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Ch.29 Aggregate Demand and Aggregate Supply Test

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5 Written Questions

5 Matching Questions

  1. aggregate supply
  2. long-run
  3. determinants of aggregate supply
  4. immediate-short-run
  5. menu costs
  1. a The aggregate supply curve associated with a time period in which input prices (especially nominal wages) are fully responsive to changes in the price level.
  2. b Factors such as input prices, productivity, and the legal-institutional environment that, if they change, shift the aggregate supply curve.
  3. c An aggregate supply curve for which real output, but not the price level, changes when the aggregate demand curves shifts; a horizontal aggregate supply curve that implies an inflexible price level.
  4. d A schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels.
  5. e The reluctance of firms to cut prices during recessions (that they think will be short-lived) because of the costs of altering and communicating their price reductions; named after the cost associated with printing new menus at restaurants.

5 Multiple Choice Questions

  1. The BLANK BLANK curve shows the level of real output that the economy demands at each price level.
  2. Leftward shifts of the aggregate supply curve reflect increases in per-unit production costs and cause BLANK-BLANK inflation, with accompanying negative GDP gaps.
  3. The determinants of aggregate demand consist of spending by domestic BLANKS, by businesses, by BLANK, and by foreign buyers. The extent of the shift is determined by the size of the initial change in spending and the strength of the economy's BLANK.
  4. Factors such as consumption spending, investment, government spending, and net exports that, if they change, shift the aggregate demand curve.
  5. The price level at which the aggregate demand curve intersects the aggregate supply curve.

5 True/False Questions

  1. downslopingThe aggregate demand curve is BLANKING because of the real-balances effect, the interest-rate effect, and the foreign purchases effect. The real-balances effect indicates that inflation reduces the real value or purchasing power of fixed-value financial assets held by households, causing cutbacks in consumer spending. The interest-rate effect means that, with a specific supply of money, a higher price level increases the demand for money, thereby raising the interest rate and reducing investment purchases. The foreign purchases effect suggests that an increase in one country's price level relative to the price levels in other countries reduces the net export component of that nation's aggregate demand.


  2. recession, cyclical, inflexibleShifts of the aggregate demand curve to the left of the full-employment output cause BLANK, negative GDP gaps, and BLANK unemployment. The price level may not fall during recessions because of downwardly BLANKABLE prices and wages. This results from fear of price wars, menu costs, wage contracts, efficiency wages, and minimum wages. When the price level is fixed, changes in aggregate demand produce full-strength multiplier effects.


  3. interest-rate effectThe tendency for increases in the price level to increase the demand for money, raise interest rates, and, as a result, reduce total spending and real output in the economy (and the reverse for price-level decreases).


  4. foreign purchases effectThe inverse relationship between the net exports of an economy and its price level relative to foreign price levels.


  5. simultaneousAn aggregate supply curve relevant to a time period in which input prices (particularly nominal wages) do not change in response to changes in the price level.


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