Question 1

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

Accepted Answer

The slopes of the aggregate demand and short-run aggregate supply curves are based on different economic principles than those for individual goods and services. Aggregate demand slopes downward due to the wealth effect, interest rate effect, and exchange rate effect, while the short-run aggregate supply curve slopes upward due to factors like wage rates, input prices, and productivity, which differ from the simple supply and demand dynamics of individual goods and services.

Question 2

Most economists believe that classical theory describes the world in the short run but not in the long run.

Accepted Answer

Most economists actually believe that classical theory describes the world in the long run, but not in the short run. It assumes that markets will eventually adjust to equilibrium, but in the short run, there may be frictions that prevent this.

Question 3

Most macroeconomic variables that measure some type of income,spending,or production fluctuate closely together.

Accepted Answer

This phenomenon is known as business cycle synchronization and is a common observation in macroeconomics. Factors such as changes in aggregate demand, monetary policy, and international trade can affect multiple economic variables simultaneously, leading to similar fluctuations over time.

Question 4

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

Accepted Answer

When speculators bid up the value of the dollar, it becomes stronger compared to other currencies. This makes U.S. goods more expensive for foreign buyers, reducing exports. At the same time, imports become cheaper for U.S. consumers, leading to a decrease in domestic production and a shift of the U.S. aggregate demand to the left.

Question 5

A change in the money supply changes only nominal variables in the long run.

Accepted Answer

In the long run, changes in the money supply only affect nominal variables such as prices and wages but not real variables such as output and employment. This is known as the neutrality of money in the long run.

Question 6

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

Accepted Answer

Changes in the money supply affect the economy in the short run through changes in interest rates and output, but in the long run, they only affect the price level. Therefore, an increase in the money supply does not shift the long-run aggregate supply curve, which is determined by the economy's potential output and factor productivity.

Question 7

The exchange-rate effect is the idea that a higher U.S.price level causes the value of the dollar to increase in foreign exchange markets,and this effect contributes to the downward slope of the aggregate-demand curve.

Accepted Answer

This statement is true as a higher U.S. price level increases the demand for dollars in foreign exchange markets, causing an appreciation of the dollar, and in turn, a decrease in exports and an increase in imports, which contributes to the downward slope of the aggregate-demand curve.

Question 8

According to classical macroeconomic theory,changes in the money supply change nominal but not real variables.

Accepted Answer

According to the Quantity Theory of Money, an increase in the money supply will lead to a proportional increase in prices (nominal variable) but will not affect real variables like output or employment in the long run. This theory assumes a constant velocity of money and no changes in real factors such as technology or resources.

Question 9

Because economists understand what things change GDP,they can predict recessions with a fair amount of accuracy.

Accepted Answer

While economists can use economic indicators to make predictions about the likelihood of a recession, there are many factors that can impact GDP and economic performance, making it difficult to predict with complete accuracy.

Question 10

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

Accepted Answer

Technological progress increases the productivity of an economy, which leads to a decrease in the cost of production and an increase in the potential output of an economy. This shift is represented by a movement of the long-run aggregate supply curve to the right.

Question 11

The effect of a change in the value of the dollar in the foreign exchange market due to a change in the price level helps explain the slope of aggregate demand,but does not shift it.The effects of a change in the value of the dollar in the foreign exchange market due to speculation is shown by shifting the aggregate demand curve.

Accepted Answer

The slope of the aggregate demand curve is influenced by the price level's effect on the value of the dollar in foreign exchange markets, which in turn affects net exports. However, shifts in the aggregate demand curve are caused by factors other than price level changes, such as changes in consumer confidence, fiscal policy, or speculation affecting the value of the dollar, which impact the overall demand for goods and services at all price levels.

Question 12

The aggregate-demand curve shows the quantity of domestic goods and services that households,firms,the government,and customers abroad want to buy at each price level.

Accepted Answer

The aggregate-demand curve is a graphical representation of the relationship between the overall demand for goods and services in an economy and the price level. It shows the total amount of goods and services that all sectors of the economy are willing to buy at each price level, including households, firms, the government, and customers abroad.

Question 13

Like real GDP,investment fluctuates,but it fluctuates much less than real GDP..

Accepted Answer

Investment is actually more volatile than real GDP, meaning it fluctuates more, not less, in response to economic changes.

Question 14

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

Accepted Answer

An increase in the money supply would lead to lower interest rates, which would stimulate investment and consumption, thereby increasing aggregate demand. Therefore, an increase in the money supply would shift the aggregate demand curve to the right, not the left.

Question 15

The downward slope of the aggregate demand curve is based on logic that as the price level rises,consumption,investment,and net exports all fall.

Accepted Answer

The law of demand states that as the price of a good or service increases, the quantity demanded decreases. This applies to the aggregate demand curve as well, where the price level is a proxy for the general price level in the economy. When the price level increases, the purchasing power of consumers decreases, leading to a decrease in consumption. Similarly, higher interest rates resulting from an increase in the price level lead to a decrease in investment, and an increase in the price level makes exports more expensive, leading to a decrease in net exports. All of these factors lead to a downward slope of the aggregate demand curve.

Question 16

When output rises,unemployment falls.

Accepted Answer

This is the basic relationship depicted by the Phillips curve, which shows an inverse relationship between inflation and unemployment. As output rises, there is an increase in demand for labor which lowers unemployment.

Question 17

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

Accepted Answer

According to the theory of interest rate parity, a decrease in the domestic interest rate relative to the foreign interest rate will result in a depreciation of the domestic currency. Therefore, if the price level decreases and causes a decrease in the domestic interest rate, the dollar is likely to depreciate in the foreign exchange market.

Question 18

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

Accepted Answer

When the money supply decreases, the interest rates tend to rise as the availability of money becomes scarce. When interest rates increase, borrowing costs increase, and as a result, investment falls. This is due to the fact that rising interest rates increase the cost of borrowing, causing businesses to cut back on investments and hiring.

Question 19

An increase in the money supply causes output to rise in the long run.

Accepted Answer

In the long run, changes in the money supply only affect the price level, not output. This is known as the neutrality of money in the long run.

Question 20

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

A decrease in price level leads to an increase in the purchasing power of consumers, making them feel wealthier and leading to increased consumption. This increase in consumption leads to an overall increase in aggregate demand, resulting in a downward-sloping demand curve.

Quiz 33: Aggregate Demand and Aggregate Supply