Question 1

As the price level falls the purchasing power of your currency increases. This is an example of:

Accepted Answer

The real balance effect states that as the price level falls, the purchasing power of individuals' money balances increases, causing an increase in consumption and hence aggregate demand. Thus, option B is the correct choice. The interest rate effect and the substitution effect are related to changes in the interest rate and relative prices, respectively, while the valuation effect of prices is not a widely recognized economic concept.

Question 2

An increase in aggregate demand would most likely be caused by:

Accepted Answer

An increase in aggregate demand is best caused by expansionary monetary policy, such as lower interest rates, increased money supply, and increased government spending, which would increase consumer and business spending, stimulating economic growth.

Question 3

During the past quarter real GDP increased by 2.5 percent and the unemployment rate dropped to 5.40 percent. Economists predict that in the next quarter GDP will grow at a rate of 3.1 percent and the unemployment rate will fall to 5.38 percent. The economy is most likely:

Accepted Answer

The increase in real GDP and the drop in unemployment rate suggest that the economy is in an expansion phase. The predicted further growth in GDP and continued decrease in unemployment rate further support this conclusion.

Question 4

Suppose the wage rate decreases. As a result we would expect:

Accepted Answer

When the wage rate decreases, the cost of production for firms decreases, making it more profitable to produce goods and services. This leads to an increase in the quantity of goods and services supplied at every price level. This increase is reflected by a rightward shift in the positively sloped portion of the aggregate supply curve, as firms are willing and able to supply more output for every price level. Therefore, the correct answer is choice D.

Question 5

Use the following diagram to answer the following questions.
 
-Refer to Real GDP. An increase in the price level is most likely to cause:

Accepted Answer

The answer of Use the following diagram to answer the...

Question 6

Suppose the GDP deflator is currently 115 while the equilibrium GDP deflator is 111. In this instance:

Accepted Answer

If the current GDP deflator is higher than the equilibrium level, it suggests that there is an excess supply of goods and services in the economy. This could be caused by lower demand or excess production. In such a scenario, sellers may lower their prices to attract more buyers, leading to a decrease in the GDP deflator. Hence, option B is the correct answer.

Question 7

Use the following diagram to answer the following questions.
 
-Refer to GDP Deflator. A shift in aggregate demand from AD₁ to AD₂ would most likely by caused by:

Accepted Answer

A shift in aggregate demand from AD₁ to AD₂ indicates an increase in both real GDP and the price level. Expansionary monetary policy, which involves increasing the money supply and lowering interest rates, can stimulate spending and increase aggregate demand, leading to an increase in real GDP and the price level.

Question 8

Use the following diagram to answer the following questions.
 
-Refer to Diagram 12-1. Suppose the price level in the above graph is currently P₁. In this instance, the economy would most likely be experiencing:

Accepted Answer

At price level P₁, the aggregate demand curve intersects with the aggregate supply curve at a level of output lower than potential GDP. This suggests that there is excess demand for goods and services, which may lead to inflationary pressure on prices as consumers compete for scarce goods. Therefore, the correct answer is D.

Question 9

During the past three quarters real GDP has fallen by 4 percent and the unemployment rate has climbed from 5 to 7 percent. Economists predict that in the next quarter GDP will show a modest growth of 0.5 percent and unemployment may fall to 6.8 percent. The economy is most likely:

Accepted Answer

The economy is likely at the trough of the business cycle, as GDP is starting to grow again after a period of decline, and unemployment is beginning to decrease.

Question 10

Suppose the GDP deflator is currently 121 while the equilibrium GDP deflator is 128. In this instance:

Accepted Answer

An excess demand for goods and services in the economy typically leads to an increase in prices, as suppliers can charge more due to the higher demand. This would cause the GDP deflator, which is a measure of the level of prices of all new, domestically produced, final goods and services in an economy, to increase towards the equilibrium level.

Question 11

A change in technology will cause:

Accepted Answer

A change in technology generally affects the productivity of an economy, which in turn affects the entire aggregate supply curve by shifting it. This is because improvements in technology make it possible for the same amount of inputs to produce more outputs, effectively increasing the supply of goods and services at all price levels.

Question 12

Use the following diagram to answer the following questions.
 
-Refer to Real GDP. A technological advance is most likely to cause:

Accepted Answer

A technological advance improves productivity, which shifts the aggregate supply curve to the right, from AS₁ to AS₂.

Question 13

Use the following diagram to answer the following questions.
 
-Refer to Diagram 12-1. In the diagram above, the equilibrium level of real output and the equilibrium price level are:

Accepted Answer

The equilibrium level of real output is represented by GDP₂ and the equilibrium price level is represented by P₂.

Question 14

Use the following diagram to answer the following questions.
 
-Refer to GDP Deflator. A shift in aggregate demand from AD₂ to AD₁ would most likely be caused by:

Accepted Answer

A shift from AD₂ to AD₁ implies a decrease in aggregate demand, which can be caused by a decrease in the money supply. This reduction in the money supply can lead to lower spending by consumers and businesses, thus shifting the aggregate demand curve to the left. Options A and B would likely increase aggregate demand, and D is a result of shifts in aggregate demand, not a cause.

Question 15

During the past two quarters real GDP has fallen by 1.5 percent and the unemployment rate has increased by 1 percentage point. Economists predict that during the next quarter unemployment will rise by another percentage point. The economy is most likely:

Accepted Answer

A fall in real GDP and an increase in unemployment indicates a contraction or a recession. The prediction of further unemployment increase in the next quarter confirms this. Therefore, the economy is likely in a recession.

Question 16

A change in the price of resources will cause:

Accepted Answer

A change in the price of resources will cause a shift in the positively sloped portion of the aggregate supply curve. This is because an increase in the price of resources will increase the costs of production and decrease the profitability of producing goods and services, leading to a decrease in output and a shift of the aggregate supply curve to the left. Conversely, a decrease in the price of resources will decrease the costs of production and increase the profitability of producing goods and services, leading to an increase in output and a shift of the aggregate supply curve to the right. This is shown in the graph below:

![aggregate supply curve shift](https://www.economicshelp.org/wp-content/uploads/2012/07/as-curve-shfit.gif)

Question 17

As a result of an increase in government spending:

Accepted Answer

An increase in government spending increases the amount of money flowing into the economy, leading to an increase in aggregate demand. This is because the government spending creates more demand for goods and services, which in turn increases the quantity demanded in the economy.

Question 18

As the price level increases, consumers increase their borrowing in order to maintain purchasing power. As a result of this increased borrowing, the interest rate rises and investment falls. This is an example of:

Accepted Answer

This scenario illustrates the interest rate effect, which is one of the three effects of changes in the price level on the economy. As the price level increases, consumers' borrowing increases, putting upward pressure on interest rates. This, in turn, causes a reduction in investment spending.

Question 19

Which of the following is likely to lead to a decrease in aggregate demand?

Accepted Answer

Contractionary fiscal policy, such as a decrease in government spending or an increase in taxes, is likely to lead to a decrease in aggregate demand by decreasing the amount of disposable income available to consumers, which leads to a decrease in consumption spending.

Question 20

As the domestic price level falls:

Accepted Answer

When the domestic price level falls, exports become relatively cheaper and therefore more attractive to foreign buyers, leading to an increase in exports. At the same time, imports become more expensive to domestic buyers, leading to a decrease in imports. Therefore, the correct choice is that exports will increase and imports will decrease.

Quiz 12: Tracking and Explaining the Macroeconomy