Question 1

The full-employment level is greater than the natural rate of employment.

Accepted Answer

The full-employment level is the same as the natural rate of employment. The natural rate of employment is the rate at which the economy is producing goods and services at its maximum potential level, given the available resources, without causing inflation.

Question 2

If the money supply is fixed and prices rise, the cost of borrowing will _____ and business investment will _____. This is called the _____.
A) rise; rise; wealth effect
B) fall; rise; interest rate effect
C) rise; fall; wealth effect
D) rise; fall; interest rate effect

Accepted Answer

If the money supply is fixed and prices rise, the demand for borrowing will increase, causing the cost of borrowing to rise. This will lead to a decrease in business investment since borrowing for investment purposes becomes more expensive. This is known as the interest rate effect.

Question 3

Which of these would NOT affect (shift) the short-run aggregate supply curve?
A) an increase in labor productivity
B) a decline in the price of imported oil
C) a decline in business taxes
D) an increase in the price level

Accepted Answer

A change in the price level would not shift the short-run aggregate supply curve, as it represents a movement along the curve rather than a shift of the entire curve. The other options would affect the curve by shifting it to the right (increased labor productivity, decline in business taxes) or left (increase in price of imported oil).

Question 4

The aggregate demand curve shows the level of real GDP that firms will produce at different price levels.

Accepted Answer

The aggregate demand curve shows the quantity of goods and services demanded at different price levels, not the level of real GDP that firms will produce.

Question 5

As the aggregate price level declines
A) there is a movement down along the aggregate demand curve.
B) the aggregate demand curve shifts to the left.
C) there is a movement up along the aggregate demand curve.
D) the aggregate demand curve shifts to the right.

Accepted Answer

A decline in the aggregate price level leads to a decrease in the cost of goods and services, which increases the purchasing power of consumers. This, in turn, leads to an increase in the demand for goods and services, causing a movement down along the existing aggregate demand curve.

Question 6

John Maynard Keynes's analysis was based on an economy whose resources were underutilized.

Accepted Answer

Keynes believed that the economy could be in a state of underutilization, which he described as a "recessionary gap," where there are unused resources and high unemployment.

Question 7

If the U.S. aggregate price level rises
A) net exports will also rise.
B) interest rates will decline.
C) the aggregate demand curve will shift to the left.
D) the purchasing power of wealth will decrease.

Accepted Answer

When the U.S. aggregate price level rises, the purchasing power of wealth will decrease, as the same amount of money will be able to buy less goods and services. This is because the general price level is higher. The other options are not true, as an increase in aggregate price level does not necessarily lead to an increase in net exports or a decline in interest rates, and it actually causes a shift in the aggregate demand curve to the right, not to the left.

Question 8

High family debt
A) reduces the tendency to consume.
B) encourages the tendency to spend.
C) is illegal.
D) is a prime predictor of impending inflation.

Accepted Answer

When a family has high debt, they are more likely to be burdened with high interest payments and may have to cut back on their spending to repay their debts. This reduces their tendency to consume and can have a negative impact on the overall economy.

Question 9

Increased taxes will shift the aggregate demand curve to the _____ and _____ output demanded.
A) left; decrease
B) left; increase
C) right; increase
D) right; decrease

Accepted Answer

Increased taxes will reduce disposable income for consumers, leading to a decrease in consumption spending, which will shift the aggregate demand curve to the left. This will result in a decrease in the output demanded.

Question 10

If the economy shown in the figure begins on AD₁ and SRAS₁, what will happen in the short run and long run if the government begins a sustained period of increased spending? A) The economy moves from point C to E to B. B) The economy moves from point D to C to A. C) The economy moves from point D to C to E. D) The economy moves from point C to A to B.

Accepted Answer

The answer of If the economy shown in the figure...

Question 11

At high domestic price levels compared to other countries, Americans
A) sell more exported goods.
B) buy more imported goods.
C) buy the same amount of foreign goods.
D) buy more American-made goods.

Accepted Answer

When domestic prices are high compared to other countries, it is often cheaper for Americans to import goods from other countries where prices are lower. This leads to Americans buying more imported goods rather than buying more American-made goods or the same amount of foreign goods.

Question 12

Which event will shift the aggregate demand curve to the right?
A) catastrophic hurricane hits the northeastern United States
B) increase in household debt
C) decrease in taxes
D) decrease in military spending

Accepted Answer

A decrease in taxes will increase disposable income and consumer spending, leading to an increase in aggregate demand.

Question 13

The collapse of home values in 2008 led to a(n) _____ in Americans' consumption and a(n) _____ in their saving rates.
A) decrease; decrease
B) decrease; increase
C) increase; increase
D) increase; decrease

Accepted Answer

The collapse of home values led to a decrease in Americans' consumption as they had less equity in their homes and less disposable income. This decrease in consumption led to an increase in their saving rates as they attempted to save more money in case of future financial uncertainty.

Question 14

The idea that new spending creates more new spending is known as the _____ effect.
A) crowding-out
B) multiplier
C) wealth
D) interest rate

Accepted Answer

The multiplier effect refers to the idea that an increase in spending will lead to a larger increase in economic activity. As new spending creates new income, which in turn leads to more spending, this creates a multiplier effect on the overall economy.

Question 15

_____ inflation occurs when a supply shock reduces aggregate supply.
A) Cost-push
B) Demand-pull
C) Sticky
D) Demand-push

Accepted Answer

Cost-push inflation occurs when there is a decrease in aggregate supply due to increased production costs, such as higher wages or the cost of raw materials. This leads to a decrease in the quantity of goods and services supplied, which then leads to higher prices.

Question 16

Consumption would decrease, and the aggregate demand curve would shift to the
A) right if taxes increased.
B) right if taxes decreased.
C) left if taxes increased.
D) left if taxes decreased.

Accepted Answer

When taxes increase, people have less disposable income to spend, which decreases consumption. This leads to a decrease in aggregate demand, which shifts the curve to the left.

Question 17

The curve that shows how much GDP is demanded at various price levels is called
A) the aggregate expenditures schedule.
B) the consumption line.
C) aggregate demand.
D) aggregate supply.

Accepted Answer

The curve that shows how much GDP is demanded at various price levels is called aggregate demand. The aggregate expenditures schedule and the consumption line also relate to the demand side of the economy, but they do not specifically show the relationship between GDP and price levels. Aggregate supply, on the other hand, shows how much output firms are willing and able to produce at different price levels.

Question 18

An increase in aggregate demand can be caused by
A) the depreciation of the dollar.
B) a cut in government spending.
C) an increase in interest rates.
D) a rise in consumer debt.

Accepted Answer

The depreciation of the dollar can make exports less expensive and increase demand for domestic goods and services, thus increasing aggregate demand. B, C, and D are all factors that could decrease aggregate demand.

Question 19

(Figure: Aggregate Demand Shift)  Which of these may be an explanation for the shift in aggregate demand from A to B?
A) Prices fall and increase real wealth.
B) Consumer confidence declines and consumption spending falls.
C) Goods and services become less competitive and exports fall.
D) Interest rates fall and boost investments.

Accepted Answer

Interest rates fall and boost investments.

Question 20

If the marginal propensity to consume is 0.9, then the spending multiplier is
A) 1.
B) 7.
C) 9.
D) 10.

Accepted Answer

The spending multiplier is calculated as 1/(1-MPC) where MPC is the marginal propensity to consume. So, in this case, the spending multiplier would be 1/(1-0.9) = 10. Therefore, the correct answer is D.

Quiz 9: Aggregate Demand and Supply

The full-employment level is greater than the natural rate of employment.

If the money supply is fixed and prices rise, the cost of borrowing will ___ and business investment will _. This is called the ___.

Which of these would NOT affect (shift) the short-run aggregate supply curve?

The aggregate demand curve shows the level of real GDP that firms will produce at different price levels.

As the aggregate price level declines

John Maynard Keynes's analysis was based on an economy whose resources were underutilized.

If the U.S. aggregate price level rises

High family debt

Increased taxes will shift the aggregate demand curve to the _ and _ output demanded.

If the economy shown in the figure begins on AD₁ and SRAS₁, what will happen in the short run and long run if the government begins a sustained period of increased spending?

At high domestic price levels compared to other countries, Americans

Which event will shift the aggregate demand curve to the right?

The collapse of home values in 2008 led to a(n) _ in Americans' consumption and a(n) _ in their saving rates.

The idea that new spending creates more new spending is known as the _____ effect.

_____ inflation occurs when a supply shock reduces aggregate supply.

Consumption would decrease, and the aggregate demand curve would shift to the

The curve that shows how much GDP is demanded at various price levels is called

An increase in aggregate demand can be caused by

(Figure: Aggregate Demand Shift) Which of these may be an explanation for the shift in aggregate demand from A to B?

If the marginal propensity to consume is 0.9, then the spending multiplier is

Quiz 9: Aggregate Demand and Supply

The full-employment level is greater than the natural rate of employment.

If the money supply is fixed and prices rise, the cost of borrowing will _____ and business investment will _____. This is called the _____.

Which of these would NOT affect (shift) the short-run aggregate supply curve?

The aggregate demand curve shows the level of real GDP that firms will produce at different price levels.

As the aggregate price level declines

John Maynard Keynes's analysis was based on an economy whose resources were underutilized.

If the U.S. aggregate price level rises

High family debt

Increased taxes will shift the aggregate demand curve to the _____ and _____ output demanded.

If the economy shown in the figure begins on AD1 and SRAS1, what will happen in the short run and long run if the government begins a sustained period of increased spending?

At high domestic price levels compared to other countries, Americans

Which event will shift the aggregate demand curve to the right?

The collapse of home values in 2008 led to a(n) _____ in Americans' consumption and a(n) _____ in their saving rates.

The idea that new spending creates more new spending is known as the _____ effect.

_____ inflation occurs when a supply shock reduces aggregate supply.

Consumption would decrease, and the aggregate demand curve would shift to the

The curve that shows how much GDP is demanded at various price levels is called

An increase in aggregate demand can be caused by

(Figure: Aggregate Demand Shift) Which of these may be an explanation for the shift in aggregate demand from A to B?

If the marginal propensity to consume is 0.9, then the spending multiplier is

If the money supply is fixed and prices rise, the cost of borrowing will ___ and business investment will _. This is called the ___.

Increased taxes will shift the aggregate demand curve to the _ and _ output demanded.

If the economy shown in the figure begins on AD₁ and SRAS₁, what will happen in the short run and long run if the government begins a sustained period of increased spending?

The collapse of home values in 2008 led to a(n) _ in Americans' consumption and a(n) _ in their saving rates.