Exam #3 Study Guide

1. The aggregate demand curve:
A) is upsloping because a higher price level is necessary to make production profitable as production costs
rise.
B) is downsloping because production costs decline as real output increases.
C) shows the amount of expenditures required to induce the production of each possible level of real
output.
D) shows the amount of real output that will be purchased at each possible price level.

D

2. The aggregate demand curve is:
A) vertical if full employment exists.
B) horizontal when there is considerable unemployment in the economy.
C) downsloping because of the interest-rate, real-balances, and foreign purchases effects.
D) downsloping because production costs decrease as real output rises.

C

3. The interest-rate effect suggests that:
A) a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption
and investment spending.
B) an increase in the price level will increase the demand for money, reduce interest rates, and decrease
consumption and investment spending.
C) an increase in the price level will increase the demand for money, increase interest rates, and decrease
consumption and investment spending.
D) an increase in the price level will decrease the demand for money, reduce interest rates, and increase
consumption and investment spending.

C

The real-balances effect indicates that:
A) an increase in the price level will increase the demand for money, increase interest rates, and reduce
consumption and investment spending.
B) a lower price level will decrease the real value of many financial assets and therefore reduce spending.
C) a higher price level will increase the real value of many financial assets and therefore increase
spending.
D) a higher price level will decrease the real value of many financial assets and therefore reduce spending.

D

The interest-rate and real-balances effects are important because they help explain:
A) rightward and leftward shifts of the aggregate demand curve.
B) why fiscal policy cannot be used effectively to curb inflation.
C) the shape of the aggregate demand curve.
D) the shape of the aggregate supply curve.

C

The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:
A) increase the amount of U.S. real output purchased.
B) increase U.S. imports and decrease U.S. exports.
C) increase both U.S. imports and U.S. exports.
D) decrease both U.S. imports and U.S. exports.

B

The foreign purchases effect suggests that a decrease in the U.S. price level relative to other countries will:
A) shift the aggregate demand curve leftward.
B) shift the aggregate supply curve leftward.
C) decrease U.S. exports and increase U.S. imports.
D) increase U.S. exports and decrease U.S. imports

D

The foreign purchases effect:
A) shifts the aggregate demand curve rightward.
B) shifts the aggregate demand curve leftward.
C) shifts the aggregate supply curve rightward.
D) moves the economy along a fixed aggregate demand curve.

D

. If the price level increases in the United States relative to foreign countries, then American consumers will
purchase more foreign goods and fewer U.S. goods. This statement describes:
A) the output effect. C) the real-balances effect.
B) the foreign purchases effect. D) the shift-of-spending effect

B

The real-balances, interest-rate, and foreign purchases effects all help explain:
A) why the aggregate demand curve is downsloping.
B) why the aggregate supply curve is upsloping.
C) shifts in the aggregate demand curve.
D) shifts in the aggregate supply curve.

A

Which of the following explains why the aggregate demand schedule is downward sloping:
A) the real-balances effect
C) the foreign purchases effect
B) the interest-rate effect
D) all of the above

D

Which of the following is incorrect?
A) As the U.S. price level rises, U.S. goods become relatively more expensive so that U.S. exports fall and
U.S. imports rise.
B) As the price level falls, the demand for money declines, the interest rate declines, and interest-rate
sensitive spending increases.
C) When the price level increases, real balances increase, businesses and households find themselves
wealthier and therefore increase their spending.
D) Given aggregate demand, an increase in aggregate supply increases real output and, assuming
downward flexible prices, reduces the price level.

C

The factors that affect the amounts that consumers, businesses, government, and foreigners wish to
purchase at each price level are the:
A) real-balances, interest-rate, and foreign purchases effects.
B) determinants of aggregate supply.
C) determinants of aggregate demand.
D) sole determinants of the equilibrium price level and the equilibrium real output

C

The determinants of aggregate demand:
A) explain why the aggregate demand curve is downsloping.
B) explain shifts in the aggregate demand curve.
C) demonstrate why real output and the price level are inversely related.
D) include input prices and resource productivity.

B

Other things equal, if the national incomes of the major trading partners of the United States were to rise,
the U.S.:
A) aggregate demand curve would shift to the right.
B) aggregate supply curve would shift to the left.
C) aggregate supply curve would shift to the right.
D) aggregate demand curve would shift to the left.

A

Which one of the following would not shift the aggregate demand curve?
A) a change in the price level
B) depreciation of the international value of the dollar
C) a decline in the interest rate at each possible price level
D) an increase in personal income tax rates

A

Other things equal, a decrease in the real interest rate will:
A) expand investment and shift the AD curve to the left.
B) expand investment and shift the AD curve to the right.
C) reduce investment and shift the AD curve to the left.
D) reduce investment and shift the AD curve to the right.

B

A decline in investment will shift the AD curve to the:
A) left by a multiple of the change in investment.
B) left by the same amount as the change in investment.
C) right by the same amount as the change in investment.
D) right by a multiple of the change in investment.

A

An increase in net exports will shift the AD curve to the:
A) left by a multiple of the change in investment.
B) left by the same amount as the change in investment.
C) right by the same amount as the change in investment.
D) right by a multiple of the change in investment.

D

If investment increases by $10 billion and the economy's MPC is .8, the aggregate demand curve will shift:
A) leftward by $40 billion at each price level.
C) rightward by $50 billion at each price level.
B) rightward by $10 billion at each price level.
D) leftward by $20 billion at each price level.

C

If investment decreases by $20 billion and the economy's MPC is .5, the aggregate demand curve will shift:
A) leftward by $40 billion at each price level.
C) rightward by $40 billion at each price level.
B) rightward by $20 billion at each price level.
D) leftward by $20 billion at each price level.

A

An economy's aggregate demand curve shifts leftward or rightward by more than changes in initial
spending because of the:
A) net export effect.
B) wealth effect.
C) real-balances effect.
D) multiplier effect.

D

The economy's long-run aggregate supply curve:
A) slopes upward and to the right.
C) is horizontal.
B) is vertical.
D) slopes downward and to the right.

B

The economy's long-run AS curve assumes that wages and other resource prices:
A) eventually rise and fall to match upward or downward changes in the price level.
B) are flexible upward but inflexible downward.
C) rise and fall more rapidly than the price level.
D) are relatively inflexible both upward and downward.

A

The aggregate supply curve:
A) is explained by the interest rate, real-balances, and foreign purchases effects.
B) gets steeper as the economy moves from the top of the curve to the bottom of the curve.
C) shows the various amounts of real output that businesses will produce at each price level.
D) is downsloping because real purchasing power increases as the price level falls.

C

The graphical relationship between the price level and the amount of real GDP that businesses will offer for
sale is known as the:
A) aggregate demand curve.
C) investment demand curve.
B) investment supply curve.
D) aggregate supply curve.

D

The aggregate supply curve (short-run):
A) slopes downward and to the right. C) slopes upward and to the right.
B) graphs as a vertical line.
D) graphs as a horizontal line.

C

The aggregate supply curve (short-run):
A) graphs as a horizontal line.
B) is steeper above the full-employment output than below it.
C) slopes downward and to the right.
D) presumes that changes in wages and other resource prices match changes in the price level.

B

The aggregate supply curve (short-run) slopes upward and to the right because:
A) changes in wages and other resource prices completely offset changes in the price level.
B) the price level is flexible upward but inflexible downward.
C) supply creates its own demand.
D) wages and other resource prices adjust only slowly to changes in the price level.

D

The aggregate supply curve (short-run) is upsloping because:
A) wages and other resource prices match changes in the price level.
B) the price level is flexible upward but inflexible downward.
C) per-unit production costs rise as the economy moves toward and beyond its full-employment real
output.
D) wages and other resource prices are flexible upward but inflexible downward.

C

Other things equal, an improvement in productivity will:
A) shift the aggregate demand curve to the left.
C) shift the aggregate supply curve to the right.
B) shift the aggregate supply curve to the left.
D) increase the price level.

C

A rightward shift in the aggregate supply curve is best explained by an increase in:
A) business taxes.
B) productivity.
C) nominal wages.
D) the price of imported resources.

B

Refer to the above information. The level of productivity is:
A) 20.
B) 10.
C) 5.
D) 2.

D

The per unit cost of production in the economy described above is:
A) $.50.
B) $1.
C) $2.
D) $5.

C

Refer to the above information. All else being equal, if the price of each input increased from $4 to $6,
productivity would:
A) fall from 2 to 3.
B) fall from .50 to .33.
C) rise from 1 to 2.
D) remain unchanged.

D

Refer to the above information. Given an increase in input price from $4 to $6, we would expect the
aggregate:
A) supply curve to shift to the left.
C) demand curve to shift to the left.
B) supply curve to shift to the right.
D) demand curve to shift to the right

A

Other things equal, if the U.S. dollar were to depreciate, the:
A) aggregate demand curve would remain fixed in place.
B) aggregate supply curve would shift to the left.
C) aggregate supply curve would shift to the right.
D) aggregate demand curve would shift to the left.

B

Which one of the following would increase per unit production cost and therefore shift the aggregate
supply curve to the left?
A) a reduction in business taxes
B) production bottlenecks occurring when producers near full plant capacity
C) an increase in the price of imported resources
D) deregulation of industry

C

Shifts in the aggregate supply curve are caused by changes in:
A) consumption spending.
B) the quantity of real output demanded.
C) the quantity of real output supplied.
D) one or more of the determinants of aggregate supply.

D

Refer to the above information. The per unit cost of production in this economy is:
A) $.05.
B) $.10.
C) $.50.
D) $1.00.

B

Refer to the above information. If the per unit price of raw materials rises from $4 to $8 and all else
remains constant, the per unit cost of production will rise by about:
A) 100 percent.
B) 50 percent.
C) 40 percent.
D) 30 percent

D

Refer to the above information. As a result of the change indicated in the previous question, the aggregate:
A) supply curve would shift to the left. C) demand curve would shift to the left.
B) supply curve would shift to the right.
D) demand curve would shift to the right.

A

The determinants of aggregate supply:
A) are consumption, investment, government, and net export spending.
B) explain why real domestic output and the price level are directly related.
C) explain the three distinct ranges of the aggregate supply curve.
D) include resource prices and resource productivity.

D

Which of the following would not shift the aggregate supply curve?
A) an increase in labor productivity
C) a decline in business taxes
B) a decline in the price of imported oil D) an increase in the price level

D

Productivity measures:
A) real output per unit of input.
B) per unit production costs.
C) the changes in real wealth caused by price level changes.
D) the amount of capital goods used per worker.

A

Per unit production cost is:
A) real output divided by inputs.
C) units of output divided by total input cost.
B) total input cost divided by units of output.
D) a determinant of aggregate demand.

B

Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the
aggregate:
A) demand curve will shift leftward.
C) supply curve will shift leftward.
B) supply curve will shift rightward.
D) expenditures curve will shift downward.

B

Monopoly or market power is the ability of a firm to:
A) shift its demand curve to the right. C) set its price.
B) shift its demand curve to the left.
D) achieve economies of scale.

C

Other things equal, appreciation of the dollar:
A) increases aggregate demand in the United States and may increase aggregate supply by reducing the
prices of imported resources.
B) increases aggregate demand in the United States and may decrease aggregate supply by reducing the
prices of imported resources.
C) decreases aggregate demand in the United States and may increase aggregate supply by reducing the
prices of imported resources.
D) decreases aggregate demand in the United States and may reduce aggregate supply by increasing the
prices of imported resources.

C

Other things equal, a reduction in personal and business taxes can be expected to:
A) increase aggregate demand and decrease aggregate supply.
B) increase both aggregate demand and aggregate supply.
C) decrease both aggregate demand and aggregate supply.
D) decrease aggregate demand and increase aggregate supply.

B

Other things equal, an improvement in productivity will:
A) increase the equilibrium price level. C) shift the aggregate supply curve to the right.
B) shift the aggregate supply curve to the left.
D) shift the aggregate demand curve to the left.

C

The level of productivity in the above economy is:
A) 2.
B) .5.
C) 4.
D) 200.

A

If the price of each input is $5, the per unit cost of production in the above economy is:
A) $5.
B) $2.75.
C) $2.50.
D) $.40.

C

Suppose that the price of each input increased from $5 to $8. The per unit cost of production in the above
economy would:
A) rise by $1.50 and the aggregate supply curve would shift to the right.
B) rise by 60 percent and the aggregate supply curve would shift to the left.
C) rise by 60 percent and the aggregate demand curve would shift to the left.
D) fall by $1.50 and the aggregate demand curve would shift to the right.

B

The equilibrium price level and level of real output occur where:
A) real output is at its highest possible level.
B) export equal imports.
C) the price level is at its lowest level.
D) the aggregate demand and supply curves intersect.

D

Refer to the above data. The equilibrium price level will be:
A) 150.
B) 200.
C) 250.
D) 300.

B

Refer to the above data. If the price level is 150 and producers supply $300 of real output:
A) a shortage of real output of $200 will occur.
B) a shortage of real output of $100 will occur.
C) a surplus of real output of $300 will occur.
D) neither a shortage nor a surplus of real output will occur.

A

Refer to the above data. If the amount of real output demanded at each price level falls by $200, the
equilibrium price level and equilibrium level of real domestic output will fall to:
A) 250 and $200, respectively.
C) 150 and $300, respectively.
B) 200 and $300, respectively.
D) 150 adn $200, respectively.

C

Refer to the above data. The change in aggregate demand indicated in the previous question might have
been caused by:
A) an increase in net exports.
C) an increase in consumer wealth.
B) a worsening of business expectations.
D) a decrease in the personal income tax.

B

Graphically, demand-pull inflation is shown as a:
A) rightward shift of the AD curve along an upsloping AS curve.
B) leftward shift of the AS curve along a downsloping AD curve.
C) leftward shift of AS curve along an upsloping AD curve.
D) rightward shift of the AD curve along a downsloping AS curve.

A

Graphically, cost-push inflation is shown as a:
A) leftward shift of the AD curve.
C) leftward shift of AS curve.
B) rightward shift of the AS curve.
D) rightward shift of the AD curve.

C

Graphically, the full-employment, low-inflation, rapid-growth economy of the last half of the 1990s is
depicted by a:
A) rightward shift of the aggregate demand curve along a fixed aggregate supply curve.
B) rightward shift of the aggregate supply curve along a fixed aggregate demand curve.
C) rightward shift of the aggregate demand curve and a rightward shift of the aggregate supply curve.
D) leftward shift of the aggregate demand curve and a leftward shift of the aggregate supply curve.

C

If aggregate demand decreases, and as a result, real output and employment decline but the price level
remains unchanged, we can assume that:
A) the money supply has declined.
B) the price level is inflexible downward and a recession has occurred.
C) cost-push inflation has occurred.
D) productivity has declined.

B

A rightward shift of the AD curve in the very steep upper part of the upsloping AS curve will:
A) increase real output by more than the price level.
B) increase the price level by more than real output.
C) reduce real output by more than the price level.
D) reduce the price level by more than real output.

B

A rightward shift of the AD curve in the very flat part of the upsloping AS curve will:
A) increase real output by more than the price level.
B) increase the price level by more than real output.
C) reduce real output by more than the price level.
D) reduce the price level by more than real output.

A

Given a fixed upsloping AS curve, a rightward shift of the AD curve will:
A) cause cost push inflation.
C) increase the price level but not real output.
B) increase real output but not the price level.
D) increase both the price level and real output.

D

A decrease in aggregate demand will cause a greater decline in real output the:
A) less flexible is the economy's price level.
B) more flexible is the economy's price level.
C) steeper is the economy's AS curve.
D) larger is the economy's marginal propensity to save.

A

In the above figure AD1 and AS1 represent the original aggregate supply and demand curves and AD2 and AS2 show the new aggregate demand and supply curves. The change in aggregate supply from AS1 to AS2 could be caused by:
A) a reduction in the price level.
B) the increased availability of entrepreneurial talent.
C) an increase in business taxes.
D) the real-balances, interest-rate, and foreign purchases effects.

B

If aggregate demand increases and aggregate supply decreases, the price level:
A) will decrease, but real output may either increase or decrease.
B) will increase, but real output may either increase or decrease.
C) and real output will both increase.
D) and real output will both decrease.

B

If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect:
A) aggregate demand to decrease and aggregate supply to increase.
B) both aggregate demand and aggregate supply to decrease.
C) both aggregate demand and aggregate supply to increase.
D) aggregate demand to increase and aggregate supply to decrease.

A

We would expect a decline in personal and corporate income taxes to:
A) shift the aggregate demand curve rightward.
C) decrease real output.
B) decrease consumption and investment spending.
D) shift the aggregate supply curve leftward.

A

An increase in input productivity will:
A) shift the aggregate supply curve leftward.
B) reduce the equilibrium price level, assuming downward flexible prices.
C) reduce the equilibrium real output.
D) reduce aggregate demand.

B

If personal taxes were decreased and resource productivity increased simultaneously, the equilibrium:
A) output would rise.
C) price level would necessarily fall.
B) output would fall.
D) price level would necessarily rise.

A

If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity
supplied, we would expect:
A) inflation to occur.
C) the aggregate demand curve to shift leftward.
B) the aggregate demand curve to shift rightward.
D) the aggregate supply curve to shift leftward.

A

In which of the following sets of circumstances can we confidently expect inflation?
A) aggregate supply and aggregate demand both increase
B) aggregate supply and aggregate demand both decrease
C) aggregate supply decreases and aggregate demand increases
D) aggregate supply increases and aggregate demand decreases

C

The size of the multiplier associated with an initial increase in spending will be:
A) the same whether or not inflation occurs.
C) zero if any increase in the price level occurs.
B) diminished if inflation occurs.
D) enhanced if inflation occurs.

B

Which of the following is a true statement?
A) firms and resource suppliers generally find it easier to reduce prices than to raise them.
B) as the price level increases, interest rates will rise and therefore consumption and investment spending
will also rise.
C) an initial increase in aggregate demand may cause a further increase in aggregate demand because
higher prices mean higher incomes.
D) a decline in aggregate demand will primarily affect real output and employment if prices are inflexible

D

Prices and wages tend to be:
A) flexible both upward and downward.
C) flexible downward, but inflexible upward.
B) inflexible both upward and downward.
D) flexible upward, but inflexible downward.

D

Efficiency wages are:
A) above-market-wages that bring forth so much added work effort that per-unit production costs are
lower than at market wages.
B) wage payments necessary to compensate workers for unpleasant or risky work conditions.
C) usually less than market wages.
D) relevant to macro economics because they explain rightward shifts in aggregate demand.

A

When aggregate demand declines, wage rates may be inflexible downward, at least for a time, because of:
A) the foreign purchases effect.
B) inflexible product prices.
C) wage contracts.
D) the wealth effect.

C

When aggregate demand declines, many firms may reduce employment rather than wages because wage
reductions may:
A) reduce per unit production costs.
B) reduce worker morale and work effort, and thus lower productivity.
C) increase the firms' cost of raising financial capital.
D) reduce the demands for their products

B

When aggregate demand declines, some firms may reduce employment rather than wages because wage reductions may:
A) not be possible due to the minimum wage law. C) reduce the demands for their products.
B) increase the cost of raising money capital. D) may set off a price war.

A

When aggregate demand declines, the price level may remain constant, at lease for a time, because:
A) firms individually fear that their price cut may set off a price war.
B) menu costs rise.
C) price cuts tend to increase efficiency wages.
D) product markets are highly competitive.

A

Menu costs:
A) increase during recession.
B) decrease during recession.
C) are the costs to firms of changing prices and communicating them to customers.
D) are sunk costs and therefore should be disregarded.

C

The fear of unwanted price wars may explain why many firms are reluctant to:
A) reduce wages when a decline in aggregate demand occurs.
B) reduce prices when a decline in aggregate demand occurs.
C) expand production capacity when an increase in aggregate demand occurs.
D) provide wage increases when labor productivity rises.

B

(Consider This) The idea that the price level readily moves upward but not downward is called the:
A) elevator effect.
B) escalator effect.
C) ratchet effect.
D) stair-step effect.

C

(Consider This) The ratchet effect is the tendency of:
A) the price level to increase but not to decrease.
B) nominal GDP to increase more rapidly than real GDP.
C) real interest rates to fall more rapidly than nominal interest rates.
D) consumption to rise year after year regardless of what happens to disposable income

A

(Last Word) In recent years:
A) unemployment rates in Europe have been higher than in the United States.
B) the natural rate of unemployment in Europe has fallen sharply.
C) Europe has had strong aggregate demand and low unemployment rates.
D) European nations have greatly reduced their unemployment rates by reducing minimum wages, welfare
benefits, and government restrictions against firing workers.

A

(Last Word) It is unclear whether:
A) high European rates of inflation reflect demand-pull or cost-push forces.
B) high European rates of poverty can be reduced by by higher transfer payments.
C) high European unemployment rates have resulted from high natural rates of unemployment or
insufficient aggregate demand.
D) European trade deficits stimulate or retard the European economies.

C

The interest-rate effect is one of the determinants of aggregate demand.

false

Other things equal, an increase in productivity will shift the aggregate supply curve rightward.

true

An increase in wealth from a substantial increase in stock prices will move the economy along a fixed
aggregate demand curve.

false

In order to study the macroeconomy we must combine the prices and quantities generated in single-product
markets into broad aggregates.

true

An increase in imports (independently of a change in the U.S. price level) will increase both U.S. aggregate
supply and U.S. aggregate demand.

false

An increase in business excise taxes will shift the aggregate supply curve leftward.

true

A decrease in per unit production costs will shift the aggregate supply curve leftward.

false

Unemployment and inflation can coexist.

true

The shape of the aggregate supply curve is determined by what happens to aggregate demand as real output
expands.

false

The real-balances effect indicates that inflation makes the public feel wealthier and they therefore spend
more out of their current incomes.

false

In locating a particular aggregate demand curve it is assumed that the money supply is fixed.

true