HW #6 - Aggregate Demand and Aggregate Supply - ECON

Study for Exam 2

d

The shape of the short-run aggregate supply curve is determined by

a) The wealth effect

b) The interest rate effect

c) The foreign price effect

d) None of the above

c

Which of the following is true about aggregate demand

a) It is derived from exports and imports

b) It is the sum of all goods and services demanded by a nation's consumers

c) It is a measure of total spending on domestic goods and services.

d) It does not take into account the expenditure that is planned for in the government budget

a

A movement along the AD curve up and to the left is caused by

a) an increase in the price level

b) an increase in supply

c) an increase in Real GDP

d) an increase in total expenditure

a

True or False The long-run supply curve determines equilibrium GDP at full employment.

a) True

b) False

d

Which of the following is true about the short-run aggregate supply curve

a) It is vertical

b) It is always a horizontal line

c) It is downward sloping

d) It is upward sloping

b

Graphically, the long-run aggregate supply curve is 

a) Horizontal

b) Vertical

c) Downward sloping

d) Upward sloping

d

The shape of the short-run aggregate supply curve is determined by

a) The wealth effect

b) The interest rate effect

c) The foreign price effect

d) None of the above

a

True or False The long-run supply curve determines equilibrium GDP at full employment.

a) True

b) False

d

Which of the following is true about the short-run aggregate supply curve

a) It is vertical

b) It is always a horizontal line

c) It is downward sloping

d) It is upward sloping

b

Graphically, the long-run aggregate supply curve is 

a) Horizontal

b) Vertical

c) Downward sloping

d) Upward sloping

d

An increase in the cost of energy 

a) causes a leftward movement along the short run aggregate supply curve

b) causes a rightward shift of the short run aggregate supply curve

c) causes a rightward movement along the aggregate supply curve

d) causes a leftward shift of the short-run aggregate supply curve

a

True or False - Suppose, in the nation of Xurbia, wage rates decrease; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• A decrease in wage rates will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower price for labor will encourage production because it will increase the possibilities for earning profits.

a) True

b) False

a

True or False - Suppose, in France, a law passes that decreases wage rates in its labor market; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction to reflect the effect on the French economy.

• A decrease in the price of inputs, in this case labor, will cause the AS curve to shift to the right, which means that at each given price level for outputs, a lower wage rate will encourage production because it will increase the possibilities for earning profits.

a) True

b) False

b

True or False - Suppose a law in Xurbia requires employees to work more hours per week (without an increase in yearly pay); illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• Longer work hours implies that workers will produce more. Therefore, they will produce more. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

a) False

b) True

b

True or False - Suppose a new technology increases the productive capacity of the textile industry, the biggest sector in Xurbia; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

a) False

b) True

b

True or False: Sudden reduction in the availability of resources (inputs and labor) for production will cause the aggregate supply curve to shift to the right.

a) True

b) False

a

True or False - Suppose, in the nation of Xurbia, the cost of electricity increases; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• An increase in the price of inputs, in this case electricity, will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will discourage production because it will dampen the possibilities for earning profits.

a) True

b) False

a

True or False - Suppose, in the nation of Xurbia, input prices within its mining sector increase; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• An increase in the price of inputs will cause the AS curve to shift to the left, which means that at each given price level for outputs, a higher price for inputs will encourage production because it will increase the possibilities for earning profits.

a) True

b) False

a

True or False - Suppose a law in Xurbia reduces the number of days off employees can have; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• Longer work hours implies that workers will produce more. Therefore, they will produce more. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

a) True

b) False

a

True or False - Suppose the regional innovation hub in Silicon Valley creates a new technology that reduces the number of resources used per unit of labor; illustrate the effect of this by shifting the aggregate supply (AS) curve in the appropriate direction.

• A technology that reduced the number of units used per unit of labor means that the people who are currently employed can produce more with fewer resources. Therefore, they will produce more. A higher level of productivity shifts the AS curve to the right, because with improved productivity, firms can produce a greater quantity of output at every price level.

a) True

b) False

b

Which of the following will result in a shift in the short-run aggregate supply curve to the left

a) an increase in the price level

b) an increase in the cost of electricity

c) a decrease in the price level

d) an increase in the quantity of labor

a

True or False: If consumers become more confident about the economy, we can expect consumption to increase. 

a) True

b) False

a

True or False - Suppose households become more optimistic about the American economy; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

• An increase in consumer confidence or business confidence can shift AD to the right. When AD shifts to the right, the new equilibrium will have a higher quantity of output and also a higher price level compared with the original equilibrium.

a) True

b) False

b

True or False - Suppose American investors anticipate the American economy to struggle in the short term; illustrate the effect of this on the American economy in the short run by shifting the aggregate demand (AD)  curve in the appropriate direction.

• A decrease in consumer confidence and business confidence can shift AD to the left. When AD shifts to the left, the new equilibrium will have a lower quantity of output and also a lower price level compared with the original equilibrium.

a) False

b) True

b

True or False - Suppose, in order to attempt to cool an overheating economy, the Australian government decides to cut government expenditure. Use the graph below to illustrate the impact of the aforementioned on the Australian economy by shifting the appropriate curve(s). 

• Government spending is one component of AD.Thus, lower government spending will cause AD to shift to the left.

a) False

b) True

b

True or False - Suppose, the government reduces business taxes significantly. Use the graph below to show the impact of the aforementioned on the economy by shifting the appropriate curve(s). 

• Lower tax rates for corporations or tax reductions will cause a change in Investment spending - a component of AD - which will shift the AD curve to the right.

a) False

b) True

c

Aggregate demand includes spending on all of the following except:

a) domestically produced household goods

b) domestically produced business services

c) foreign goods purchased by domestic consumers

d) domestically produced goods purchased by foreigners

b

True or False - Suppose, in the nation of Xurbia, after a period of sluggish growth, Xurbian consumers expect the economic activity to improve significantly; illustrate the effect of this by shifting the aggregate demand (AD) curve in the appropriate direction.

• An increase in consumer confidence or business confidence can shift AD to the right. When AD shifts to the right, the new equilibrium will have a higher quantity of output and also a higher price level compared with the original equilibrium.

a) False

b) True

a

True or False - Suppose foreigners become more confident about products made in America; illustrate the effect of this on the American economy by shifting the aggregate demand (AD) curve in the appropriate direction.

• An increase in consumer confidence or business confidence can shift AD to the right. When AD shifts to the right, the new equilibrium will have a higher quantity of output and also a higher price level compared with the original equilibrium.

a) True

b) False

b

An increase in import expenditures is bad for the U.S. economy.

a) True

b) False

a

True or False - In order to combat a crippling recession, the German government passes a series of tax cuts into law. Use the graph below to show the impact of the aforementioned on the German economy by shifting the appropriate curve(s). 

• The tax cut, by increasing consumption, shifts the AD curve to the right.

a) True

b) False

a

True or False - Suppose, the Congress decides to increase spending on domestic infrastructure in order to upgrade the nation's infrastructure. Use the graph below to show the impact of the aforementioned on the economy by shifting the appropriate curve(s). 

• Government spending is one component of AD.Thus, higher government spending will cause AD to shift to the right

a) True

b) False

b

In the AD/AS framework, when short-run macroeconomic equilibrium GDP  is significantly below potential GDP, there is cyclical unemployment but it is very low.

a) True

b) False

a and c

Inflationary pressures happen when ____.

Select the two correct answers below. 

a) aggregate demand is close to full employment and shifts even closer to full employment

b) potential output shifts to the right

c) aggregate supply decreases as a result of increases in input prices which are widely used throughout the economy 

d) there is a leftward movement along the aggregate demand curve.

d

The AD/AS diagram shows the magnitude of __________ unemployment by how close the economy is to the potential or full GDP employment level.

a) frictional

b) structural

c) natural rate of

d) cyclical

a

If aggregate demand in the economy has soared so high that firms in the economy are not capable of producing additional goods, because labor and physical capital are fully employed, then __________.

a) additional increases in aggregate demand can only result in a rise in the price level

b) additional increases in aggregate demand can only result in a decreases in the price level

c) the economy is able to produce additional output without increasing price

d) the aggregate demand curve becomes vertical 

a

Which of the following is the best definition of cyclical unemployment?

a) unemployment in excess of the natural rate of unemployment

b) the percentage of the working age population in an economy who are looking for a job

c) the percentage of the working age population who are in the labor force but who do not have jobs but are currently looking

d) the unemployment rate that would exist in a healthy economy from the combination of economic and social factors

a

True or false?

The AD/AS framework implies two ways that inflationary pressures may arise. One is if aggregate demand continues to shift to the right when the economy is already at or near potential GDP and full employment, and another is if input prices that affect many or most firms across the economy increase.

a) True

b) False

b

If an economy produces at a level below its full employment output level, the economy must have __________.

a) full employment

b) cyclical unemployment

c) an upward-sloping aggregate supply

d) a downward-sloping short-run aggregate supply

a

Following an uptick of productivity in the U.S. economy, the U.S. AS curve will shift to the right.

a) True

b) False

a and b

Inflationary pressure can occur if _________.

(Select all the apply. Hint: There are 2 correct answers.)

a) input prices that affect many or most firms across the economy increase

b) aggregate demand continues to shift to the right when the economy is already at or near potential GDP and full employment

c) aggregate demand continues to shift to the left when the economy is already at or near potential GDP and full employment

d) input prices that affects many or most firms across the economy decrease

a

A rise in input prices that affects many or most firms across the economy can cause the aggregate supply curve to shift back to the left creating __________.

a) inflationary pressure

b) an increase in aggregate demand

c) an increase in aggregate supply

d) deflationary pressure

b

Relatively high levels of cyclical unemployment for an economy occur when the level of output is close to potential GDP.

a) True

b) False

a

If rising input prices affect many or most firms across the economy, then the aggregate supply curve will shift, causing __________.

a) inflationary pressure

b) potential output to increase

c) a leftward movement along the aggregate curve.

d) a rightward movement along the aggregate demand curve.

a

The AD/AS diagram illustrates __________ when the equilibrium level of real GDP falls, often occurring below potential GDP.

a) recessions

b) expansions

c) economic growth

d) the causes of economic growth

c

In the AD/AS framework, if aggregate demand continues to shift to the right while the economy is near potential GDP, then __________.

a) inflationary pressures will decrease

b) unemployment will increase

c) inflationary pressures will increase

d) real GDP will decrease

b

An increase in productivity that affects many or most firms across the economy can cause the aggregate supply curve to shift to the left, thus creating inflationary pressures in the economy.

a) True

b) False

b

In the AD/AS diagram, long-run economic growth—due to productivity increases over time—will be represented by a gradual shift to the right of aggregate demand. 

a) True

b) False

a

If aggregate demand in the economy has soared so high that firms in the economy are not capable of producing additional goods, because labor and physical capital are fully employed, then __________.

a) additional increases in aggregate demand can only result in a rise in the price level

b) additional increases in aggregate demand can only result in a decreases in the price level

c) the economy is able to produce additional output without increasing price

d) the aggregate demand curve becomes vertical 

c

In the AD/AS diagram, long-run economic growth due to productivity increases over time will be represented by a gradual shift to the right of the  __________.

a) price level

b) aggregate demand curve

c) aggregate supply curve

d) country's budget constraint

a

Inflationary pressures happen when __________.

a) the aggregate demand curve shifts closer to full employment GDP

b) wage rates fall

c) there is a rightward movement along the AD curve.

d) there is a leftward shift of the AD curve.

b

In the AD/AS framework, when short-run macroeconomic equilibrium GDP  is significantly below potential GDP, there is cyclical unemployment but it is very low.

a) True

b) False