Question 1

The explanations for the slopes of the aggregate demand and aggregate supply curves are the same as the explanations for the slope of demand and supply curves for specific goods and services.

Accepted Answer

The slopes of the aggregate-demand and aggregate-supply curves are based on different underlying principles than those for individual goods and services. The aggregate-demand curve slopes downward in part because of the wealth effect, interest-rate effect, and exchange-rate effect, which do not apply to individual market demand curves. The aggregate-supply curve, especially in the short run, reflects how quantities supplied at the aggregate level respond to price levels, incorporating factors like nominal wage stickiness and menu costs, which are not considerations in the supply curves for specific goods and services.

Question 2

Technological progress shifts the long-run aggregate supply curve to the right.

Accepted Answer

Technological progress increases productivity and efficiency, leading to lower production costs and therefore an increase in potential output. This shifts the long-run aggregate supply curve to the right.

Question 3

Increased uncertainty and pessimism about the future of the economy decreases investment spending shifting aggregate demand to the left.

Accepted Answer

When businesses and consumers are uncertain about the future, they tend to hold back on spending and investment. This can lead to a decrease in aggregate demand, as less money is flowing into the economy. As a result, businesses may cut back on production, leading to a decrease in employment and overall economic activity.

Question 4

An increase in the money supply shifts the long-run aggregate supply curve to the right.

Accepted Answer

An increase in the money supply would affect the short-run aggregate supply curve, not the long-run aggregate supply curve. The long-run aggregate supply curve is determined by factors such as technology, resources, and institutions, and is considered to be vertical or fixed in the long run.

Question 5

Pessimism about the future leads to falling prices and rising unemployment.

Accepted Answer

Pessimism about the future can lead to a decrease in consumer and investor confidence, resulting in reduced spending and investment. This can lead to falling prices and decreased demand, resulting in increased unemployment as businesses reduce their workforce to cut costs.

Question 6

All explanations for the upward slope of the short-run aggregate supply curve suppose that output supplied increases when the price level increases more than expected.

Accepted Answer

This is because there are several reasons why output supplied may increase in the short run when the price level increases more than expected, such as sticky wages, the marginal product of labor, and input prices. However, in the long run, the SRAS curve becomes vertical, indicating that output is fixed and is not influenced by changes in the price level.

Question 7

Because not all prices adjust instantly to changing conditions, an unexpected fall in the price level leaves some firms with higher-than-desired prices, and these higher-than-desired prices depress sales and induce firms to reduce the quantity of goods and services they produce.

Accepted Answer

This is known as the sticky price theory, where some prices may not adjust quickly enough in response to changes in the economy. As a result, firms may have higher prices than what the market is willing to pay, leading to lower sales and a reduction in production.

Question 8

Economists mostly agree that the Great Depression was the result of a very large adverse supply shock.

Accepted Answer

While there is still debate among economists about the exact causes of the Great Depression, many modern theories focus on factors such as financial instability, monetary policy mistakes, and a decrease in aggregate demand. While there was certainly a supply shock in some industries, such as agriculture, it is not considered the primary cause of the Great Depression.

Question 9

In response to a decrease in output, the economy would revert to its original level of prices and output whether the decrease in output was caused by a decrease in aggregate demand or a decrease in aggregate supply.

Accepted Answer

If the decrease in output is caused by a decrease in aggregate supply, the economy would experience both a decrease in output and an increase in prices, which is known as stagflation. The economy would not automatically revert to its original level of prices and output in this scenario.

Question 10

A decrease in the price level makes consumers feel wealthier, so they purchase more. This logic helps explain why the aggregate demand curve slopes downward.

Accepted Answer

When the price level decreases, consumers can buy more goods and services for the same amount of money, which increases their purchasing power and makes them feel wealthier. As a result, they tend to increase their consumption, which in turn increases the demand for goods and services. This explains why the aggregate demand curve slopes downward - as the price level decreases, the quantity of goods and services demanded increases.

Question 11

An unexpected increase in the price level does not shift the aggregate supply curve, but an expected increase in the price level shifts the aggregate supply curve to the left.

Accepted Answer

An unexpected increase in the price level affects the short-run aggregate supply because producers might temporarily increase production due to higher prices, but it doesn't shift the curve itself. An expected increase in the price level can lead to a leftward shift in the aggregate-supply curve as producers anticipate higher costs and might reduce the quantity supplied at every price level.

Question 12

Aggregate demand shifts to the left if the money supply decreases.

Accepted Answer

A decrease in the money supply can lead to higher interest rates, which in turn can reduce investment and consumption spending, leading to a decrease in aggregate demand.

Question 13

Increased output and prices in Canada in the early 1940s was mostly the result of increased government expenditures.

Accepted Answer

Increased government expenditures during World War II led to increased demand for goods and services, which in turn led to increased output and prices. This is commonly referred to as the "wartime boom" in Canada.

Question 14

We could explain continued increases in both output and the price level by supposing that only long-run aggregate supply shifted right over time.

Accepted Answer

This statement is not true as it ignores the fact that other factors such as changes in aggregate demand, fiscal and monetary policy, and supply shocks can also affect the output and price level in the short run.

Question 15

If speculators bid up the value of the dollar in the market for foreign-currency exchange, aggregate demand would shift to the left.

Accepted Answer

When the value of the dollar increases, U.S. goods become more expensive for foreign buyers, leading to a decrease in exports. This reduces aggregate demand, causing it to shift to the left.

Question 16

A decrease in the money supply causes the interest rate to rise so that investment rises.

Accepted Answer

A decrease in the money supply causes the interest rate to rise, but this typically leads to a decrease in investment because higher interest rates make borrowing more expensive.

Question 17

Fluctuations in real GDP are caused only by changes in aggregate demand and not by changes in aggregate supply.

Accepted Answer

Fluctuations in real GDP can be caused by changes in both aggregate demand and aggregate supply. Shifts in aggregate demand can result from changes in consumer spending, investment, government spending, and net exports, while shifts in aggregate supply can result from changes in productivity, technology, and input costs. Therefore, changes in both aggregate demand and aggregate supply can lead to fluctuations in real GDP.

Question 18

When all prices rise together, there is no change in the overall quantity of goods and services supplied.

Accepted Answer

When all prices rise together, there is a general increase in the level of prices, but the overall quantity of goods and services supplied remains the same. The supply is determined by the production capacity of the economy and changes in prices do not directly affect it. Therefore, an increase in prices does not cause a decrease in the quantity of goods and services supplied.

Question 19

Other things the same, a decrease in the price level makes the interest rate increase, which leads to an appreciation of the dollar in the foreign-currency exchange.

Accepted Answer

According to the theory of purchasing power parity, a decrease in the price level leads to a decrease in the interest rate, which leads to a depreciation of the dollar in the foreign-currency exchange.

Question 20

The explanations for the downward slope of the aggregate demand curve say that as the price level rises, consumption, investment, and net exports all fall.

Accepted Answer

As the price level rises, consumption, investment, and net exports all tend to fall due to various factors such as higher interest rates, decreased purchasing power, and reduced competitiveness in international markets. This results in a downward slope of the aggregate demand curve.

Quiz 14: Aggregate Demand and Aggregate Supply