Chapter 5 aggregate demand and aggregate supply

Chapter 33
Aggregate Demand and Aggregate Supply
Sec00-Aggregate Demand and Aggregate Supply-Introduction
MULTIPLE CHOICE
1.

Most economists use the aggregate demand and aggregate supply model primarily to analyze
a. short-run fluctuations in the economy.
b. the effects of macroeconomic policy on the prices of individual goods.
c. the long-run effects of international trade policies.
d. productivity and economic growth.

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Sec01- Aggregate Demand and Aggregate Supply-Three Key Facts About
Economic Fluctuations
MULTIPLE CHOICE
2.

Which of the following is correct?
a. Short run fluctuations in economic activity happen only in developing countries.
b. During economic contractions most firms experience rising sales.
c. Recessions come at regular intervals and are easy to predict.
d. When real GDP falls, the rate of unemployment rises.

2


4.

Which of the following is most commonly used to monitor short-run changes in economic activity?
a. the inflation rate
b. real GDP
c. aggregate demand
d. aggregate supply

3


9.

Which of the following is correct?
a. Economic fluctuations are easily predicted by competent economists.
b. Recessions have never occurred very close together.
c. Other measures of spending, income, and production do not fluctuate closely with real GDP.
d. None of the above is correct.

4


11.

During recessions which type of spending falls?
a. consumption and investment
b. investment but not consumption
c. consumption but not investment
d. neither consumption nor investment

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15.

Which of the following typically rises during a recession?
a. garbage collection
b. unemployment
c. corporate profits
d. automobile sales

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16.

Real GDP
a. is the current dollar value of all goods produced by the citizens of an economy within a given time.
b. measures economic activity and income.
c. is used primarily to measure long-run changes rather than short-run fluctuations.
d. All of the above are correct.

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18.

As recessions begin, production
a. and unemployment both rise.
b. rises and unemployment falls.
c. falls and unemployment rises.
d. and unemployment both fall.

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Sec02-Aggregate Demand and Supply-Explaining Short-Run Economic
Fluctuations
MULTIPLE CHOICE
1.

The classical dichotomy refers to the separation of
a. variables that move with the business cycle and variables that do not.
b. changes in money and changes in government expenditures.
c. decisions made by the public and decisions made by the government.
d. real and nominal variables.

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3.

According to classical macroeconomic theory, changes in the money supply affect
a. real GDP and the price level.
b. real GDP but not the price level.
c. the price level, but not real GDP.
d. neither the price level nor real GDP.

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8.

Most economists believe that classical macroeconomic theory is a good description of the economy
a. in neither the short nor long run.
b. in the short run and in the long run.
c. in the short run, but not in the long run.
d. in the long run, but not in the short run.

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13.

In order to understand how the economy works in the short run, we need to
a. study the classical model.
b. study a model in which real and nominal variables interact.
c. understand that “money is a veil.”
d. understand that money is neutral in the short run.

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18.

The aggregate demand and aggregate supply graph has
a. the price level on the horizontal axis. The price level can be measured by the GDP deflator.
b. the price level on the horizontal axis. The price level can be measured by real GDP.
c. the price level on the vertical axis. The price level can be measured by the GDP deflator.
d. the price level on the vertical axis. The price level can be measured by GDP.

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21.

The aggregate-demand curve shows the
a. quantity of labor and other inputs that firms want to buy at each price level.
b. quantity of labor and other inputs that firms want to buy at each inflation rate.
c. quantity of domestically produced goods and services that households want to buy at each price
level.
d. quantity of domestically produced goods and services that households, firms, the government, and
customers abroad want to buy at each price level.

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22.

The model of aggregate demand and aggregate supply explains the relationship between
a. the price and quantity of a particular good.
b. unemployment and output.
c. wages and employment.
d. real GDP and the price level.

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28.

The model of aggregate demand and aggregate supply
a. is different from the model of supply and demand for a particular market, in that we cannot focus

on the substitution of resources between markets to explain aggregate relationships.
b. is different from the model of supply and demand for a particular market, in that we have to
separate real and nominal variables in the aggregate model.
c. is a straightforward extension of the model of supply and demand for a particular market, in which
substitution of resources between markets is highlighted.
d. is a straightforward extension of the model of supply and demand for a particular market, in which
the interaction between real and nominal variables is highlighted.

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Sec03-Aggregate Demand and Aggregate Supply-The Aggregate Demand Curve
MULTIPLE CHOICE
4.

When the price level falls the quantity of
a. consumption goods demanded rises, while the quantity of net exports demanded falls.
b. consumption goods demanded and the quantity of net exports demanded both rise.
c. consumption goods demanded and the quantity of net exports demanded both fall.
d. consumption goods demanded falls, while the quantity of net exports demand rises.

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9.

Which of the following effects helps to explain the downward slope of the aggregate-demand curve?
a. the exchange-rate effect
b. the wealth effect
c. the interest-rate effect

d. All of the above are correct.

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13.

For the US, the aggregate quantity of goods and services demanded changes as the price level rises
because
a. real wealth falls, interest rates rise, and the dollar appreciates.
b. real wealth falls, interest rates rise, and the dollar depreciates.
c. real wealth rises, interest rates fall, and the dollar appreciates.
d. real wealth rises, interest rates fall, and the dollar depreciates.

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20.

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when
the price level decreases, the real wealth of households
a. increases and as a result consumption spending increases. This effect contributes to the downward
slope of the aggregate-demand curve.
b. decreases and as a result consumption spending increases. This effect contributes to the upward
slope of the aggregate-supply curve.
c. increases and as a result households increase their money holdings; in turn, interest rates increase
and investment spending decreases. This effect contributes to the downward slope of the
aggregate-demand curve.
d. decreases and as a result households increase their money holdings; in turn, interest rates increase
and investment spending decreases. This effect contributes to the upward slope of the aggregatesupply curve.

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