Question 1

If the government repeals an investment tax credit and increases income taxes,
A) real GDP rises, and the price level could rise, fall, or stay the same.
B) real GDP falls, and the price level could rise, fall, or stay the same.
C) real GDP and the price level rise.
D) real GDP and the price level fall.

Accepted Answer

The answer of If the government repeals an investment tax...

Question 2

Which of the following would cause prices to fall and output to rise in the short run?
A) short-run aggregate supply shifts right
B) short-run aggregate supply shifts left
C) aggregate demand shifts right
D) aggregate demand shifts left

Accepted Answer

When short-run aggregate supply shifts right, it means that firms can produce more output at any given price level. This will lead to an increase in output and a decrease in prices, resulting in lower inflation.

Question 3

Imagine two economies that are identical except that for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $500 billion. It follows that
A) real GDP and the price level are lower in country B.
B) real GDP, but not the price level, is lower in country B.
C) the price level, but not real GDP is lower in country B.
D) neither the price level or real GDP is lower in country B.

Accepted Answer

According to the quantity theory of money, the price level is directly proportional to the money supply. Therefore, country B with a lower money supply will have a lower price level compared to country A. However, real GDP is not directly affected by the money supply, so it could be the same in both economies. Therefore, the correct answer is C, the price level, but not real GDP, is lower in country B.

Question 4

In which case can we be sure real GDP rises in the short run?
A) government purchases increase and taxes rise.
B) government purchases increase and taxes fall.
C) government purchases decrease and taxes rise.
D) government purchases decrease and taxes fall.

Accepted Answer

When government purchases increase and taxes fall, it means there is an increase in government spending which leads to an increase in aggregate demand. As a result, there is a short-run increase in real GDP.

Question 5

If aggregate demand shifts right then in the short run
A) firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the right.
B) firms will increase production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.
C) firms will decrease production. In the long run increased price expectations shift the short-run aggregate supply curve to the right.
D) firms will decrease production. In the long run increased price expectations shift the short-run aggregate supply curve to the left.

Accepted Answer

The answer of If aggregate demand shifts right then in...

Question 6

Consider the exhibit below for the following questions.
Figure 33-4 
-Refer to Figure 33-4. A decrease in taxes would move the economy from C to
A) B in the short run and the long run.
B) D in the short run and the long run.
C) B in the short run and A in the long run.
D) D in the short run and C in the long run.

Accepted Answer

A decrease in taxes would lead to an increase in disposable income, causing an increase in consumption and aggregate demand. This would shift the AD curve to the right, from AD1 to AD2, moving the economy from point C to point B in the short run. However, this increase in demand would also lead to an increase in prices and wages, causing an upward shift in the SRAS curve to SRAS2. As the economy adjusts to the new equilibrium in the long run, the SRAS curve will shift back to its original position, SRAS1, and the economy will reach point A. Therefore, the economy would move from point C to point B in the short run and point B to point A in the long run.

Question 7

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level
A) and output are higher than in the original long-run equilibrium.
B) and output are lower than in the original long-run equilibrium.
C) is lower and output is the same as the original long-run equilibrium.
D) is the same and output is lower than in the original long-run equilibrium.

Accepted Answer

The answer of If the economy is initially at long-run...

Question 8

Economic expansions in Europe and China would cause
A) the U.S. price level and real GDP to rise.
B) the U.S. price level and real GDP to fall.
C) the U.S. price level to rise and real GDP to fall.
D) the U.S. price level to fall and real GDP to rise.

Accepted Answer

The answer of Economic expansions in Europe and China would...

Question 9

An economic expansion caused by a shift in aggregate demand causes prices to
A) rise in the short run, and rise even more in the long run.
B) rise in the short run, and fall back to their original level in the long run.
C) fall in the short run, and fall even more in the long run.
D) fall in the short run, and rise back to their original level in the long run.

Accepted Answer

In the short run, an increase in aggregate demand leads to a temporary shortage of goods and services, causing prices to rise. However, in the long run, businesses will increase production to meet the higher demand, and the economy will reach full capacity. At this point, the increased demand will lead to higher prices in the long run. So, prices will rise in the short run and rise even more in the long run.

Question 10

The price level rises in the short run if
A) aggregate demand or aggregate supply shifts right.
B) aggregate demand shifts right or aggregate supply shifts left.
C) aggregate demand shifts left or aggregate supply shifts right.
D) aggregate demand or aggregate supply shifts right.

Accepted Answer

According to the quantity theory of money, an increase in aggregate demand or a decrease in aggregate supply will increase the price level in the short run. Therefore, if aggregate demand shifts right or aggregate supply shifts left, the price level will rise in the short run.

Question 11

If output is above its natural rate, then according to sticky-wage theory
A) workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce less at any given price level.
B) workers and firms will strike bargains for lower wages. In response to the lower wages firms will produce more at any given price level.
C) will strike bargains for higher wages. In response to the higher wages firms will produce less at any given price level.
D) workers and firms will strike bargains for higher wages. In response to the higher wages firms will produce more at any given price level.

Accepted Answer

According to sticky-wage theory, wages are slow to adjust downwards in response to changes in output. If output is above its natural rate, firms will need to reduce production to return to equilibrium. However, workers are not willing or able to accept lower wages immediately. Therefore, they will strike bargains for higher wages. Firms, in turn, will produce less at any given price level to accommodate the higher wages. Therefore, the correct choice is C.

Question 12

Which of the following would cause prices and real GDP to rise in the short run?
A) an increase in the expected price level
B) an increase in the money supply
C) a decrease in the capital stock
D) an increase in taxes.

Accepted Answer

An increase in the money supply would cause prices and real GDP to rise in the short run. An increase in the expected price level, a decrease in the capital stock, and an increase in taxes would all lead to a decrease in real GDP and a potential increase in prices in the short run.

Question 13

Which of the following would cause prices and real GDP to rise in the short run?
A) short-run aggregate supply shifts right
B) short-run aggregate supply shifts left
C) aggregate demand shifts right
D) aggregate demand shifts left

Accepted Answer

When aggregate demand shifts right, it leads to an increase in both prices and real GDP in the short run. This is because as demand for goods and services increases, firms increase output and raise prices to maximize profits.

Question 14

In which case can we be sure real GDP rises in the short run?
A) foreign economies expand and government purchases rise.
B) foreign economies expand and government purchases fall.
C) foreign economies contract and government purchases fall.
D) foreign economies contract and government purchases rise.

Accepted Answer

When foreign economies expand, there will be an increase in demand for exports, leading to an increase in production and real GDP in the short run. Additionally, when government purchases rise, it increases aggregate demand and can lead to an increase in real GDP. Therefore, when both factors occur, we can be sure real GDP will rise in the short run.

Question 15

The aggregate demand and aggregate supply model implies monetary neutrality
A) only in the short run.
B) only in the long run.
C) in both the short run and the long run.
D) in neither the short run nor long run.

Accepted Answer

The aggregate demand and aggregate supply model implies monetary neutrality in the long run. In the long run, the economy adjusts to changes in the money supply, and prices adjust to bring the economy back to its potential output. This means that a change in the money supply will only have an effect on the price level and not on the level of output or employment. However, in the short run, changes in the money supply can lead to changes in output and employment.

Question 16

Consider the exhibit below for the following questions.
Figure 33-4 
-Refer to Figure 33-4. If the economy starts at A, a decrease in the money supply moves the economy
A) to A in the long run.
B) to C in the long run.
C) back to A in the long run.
D) to D in the long run.

Accepted Answer

Starting at point A, a decrease in the money supply shifts the aggregate demand curve to the left. In the short run, this results in a decrease in both output and price level, moving the economy to point C. However, over time, wages and prices adjust to the decrease in demand, causing the short-run aggregate supply curve to shift to the right. Eventually, the economy returns to its original equilibrium point, A, but with a lower price level. This is represented by point B on the graph. Therefore, the correct choice is B.

Question 17

If aggregate demand shifts left, then in the short run
A) the price level and real GDP both rise.
B) the price level rises and real GDP falls.
C) the price level falls and real GDP rises.
D) the price and real GDP both fall.

Accepted Answer

The answer of If aggregate demand shifts left, then in...

Question 18

Recessions in Canada and Mexico would cause
A) the U.S. price level and real GDP to rise.
B) the U.S. price level and real GDP to fall.
C) the U.S. price level to rise and real GDP to fall.
D) the U.S. price level to fall and real GDP to rise.

Accepted Answer

The answer of Recessions in Canada and Mexico would cause
A)...

Question 19

In which case can we be sure that real GDP and the price level rise in the short run?
A) foreign economies expand and taxes increase.
B) foreign economies expand and taxes decrease.
C) foreign economies contract and taxes decrease.
D) foreign economies contract and taxes increase.

Accepted Answer

The answer of In which case can we be sure...

Question 20

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level
A) falls, shifting aggregate demand right.
B) rises, shifting aggregate demand left.
C) falls, shifting aggregate supply right.
D) rises, shifting aggregate supply left.

Accepted Answer

The answer of An economic expansion caused by a shift...

Quiz 33: Aggregate Demand and Aggregate Supply

If the government repeals an investment tax credit and increases income taxes,

Which of the following would cause prices to fall and output to rise in the short run?

Imagine two economies that are identical except that for a long time, economy A has had a money supply of $1,000 billion while economy B has had a money supply of $500 billion. It follows that

In which case can we be sure real GDP rises in the short run?

If aggregate demand shifts right then in the short run

Consider the exhibit below for the following questions. Figure 33-4 -Refer to Figure 33-4. A decrease in taxes would move the economy from C to

If the economy is initially at long-run equilibrium and aggregate demand declines, then in the long run the price level

Economic expansions in Europe and China would cause

An economic expansion caused by a shift in aggregate demand causes prices to

The price level rises in the short run if

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

Which of the following would cause prices and real GDP to rise in the short run?

Which of the following would cause prices and real GDP to rise in the short run?

In which case can we be sure real GDP rises in the short run?

The aggregate demand and aggregate supply model implies monetary neutrality

Consider the exhibit below for the following questions. Figure 33-4 -Refer to Figure 33-4. If the economy starts at A, a decrease in the money supply moves the economy

If aggregate demand shifts left, then in the short run

Recessions in Canada and Mexico would cause

In which case can we be sure that real GDP and the price level rise in the short run?

An economic expansion caused by a shift in aggregate demand remedies itself over time as the expected price level