by factors such as technology, labor force, and capital stock. Therefore, increasing the money supply does not have an effect on the long-run aggregate supply curve.

Question 11

A decrease in the money supply causes the interest rate to rise so that investment falls.

Accepted Answer

When the money supply decreases, there is less money available for borrowing and lending. This leads to an increase in the demand for money, causing the interest rate to rise as lenders compete for the available funds. As the interest rate rises, borrowing for investment becomes more expensive and less attractive, thus causing investment to fall.

Question 12

Increased uncertainty and pessimism about the future of the economy lead firms to desire less investment spending which shifts the aggregate-demand curve to the left.

Accepted Answer

Uncertainty and pessimism about the future lead to a decrease in overall demand, including investment spending, which shifts the aggregate-demand curve to the left.

Question 13

The exchange-rate effect is the idea that a higher U.S. price level causes the value of the dollar to increase in foreign exchange markets, and this effect contributes to the downward slope of the aggregate-demand curve.

Accepted Answer

The exchange-rate effect is a real-world phenomenon in which an increase in the U.S. price level leads to an appreciation of the dollar in foreign exchange markets. This, in turn, leads to a decrease in net exports and a downward shift in the aggregate-demand curve. Therefore, the statement is true.

Question 14

An increase in the actual price level does not shift the short-run aggregate supply curve, but an expected increase in the price level shifts the short-run aggregate supply curve to the left.

Accepted Answer

An increase in the actual price level affects the quantity of goods and services supplied in the short run but does not shift the short-run aggregate supply (SRAS) curve itself. However, if producers expect higher prices in the future, they might adjust their production plans, which can shift the SRAS curve to the left as they anticipate higher costs or demand higher prices for their products.

Question 15

Technological progress shifts the long-run aggregate supply curve to the right.

Accepted Answer

Technological progress allows for more efficient production and increased productivity, which increases the potential output and shifts the long-run aggregate supply curve to the right.

Question 16

The only way to rationalize an upward slope for the short-run aggregate-supply curve is to argue that wages are sticky in the short run.

Accepted Answer

There are multiple reasons for the upward slope of the short-run aggregate-supply curve, including not only sticky wages but also sticky prices, misperceptions about relative prices, and short-run adjustments in resource utilization.

Question 17

Other things the same, technological progress raises the price level.

Accepted Answer

Technological progress generally leads to increased efficiency and lower production costs, which would result in lower prices, rather than higher prices.

Question 18

If not all prices adjust instantly to changing economic circumstances, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Accepted Answer

This is known as the sticky price theory, which suggests that prices are slow to adjust to changes in economic conditions, and as such, a sudden decrease in the overall price level can lead to firms being left with higher prices than desired, leading to a reduction in demand and subsequently a reduction in the quantity of goods and services produced.

Question 19

The downward slope of the aggregate demand curve is based on logic that as the price level rises, consumption, investment, and net exports all fall.

Accepted Answer

This is correct. As the price level increases, the purchasing power of consumers, firms, and foreigners decreases, leading to a decrease in consumption, investment, and net exports. This results in a downward slope of the aggregate demand curve.

Question 20

The effect of a change in the value of the dollar in the foreign exchange market due to a change in the price level helps explain the slope of aggregate demand, but does not shift it. The effects of a change in the value of the dollar in the foreign exchange market due to speculation is shown by shifting the aggregate demand curve.

Accepted Answer

The slope of the aggregate demand curve is influenced by the price level's effect on the value of the dollar in foreign exchange markets, which in turn affects net exports. However, shifts in the aggregate demand curve are caused by factors other than price level changes, such as changes in consumer confidence, fiscal policy, or speculation affecting the value of the dollar, which impact the overall demand for goods and services at all price levels.

Quiz 33: Aggregate Demand and Aggregate Supply