Question 1

The model of aggregate demand and aggregate supply explains the relationship between
A)the price and quantity of a particular good.
B)unemployment and output.
C)wages and employment.
D)real GDP and the price level.

Accepted Answer

The model of aggregate demand and aggregate supply explains the relationship between the overall level of real GDP and the price level, taking into account factors such as consumer spending, investment, government spending, and net exports. It does not directly address the relationships between the price and quantity of a particular good, unemployment and output, or wages and employment.

Question 2

When looking at a graph of aggregate demand, which of the following is correct?
A)There are nominal variables on both the vertical and the horizontal axes.
B)There are real variables on both the vertical and horizontal axes.
C)The variable on the vertical axis is nominal; the variable on the horizontal axis is real
D)The variable on the vertical axis is real; the variable on the horizontal axis is nominal

Accepted Answer

In a graph of aggregate demand, the vertical axis typically represents the price level, which is a nominal variable, and the horizontal axis represents real GDP or output, which is a real variable. This setup allows for the analysis of the relationship between the overall price level in the economy and the total output of goods and services, adjusted for inflation.

Question 3

Most economists believe that classical macroeconomic theory is a good description of the economy
A)in neither the short nor long run.
B)in the short run and in the long run.
C)in the short run, but not in the long run.
D)in the long run, but not in the short run.

Accepted Answer

Most economists believe that classical macroeconomic theory is a good description of the economy in the long run, but not in the short run. In the short run, factors such as sticky prices and wages, imperfect information, and uncertainty can lead to deviations from classical theory predictions. However, in the long run, classical theory predicts that the economy will tend towards full employment and potential output as prices and wages adjust to clear markets.

Question 4

Most economists believe that money neutrality
A)does not hold in the short run.
B)does not hold in the long run.
C)does not hold in either the short run or long run.
D)holds in the short run and the long run.

Accepted Answer

Most economists agree that money neutrality does hold in the long run, but not in the short run. In the short run, changes in the money supply can affect output and employment levels, as well as interest rates. It is only in the long run, after all adjustments have taken place, that money neutrality holds, meaning that changes in the money supply only affect nominal variables such as prices and exchange rates.

Question 5

The model of short-run economic fluctuations focuses on
A)the price level and real GDP.
B)productivity and economic growth.
C)the neutrality of money and inflation.
D)None of the above is correct.

Accepted Answer

The model of short-run economic fluctuations, also known as the Keynesian model, focuses on analyzing the relationship between changes in the price level and real GDP in the short run. It explains how different factors such as changes in aggregate demand, fiscal policy, and monetary policy affect these variables, leading to economic booms and recessions. Therefore, option A is the correct choice. Option B is incorrect as productivity and economic growth are long-term factors that are not relevant to short-run fluctuations. Option C is also incorrect as it refers to the Quantity Theory of Money, which is a long-run concept and not related to the Keynesian model of short-run fluctuations.

Question 6

In order to understand how the economy works in the short run, we need to
A)study the classical model.
B)study a model in which real and nominal variables interact.
C)understand that "money is a veil."
D)understand that money is neutral in the short run.

Accepted Answer

The short run model of the economy involves the interaction of both real and nominal variables, such as output and prices, respectively. Therefore, studying a model in which these variables interact is necessary to understand the short run dynamics of the economy. The classical model (A), which assumes that markets are always in equilibrium and does not account for nominal variables, is not sufficient for understanding the short run. "Money is a veil" (C) and "money is neutral in the short run" (D) are concepts related to the long-run neutrality of money and are not directly relevant to understanding short-run dynamics.

Question 7

Classical economist David Hume observed that as the money supply expanded after gold discoveries it took some time for prices to rise and in the meantime the economy enjoyed higher employment and production. This is inconsistent with monetary neutrality because
A)monetary neutrality would mean that neither prices nor production should have risen.
B)monetary neutrality would mean that production should have risen, but prices should not have.
C)monetary neutrality would mean the prices should have risen, but production should not have changed.
D)monetary neutrality would mean that prices and production should both have fallen.

Accepted Answer

According to monetary neutrality, changes in the money supply should only affect nominal variables such as prices, but not real variables such as employment and production. However, Hume observed that after gold discoveries, employment and production did increase before prices eventually rose. This suggests that monetary neutrality did not hold in the short run. Choice C reflects the correct statement that monetary neutrality would mean that prices should have risen, but production should not have changed, which is inconsistent with Hume's observation.

Question 8

The aggregate demand and aggregate supply graph has
A)the price level on the horizontal axis. The price level can be measured by the GDP deflator.
B)the price level on the horizontal axis. The price level can be measured by real GDP.
C)the price level on the vertical axis. The price level can be measured by the GDP deflator.
D)the price level on the vertical axis. The price level can be measured by GDP.

Accepted Answer

The answer of The aggregate demand and aggregate supply graph...

Question 9

The average price level is measured by
A)the price of oil.
B)the rate of inflation.
C)the nominal interest rate.
D)the GDP deflator or the CPI.

Accepted Answer

The average price level is measured by the GDP deflator or the CPI, which are both indexes that measure the overall level of prices in an economy. The price of oil, rate of inflation, and nominal interest rate are all factors that can influence the overall price level, but they are not direct measures of it.

Question 10

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes
A)both the short run and the long run.
B)the short run, but not the long run.
C)the long run, but not the short run.
D)neither the long run nor the short run.

Accepted Answer

The answer of Real and nominal variables are highly intertwined,...

Question 11

Most economists believe that classical theory describes the world
A)in the short run.
B)in the long run.
C)in both the short run and the long run.
D)in neither the short run nor the long run.

Accepted Answer

Classical theory is based on the assumption that markets will eventually reach equilibrium in the long run. Therefore, it is believed to describe the world in the long run. However, in the short run, classical theory may not hold true as there can be market imperfections and frictions that prevent the market from reaching equilibrium.

Question 12

The variables on the vertical and horizontal axes of the aggregate demand and supply graph are
A)the price level and real output.
B)real output and employment.
C)employment and the inflation rate.
D)the value of money and the price level.

Accepted Answer

The vertical axis on the AD-AS graph represents the price level while the horizontal axis represents real output. Therefore, choice A is the correct answer.

Question 13

Most economists believe that in the short run
A)real and nominal variables are determined independently and that money cannot move real GDP away from its long-run trend.
B)real and nominal variables are determined independently but that money can temporarily move real GDP away from its long-run trend.
C)real and nominal variables are highly intertwined but that money cannot move real GDP away from its long-run trend.
D)real and nominal variables are highly intertwined and that money can temporarily move real GDP away from its long-run trend.

Accepted Answer

The answer of Most economists believe that in the short...

Question 14

Most economists believe that in the long run, changes in the money supply
A)affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical theory.
B)affect nominal but not real variables. This view that money is ultimately neutral is inconsistent with classical theory.
C)affect real but not nominal variables. This view that money is ultimately neutral is consistent with classical theory.
D)affect real but not nominal variables. This view that money is ultimately neutral is inconsistent with classical theory.

Accepted Answer

According to the classical theory, changes in the money supply only affect nominal variables such as prices, wages, and nominal GDP, but not real variables such as real GDP, real interest rates, and employment. This is because in the long run, prices and wages adjust to changes in the money supply, and therefore real variables remain unaffected. This view that money is ultimately neutral is consistent with classical theory.

Question 15

The aggregate-demand curve shows the
A)quantity of labor and other inputs that firms want to buy at each price level.
B)quantity of labor and other inputs that firms want to buy at each inflation rate.
C)quantity of domestically produced goods and services that households want to buy at each price level.
D)quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level.

Accepted Answer

The aggregate-demand curve shows the quantity of domestically produced goods and services that households, firms, the government, and customers abroad want to buy at each price level. The aggregate demand reflects the spending decisions of households, firms, and the government, as well as the country's net exports (exports minus imports).

Question 16

The aggregate demand and aggregate supply graph has
A)quantity of output on the horizontal axis. Output can be measured by the GDP deflator.
B)quantity of output on the horizontal axis. Output can be measured by real GDP.
C)quantity of output on the vertical axis. Output can be measured by the GDP deflator.
D)quantity of output on the vertical axis. Output can be measured by real GDP.

Accepted Answer

The aggregate demand and aggregate supply graph has quantity of output on the horizontal axis, and output can be measured by real GDP because it represents the real output of goods and services produced in an economy. The GDP deflator is a measure of the overall price level and is used to adjust nominal GDP to real GDP.

Question 17

Classical economist David Hume observed that as the money supply expanded after gold discoveries
A)prices and output both increased immediately.
B)prices increased immediately while output remained unchanged.
C)it took time for prices to rise; in the meantime output was lower.
D)it took time for prices to rise; in the meantime output was higher.

Accepted Answer

The answer of Classical economist David Hume observed that as...

Question 18

Aggregate demand includes
A)the quantity of goods and services the government, households, firms, and customers abroad want to buy.
B)neither the quantity of goods and services the government, households, nor firms want to buy nor the quantity of goods and services customers abroad want to buy.
C)the quantity of goods and service the government wants to buy, but not the quantity of goods and services households, firms, or customers abroad want to buy.
D)the quantity of goods and services households and firms want to buy, but not the quantity of goods and services the government wants to buy.

Accepted Answer

Aggregate demand refers to the total amount of goods and services that all sectors of an economy (government, households, firms, and customers abroad) want to buy at a given price level. Therefore, option A is the correct choice as it includes all the sectors mentioned in the question. Option B is incorrect as it excludes all the sectors mentioned in the question. Option C is also incorrect as it only includes the government sector. Option D is incorrect as it only includes households and firms and excludes the government and foreign sectors.

Question 19

The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning
A)both the short run and the long run.
B)the short run, but not the long run.
C)the long run, but not the short run.
D)neither the long run nor the short run.

Accepted Answer

In the short run, changes in the quantity of money can impact employment levels through their effects on interest rates and investment levels. However, in the long run, the quantity of money has no impact on the overall level of employment or other important factors in people's lives. Most economists would agree with this assessment.

Question 20

We depart from the assumptions of classical economics when we focus on the relationship between
A)the quantity of output and the price level.
B)the quantity of output and the unemployment rate.
C)the price level and the inflation rate.
D)inflation and the nominal interest rate.

Accepted Answer

The answer of We depart from the assumptions of classical...

Quiz 33: Aggregate Demand and Aggregate Supply

The model of aggregate demand and aggregate supply explains the relationship between

When looking at a graph of aggregate demand, which of the following is correct?

Most economists believe that classical macroeconomic theory is a good description of the economy

Most economists believe that money neutrality

The model of short-run economic fluctuations focuses on

In order to understand how the economy works in the short run, we need to

Classical economist David Hume observed that as the money supply expanded after gold discoveries it took some time for prices to rise and in the meantime the economy enjoyed higher employment and production. This is inconsistent with monetary neutrality because

The aggregate demand and aggregate supply graph has

The average price level is measured by

Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

Most economists believe that classical theory describes the world

The variables on the vertical and horizontal axes of the aggregate demand and supply graph are

Most economists believe that in the short run

Most economists believe that in the long run, changes in the money supply

The aggregate-demand curve shows the

The aggregate demand and aggregate supply graph has

Classical economist David Hume observed that as the money supply expanded after gold discoveries

Aggregate demand includes

The quantity of money has no real impact on things people really care about like whether or not they have a job. Most economists would agree that this statement is appropriate concerning

We depart from the assumptions of classical economics when we focus on the relationship between