Question 1

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 explains 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 2

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

If workers become pessimistic and start saving more and spending less, then aggregate demand (AD) will shift leftward. If the economy is on the intermediate range of the aggregate supply (AS) curve, then the decline in AD will cause both real GDP and the price level to fall. This is a situation of stagflation, where the economy experiences both high unemployment (due to the fall in output) and high inflation (due to the increase in the relative price level).

Question 3

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 tend to decrease their spending, which leads to a decrease in aggregate demand. Therefore, it will not shift the aggregate demand curve to the right.

Question 4

Which of the following is true , other things equal?
A) A reduction in prices will increase the real wealth of those holding a fixed quantity of money.
B) A reduction in prices will lead to a decline in net exports.
C) A reduction in prices will increase the scarcity of money, raise the real interest rate, and, thereby, encourage investment and consumption.
D) A reduction in prices will increase profit margins and, thereby, stimulate additional investment.

Accepted Answer

A reduction in prices will increase the real purchasing power of those holding a fixed quantity of money, as they are now able to buy more goods and services with their money. This increase in real wealth can result in increased consumer spending, which can lead to increased economic activity.

Question 5

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 increase aggregate demand as it increases spending in the economy, leading to an increase in output and prices. A decrease in stock market prices (A) could decrease aggregate demand if it leads to a decrease in consumer and business confidence. A decrease in the expected inflation rate (C) could also decrease aggregate demand if it leads to lower spending due to anticipation of lower prices in the future. A decrease in real GDP (D) will decrease aggregate demand as it means the economy is producing less, leading to a decrease in output and prices.

Question 6

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 shift the aggregate demand curve because it is a point on the curve, rather than a shift factor. Changes in net exports, consumption spending, and government spending can all cause shifts in the aggregate demand curve.

Question 7

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 would increase consumer spending and investment, which would in turn increase aggregate demand. A higher price level (A) would actually decrease aggregate demand by reducing real income and purchasing power. An increase in the real interest rate (B) would decrease both consumption and investment spending, reducing aggregate demand. A decrease in real income in Japan and Western Europe (D) would decrease their demand for U.S. goods and services, reducing U.S. net exports and aggregate demand.

Question 8

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...

Question 9

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 domestically produced goods and services, which in turn increases aggregate demand.

Question 10

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 answer of The interest rate effect predicts that higher...

Question 11

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 (wealth effect), the interest rate effect, and the net exports effect are all factors that influence aggregate demand. The downward-sloping aggregate demand curve represents the relationship between the price level and the level of aggregate expenditures, which can be affected by these factors. Therefore, D is the best choice.

Question 12

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 increase in purchasing power stimulates more demand for goods and services, which is represented by a downward slope in the aggregate demand curve. This is known as the real balances effect, where a lower price level increases the real value of money and wealth, leading to higher consumption and demand.

Question 13

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 money declines, which means that people are able to buy less with the same amount of money. This leads to a decrease in demand for goods and services since people are less able and willing to buy them at higher prices.

Question 14

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 decrease overall spending in the economy, leading to a leftward shift in the aggregate demand curve.

Question 15

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

Business investment spending increases aggregate demand by increasing the demand for goods and services. Increases in the price level (A) and production costs (D) shift the aggregate supply curve, not the demand curve. Taxes (C) may affect aggregate demand, but not necessarily in a rightward shift.

Question 16

The aggregate demand curve is downward sloping because:
A) an increase in the price level will cause an increase in spending.
B) at lower price levels, real wealth decreases, causing a decrease in the quantities of goods and services demanded.
C) at lower price levels, interest rates decrease, causing a decrease in the quantities of goods and services demanded.
D) at lower price levels, exports increase, causing an increase in real GDP.

Accepted Answer

The answer of The aggregate demand curve is downward sloping...

Question 17

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 them to save more and spend less in an attempt to restore their wealth, not to save less and spend more. Choices B, C, and D do not accurately describe the real balances effect.

Question 18

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 called the interest-rate effect, as an increase in the price level leads to an increase in the nominal interest rate, which reduces the demand for loanable funds and increases the cost of borrowing for consumption and investment spending. This results in a decrease in aggregate demand and output. Option A (real balances effect) refers to the effect of changes in the price level on the real value of money balances, while option C (net exports effect) refers to the effect of changes in the exchange rate on a nation's net exports. Option D (substitution effect) is a concept in microeconomics that refers to the shift of consumers between products when there is a change in relative prices.

Question 19

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

Option A will not shift the aggregate demand curve to the left as increased consumer optimism will lead to higher spending and increase aggregate demand. Options B, C, and D will shift the aggregate demand curve to the left as they lead to decreases in spending and decreases in aggregate demand.

Question 20

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

An increase in consumer and business optimism leads to an increase in spending, which in turn increases aggregate demand. This shift in the AD curve results in higher output and prices in both the short and long run. There is no direct effect on the long-run aggregate supply.

Quiz 14: Aggregate Demand and Supply

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:

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:

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

Which of the following is true , other things equal?

Which of the following will most likely increase aggregate demand?

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

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

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?

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

The interest rate effect predicts that higher prices:

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

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

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

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

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

The aggregate demand curve is downward sloping because:

The real balances effect predicts that higher prices:

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:

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

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