Question 1

If people expect the economy to do well in the future, they will increase their consumption today at every price level.

Accepted Answer

When people are optimistic about the future state of the economy, they tend to increase their spending and consumption today because they anticipate having more resources and income in the future. This leads to an increase in demand for goods and services across all price levels, as people are willing to pay more for the products they desire.

Question 2

In the long-run, the aggregate supply curve normally is downward-sloping.

Accepted Answer

The long-run aggregate supply curve is typically vertical, reflecting that in the long run, an economy's output is determined by factors such as technology and resources, not by the price level.

Question 3

The aggregate quantity of goods and services produced will decrease at every price level when resource price rises.

Accepted Answer

When resource prices rise, the cost of production increases. As a result, firms will produce fewer goods and services to reduce their costs and maintain profitability. This will lead to a decrease in the aggregate quantity of goods and services produced, regardless of the price level.

Question 4

If the level of prices falls, the real value of wealth also falls.

Accepted Answer

If the level of prices falls, the real value of wealth actually increases. This is because the same amount of money can now buy a greater quantity of goods and services. In other words, the purchasing power of money has increased.

Question 5

When the actual inflation rate rises more rapidly than nominal wage rates, we would expect the short-run aggregate supply curve to shift to the right.

Accepted Answer

The answer of When the actual inflation rate rises more...

Question 6

A higher domestic price level lowers aggregate expenditures and, therefore, shifts the aggregate demand curve to the left.

Accepted Answer

The answer of A higher domestic price level lowers aggregate...

Question 7

If the aggregate supply curve is vertical, then shifts in aggregate demand will not change aggregate output.

Accepted Answer

If the aggregate supply curve is vertical, it means that the level of output is fixed in the short run and is determined by the economy's productive capacity. Thus, shifts in aggregate demand will only affect the price level but not the quantity of output. Therefore, aggregate output will not change, and the answer is A.

Question 8

The aggregate supply curve shows the negative relationship between general price level and real GDP.

Accepted Answer

The aggregate supply curve typically shows a positive relationship between the general price level and real GDP, meaning as prices increase, the quantity of goods and services supplied also increases.

Question 9

In the Keynesian case, an increase in aggregate demand results in an increase in both the price level and equilibrium real GDP.

Accepted Answer

The answer of In the Keynesian case, an increase in...

Question 10

The wealth effect of a change in the price level refers to the fact that wealthier individuals tend to spend more on foreign goods.

Accepted Answer

The wealth effect refers to the change in consumer spending that occurs as a result of a change in the perceived value of assets. Specifically, when the price level increases, individuals who hold assets such as real estate and stocks may feel wealthier and therefore spend more. This increase in spending typically occurs on domestic goods and services, not foreign goods.

Question 11

In the long run, increased consumption spending raises only the price level.

Accepted Answer

In the long run, increased consumption spending can lead to higher demand, which may cause prices to rise if the economy is at or near full capacity, without affecting real output.

Question 12

The fact that the aggregate demand curve slopes downward means that aggregate expenditures increase when the price level decreases.

Accepted Answer

This is because when the price level decreases, consumers and businesses are able to buy more goods and services with the same amount of income or expenditures. This results in an increase in aggregate demand, as people tend to spend more when things are cheaper. Conversely, when the price level increases, people tend to reduce their overall expenditures and demand for goods and services, leading to a downward slope in the aggregate demand curve.

Question 13

Suppose an increase in investment spending results in an increase in equilibrium real GDP and a rise in the equilibrium price level.This implies that the aggregate supply curve for this economy is vertical.

Accepted Answer

If an increase in investment spending results in an increase in both equilibrium real GDP and the equilibrium price level, this indicates that there is a short-term upward sloping aggregate supply curve. A vertical aggregate supply curve would mean that changes in aggregate demand have no effect on the equilibrium price level, which is not likely the case in the short run.

Question 14

The main reason why the short-run aggregate supply curve slopes upward is that as the average price level increases, larger scales of production become more profitable.

Accepted Answer

The answer of The main reason why the short-run aggregate...

Question 15

If a large number of laborers shift from fixed-wage contracts to wages that depend on the cost of living adjustments, the long-run aggregate supply curve for the economy will become relatively steeper.

Accepted Answer

If wages become tied to the cost of living, then laborers will demand higher wages during times of inflation, causing an increase in costs for businesses and a decrease in long-run aggregate supply. This makes the long-run aggregate supply curve steeper.

Question 16

In the short run, a decrease in the general price level will cause business profits to rise and, hence, the total quantity of output to increase.

Accepted Answer

A decrease in the general price level may lead to lower revenues for businesses, especially if they cannot adjust their costs quickly enough. This could lead to lower profits or even losses in the short run, and may lead to a decrease in the total quantity of output if firms reduce their production. In the long run, however, lower prices may stimulate demand and increase output if firms can adjust their costs and find new ways to produce at lower prices.

Question 17

The steeper slope of the aggregate supply curve in the long run indicates that an increase in aggregate demand will cause an increase in the price level and an even greater increase in output in the long run.

Accepted Answer

In the long run, the aggregate supply curve is generally considered to be vertical, indicating that changes in aggregate demand will only affect the price level and not the level of output. Therefore, the statement that an increase in aggregate demand will cause an even greater increase in output in the long run is false.

Question 18

The slope of the aggregate supply curve becomes steeper, the faster the costs of production adjust to prices and the smaller the amount of excess capacity in the economy.

Accepted Answer

A steeper slope means that changes in price result in a larger change in quantity supplied. This occurs when production costs adjust quickly to changes in prices and there is less excess capacity in the economy (i.e. firms are operating closer to their full potential).

Question 19

When the foreign price level falls, domestic goods become more expensive relative to foreign goods, causing domestic net exports and aggregate demand to fall.

Accepted Answer

When the foreign price level falls, domestic goods become more expensive relative to foreign goods, making foreign goods more attractive to domestic consumers. This leads to a decrease in domestic net exports and a subsequent decrease in aggregate demand.

Question 20

A rightward shift in the aggregate supply curve is generally associated with a reduction in resource prices.

Accepted Answer

A rightward shift in the aggregate supply curve means that there is an increase in the amount of goods and services that firms are willing and able to supply at each price level. This could be due to a variety of factors such as technological advancements, increases in productivity, or decreased regulations.

If the shift is caused by a decrease in resource prices, it means that firms can produce goods and services at a lower cost, which implies that aggregate supply has increased. Therefore, a rightward shift is generally associated with a reduction in resource prices.

Quiz 11: Macroeconomic Equilibrium: Aggregate Demand and Supply