Econ: Chapter 24

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. If short-run aggregate supply increases (shifts to the right) by less than long-run aggregate supply, then, at the
short-run equilibrium,
A) GDP will be above potential GDP.
B) aggregate demand will increase.
C) GDP will be below potential GDP.
D) GDP will be equal to potential GDP.

C) GDP will be below potential GDP

. In the long run,
A) LRAS and SRAS lie on the same line.
B) GDP = potential GDP
C) Unemployment is below its natural rate.
D) Unemployment is above its natural rate.

B) GDP = potential GDP

. Suppose the economy is at full employment and firms become more optimistic about the future profitability of
new investment. Which of the following will happen in the short run?
A) Prices will decline.
B) Aggregate demand will shift to the left.
C) Unemployment will decline.
D) Output will decline.

C) Unemployment will decline

. Which of the following is considered a negative supply shock?
A) increasing investment in the economy causes the capital stock to rise
B) an improvement in technology
C) a decline in wages
D) an unexpected increase in the price of natural gas

D) an unexpected increase in the price of natural gas

. Why does the short run aggregate supply curve shift to the right in the long run, following a decrease in
aggregate demand?
A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages
and prices.
B) Workers and firms adjust their expectations of wages and prices downward and they push for higher
wages and prices.
C) Workers and firms adjust their expectations of wages and prices upward and they accept lower wages and
prices.
D) Workers and firms adjust their expectations of wages and prices upward and they push for higher wages
and prices

A) Workers and firms adjust their expectations of wages and prices downward and they accept lower wages
and prices

2. ________ of unemployment during ________ make it easier for workers to ________ wages.
A) High levels; a recession; accept lower
B) High levels; an expansion; negotiate higher
C) Low levels; an expansion; accept lower
D) Low levels; a recession; negotiate higher

A) High levels; a recession; accept lower

7. Higher personal income taxes
A) increase aggregate demand.
B) increase disposable income.
C) decrease aggregate demand.
D) both b and c.

C) decrease aggregate demand.

After an unexpected increase in the price of oil, the long-run adjustment ________ the price level and ________
the unemployment rate as they return to their original levels.
A) decreases; increases
B) decreases; decreases
C) increases; increases
D) increases; decreases

B) decreases; decreases

The aggregate demand and aggregate supply model explains
a. the effect of changes in the inflation rate on the nominal interest rate.
b. short-run fluctuations in real GDP and the price level.
c. the effect of long-run economic growth on the standard of living.
d. the effect of changes in the interest rate on investment spending.

b. short-run fluctuations in real GDP and the price level.

The aggregate demand curve shows the relationship between the price level and the quantity of real
GDP demanded by
a. households.
b. firms.
c. the government.
d. all of the above

d. all of the above

Assume that steel is the only good produced in the economy. Which of the following would explain
why the short-run aggregate supply curve for steel would be upward sloping?
a. Steel demand and steel prices begin to rise rapidly, and the wages of steel workers rise as the
demand for workers increases.
b. Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the
production of steel—remains fixed by contract.
c. Steel demand and steel prices begin to rise rapidly, but foreign producers increase production
faster than domestic producers increase production.
d. all of the above

b. Steel demand and steel prices begin to rise rapidly, but the price of coal—an input into the
production of steel—remains fixed by contract.

Describe aggregate demand.

shows the relationship between the price level and the quantity of real GDP
demanded by households, firms, and the government

Describe aggregate supply

shows the relationship between
the price level and the quantity of real GDP that firms are willing to produce

Describe fiscal policy.

involves changes in federal taxes and purchases that are intended to achieve macroeconomic policy
objectives

Describe monetary policy.

involves the
actions the Federal Reserve takes to manage the money supply and interest rates to pursue
macroeconomic policy objectives

Describe the aggregate demand curve.

shows the relationship between the price level and the level of planned
aggregate expenditure by households, firms, and the government

Describe the interest rate effect.

A higher price level will tend to increase interest rates. Higher
interest rates will reduce investment spending by firms as borrowing costs rise. Additionally,
higher interest rates will also reduce consumption spending.

Describe the international effect.

A higher price level will make U.S. goods relatively more
expensive compared to other countries' goods. This will reduce exports, increase imports,
and, therefore, reduce net exports.

Describe the long-run aggregate supply curve.

1.shows the relationship in the long run between the price level and the quantity of real GDP supplied
2. a vertical line because in the long run, real GDP is always at its
potential level and is unaffected by the price level

Describe the short-run aggregate supply curve.

1. shows the relationship in the short run between the price level and the quantity of real GDP supplied by
firms
2. slopes upward
because workers and firms fail to predict accurately the future price level

Describe the wealth effect.

As the price level increases, the real value of household wealth falls, and
so will consumption. In contrast, if the price level declines, real household wealth rises and so
does consumption.

How can government policies shift the aggregate demand curve to the right?
a. by increasing personal income taxes
b. by increasing business taxes
c. by increasing government purchases
d. all of the above

c. by increasing government purchases

If firms and workers could predict the future price level exactly, the short-run aggregate supply curve
would be
a. downward sloping.
b. upward sloping.
c. horizontal.
d. the same as the long-run aggregate supply curve

d. the same as the long-run aggregate supply curve.

If firms reduce investment spending and the economy slumps into a recession, which of the following
contributes to the adjustment that causes the economy to return to its long-run equilibrium?
a. the eventual agreement by workers to accept lower wages
b. the decision by firms to charge higher prices
c. both of the above
d. none of the above

a. the eventual agreement by workers to accept lower wages

If oil prices rise unexpectedly,
a. there will be a movement up and to the right along a stationary aggregate supply curve.
b. there will be a movement down and to the left along a stationary aggregate supply curve.
c. the short-run aggregate supply curve will shift to the left.
d. the short-run aggregate supply curve will shift to the right

c. the short-run aggregate supply curve will shift to the left.

If real GDP in the United States increases faster than real GDP in other countries, U.S. imports will
__________ faster than U.S. exports, and net exports will ___________.
a. increase; rise
b. increase; fall
c. decrease; rise
d. decrease; fall

b. increase; fall

If the economy adjusts through the automatic mechanism, then a decline in aggregate demand causes
a. a recession in the short run, and an increase in the price level in the long run.
b. a recession in the short run, and a decline in the price level in the long run.
c. an expansion in the short run, and a decline in the price level in the long run.
d. an expansion in the short run, and an increase in the price level in the long run.

b. a recession in the short run, and a decline in the price level in the long run.

If the exchange rate between the dollar and foreign currencies rises (the dollar rises in value versus
foreign currencies), the price in foreign currency of U.S. products will _________ and the U.S.
aggregate demand curve will shift to the _________.
a. rise; right
b. rise; left
c. fall; right
d. fall; left

b. rise; left

If the price level increases, then
a. the economy will move up and to the left along a stationary aggregate demand curve.
b. the aggregate demand curve will shift to the right.
c. the aggregate demand curve will shift to the left.
d. none of the above

a. the economy will move up and to the left along a stationary aggregate demand curve.

If workers and firms across the economy adjust to the fact that the price level is higher than they had
expected it to be,
a. there will be a movement up and to the right along a stationary aggregate supply curve.
b. there will be a movement down and to the left along a stationary aggregate supply curve.
c. the short-run aggregate supply curve will shift to the left.
d. the short-run aggregate supply curve will shift to the right.

c. the short-run aggregate supply curve will shift to the left

An increase in net exports that results from a change in the price level in the United States
a. will shift the aggregate demand curve to the right.
b. will shift the aggregate demand curve to the left.
c. will not cause the aggregate demand curve to shift.
d. will have an indeterminate effect on aggregate demand.

c. will not cause the aggregate demand curve to shift

The interest rate effect refers to the fact that a higher price level results in
a. higher interest rates and higher investment.
b. higher interest rates and lower investment.
c. lower interest rates and lower investment.
d. lower interest rates and higher investment.

b. higher interest rates and lower investment.

The international-trade effect refers to the fact that an increase in the price level will result in
a. an increase in exports and a decrease in imports.
b. a decrease in exports and an increase in imports.
c. an increase in exports and an increase in imports.
d. a decrease in exports and a decrease in imports.

b. a decrease in exports and an increase in imports

The level of real GDP in the long run is called
A) short run GDP.
B) low capacity GDP.
C) frictional GDP.
D) potential GDP.

D) potential GDP.

The long-run aggregate supply curve
a. is positively sloped.
b. shifts to the right as technological change occurs.
c. is negatively sloped.
d. shifts to the left as the capital stock of the country grows.

b. shifts to the right as technological change occurs.

Potential GDP is also referred to as
A) balanced-budget GDP
B) realized GDP
C) full-employment GDP
D) politico-economic GDP

C) full-employment GDP

Spending on the war in Iraq is essentially categorized as government purchases. How do increases in spending
on the war in Iraq affect the aggregate demand curve?
A) They will shift the aggregate demand curve to the left.
B) They will move the economy up along a stationary aggregate demand curve.
C) They will move the economy down along a stationary aggregate demand curve.
D) They will shift the aggregate demand curve to the right.

D) They will shift the aggregate demand curve to the right

Stagflation is often a result of
A) a decrease in aggregate demand.
B) an increase in aggregate demand.
C) a negative supply shock.
D) an increase in aggregate supply.

C) a negative supply shock

A supply shock will
a. increase the real GDP in the short-run.
b. not change real GDP in the long-run.
c. shift the long-run aggregate supply curve to the right.
d. decrease both the price level and real GDP in the short-run

b. not change real GDP in the long-run.

An unexpected increase in the price of oil would be called _________ by economists.
a. a demand shock
b. an adverse supply shock
c. disinflation
d. an increase in menu costs

b. an adverse supply shock

The wealth effect refers to the fact that
a. when the price level falls, the real value of household wealth rises, and so will consumption.
b. when income rises, consumption rises.
c. when the price level falls, the nominal value of assets rises, while the real value of assets remains
the same.
d. all of the above

a. when the price level falls, the real value of household wealth rises, and so will consumption.

What are menu costs?
a. the costs of searching for profitable opportunities
b. the costs associated with guarding against the effects of inflation
c. the costs to firms of changing prices
d. the costs of a fixed list of inputs

c. the costs to firms of changing prices

What are the four components of aggregate demand?

consumption
(C), investment (I), government purchases (G), and net exports (NX)

What are the three factors that cause the AD curve to shift?

1. changes in government policies
2. changes in expectations of households
3. changes in foreign variables

What are the three reason why the other components of GDP change as the price level changes?

1. the wealth effect
2. the interest rate effect
3. the international effect

What is a supply shock?

an
unexpected event that causes the short-run aggregate supply curve to shift

What is stagflation?

a combination
of inflation and recession, usually resulting from a supply shock

What is the impact of an increase in the price level on the short-run aggregate supply curve?
a. a shift of the curve to the right
b. a shift of the curve to the left
c. a movement up and to the right along a stationary curve
d. a combination of a movement along the curve and a shift of the curve

c. a movement up and to the right along a stationary curve

Which component of GDP does not change as price level changes?

government purchases

Which of the following factors does not cause the aggregate demand curve to shift?
a. a change in the price level
b. a change in government policies
c. a change in the expectations of households and firms
d. a change in foreign variables

a. a change in the price level

Which of the following factors will cause the long-run aggregate supply curve to shift to the right?
a. an increase in the number of workers in the economy
b. the accumulation of more machinery and equipment
c. technological change
d. all of the above

d. all of the above

Which of the following factors will shift the short-run aggregate supply to the right?
a. an increase in the price level
b. an increase in the wage rate
c. an increase in the cost of producing output
d. the labor force increases

d. the labor force increases

Which of the following government policies affects the economy through intended changes in the
money supply and interest rates?
a. fiscal policy
b. monetary policy
c. both fiscal and monetary policies
d. neither fiscal nor monetary policies

b. monetary policy

Which of the following statements is correct?
a. If households become more optimistic about their future incomes, the aggregate demand curve
will shift to the right.
b. If firms become more optimistic about the future profitability of investment spending, the
aggregate demand curve will shift to the right.
c. Both a. and b.
d. Neither a. nor b. Optimism or pessimism do not have anything to do with shifts in the aggregate
demand curve

c. Both a. and b.

Which of the following statements is true?
a. In the long run, increases in the price level result in an increase in real GDP.
b. In the long run, increases in the price level result in a decrease in real GDP.
c. In the long run, changes in the price level do not affect the level of real GDP.
d. In the long run, changes in the price level may either increase or decrease real GDP.

c. In the long run, changes in the price level do not affect the level of real GDP

Which of the following will cause the short-run aggregate supply curve to shift to the right?
a. a higher expected future price level
b. an increase in the actual (or current) price level
c. a technological change
d. all of the above

c. a technological change

Which of the following will not shift the aggregate demand curve to the right?
a. a fall in the price level
b. a decrease in taxes
c. households expecting higher future income
d. exports rising

a. a fall in the price level

Why does the failure of workers and firms to accurately predict the price level result in an upwardsloping
aggregate supply curve?
a. because contracts make some wages and prices "sticky"
b. because firms are often slow to adjust wages
c. because menu costs make some prices "sticky"
d. all of the above

d. all of the above

Why does the short-run aggregate supply curve slope upward?
a. because profits rise when the prices of the goods and services firms sell rise more rapidly than the
prices they pay for inputs
b. because an increase in market price results in an increase in quantity supplied, as stated by the
law of supply
c. because, as the number of workers, machinery, equipment, and technological changes increase,
quantity supplied increases
d. all of the above

a. because profits rise when the prices of the goods and services firms sell rise more rapidly than the
prices they pay for inputs

Why is the aggregate demand curve downward sloping?

because a decrease in the price level increases the quantity of real GDP demanded

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