Final Chapter 11

Question 1

In the long-run
Answers:
real GDP is equal to potential GDP.
the aggregate supply curve is upward sloping.
aggregate supply depends on the price level.
All of the above answers are correct.

Answer 1

real GDP is equal to potential GDP.

Question 2

If the economy is in short run equilibrium then
Answers:
real GDP equals potential GDP.
real GDP can be greater than, less than, or equal to potential GDP.
nominal GDP equals potential GDP.
real GDP cannot be equal to potential GDP.

Answer 2

real GDP can be greater than, less than, or equal to potential GDP.

Question 3

An increase in the quantity of money
Answers:	
increases aggregate demand.
increase the short-run quantity supply.
decreases aggregate demand.
decrease the short-run aggregate supply.

Answer 3

increases aggregate demand.

Question 4

The long-run aggregate supply curve is vertical because
Answers:
there is no cyclical inflation.
potential GDP is independent of the price level.
the money wage rate increases faster than the price level.
at full employment prices are stable.

Answer 4

potential GDP is independent of the price level.

Question 5

The quantity of real GDP supplied (or aggregate production) at different price levels is reflected by the
Answers:	
aggregate supply curve.
aggregate demand curve.
total expenditure curve.
real wealth curve.

Answer 5

aggregate supply curve.

Question 6

The U.S. aggregate demand curve shifts leftward (decreases) if:
Answers:
the economic conditions in Europe improve so that European incomes increase.
U.S. exports increase.
there is a tax cut.
the Federal Reserve increases the interest rate by cutting the money supply.

Answer 6

the Federal Reserve increases the interest rate by cutting the money supply.

Question 7

Which of the following shifts the aggregate demand curve rightward?
Answers:
a decrease in consumption
a decrease in net exports
an increase in investment
a decrease in government expenditure on goods and services

Answer 7

an increase in investment

Question 8

Which of the following does NOT shift the aggregate demand curve?
Answers:
an increase in the price level
a decrease in the quantity of money
an increase in people’s expected future incomes
an increase in current foreign income

Answer 8

an increase in the price level

Question 9

An increase in the price level creates a
Answers:	
wealth effect.
decrease in consumption expenditures.
movement along the aggregate demand curve.
All of the above answers are correct.

Answer 9

All of the above answers are correct.

Question 10

An increase in the money wage rate (or of other input prices)
Answers:
decreases the short-run aggregate supply.
decreases the long-run aggregate supply.
increases the long-run aggregate supply.
increases the short-run aggregate supply.

Answer 10

decreases the short-run aggregate supply.

Question 11

Which of the following increases aggregate demand and shifts the AD curve rightward?
answers:
predictions of a recession that lead to expectations of lower future income
an increase in the exchange rate that makes imports less expensive
an increase in the quantity of money and a resulting fall in the interest rate
a fall in the price level

Answer 11

an increase in the quantity of money and a resulting fall in the interest rate

Question 12

For movements along the long-run aggregate supply curve,
Answers:
the price level and the money wage rate change by the same percentage.
potential GDP is dependent on the price level.
the prices of goods and services change while the prices of productive resources hold steady.
All of the above are correct.

Answer 12

the price level and the money wage rate change by the same percentage.

Question 13

At potential GDP
Answers:
there is no unemployment but there is not necessarily full employment.
there is no unemployment and there is full employment.
unemployment is at its natural rate.
None of the above is correct.

Answer 13

unemployment is at its natural rate.

Question 14

People expect their incomes will decrease next year (i.e. consumer expectations). As a result, the ________ will shift ________.
Answers:
aggregate demand curve; rightward
long-run aggregate supply curve; rightward
aggregate demand curve; left ward
short-run aggregate supply curve; rightward

Answer 14

aggregate demand curve; left ward

Question 15

A decrease in government transfer payments
Answers:
increases aggregate demand.
increases the aggregate quantity demanded.
decreases the aggregate quantity demanded.
decreases aggregate demand.

Answer 15

decreases aggregate demand.

Question 16

Substitution (i.e. interest rate) effects help explain the slope of the aggregate demand curve. This refers to the:
Answers:
effect on investment expenditures that result from a change in interest rates produced by a change in the price level.
change in wealth that results from a change in the interest rate.
inverse relationship between the interest rate and the price level.
direct relationship between the interest rate and the real value of wealth.

Answer 16

effect on investment expenditures that result from a change in interest rates produced by a change in the price level.

Question 17

people expect their incomes will decrease next year. As a result, the ________ will shift ________.
Answers:
aggregate demand curve; rightward
aggregate demand curve; leftward
long-run aggregate supply curve; rightward
short-run aggregate supply curve; rightward

Answer 17

aggregate demand curve; leftward

Question 18

Which of the following statements is FALSE?
Answers:
Fiscal policy is the attempt to influence the economy using taxes, transfer payments, and government expenditures.
Taxes and transfer payments affect aggregate demand by changing disposable income.
An increase in disposable income leads to a decrease in aggregate demand.
Government expenditure affects aggregate demand directly because government expenditure is a component of aggregate demand.

Answer 18

An increase in disposable income leads to a decrease in aggregate demand.

Question 19

Why does the aggregate demand curve slope downward?
Answers:	
Wealth effect
export effect
interest rate effect
all of the answers in this question
none of the answers

Answer 19

all of the answers in this question

Question 20

Which of the following is true?
Answers:
a change the money wage and other resource prices does not shift the long-run aggregate supply.
a shift right of the long-run aggregate supply and potential GDP will also shift the short-run aggregate supply curve right as well.
a shift left of the long-run aggregate supply and potential GDP will also shift the short-run aggregate supply curve left as well.
all of the above are true.

Answer 20

all of the above are true.

Question 21

A decrease in government transfer payments
Answers:
increases aggregate demand.
increases the aggregate quantity demanded.
decreases the aggregate quantity demanded.
decreases aggregate demand.

Answer 21

decreases aggregate demand.

Question 22

According to the interest rate effect (i.e. intertemporal substitution effect), a fall in the price level will
Answers:
decrease the real value of wealth, which increases the quantity of real GDP demanded.
increase net exports, which causes the quantity of real GDP demanded to increase.
increase the real value of wealth, which raises the interest rate so that the quantity of real GDP demanded decreases.
cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases.

Answer 22

cause the interest rate to fall so that investment increases and the quantity of real GDP demanded increases.

Question 23

Which of the following events will increase long-run aggregate supply?
answers:	
an advance in technology
an increase in resource prices
an increase in the interest rate
a decrease in expected profit

Answer 23

an advance in technology

Question 24

As the price level falls and other things remain the same, real wealth ________ and ________.
Answers:
aggregate demand curve; left ward
aggregate demand curve; rightward
short-run aggregate supply curve; rightward
long-run aggregate supply curve; rightward

Answer 24

aggregate demand curve; left ward

Question 25

Moving along a short-run aggregate supply curve, resource prices (and other input prices) ________, the money rate wage ________, and potential GDP ________. Answers: change; does not change; does not change do not change; changes; does not change do not change; does not change; changes do not change; does not change; does not change

Answer 25

do not change; does not change; does not change

Question 26

A decrease in government expenditure on goods and services Answers: decreases the aggregate quantity demanded. increases aggregate demand. decreases aggregate demand. increases the aggregate quantity demanded.

Answer 26

decreases aggregate demand.

Question 27

people expect their incomes will decrease next year. As a result, the ________ will shift ________. Answers: aggregate demand curve; left ward aggregate demand curve; rightward short-run aggregate supply curve; rightward long-run aggregate supply curve; rightward

Answer 27

aggregate demand curve; left ward

Question 28

Other things equal, along the aggregate demand curve, a higher price level is associated with Answers: higher income levels. a decrease in the quantity of real GDP demanded. an increase in the quantity of real GDP demanded. a decrease in the quantity of nominal GDP demanded.

Answer 28

a decrease in the quantity of real GDP demanded.

Question 29

``` One possible result of a decrease in aggregate demand (ceteris paribus): Answers: a recession. an economic expansion. a rise in the price level. an increase in employment levels. ```

Answer 29

a recession.

Question 30

When talking about aggregate supply, it is necessary to Answers: focus on the long run. focus on the short run. distinguish between long-run full employment and short-run full-employment. distinguish between long-run aggregate supply and short-run aggregate supply.

Answer 30

distinguish between long-run aggregate supply and short-run aggregate supply.

Question 31

Aggregate demand decreases when Answers: the government implements monetary policies that decrease the quantity of money. the government cuts taxes. businesses come to expect higher profits in the future. incomes in foreign countries increase.

Answer 31

the government implements monetary policies that decrease the quantity of money.

Question 32

The short-run aggregate supply curve is upward sloping because Answers: each firm must keep its production up to the level of its rivals, and some firms will expand production as the price level increases. firms can increase their profits by increasing their maintenance. the money wage rate (and other input prices) remains constant so the higher prices makes it profitable for firms to expand production. the higher prices allow the firm to hire more workers by offering higher wages, thereby increasing productivity and profits.

Answer 32

the money wage rate (and other input prices) remains constant so the higher prices makes it profitable for firms to expand production.

Question 33

The supply of real GDP is a function of Answers: the total expenditures of consumers, investors and government. the sum of wages, salaries, corporate profits, rents and interest. only the state of technology. the quantities of labor, capital and the state of technology.

Answer 33

the quantities of labor, capital and the state of technology.

Question 34

Higher taxes Answers: decrease the aggregate quantity demanded. decrease aggregate demand. increase aggregate demand. increase the aggregate quantity demanded.

Answer 34

decrease aggregate demand.

Question 35

``` Which of the following shifts the aggregate demand curve rightward? Answers: an increase in imports an increase in tax rates an increase in the exchange rate an increase in government expenditure ```

Answer 35

an increase in government expenditure

Question 36

A fall in the money wage rate (or other input prices) shifts Answers: both the SRAS and LRAS curves leftward. the SRAS curve rightward but leaves the LAS curve unchanged. the LRAS curve rightward but leaves the SAS curve unchanged. both the SRAS and LRAS curves rightward.

Answer 36

the SRAS curve rightward but leaves the LAS curve unchanged.

Question 37

``` Aggregate supply describes the behavior of Answers: government. producers. households. foreign buyers. ```

Answer 37

producers.

Question 38

Factors that shift the long-run aggregate supply and potential GDP rightward include an increase in: Answers: technology. quality and quantity of other inputs. quantity of capital (physical capital and human capital). quantity of labor. all of the above.

Answer 38

all of the above.

Question 39

According to the wealth effect, if real wealth decreases then people Answers: decrease their consumption expenditure. do not respond if their nominal wealth does not change. increase their consumption expenditure. decrease their consumption expenditure only if their nominal wealth also decreases.

Answer 39

decrease their consumption expenditure.

Question 40

``` The long-run aggregate supply ( LRAS) curve Answers: has a negative slope. is vertical. is horizontal. has a positive slope. ```

Answer 40

is vertical.

Question 41

``` Higher taxesAnswers: decrease the short-run aggregate supply. increase the short-run quantity supply. decrease aggregate demand. increase aggregate demand. ```

Answer 41

decrease aggregate demand.

Question 42

The short-run aggregate supply curve is upward sloping because Answers: marginal costs rise with increased output so firms have to receive higher prices to justify their increase in output. capital is scarce. technology is scarce. potential GDP is less than real GDP when the price level falls.

Answer 42

marginal costs rise with increased output so firms have to receive higher prices to justify their increase in output.

Question 43

Other things constant, the economy's aggregate demand curve shows that Answers: the quantity of real GDP demanded and the price level are not related. as the price level falls, real GDP decreases. the quantity of real GDP demanded decreases when the price level rises. any change in the price level shifts the aggregate demand curve.

Answer 43

the quantity of real GDP demanded decreases when the price level rises.

Question 44

Which of the following shifts the aggregate demand curve left ward? Answers: an increase in net exports of goods and services a decrease in taxes an increase in consumption expenditures a decrease in government expenditures on goods and services

Answer 44

a decrease in government expenditures on goods and services