Question 1

Which one of the following factors will most likely cause an increase in aggregate demand?
A) An increase in net exports.
B) An increase in the real interest rate.
C) A decrease in net exports due to falling incomes abroad.
D) A technological development that decreases the cost of producing computer chips.

Accepted Answer

An increase in net exports leads to a higher demand for a country's goods and services from abroad, which in turn increases the aggregate demand within the country.

Question 2

The interest rate effect predicts that higher prices:
A) make it more expensive to borrow, leading to higher interest rates and less investment.
B) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
C) increase borrowing, leading to lower interest rates and more investment.
D) increase borrowing, leading to higher interest rates and less investment.

Accepted Answer

The interest rate effect suggests that higher prices lead to increased borrowing, which raises interest rates and reduces investment.

Question 3

Which of the following will most likely increase aggregate demand?
A) a decrease in stock market prices
B) an increase in business investment spending
C) a decrease in the expected inflation rate
D) a decrease in real GDP

Accepted Answer

An increase in business investment spending will lead to an increase in aggregate demand as it increases the total amount of spending in the economy. Decreases in stock market prices and real GDP are likely to decrease aggregate demand, while a decrease in expected inflation may have a small positive effect, but not as significant as an increase in investment spending.

Question 4

A rightward shift in the aggregate demand curve can be caused by an increase in:
A) the price level.
B) business investment spending.
C) taxes.
D) production costs.

Accepted Answer

An increase in business investment spending can lead to an increase in aggregate demand as firms increase their production and hiring, leading to more spending in the economy. The other options listed would either lead to a leftward shift in the aggregate demand curve (A, C) or have no direct impact on the curve (D).

Question 5

Which of the following will not shift the aggregate demand curve to the right?
A) consumers becoming more optimistic about the future
B) an increase in government spending
C) business optimism increases
D) consumers become pessimistic about the future

Accepted Answer

When consumers become pessimistic about the future, they are less likely to spend money, causing a decrease in consumption expenditures, which leads to a decrease in aggregate demand.

Question 6

The aggregate demand curve will shift rightward when there is:
A) a decrease in government spending.
B) a decrease in incomes abroad.
C) a tax increase.
D) the expectation that future consumer income will rise.

Accepted Answer

The expectation that future consumer income will rise will lead to an increase in consumption expenditures and therefore increase aggregate demand. A decrease in government spending (A) would lead to a decrease in aggregate demand. A decrease in incomes abroad (B) would decrease exports and decrease aggregate demand. A tax increase (C) would decrease disposable income and decrease consumption expenditures, leading to a decrease in aggregate demand.

Question 7

The real balances effect predicts that higher prices:
A) make people worse off by reducing the value of their wealth, leading them to save more and spend less.
B) make people worse off by reducing the value of their wealth, leading them to save less and spend more.
C) make people better off by increasing the value of their wealth, leading them to save less and spend more.
D) increase borrowing, leading to higher interest rates and less investment.

Accepted Answer

The real balances effect suggests that as prices increase, the real value of people's wealth decreases, making them feel poorer. This typically leads to an increase in saving and a decrease in spending as individuals attempt to rebuild their wealth.

Question 8

Which of the following will increase aggregate demand in the United States?
A) a higher price level
B) an increase in the real interest rate
C) an increase in wealth due to a substantial appreciation in the value of stocks
D) a decrease in real income in Japan and Western Europe

Accepted Answer

An increase in wealth due to a substantial appreciation in the value of stocks will increase aggregate demand as people will have more disposable income and will be able to spend more. A higher price level (A) will decrease aggregate demand as people will have less purchasing power. An increase in the real interest rate (B) will also decrease aggregate demand by discouraging borrowing and spending. A decrease in real income in Japan and Western Europe (D) may have an impact on the U.S. economy through its effect on U.S. trade, but it will not directly increase aggregate demand.

Question 9

Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then:
A) aggregate demand will decrease.
B) aggregate demand will increase.
C) long-run aggregate supply will increase.
D) long-run aggregate supply will decrease.

Accepted Answer

Consumers and businesses becoming more optimistic and increasing their spending will lead to an increase in aggregate demand, as there will be more demand for goods and services in the economy. This can result in an increase in production and employment in the short run, but may also lead to an increase in prices in the long run.

Question 10

The real balance effect (wealth effect), the interest rate effect, and the net exports effect all help to explain the:
A) decrease in supply in the loanable funds market.
B) large federal budget deficit.
C) increase in short-run aggregate supply.
D) downward-sloping aggregate demand curve.

Accepted Answer

The real balance effect, interest rate effect, and net exports effect all affect aggregate demand, which is represented by the downward-sloping aggregate demand curve. The real balance effect and interest rate effect both deal with changes in consumer spending and investment, which are components of aggregate demand. The net exports effect deals with changes in exports and imports, which also affects aggregate demand.

Question 11

Which of the following will not shift the aggregate demand curve to the left?
A) Consumers become more optimistic about the future.
B) Government spending decreases.
C) Business optimism decreases.
D) Consumers become pessimistic about the future.

Accepted Answer

Consumers becoming more optimistic about the future will shift the aggregate demand curve to the right, not to the left. B, C, and D will shift the aggregate demand curve to the left.

Question 12

Which of the following could not be expected to shift the aggregate demand curve?
A) net exports fall
B) consumption spending decreases
C) an increase in government spending
D) a change in real GDP

Accepted Answer

A change in real GDP would not be expected to shift the aggregate demand curve because real GDP is a component of aggregate demand itself, not a determinant of it. The other options, net exports, consumption spending, and government spending, are all determinants of aggregate demand and would shift the curve.

Question 13

Suppose the price level falls. The result is that the:
A) aggregate supply curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) general price level would rise causing a movement up the aggregate demand curve.
D) aggregate demand curve would slope downward because of the real balances effect.

Accepted Answer

When the price level falls, the real value of money increases, which means consumers have more purchasing power. This leads to an increase in consumption and shifts the aggregate demand curve to the right, not the aggregate supply curve. The downward slope of the aggregate demand curve is partly due to the real balances effect, which is the increase in consumption and investment spending that results from the increase in the real value of money balances when the price level falls.

Question 14

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:
A) real balances effect.
B) interest-rate effect.
C) net exports effect.
D) substitution effect.

Accepted Answer

This argument is known as the interest-rate effect, which states that as the price level increases, the demand for credit also increases, leading to higher interest rates. Higher interest rates, in turn, discourage both consumption and investment spending, which reduces the overall demand in the economy.

Question 15

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:
A) both real GDP and the price level will fall.
B) real GDP will fall and the price level will rise.
C) real GDP will rise and the price level will fall.
D) both real GDP and the price level will rise.

Accepted Answer

When workers become pessimistic about their future employment and start saving more and spending less, it causes a decrease in aggregate demand, leading to lower real GDP and lower prices. This corresponds to a leftward shift of the aggregate demand curve. Since the economy is on the intermediate range of the aggregate supply curve, the decrease in aggregate demand will cause a reduction in both real GDP and the price level. Therefore, the correct answer is A.

Question 16

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:
A) interest-rate effect.
B) real balance effect.
C) investment effect.
D) disinvestment effect.

Accepted Answer

The interest-rate effect describes how an increase in the price level leads to higher interest rates, which in turn reduce the quantity of goods and services demanded. This occurs because higher prices increase the demand for money, leading to higher interest rates that discourage spending on consumption and investment.

Question 17

Which of the following would shift the aggregate demand curve to the left?
A) An increase in exports.
B) An increase in investment.
C) An increase in government spending.
D) A decrease in government spending.

Accepted Answer

A decrease in government spending would shift the aggregate demand curve to the left because it would decrease the overall level of spending in the economy, leading to a decrease in demand for goods and services.

Question 18

As prices rise, people will buy fewer goods and services because:
A) the interest rate has declined.
B) aggregate demand has increased.
C) the purchasing power of the fixed quantity of money has declined.
D) the income of households has increased.

Accepted Answer

When prices rise, the purchasing power of the fixed quantity of money that people have declines. This means that people can purchase fewer goods and services than before, which leads to a decrease in demand. This is known as the "income effect" of a price increase. The other choices are incorrect: A is wrong because a decline in interest rates would actually encourage spending and increase aggregate demand; B is wrong because an increase in aggregate demand would mean more spending and higher prices; and D is wrong because an increase in household income would likely lead to more spending and higher prices, not less.

Question 19

A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future consumer income will fall will all cause aggregate:
A) demand to shift rightward.
B) demand to shift leftward.
C) supply to shift rightward.
D) supply to shift leftward.

Accepted Answer

A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future consumer income will fall all indicate a decrease in overall economic activity, which then causes a decrease in demand, shifting the aggregate demand curve leftward.

Question 20

Why does the aggregate demand (AD) curve slope downward? What could cause the AD curve to shift to the right? What impact would a rightward shift of the AD curve have on the economy?

Accepted Answer

The answer of Why does the aggregate demand (AD) curve...

Quiz 20: Aggregate Demand and Supply

Which one of the following factors will most likely cause an increase in aggregate demand?

The interest rate effect predicts that higher prices:

Which of the following will most likely increase aggregate demand?

A rightward shift in the aggregate demand curve can be caused by an increase in:

Which of the following will not shift the aggregate demand curve to the right?

The aggregate demand curve will shift rightward when there is:

The real balances effect predicts that higher prices:

Which of the following will increase aggregate demand in the United States?

Using the AD-AS model, if consumers and business become more optimistic about the future direction of the economy and increase spending, then:

The real balance effect (wealth effect) , the interest rate effect, and the net exports effect all help to explain the:

Which of the following will not shift the aggregate demand curve to the left?

Which of the following could not be expected to shift the aggregate demand curve?

Suppose the price level falls. The result is that the:

When the supply of credit is fixed, an increase in the price level stimulates the demand for credit, which in turn reduces consumption and investment spending. This argument is called the:

Suppose workers become pessimistic about their future employment, which causes them to save more and spend less. If the economy is on the intermediate range of the aggregate supply curve, then:

When prices rise, consumers and businesses hold larger money balances. This reduces the supply of loanable funds, increases the interest rate, and discourages both consumption and investment. This process is called the:

Which of the following would shift the aggregate demand curve to the left?

As prices rise, people will buy fewer goods and services because:

A cut in government spending, a decrease in income abroad, an increase in taxes, or an expectation that future consumer income will fall will all cause aggregate:

Why does the aggregate demand (AD) curve slope downward? What could cause the AD curve to shift to the right? What impact would a rightward shift of the AD curve have on the economy?