Chapter 7Aggregate Demand, Aggregate Supply,
and the Self-Correcting Economy
1)The aggregate demand curve may be derived from the IS-LM analysis by shifting
A)the IS curve as the price changes.
B)the real money supply and thus LM curve for each new price level.
C)both the LM and IS curves since the real money supply and real expenditures change when P changes.
D)the LM rightward when P increases to define Y.
2)If the interest responsiveness of business firms investment is great then the
A)IS curve is flatter and the AD curve is flatter.
B)IS curve is steeper and the AD curve is steeper.
C)IS curve is horizontal and the AD curve is perfectly vertical.
D)IS curve is horizontal and the AD curve is perfectly horizontal.
3)Let the government increase lump-sum taxes. The aggregate demand curve will
A)shift leftward and the IS curve will shift leftward.
B)shift rightward and the IS curve will shift rightward.
C)remain unaffected but the IS curve will shift leftward.
D)become positively sloped but the IS curve will remain negatively sloped.
4)An increase in the price level will
A)increase the real money supply and shift the aggregate demand curve.
B)decrease the real money supply and shift the aggregate demand curve.
C)change the slope of the aggregate demand curve at each income level.
D)None of the above is correct.
Figure 7-1
5)Employing Figure 7-1, assume that the initial equilibrium Y was 2500 at E0 prior to a change in the nominal money supply. The movement from E0 to H' represents
A)an increase in the nominal money supply with a constant interest rate.
B)an increase in the nominal money supply with a constant price level.
C)a decrease in the nominal money supply with a constant price level.
D)a decrease in the nominal money supply with a rising interest rate.
6)A doubling of the nominal money supply would create a new AD curve at double the vertical position of the original AD curve because
A)at each price level there is a decrease in autonomous spending.
B)each output level requires the same real money supply as in the original situation.
C)the rise in money supply causes increased expectation of further price increases and investment declines.
D)the rise in the money supply causes an excess supply of money and generates rising interest rates.
7)A steeper LM curve implies that the aggregate demand curve will be
A)steeper and the k1 multiplier becomes smaller.
B)flatter and the k1 multiplier becomes larger.
C)unaffected and the k1 multiplier becomes smaller.
D)horizontal and k1 multiplier becomes larger.
8)A flatter IS curve implies that the aggregate demand curve will be
A)steeper and the k1 multiplier becomes larger.
B)flatter and the k1 multiplier becomes smaller.
C)unaffected and the k1 multiplier becomes smaller.
D)vertical and the k1 multiplier becomes smaller.
9)A rise in the nominal money supply will
A)shift the IS curve and shift the AD curve.
B)shift the AD curve and raise the equilibrium price level.
C)shift the AD curve and raise the equilibrium level of nominal GDP.
D)All of the above are correct.
10)The LM curve will shift to the
A)left if the price level falls and the quantity of money is held constant.
B)right if the price level rises and the quantity of money is held constant.
C)left if the price level is held constant and the quantity of money rises.
D)right if the price level falls and/or the quantity of money rises.
11)The AD curve will shift to the
A)right if the price level falls and the quantity of money is held constant.
B)right if the price level rises and the quantity of money is held constant.
C)right if the price level is held constant and the quantity of money rises.
D)right if the price level is held constant and the quantity of money falls.
12)If money demand relative to the level of real output is constant then, the slope of the AD curve is
A)steeper the steeper the slope of the LM curve.
B)flatter the flatter the slope of the LM curve.
C)steeper the flatter the slope of the LM curve.
D)horizontal if the LM curve is vertical.
13)If the marginal leakage rate is small, then the AD is
A)flatter.
B)steeper.
C)perfectly vertical.
D)perfectly horizontal.
14)The slope of the AD curve is important because it explains the
A)responsiveness of consumers to changes in the price level.
B)impact on Y and P for a given change in the SAS curve.
C)responsiveness of money demand to price changes.
D)responsiveness of business firms to price changes.
15)The slope of the SAS curve is important because it
A)explains the impact of supply side policies on the economy.
B)explains the impact of both supply and demand side policies on Y and P.
C)partially explains the impact of AD stabilization policies on Y and P.
D)None of the above.
16)An increase in the nominal money supply will shift
A)AD up and raise the price level.
B)AD down and lower the price level.
C)SAS up and raise the price level.
D)SAS down and lower the price level.
17)Suppose that the administration proposes to follow a contractionary fiscal policy. This would cause the
A)AD to shift rightward and raise the price level.
B)SAS to shift rightward and lower the price level.
C)AD to shift leftward and lower the price level.
D)SAS to shift leftward and raise the price level.
18)An "easy money, easy fiscal" policy combination would shift AD
A)upward to the left and raise the price level.
B)downward to the left and raise the price level.
C)upward to the right and raise the price level.
D)downward to the left and lower the price level.
19)Which of the following factors will not cause the AD curve to shift?
A)tax rates.
B)autonomous exports.
C)changes in the marginal product of labor.
D)consumer confidence.
20)If there are perfectly flexible prices and the economy is operating at Y(N), then an increase in government expenditures
A)will increase real GDP and the price level.
B)will increase nominal GDP and the raise price level.
C)will not lead to complete real crowding out.
D)will lead to complete nominal crowding out and have the price level unchanged.
21)When the real wage falls, as a result of a rise in the price level
A)the demand for labor will fall.
B)the supply of labor will rise.
C)firms will hire more labor as they move down the demand curve for labor.
D)the nominal wage will fall.
22)If, other things constant, the actual real wage is below the equilibrium real wage, the short-run aggregate supply curve in the next period would
A)be unaffected and the price level would remain constant.
B)shift upward and the price level would increase.
C)shift downward and the price level would fall.
D)be vertical and the price level would increase.
23)The long-run aggregate supply curve is
A)vertical at the natural level of income.
B)horizontal at the natural price level.
C)upward-sloping for all income levels below the natural level of income.
D)downward-sloping for all income levels above the natural level of income.
24)If the price level were to rise, the short-run aggregate supply curve in the next period will
A)shift upward.
B)shift downward.
C)become steeper.
D)None of the above is correct.
25)The short-run aggregate supply curve slopes upward because, with a given equilibrium wage rate, a higher actual price level will
A)reduce the actual real wage and induce firms to hire more labor.
B)shift the labor supply curve.
C)increase the aggregate demand for goods, so that output will rise.
D)All of these.
26)The position of the short-run aggregate supply curve depends on
A)the price level.
B)workers' expectations.
C)aggregate demand.
D)the actions of the monetary authority.
27)A fiscal expansion will
A)raise both the price level and real income in the long run.
B)reduce both the price level and the real income in the short run.
C)raise real income but leave the price level unaffected in the long run.
D)raise both the price level and real income in the short run.
28)Which of the following will NOT shift the aggregate demand curve?
A)an increase in the money supply
B)a change in the price level
C)a reduction in the marginal propensity to save
D)an increase in government spending
29)The fixed price level that was assumed in Chapters 3 through 5 implied that
A)there is always full employment.
B)there is always less than full employment.
C)the aggregate supply curve is upward sloping to the left.
D)the aggregate supply curve is horizontal.
30)If the productivity of labor were suddenly to increase, we would expect to observe
A)a short-run rise in output and fall in prices.
B)an increase in the natural level of real GDP.
C)a downward shift in the aggregate supply curve.
D)All of the above are correct.
Figure 7-2
31)In Figure 7-2, the shifts F0 to F1 and N0d to N1d may have occurred in an economy subjected to a
A)permanent fiscal deficit.
B)temporary fiscal deficit.
C)permanent increase in the relative price of energy.
D)permanent increase in the rate of growth of the money supply.
32)As firms hire more labor
A)the supply of labor increases.
B)each additional worker hired produces an additional amount of output but at a diminishing rate.
C)each additional worker hired produces an additional amount of output but at an increasing rate.
D)the marginal labor cost of output decreases.
33)Given the technology and the amount of other resources available, the position of the demand for labor depends on the
A)supply of labor.
B)other firms' demand for labor.
C)rate of population growth.
D)price level.
34)The equilibrium real wage rate
A)is equal to the nominal wage rate.
B)equals the actual real wage rate in short-run equilibrium.
C)equals the actual real wage rate at every point on the SS curve.
D)is determined by the intersection of the labor supply and demand curves.
35)If the actual real wage rate is above the equilibrium real wage rate there will be
A)pressure for the actual real wage rate to rise.
B)pressure for the actual real wage rate to decline.
C)a tendency for prices to rise and output to fall.
D)None of the above.
Figure 7-3
36)Employing Figure 7-3 with equilibrium initially at E0, assume the nominal money supply eased. If prices are flexible, in the short run ______and in the long run ______.
A)prices and output rise as in E2; output remains at 3000
B)prices and output remain at E0; output changes to 2500
C)prices and output rise, E0 to E2; output returns to E3
D)None of the above.
37)Assuming constant wages implies that
A)an increase in the price of goods raises profits and SAS is vertical.
B)a decrease in the price of goods lowers profits and SAS is horizontal.
C)an increase in the price of goods lowers profits and SAS is vertical.
D)an increase in the price of goods raises profits and SAS is positively sloped.
38)In the short-run with fixed wages, the SAS curve is positively sloped because
A)the marginal product of labor declines, marginal costs rise.
B)the marginal product of labor increases, marginal costs rise.
C)marginal cost equals price and marginal costs decline.
D)None of the above.
39)The demand for labor is determined by
A)the marginal product of labor, and technology.
B)the marginal product of labor, the price of goods, and nominal wages.
C)MPN and the CPI.
D)None of the above.
40)If firms hire workers until the real wage, W/P, is equal to the marginal product of labor, MPN, then the firm
A)maximizes employment.
B)maximizes employment and profits.
C)maximizes profits.
D)minimizes "waste," such as pollution.
41)Suppose that the discovery of cold fusion implies that the productivity of each worker in the economy doubles. This would cause the
A)AD curve to shift up and the SAS curve to remain stationary.
B)SAS curve to shift rightward.
C)SAS curve to shift leftward.
D)AD curve to shift down and the SAS curve to shift upward.
42)With a fixed nominal wage the SAS curve is positively sloped because
A)an increase in P decreases the real wage and raises profits if output is increased.
B)A decrease in P decreases the real wage and raises profits if output is increased.
C)business firms are responsive to interest rates.
D)the marginal leakage rate is small.
43)The SAS curve will be steeper the
A)greater is the marginal product of each additional worker.
B)greater is MC.
C)greater is the nominal wage.
D)the faster the MPN falls for each additional worker.
44)If labor unions negotiate an increase in the nominal wage rate the SAS curve will shift
A)upward to the right and output will increase.
B)downward to the right and output will increase.
C)downward to the left and output will decrease.
D)upward to the left and output will decrease.
45)The labor supply curve may be shifted if
A)jobs are scarce.
B)jobs are plentiful.
C)real wages change.
D)immigration increases.
46)The SAS curve is positively sloped because workers, in the short-run, will supply the labor required by
A)households at the fixed real wage.
B)business firms at the fixed real wage.
C)business firms at the fixed nominal wage.
D)A and B.
47)The classical economists believed that shifts in the AD and SAS curves offset each other such that the
A)price level rose and output fell unidirectionally given any change in aggregate demand
B)unemployment level is constant
C)price level is constant
D)price level is cyclical
48)In the classical model, flexible prices and wages serve to
A)self-correct the economy guaranteeing a constant price level and a constant level of output
B)self-correct the economy above to the natural rate of unemployment, and constant price level
C)ensure that stabilization policy is not required on the part of fiscal authorities
D)none of the above
49)Classical economists believed that
A)government intervention was necessary to stabilize the economy
B)movements away from the natural rate of output were only temporary
C)monetary policy was ineffective
D)monetary impotence would make fiscal policy necessary to bring the economy out of a depression
50)In a self-correcting economy, an increase in government expenditures in the long-run will
A)raise equilibrium real GDP and raise the price level
B)lower the price level but leave real GDP unaffected
C)raise nominal GDP but leave real GDP unaffected
D)leave the price level and real GDP unaffected
51)To the classical economists it was ______not ______which adjust when unemployment differs from the natural rate
A)wages; prices
B)prices; wages
C)output; prices
D)prices; output
52)The Classical Economists believed that
A)the cure for wage sickness was the passage of labor laws requiring the indexing of wages to changes in normal GDP.
B)the cure for unemployment was the passage of labor laws requiring the indexing of wages to changes in nominal GDP.
C)the cure for wage stickiness was to remedy market inefficiencies.
D)unemployment required active government intervention to manipulate AD.
Figure 7-4
53)According to the classical economists when aggregate demand declines, AD0 to AD1 in Figure 7-4, and output, falls below the natural rate of unemployment at 3000, wages and prices would
A)fall to E1 causing output to rise and unemployment would be temporary.
B)rise to E0 causing output to rise and unemployment would be temporary.
C)rise to A causing output to fall and unemployment would be temporary.
D)fall to A causing output to fall and unemployment would be permanently increased.
54)According to the classical economists when output Y rises above the natural rate of employment, wages and prices would
A)fall causing output to rise; unemployment would be permanent.
B)rise causing output to rise; increased employment would be temporary.
C)rise causing output to fall; increased employment would be temporary.
D)fall causing output to fall; unemployment would be temporary.
55)What key assumption changed the quantity equation into the quantity theory of money?
A)wage rates were flexible
B)only cash, currency, and demand deposits were considered money
C)the velocity of money was relatively stable
D)the money supply grew at a steady rate over the long run
56)The term monetary impotence refers to the
A)failure of firms to lower prices even when wages are falling.
B)problems that an economy faces when industries are not perfectly competitive and prices do not fluctuate.
C)failure of fiscal policy to drive down prices in a depression.
D)inability of an increase in real balances to raise the level of output.
57)The Pigou effect refers to the fact that autonomous expenditures may depend on
A)interest rates and variations in the perceived value of money balances.
B)the real money supply and variations in the perceived value of money balances.
C)income and variations in the perceived value of money balances.
D)taxes and variations in the perceived value of money balances.
58)The Pigou effect is
A)the stimulus to aggregate demand from a fall in the interest rate.
B)the effect of a cut in taxes on the aggregate demand curve.
C)the effect of a fall in prices on aggregate demand curve.
D)the direct stimulus to consumption because of an increase in the real value of the money supply.
59)Pigou's explanation of the existence of unemployment required
A)wage "stickiness" or slowness of wages to adjust to changes in market conditions.
B)fixed goods price or slowness of prices to adjust to changes in market conditions.
C)Churchill's introduction of unemployment compensation.
D)all of the above.
60)If the Pigou effect characterizes the economy then the slope