Question 1

During World War II, the economy's production increased about
A) 25 percent and prices rose about 5 percent.
B) 50 percent and prices rose about 10 percent.
C) 75 percent and prices rose about 15 percent.
D) 100 percent and prices rose about 20 percent.

Accepted Answer

The answer of During World War II, the economy's production...

Question 2

In the short-run an increase in the costs of production makes
A) output and prices rise.
B) output rise and prices fall.
C) output fall and prices rise.
D) output and prices fall.

Accepted Answer

An increase in the costs of production will lead to a decrease in the supply of goods or services. With lower supply, prices will increase due to higher demand from consumers. However, output will fall as the higher cost of production will make it less profitable for firms to produce at the same level as before.

Question 3

During World War II,
A) government purchases of goods and services increased fivefold.
B) the economy's production increased about 25 percent.
C) unemployment fell to about 5%.
D) All of the above are correct.

Accepted Answer

The answer of During World War II,
A) government purchases of...

Question 4

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift
A) aggregate supply to the right.
B) aggregate supply to the left.
C) aggregate demand to the right.
D) aggregate demand to the left.

Accepted Answer

To offset the effects on output of an economic contraction caused by a shift in aggregate supply, policymakers should use policy to shift aggregate demand to the right. This can be achieved through expansionary monetary or fiscal policy, such as increasing government spending or lowering interest rates, which will increase demand and stimulate economic growth. Shifting aggregate supply to the right would only address the underlying causes of the shift and may not immediately boost output, making option A an incorrect choice. Shifting aggregate supply to the left or aggregate demand to the left would have the opposite effect and worsen the economic contraction, making options B and D incorrect choices.

Question 5

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?
A) It would have to have shifted left by less than aggregate supply shifted
B) It would have to have to shifted left by more than aggregate supply shifted.
C) It would have to have shifted right by less than aggregate supply shifted
D) It would have to have to shifted right by more than aggregate supply shifted.

Accepted Answer

If the long-run aggregate supply curve shifted to the right, it means that the economy's potential output increased. This would cause prices to decrease and output to increase. For this to occur, aggregate demand must have shifted left, but by a smaller amount than the shift in aggregate supply. If aggregate demand had shifted left by a greater amount than the shift in aggregate supply, then output would have decreased and prices would have decreased even further. Therefore, the best choice is A.

Question 6

In the early 1930s in the United States, there was a
A) large increase in output. In the early 1940s there was also a large increase in output.
B) large increase in output. In the early 1940s there was a large decrease in output.
C) large decrease in output. In the early 1940s there was a large increase in output.
D) large decrease in output. In the early 1940s there was also a large decrease in output.

Accepted Answer

The early 1930s marked the beginning of the Great Depression in the United States, which saw a significant decrease in output. However, in the early 1940s, the US entered World War II and experienced a large increase in output due to the wartime economy. Therefore, option C is the best choice as it accurately reflects the economic trends during these two time periods.

Question 7

In the first few years of the Great Depression, unemployment rose to about
A) 10 percent, and prices rose about 14 percent.
B) 15 percent, and prices rose about 22 percent.
C) 20 percent, and prices fell about 14 percent.
D) 25 percent, and prices fell about 22 percent.

Accepted Answer

In the first few years of the Great Depression, unemployment rose to about 25 percent and prices fell about 22 percent. This is known as deflation, which can occur during a severe economic downturn.

Question 8

Which of the following did not happen during the onset of the Great Depression?
A) The money supply fell as households took money out of bank deposits.
B) The Fed conducted expansionary monetary policy.
C) Stock prices fell about 90 percent.
D) Disruption of the banking system made it difficult for some firms to obtain funds for investment.

Accepted Answer

The Fed actually conducted contractionary monetary policy by reducing the money supply, which exacerbated the economic downturn.

Question 9

Which of the following alone can explain the change in the price level and output during World War II?
A) aggregate demand shifted right
B) aggregate demand shifted left
C) aggregate supply shifted right
D) aggregate supply shifted left

Accepted Answer

The answer of Which of the following alone can explain...

Question 10

Which of the following shifts short-run aggregate supply left?
A) an increase in price expectations
B) an increase in the actual price level
C) a decrease in the money supply
D) a decrease in the price of oil

Accepted Answer

The answer of Which of the following shifts short-run aggregate...

Question 11

If output is above its natural rate, then according to sticky-wage theory
A) workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve right.
B) workers and firms will strike bargains for higher wages. This increase in wages shifts the short-run aggregate supply curve left.
C) workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve right.
D) workers and firms will strike bargains for lower wages. This decrease in wages shifts the short-run aggregate supply curve left.

Accepted Answer

According to sticky-wage theory, wages are slow to adjust downwards in response to changes in output. Therefore, if output is above its natural rate, workers and firms will strike bargains for higher wages, which will increase production costs and shift the short-run aggregate supply curve left.

Question 12

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand?
A) It would have to have shifted left by less than aggregate supply.
B) It would have to have shifted left by more than aggregate supply.
C) It would have to have shifted right by less than aggregate supply.
D) It would have to have shifted right by more than aggregate supply.

Accepted Answer

If long-run aggregate supply shifted left during the Great Depression, it would mean that the economy's potential output decreased. To maintain equilibrium in the short-run, aggregate demand would have to shift left as well. However, since the Great Depression was characterized by a significant decline in both output and prices, it suggests that aggregate demand contracted by more than the decrease in long-run aggregate supply. Therefore, aggregate demand would had to have shifted left by more than aggregate supply to account for the decrease in output and prices.

Question 13

Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression?
A) aggregate demand shifted right
B) aggregate demand shifted left
C) aggregate supply shifted right
D) aggregate supply shifted left

Accepted Answer

The answer of Which of the following by itself is...

Question 14

When production costs rise,
A) the short-run aggregate supply curve shifts to the right.
B) the short-run aggregate supply curve shifts to the left.
C) the aggregate demand curve shifts to the right.
D) the aggregate demand curve shifts to the left.

Accepted Answer

When production costs rise, it becomes more expensive for firms to produce goods and services. As a result, they will supply less at any given price level, causing a shift to the left in the short-run aggregate supply curve.

Question 15

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?
A) as people revise their price-level expectations upward, firms and workers strike bargains for higher nominal wages.
B) as people revise their price-level expectations upward, firms and workers strike bargains for lower nominal wages.
C) as people revise their price-level expectations downward, firms and workers strike bargains for higher nominal wages.
D) as people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages.

Accepted Answer

A decrease in government expenditures leads to a decrease in aggregate demand, which causes downward pressure on prices. As people revise their price-level expectations downward, firms and workers strike bargains for lower nominal wages, which allows the economy to move back to long-run equilibrium.

Question 16

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to
A) rise. This rise in price expectations shifts the short-run aggregate supply curve to the right.
B) rise. This rise in price expectations shifts the short-run aggregate supply curve to the left.
C) fall. This fall in price expectations shifts the short-run aggregate supply curve to the right.
D) fall. This fall in price expectations shifts the short-run aggregate supply curve to the left.

Accepted Answer

When the government increases its expenditures, aggregate demand increases, causing an increase in the price level in the short run. However, as firms adjust their prices and wages in response to the higher demand, they begin to raise their inflation expectations. These higher expectations shift the short-run aggregate supply curve to the left, causing the price level to rise even further, while output remains at its natural rate. Therefore, the correct answer is B.

Question 17

Which of the following has been suggested as a cause of the Great Depression?
A) a decline in the money supply
B) a decrease in stock prices
C) the collapse of the banking system
D) All of the above are correct.

Accepted Answer

All three factors listed (a decline in the money supply, a decrease in stock prices, and the collapse of the banking system) have been cited as contributing to the onset and severity of the Great Depression.

Question 18

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting
A) aggregate supply right.
B) aggregate supply left.
C) aggregate demand right.
D) aggregate demand left.

Accepted Answer

If there is an economic contraction due to a shift in aggregate demand, policymakers can respond by shifting aggregate demand right. This means they would take measures to increase consumer spending, investment, government spending, or net exports, which would increase aggregate demand and counteract the initial contraction. Shifting aggregate supply would not be an effective solution in this situation because it would not address the underlying cause of the contraction, which is a decrease in demand.

Question 19

A decrease in the availability of an important major resource such as oil shifts
A) aggregate supply right.
B) aggregate supply left.
C) aggregate demand right.
D) aggregate demand left.

Accepted Answer

A decrease in oil availability would increase the cost of production and lead to higher prices for goods and services, shifting the aggregate supply curve leftward. This would result in a decrease in total output and an increase in inflation. Aggregate demand would not be affected by a decrease in resource availability as it represents the total amount of goods and services that consumers, businesses, and governments are willing and able to purchase at various price levels.

Question 20

The economic boom of the early 1940s resulted mostly from
A) increased government expenditures.
B) falling prices of oil and other natural resources.
C) an increase in the growth rate of the money supply.
D) rapid developments in transportation, electronics, and communication.

Accepted Answer

The economic boom of the early 1940s resulted mostly from increased government expenditures related to World War II. The government spent heavily on military equipment, supplies, and personnel, which stimulated economic growth and created many jobs.

Quiz 20: Aggregate Demand and Aggregate Supply

During World War II, the economy's production increased about

In the short-run an increase in the costs of production makes

During World War II,

Policymakers who control monetary and fiscal policy and want to offset the effects on output of an economic contraction caused by a shift in aggregate supply could use policy to shift

Suppose that during World War II the long-run aggregate supply curve shifted right. In order for price and output to have changed in the direction they did, what would have to have happened to aggregate demand?

In the early 1930s in the United States, there was a

In the first few years of the Great Depression, unemployment rose to about

Which of the following did not happen during the onset of the Great Depression?

Which of the following alone can explain the change in the price level and output during World War II?

Which of the following shifts short-run aggregate supply left?

If output is above its natural rate, then according to sticky-wage theory

Suppose that during the Great Depression long-run aggregate supply shifted left. To be consistent with what happened to the price level and output, what would have had to happen to aggregate demand?

Which of the following by itself is consistent with the directions that the price level and real GDP changed at the onset of the Great Depression?

When production costs rise,

Suppose the economy is in long-run equilibrium and the government decreases its expenditures. Which of the following helps explain the logic of why the economy moves back to long-run equilibrium?

Suppose the economy is in long-run equilibrium. If the government increases its expenditures, eventually the increase in aggregate demand causes price expectations to

Which of the following has been suggested as a cause of the Great Depression?

Suppose a shift in aggregate demand creates an economic contraction. If policymakers can respond with sufficient speed and precision, they can offset the initial shift by shifting

A decrease in the availability of an important major resource such as oil shifts

The economic boom of the early 1940s resulted mostly from