Basics
Recessions occur at ________ intervals and are ________ to predict with much accuracy.
a. regular; quite possible
b. regular; almost impossible
c. irregular; quite possible
d. irregular; almost impossible
D. irregular ; almost impossible
Economic fluctuations are not at all regular, and they are almost impossible to predict with much accuracy.
Which of the following would be included in aggregate demand?
a.The quantity of goods that firms produce
b.The quantity of services that firms sell
c.Government's tax collections
d.Firms' purchases of newly produced machinery
D. Firms' purchases of newly produced machinery
Aggregate demand includes the quantity of goods and services (such as newly produced machinery) that households, firms, the government, and customers abroad want to buy at each price level.
Which of the following both shift aggregate-demand curve to the right?
a.A decrease in taxes and at a given price level consumers feel more wealthy
b.An increase in taxes and at a given price level consumers feel less wealthy
c.A decrease in taxes and at a given price level consumers feel less wealthy
d.An increase in taxes and at a given price level consumers feel more wealthy
a.A decrease in taxes and at a given price level consumers feel more wealthy
When the government cuts taxes and when people feel wealthier, it encourages people to spend more, so the aggregate-demand curve shifts to the right.
An improvement in technology would cause the long-run aggregate-supply curve to shift
a.right.
b.downward.
c.not at all but instead to remain constant.
d.left.
A. Right
Advances in technological knowledge have allowed us to produce more goods and services from any given amount of labor, capital, and natural resources and have shifted the long-run aggregate-supply curve to the right.
Which of the following would decrease the price level?
a.a decrease in taxes.
b.an increase in the natural rate of unemployment.
c.an increase in the expected price level.
d.a decrease in the money supply.
d.a decrease in the money supply.
A decrease in the money supply raises the interest rate, discourages investment spending, and shifts the aggregate-demand curve to the left. Holding the short-run aggregate-supply curve constant, the new equilibrium will have a lower price level.
During recessions, changes in investment spending are the biggest contributor to changes in
a. retail sales.
b. consumer spending.
c. personal income.
d. real GDP.
D. real gdp
much of the decline in real GDP is attributable to reductions in investment spending.
The vertical axis of the aggregate demand and aggregate supply graph has the
a.price level.
b.output of services.
c.output of goods.
d.real GDP.
A. Price level
On the vertical axis of the graph of aggregate demand and aggregate supply is the overall price level in the economy.
If there is a natural disaster, the long-run aggregate-supply curve shifts
a.right.
b.left.
c.not at all but instead remains constant.
d.upward.
B. Left
A natural disaster might kill or displace workers and destroy physical capital. Both of these changes would shift the long-run aggregate-supply to the left.
When prices and unemployment rise, such an event is sometimes called
a.inflation.
b.stagflation.
c.expansion.
d.depreciation.
B. stagflation
Stagflation is a period of falling output, rising unemployment, and rising prices.
During expansions,
a.sales and profits rise.
b.sales rise, but profits fall.
c.sales and profits fall.
d.sales fall, but profits rise.
A. sales and profits rise
The quantity of goods and services that firms produce and sell at each price level is shown on the
a.aggregate-supply curve.
b.market-supply curve.
c.aggregate-services curve.
d.aggregate-demand curve.
A. Aggregate Supply Curve
he aggregate-supply curve shows the quantity of goods and services that firms produce and sell at each price level.
When the price level rises,
a.firms will spend more on new business buildings and business equipment, and households will want to spend more on building new homes.
b.the interest rate falls because people will want to hold more money and so they sell fewer bonds.
c.firms will spend less on new business buildings and business equipment, and households will want to spend less on building new homes.
d.the interest falls because people will want to hold less money and so they buy more bonds.
c. firms will spend less on new business buildings and business equipment, and households will want to spend less on building new homes.
When the price level rises, households try to increase their holdings of money by reducing their willingness to lend some of it out. A household would buy fewer bonds and the interest rate would rise. A higher interest rate motivates firms and households to spend less on investment.
The idea that nominal wages are slow to adjust to changing economic conditions can explain the ________ slope of the short-run aggregate-supply curve.
a.horizontal
b.downward
c.vertical
d.upward
D. upward
One explanation of the upward slope of the short-run aggregate-supply curve is the sticky-wage theory in which nominal wages are slow to adjust to changing economic conditions.
Which of the following shifts short-run aggregate-supply curve to the right?
a.an increase in the actual price level
b.an increase in the price of oil
c.a decrease in price expectations
d.a decrease in the money supply
c. a decrease in price expectations
A decrease in the expected price level raises the quantity of goods and services supplied and shifts the short-run aggregate-supply curve to the right.
Which of the following rises during expansions?
a. Neither employment nor consumer spending
b. Both employment and consumer spending
c. Employment but not consumer spending
d. Consumer spending but not employment
b. Both employment and consumer spending
In an expansion, both employment and consumer spending rise.
Most economists believe that classical theory describes the world in the long run but not in the short run.
True
False
True
The classical model says that in the long run changes in the money supply affect the price level and other nominal variables but do not affect real GDP, unemployment, or other real variables.
In the context of the aggregate-demand curve, when the price level increases, households increase their holdings of money, interest rates increase, and spending on investment goods decreases because of the ________ effect.
a.wealth
b.exchange-rate
c.interest-rate
d.net-export
C. Interest-rate
When the price level rises, households try to increase their holdings of money by reducing their willingness to lend some of it out. A household would buy fewer bonds and the interest rate would rise. A higher interest rate motivates firms and households to spend less on investment.
A change in weather could ____
a.cause a left to right movement along the long-run aggregate-supply curve.
b.shift the long-run aggregate-supply curve.
c.not change the long-run aggregate-supply curve.
d.cause a right to left movement along the long-run aggregate-supply curve.
b.shift the long-run aggregate-supply curve.
A change in weather can create more or less favorable growing conditions, impacting total output for all price levels.
If aggregate demand and aggregate supply both shift left, we can be sure that the price level is higher in the short run.
True
False
False
When the aggregate-demand curve shifts left, the price level falls. When the short-run aggregate-supply curve shifts left, the price level rises. The final price level depends on the relative strength of the shifts.
Which of the following is not correct?
a.During economic contractions most firms experience dwindling profits.
b.Recessions come at irregular intervals and are almost impossible to predict.
c.Short-run fluctuations in economic activity can happen in developed countries such as the U.S.
d.When real GDP expands, the rate of unemployment rises.
d.When real GDP expands, the rate of unemployment rises.
When a recession ends and real GDP starts to expand, the unemployment rate gradually declines.
An increase in the money supply causes output to rise in the short run.
True
False
True
In the short run, changes in the money supply can temporarily push real GDP away from its long-run trend. For example, an increase in the money supply causes short-run output to rise.
When U.S. net exports rise, which increases the aggregate quantity of goods and services demanded, the dollar must have
a.depreciated.
b.equivocated.
c.reciprocated.
d.appreciated.
A. depreciated
A lower price level causes U.S. interest rates to fall, the real value of the dollar to depreciate in foreign exchange markets, U.S. net exports to rise, and the aggregate quantity of goods and services demanded to rise.
Imagine a hypothetical world in which, over the last fifty years, both real GDP and prices have trended downward in most countries. Continuing falls in the level of real GDP and the price level can be explained by
a.continuing losses in technological ability and continuing decreases in the money supply.
b.continuing losses in technological ability alone.
c.continuing decreases in the money supply alone.
d.neither technological ability nor changes in the money supply can explain continuing falls in the level of real GDP contraction and the price level.
a.continuing losses in technological ability and continuing decreases in the money supply.
Continuing losses in technological ability cause the long-run aggregate-supply curve to shift to the left, causing falls in the level of real GDP. Continuing decreases in the money supply cause the aggregate-demand curve to shift to the left, causing falls in the price level.
When production costs fall,
a.the short-run aggregate-supply curve shifts to the left.
b.the short-run aggregate-supply curve shifts to the right.
c.the aggregate-demand curve shifts to the right.
d.the aggregate-demand curve shifts to the left.
b. the short-run aggregate-supply curve shifts to the right.
When production costs fall, firms are able to produce more output at any given price level. The short-run aggregate-supply curve shifts to the right.