Question 1

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

A sudden increase in government spending on security will shift the AD curve to the right.

Question 2

For a given level of inflation, if there is a greater reluctance by foreigners to purchase domestic goods, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

A decrease in exports that is independent of the general price level (inflation)will decrease aggregate expenditure at any inflation rate, thereby shifting the AD curve to the left.

Question 3

Which of the following will shift the aggregate demand curve to the left?
A)Income taxes are lowered.
B)The government increases spending on education.
C)Consumers become optimistic about the future.
D)Foreign economies fall into recession, reducing their demand for domestic exports.

Accepted Answer

A decrease in exports that is not caused by changes in domestic prices (inflation)will shift the AD curve to the left.

Question 4

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.
A)shifts upward to the left; shifts to the right
B)shifts downward to the right; shifts to the right
C)shifts upward to the left; shifts to the left
D)shifts downward to the right; shifts to the left

Accepted Answer

A higher target inflation rate means an easing of monetary policy, which is seen as a downward shift in the Fed's policy reaction. With the Fed setting the real interest rate lower than before at each given rate of inflation, aggregate expenditure and the short-run equilibrium output is increased at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new higher level of output. Thus a downward shift of the Fed's policy reaction function shifts the AD curve to the right.

Question 5

For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

An increase in exports that is independent of the general price level (inflation)will increase aggregate expenditure at any inflation rate, thereby shifting the AD curve to the right.

Question 6

An upward shift in the Fed's policy reaction function is a(n)________ of monetary policy, and the aggregate demand curve ________.
A)tightening; shifts right
B)easing; shifts right
C)tightening; shifts left
D)easing; shifts left

Accepted Answer

A tighter monetary policy, which is seen as an upward shift in the Fed's policy reaction, means that the Fed is setting the real interest rate higher than before at each given rate of inflation. This reduces aggregate expenditure and the short-run equilibrium output at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new level of output. Thus an upward shift of the Fed's policy reaction function shifts the AD curve leftward.

Question 7

For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

A sudden decrease in business confidence, and the resultant decrease in capital investment spending, shifts the AD curve to the left.

Question 8

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.
A)shifts upward to the left; shifts to the right
B)shifts downward to the right; shifts to the right
C)shifts upward to the left; shifts to the left
D)shifts downward to the right; shifts to the left

Accepted Answer

A lower target inflation rate means tighter monetary policy, which is seen as an upward shift in the Fed's policy reaction. With the Fed setting the real interest rate higher than before at each given rate of inflation, aggregate expenditure and the short-run equilibrium output is reduced at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new lower level of output. Thus an upward shift of the Fed's policy reaction function shifts the AD curve to the left.

Question 9

Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF₁)and the aggregate demand curve (AD₁). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*₁.   
If the Federal Reserve lowers its target inflation rate to π*₂, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.
A)shift to RF₃; shift to AD₂
B)shift to RF₂; shift to AD₂
C)shift to RF₃; shift to AD₃
D)shift to RF₂; shift to AD₃

Accepted Answer

A lower target inflation rate means tighter monetary policy, which is seen as an upward shift in the Fed's policy reaction. At RF₂ the Fed is setting the real interest rate higher than before at each given rate of inflation. Aggregate expenditure and the short-run equilibrium output are reduced at each rate of inflation as seen in the shift in AD curve from AD₁ to AD₃.

Question 10

A downward shift in the Fed's policy reaction function is a(n)________ of monetary policy, and the aggregate demand curve ________.
A)tightening; shifts right
B)easing; shifts right
C)tightening; shifts left
D)easing; shifts left

Accepted Answer

An easing of monetary policy, which is seen as a downward shift in the Fed's policy reaction, means that the Fed is setting the real interest rate lower than before at each given rate of inflation. This increases aggregate expenditure and the short-run equilibrium output at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new level of output. Thus a downward shift of the Fed's policy reaction function shifts the AD curve rightward.

Question 11

Exogenous changes in spending refer to changes in planned spending:
A)caused by changes in output.
B)caused by changes in the inflation rate.
C)caused by changes in the real interest rate.
D)not caused by changes in output or changes in the inflation rate.

Accepted Answer

Exogenous shifters of the aggregate demand curve are forces other than output or the inflation rate (e.g., changes in consumer confidence or wealth).

Question 12

Which of the following will shift the aggregate demand curve to the right?
A)Income taxes are raised.
B)The government increases spending on education.
C)Consumers become pessimistic about the future.
D)Business managers become pessimistic about the future.

Accepted Answer

An increase in government spending on education will shift the AD curve to the right.

Question 13

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

A sudden decrease in government (military)spending will reduce aggregate spending and shift the AD curve to the left.

Question 14

Which of the following will shift the aggregate demand curve to the right?
A)Income taxes are raised.
B)The government reduces purchases to balance the budget.
C)Consumers become more optimistic about the future.
D)Foreign economies fall into recession, reducing their demand for domestic exports.

Accepted Answer

A sudden increase in household or consumer confidence will increase consumption spending, shifting the AD curve to the right.

Question 15

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

A sudden increase in capital investment or business spending will shift the AD curve to the right.

Question 16

When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.
A)higher; shift to the right
B)lower; shift to the right
C)higher; shift to the left
D)lower; shift to the left

Accepted Answer

A lower target inflation rate means tighter monetary policy, which is seen as an upward shift in the Fed's policy reaction. With the Fed setting the real interest rate higher than before at each given rate of inflation, aggregate expenditure and the short-run equilibrium output is reduced at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new lower level of output. Thus an upward shift of the Fed's policy reaction function shifts the AD curve to the left.

Question 17

For a given level of inflation, if a rise in the stock market makes consumers more willing to spend, known as the wealth effect, then the ________ shifts ________.
A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Accepted Answer

A sudden increase in household wealth will increase consumption spending, shifting the AD curve to the right.

Question 18

Which of the following will shift the aggregate demand curve to the left?
A)Income taxes are raised.
B)The government increases spending on education.
C)Consumers become optimistic about the future.
D)A new technology is developed that will increase profits.

Accepted Answer

The AD curve responds to changes to fiscal policy such as changes to government spending and taxes. If income taxes are raised, aggregate spending will decrease, shifting AD left.

Question 19

The AD curve can be shifted by:
A)both fiscal and monetary policy.
B)neither fiscal nor monetary policy.
C)fiscal policy only.
D)monetary policy only.

Accepted Answer

The AD curve responds to both fiscal policy (such as changes to government spending and taxes)and monetary policy (such as changes to Fed's policy reaction function).

Question 20

When the Federal Reserve increases its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.
A)higher; shift to the right
B)lower; shift to the right
C)higher; shift to the left
D)lower; shift to the left

Accepted Answer

A higher target inflation rate means an easing of monetary policy, which is seen as a downward shift in the Fed's policy reaction. With the Fed setting the real interest rate lower than before at each given rate of inflation, aggregate expenditure and the short-run equilibrium output is increased at each rate of inflation. Alternatively, we can say that each level of inflation now corresponds to a new higher level of output. Thus a downward shift of the Fed's policy reaction function shifts the AD curve to the right.

Quiz 27: Aggregate Demand, Aggregate Supply, and Inflation

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the shifts .

For a given level of inflation, if there is a greater reluctance by foreigners to purchase domestic goods, then the shifts .

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

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function and the aggregate demand curve .

For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the shifts .

An upward shift in the Fed's policy reaction function is a(n) of monetary policy, and the aggregate demand curve .

For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the shifts .

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function and the aggregate demand curve .

A downward shift in the Fed's policy reaction function is a(n) of monetary policy, and the aggregate demand curve .

Exogenous changes in spending refer to changes in planned spending:

Which of the following will shift the aggregate demand curve to the right?

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the shifts .

Which of the following will shift the aggregate demand curve to the right?

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the shifts .

When the Federal Reserve reduces its target rate of inflation, it will set a real interest rate at every inflation rate and the aggregate demand curve will .

For a given level of inflation, if a rise in the stock market makes consumers more willing to spend, known as the wealth effect, then the shifts .

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

The AD curve can be shifted by:

When the Federal Reserve increases its target rate of inflation, it will set a real interest rate at every inflation rate and the aggregate demand curve will .

Quiz 27: Aggregate Demand, Aggregate Supply, and Inflation

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the ________ shifts ________.

For a given level of inflation, if there is a greater reluctance by foreigners to purchase domestic goods, then the ________ shifts ________.

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

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the ________ shifts ________.

An upward shift in the Fed's policy reaction function is a(n) ________ of monetary policy, and the aggregate demand curve ________.

For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ________ shifts ________.

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

A downward shift in the Fed's policy reaction function is a(n) ________ of monetary policy, and the aggregate demand curve ________.

Exogenous changes in spending refer to changes in planned spending:

Which of the following will shift the aggregate demand curve to the right?

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.

Which of the following will shift the aggregate demand curve to the right?

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the ________ shifts ________.

When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

For a given level of inflation, if a rise in the stock market makes consumers more willing to spend, known as the wealth effect, then the ________ shifts ________.

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

The AD curve can be shifted by:

When the Federal Reserve increases its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the shifts .

For a given level of inflation, if there is a greater reluctance by foreigners to purchase domestic goods, then the shifts .

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function and the aggregate demand curve .

For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the shifts .

An upward shift in the Fed's policy reaction function is a(n) of monetary policy, and the aggregate demand curve .

For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the shifts .

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function and the aggregate demand curve .

A downward shift in the Fed's policy reaction function is a(n) of monetary policy, and the aggregate demand curve .

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the shifts .

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the shifts .

When the Federal Reserve reduces its target rate of inflation, it will set a real interest rate at every inflation rate and the aggregate demand curve will .

For a given level of inflation, if a rise in the stock market makes consumers more willing to spend, known as the wealth effect, then the shifts .

When the Federal Reserve increases its target rate of inflation, it will set a real interest rate at every inflation rate and the aggregate demand curve will .