Question 1

The dynamic aggregate demand and aggregate supply model assumes that potential GDP increases over time.

Accepted Answer

A) True 
 B)False

Question 2

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Accepted Answer

A)  Output will decrease.
B)  Prices will increase.
C)  Unemployment will rise.
D)  Short-run aggregate supply will shift to the right.E) A) and D)
F) B) and C)

Question 3

Figure 15-4 
-Refer to Figure 15-4.Given the economy is at point A in year 1,what is the inflation rate between year 1 and year 2?

Accepted Answer

A)  0.9%
B)  1.8%
C)  2.7%
D)  3.0%E) None of the above
F) A) and B)

Question 4

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Accepted Answer

A)  monetary policy.
B)  an automatic mechanism.
C)  "releasing sticky prices."
D)  fiscal policy.E) A) and B)
F) C) and D)

Question 5

An increase in aggregate demand causes an increase in ________ only in the short run,but causes an increase in ________ in both the short run and the long run.

Accepted Answer

A)  the price level;real GDP
B)  real GDP;real GDP
C)  the price level;the price level
D)  real GDP;the price levelE) All of the above
F) A) and C)

Question 6

The international trade effect states that

Accepted Answer

A)  an increase in the price level will raise net exports.
B)  an increase in the price level will lower net exports.
C)  an increase in the price level will raise exports.
D)  an increase in the price level will lower imports.E) A) and B)
F) All of the above

Question 7

Which of the following will shift the aggregate demand curve to the right,ceteris paribus?

Accepted Answer

A)  an increase in interest rates
B)  a decrease in disposable income
C)  a decrease in expected profits for firms
D)  an increase in net exportsE) A) and B)
F) B) and C)

Question 8

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Accepted Answer

A)  raises;recession;lowers;expansion
B)  raises;expansion raises;recession
C)  lowers;expansion;lowers;recession
D)  lowers;recession;raises;expansionE) None of the above
F) A) and B)

Question 9

Figure 15-1 1 to AD2. B) AD2 to AD1. C) point A to point B. D) point B to point A." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 15-1.Ceteris paribus,an increase in personal income taxes would be represented by a movement from

Accepted Answer

A)  AD1 to AD2.
B)  AD2 to AD1.
C)  point A to point B.
D)  point B to point A.E) None of the above
F) A) and C)

Question 10

Spending on the war in Afghanistan is essentially categorized as government purchases.How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

Accepted Answer

A)  They will move the economy up along a stationary aggregate demand curve.
B)  They will move the economy down along a stationary aggregate demand curve.
C)  They will shift the aggregate demand curve to the left.
D)  They will shift the aggregate demand curve to the right.E) A) and B)
F) C) and D)

Question 11

How do lower taxes affect aggregate demand?

Accepted Answer

A)  They increase disposable income,consumption,and aggregate demand.
B)  They reduce disposable income,consumption,and aggregate demand.
C)  they increase corporate investment and aggregate demand.
D)  They increase aggregate supply and thus increase aggregate demand as well.E) A) and B)
F) A) and C)

Question 12

Using an aggregate demand graph,illustrate the impact of an increase in the price level on aggregate demand.

Accepted Answer

<img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> This illustrates an increase in the pri...

Question 13

If workers and firms have rational expectations,they form their expectations using

Accepted Answer

A)  all the information available to them.
B)  only information from the past.
C)  only information provided to them by the government.
D)  only information gathered from random sources.E) A) and B)
F) A) and C)

Question 14

Starting from long-run equilibrium,use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

Accepted Answer

<img  loading="lazy" src="/assets/images/blured-textbook.svg" class="d-inline m-1" alt="blured image" width="139" height="30"> Before the decline in demand,the econom...

Question 15

Suppose there has been an increase in investment.As a result,real GDP will ________ in the short run,and ________ in the long run.

Accepted Answer

A)  increase;increases further
B)  increase;decrease to its initial value
C)  decrease;decrease further
D)  decrease;increase to its initial levelE) A) and B)
F) None of the above

Question 16

A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run.

Accepted Answer

A) True 
 B)False

Question 17

Figure 15-3 
-Refer to Figure 15-3.Suppose the economy is at point C.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

Accepted Answer

A)  A
B)  B
C)  C
D)  DE) A) and D)
F) B) and C)

Question 18

Figure 15-2 1 to SRAS2. B) SRAS2 to SRAS1. C) point A to point B. D) point B to point A." class="answers-bank-image d-inline" rel="preload" >
-Refer to Figure 15-2.Ceteris paribus,an increase in the labor force would be represented by a movement from

Accepted Answer

A)  SRAS1 to SRAS2.
B)  SRAS2 to SRAS1.
C)  point A to point B.
D)  point B to point A.E) B) and C)
F) A) and D)

Question 19

Stagflation occurs when aggregate supply and aggregate demand both increase.

Accepted Answer

A) True 
 B)False

Question 20

Monetarism is a school of thought put forth by ________,who argued that the economy would most likely be at potential GDP.

Accepted Answer

A)  Karl Marx
B)  Milton Friedman
C)  Finn Kydland and Edward Prescott
D)  Robert Lucas and Thomas SargentE) B) and D)
F) B) and C)

Exam 15: Aggregate Demand and Aggregate Supply Analysis

If workers and firms have rational expectations,they form their expectations using

Correct AnswerverifiedShow Answer

Monetarism is a school of thought put forth by ________,who argued that the economy would most likely be at potential GDP.

Correct AnswerverifiedShow Answer

The dynamic aggregate demand and aggregate supply model assumes that potential GDP increases over time.

Correct AnswerverifiedShow Answer

Suppose there has been an increase in investment.As a result,real GDP will ________ in the short run,and ________ in the long run.

Correct AnswerverifiedShow Answer

Starting from long-run equilibrium,use the basic aggregate demand and aggregate supply diagram to show what happens in both the long run and the short run when there is a decline in wealth.

Correct Answerverified Before the decline in demand,the econom...View AnswerShow Answer

An increase in aggregate demand causes an increase in ________ only in the short run,but causes an increase in ________ in both the short run and the long run.

Correct AnswerverifiedShow Answer

Stagflation occurs when aggregate supply and aggregate demand both increase.

Correct AnswerverifiedShow Answer

The international trade effect states that

Correct AnswerverifiedShow Answer

Figure 15-4 -Refer to Figure 15-4.Given the economy is at point A in year 1,what is the inflation rate between year 1 and year 2?

Correct AnswerverifiedShow Answer

Using an aggregate demand graph,illustrate the impact of an increase in the price level on aggregate demand.

Correct Answerverified This illustrates an increase in the pri...View AnswerShow Answer

Figure 15-1 -Refer to Figure 15-1.Ceteris paribus,an increase in personal income taxes would be represented by a movement from

Correct AnswerverifiedShow Answer

Figure 15-2 -Refer to Figure 15-2.Ceteris paribus,an increase in the labor force would be represented by a movement from

Correct AnswerverifiedShow Answer

Which of the following will shift the aggregate demand curve to the right,ceteris paribus?

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Figure 15-3 -Refer to Figure 15-3.Suppose the economy is at point C.If government spending decreases in the economy,where will the eventual long-run equilibrium be?

Correct AnswerverifiedShow Answer

A decrease in government spending will result in a decrease in the price level and a decrease in real GDP in the long run.

Correct AnswerverifiedShow Answer

The process of an economy adjusting from a recession back to potential GDP in the long run without any government intervention is known as

Correct AnswerverifiedShow Answer

Suppose the economy is at a short-run equilibrium GDP that lies below potential GDP.Which of the following will occur because of the automatic mechanism adjusting the economy back to potential GDP?

Correct AnswerverifiedShow Answer

Spending on the war in Afghanistan is essentially categorized as government purchases.How do increases in spending on the war in Afghanistan affect the aggregate demand curve?

Correct AnswerverifiedShow Answer

The automatic mechanism ________ the price level in the case of ________ and ________ the price level in the case of ________.

Correct AnswerverifiedShow Answer

How do lower taxes affect aggregate demand?

Correct AnswerverifiedShow Answer

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Suppose there has been an increase in investment.As a result,real GDP will in the short run,and in the long run.

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Before the decline in demand,the econom...
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An increase in aggregate demand causes an increase in only in the short run,but causes an increase in in both the short run and the long run.

Correct Answer
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This illustrates an increase in the pri...
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The automatic mechanism the price level in the case of and the price level in the case of .

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