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5 Written questions

5 Matching questions

  1. equilibrium
  2. consumers, government, multiplier
  3. aggregate supply
  4. demand, supply
  5. foreign purchases effect
  1. a The aggregate BLANK-aggregate BLANK model (AD-AS model) is a flexible-price model that enables analysis of simultaneous changes of real GDP and the price level.
  2. b A schedule or curve showing the total quantity of goods and services supplied (produced) at different price levels.
  3. c The inverse relationship between the net exports of an economy and its price level relative to foreign price levels.
  4. d The intersection of the aggregate demand and aggregate supply curves determines an economy's BLANK price level and real GDP. At the intersection, the quantity of real GDP demanded equals the quantity of real GDP supplied.
  5. e 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.

5 Multiple choice questions

  1. The tendency for increases in the price level to lower the real value (or purchasing power) of financial assets with fixed money value and, as a result, to reduce total spending and real output, and conversely for decreases in the price level.
  2. The 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.
  3. The BLANK BLANK curve shows the level of real output that the economy demands at each price level.
  4. Shifts 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.
  5. The 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).

5 True/False questions

  1. immediate-short-runAn 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.


  2. productivityA measure of average output or real output per unit of input. For example, the productivity of labor is determined by dividing real output by hours of work.


  3. AD-AS modelThe macroeconomic model that uses aggregate demand and aggregate supply to determine and explain the price level and the real domestic output.


  4. aggregate supplyRightward shifts of the BLANK BLANK curve, caused by large improvements in productivity, help explain the simultaneous achievement of full employment, economic growth, and price stability that occurred in the United States between 1996 and 2000. The recession of 2001, however, ended the expansionary phase of the business cycle. Expansion resumed in the 2002-2007 period, before giving way to the severe recession of 2007-2009.


  5. menu costsThe 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.