Macroeconomics, 11e, Global Edition (Parkin)

Chapter 10 Aggregate Supply and Aggregate Demand

1 Aggregate Supply

1) The supply of real GDP is a function of

A) the total expenditures of consumers, investors and government.
B) the sum of wages, salaries, corporate profits, rents and interest.
C) only the state of technology.
D) the quantities of labor, capital and the state of technology.
Answer: D
Topic: Aggregate Supply Fundamentals
Skill: Conceptual
AACSB: Reflective thinking

2) The quantity of real GDP supplied depends on the

A) level of aggregate demand.
B) quantity of capital, bonds, and stocks.
C) quantity of labor, the quantity of capital, and the state of technology.
D) price level, the unemployment rate, and the quantity of government expenditures on goods
and services.
Answer: C
Topic: Aggregate Supply Fundamentals
Skill: Recognition
AACSB: Reflective thinking

3) An aggregate supply curve depicts the relationship between

A) the price level and nominal GDP.
B) household expenditures and household income.
C) the price level and the aggregate quantity supplied.
D) the price level and the aggregate quantity demanded.
Answer: C
Topic: Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

4) An aggregate supply curve depicts the relationship between

A) the price level and the quantity of nominal GDP supplied.
B) household expenditures and household income.
C) the price level and the quantity of real GDP supplied.
D) the money wage rate and the quantity of real GDP supplied.
Answer: C
Topic: Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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5) In the macroeconomic short run
A) actual real GDP may be less than or more than potential GDP.
B) the unemployment rate is zero.
C) by definition, the economy is always moving away from full employment.
D) actual real GDP always equals potential GDP.
Answer: A
Topic: Macroeconomic Long Run and Short Run
Skill: Recognition
AACSB: Reflective thinking

6) When talking about aggregate supply, it is necessary to

A) focus on the short run.
B) focus on the long run.
C) distinguish between long-run aggregate supply and short-run aggregate supply.
D) distinguish between long-run full employment and short-run full employment.
Answer: C
Topic: Macroeconomic Long Run and Short Run
Skill: Recognition
AACSB: Reflective thinking

7) We distinguish between the long-run aggregate supply curve and the short-run aggregate
supply curve. In the long run
A) technology is fixed but it is not in the short run.
B) the price level is constant but in the short run it fluctuates.
C) the aggregate supply curve is horizontal while in the short run it is upward sloping.
D) real GDP equals potential GDP.
Answer: D
Topic: Macroeconomic Long Run and Short Run
Skill: Recognition
AACSB: Reflective thinking

8) In the macroeconomic long run

A) real GDP is always below potential GDP.
B) there is full employment with no unemployment.
C) output always is above potential GDP.
D) there is full employment and real GDP is equal to potential GDP.
Answer: D
Topic: Macroeconomic Long Run and Short Run
Skill: Recognition
AACSB: Reflective thinking

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9) In the macroeconomic long run
A) real GDP equals potential GDP.
B) the economy is at full employment.
C) regardless of the price level, the economy is producing at potential GDP.
D) All of the above are correct.
Answer: D
Topic: Macroeconomic Long Run and Short Run
Skill: Recognition
AACSB: Reflective thinking

10) In the long run

A) the aggregate supply curve is upward sloping.
B) real GDP is equal to potential GDP.
C) aggregate supply depends on the price level.
D) All of the above answers are correct.
Answer: B
Topic: Macroeconomic Long Run and Short Run
Skill: Recognition
AACSB: Reflective thinking

11) The long-run aggregate supply (LAS) curve

A) has a positive slope.
B) has a negative slope.
C) is vertical.
D) is horizontal.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

12) When the labor market is at full employment

A) real GDP equals potential GDP.
B) the price level is stable.
C) the price level equals the potential price level.
D) the short run aggregate supply curve is horizontal.
Answer: A
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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13) The long-run aggregate supply curve is vertical because
A) at full employment, prices are stable.
B) there is no cyclical inflation.
C) potential GDP is independent of the price level.
D) the money wage rate increases faster than the price level.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

14) The long-run aggregate supply curve is

A) horizontal at the full-employment price level.
B) vertical at the full-employment level of real GDP.
C) upward sloping because of the effects of price level changes on real GDP.
D) the same as the short-run aggregate supply curve.
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

15) Which of the following statements is TRUE?

A) The long-run aggregate supply curve is upward sloping.
B) The long-run aggregate demand curve is upward sloping.
C) The short-run aggregate supply curve is vertical.
D) The long-run aggregate supply curve is vertical.
Answer: D
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

16) The long-run aggregate supply curve is ________ because along it, as prices rise, the money
wage rate ________.
A) vertical; falls
B) vertical; rises
C) upward sloping; falls
D) upward sloping; stays constant
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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17) The long-run aggregate supply curve illustrates the
A) relationship of the price level and real GDP when the economy is at full employment.
B) relationship of the price level and real GDP when the economy is at zero unemployment.
C) amount of products producers offer at various prices when money wages and other resource
prices are fixed.
D) surpluses, shortages and equilibrium level of GDP.
Answer: A
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

18) The long-run aggregate supply curve is the relationship between the quantity of real GDP
supplied and ________ when ________.
A) the price level; real GDP equals potential GDP
B) real GDP demanded; the wage rate is constant
C) the price level; real GDP equals nominal GDP
D) real GDP demanded; the price level does not change
Answer: A
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

19) When the price level rises, the long-run aggregate supply curve ________.
A) shifts rightward
B) does not shift
C) slopes upward
D) shifts leftward
Answer: B
Topic: Long-Run Aggregate Supply Curve
Skill: Conceptual
AACSB: Reflective thinking

20) For movements along the long-run aggregate supply curve

A) potential GDP is dependent on the price level.
B) the prices of goods and services change while the prices of productive resources hold steady.
C) the price level and the money wage rate change by the same percentage.
D) All of the above are correct.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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21) For movements along the long-run aggregate supply curve
A) the price level changes while the money wage rate remains constant
B) the prices of goods and services change while the prices of productive resources remains
constant.
C) the price level and the money wage rate change by the same percentage.
D) the price level and the real wage rate change by the same percentage.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

22) The long-run aggregate supply curve shows the

A) maximum GDP the nation will ever produce.
B) full-employment level of real GDP.
C) level of real GDP associated with a constant price level.
D) level of output at which real GDP equals nominal GDP.
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

23) Which of the following is TRUE about the long-run aggregate supply curve?
A) It is vertical at the level of potential GDP.
B) It shows the relationship between the price level and real GDP when the economy is at full
employment.
C) It does not shift in response to temporary changes in aggregate demand.
D) All of the above are true.
Answer: D
Topic: Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

24) Which of the following events will increase long-run aggregate supply?
A) an increase in the interest rate
B) an increase in resource prices
C) a decrease in expected profit
D) an advance in technology
Answer: D
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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25) The curve labeled A in the above figure is a
A) short-run aggregate demand curve.
B) short-run aggregate supply curve.
C) long-run aggregate demand curve.
D) long-run aggregate supply curve.
Answer: D
Topic: Long-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

26) The curve labeled A in the above figure will shift rightward when
A) the price level falls.
B) technology increases.
C) population falls.
D) the price level rises.
Answer: B
Topic: Changes in Aggregate Supply, Technology
Skill: Analytical
AACSB: Analytical thinking

27) The curve labeled A in the above figure will shift rightward when
A) the quantity of capital increases or the price level falls.
B) technology increases or the quantity of capital increases.
C) technology increases or the price level increases.
D) the quantity of capital increases or the price level rises.
Answer: B
Topic: Changes in Aggregate Supply, Technology
Skill: Analytical
AACSB: Analytical thinking

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28) The short-run aggregate supply curve
A) shows what each producer is willing and able to produce at each level of income holding
constant potential GDP and all resource prices.
B) shows the relationship between aggregate production and the price level holding constant
potential GDP and all resource prices.
C) becomes vertical if there is excess production capacity within the economy.
D) shows a negative relationship between the price level and real national income holding
constant potential GDP and all resource prices.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

29) The short-run aggregate supply curve

A) is vertical.
B) has a negative slope.
C) has a positive slope.
D) is horizontal.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

30) The short-run aggregate supply curve is upward sloping because in the short run the
A) money wage rate changes but the price level does not.
B) price level changes but the money wage rate does not.
C) both the money wage rate and the price level change.
D) neither the money wage rate nor the price level can change.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

31) The positive relationship between short-run aggregate supply and the price level indicates
that, in the short run
A) firms produce more output as the price level falls.
B) firms produce more output as the price level rises.
C) the money wage rate increases when moving along the short-run aggregate supply curve.
D) lower price levels are more profitable for firms.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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32) Moving upward along the short-run aggregate supply curve results in a ________ in the price
level and ________ in real GDP.
A) rise; an increase
B) rise; a decrease
C) fall; an increase
D) fall; a decrease
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

33) The short-run aggregate supply curve is upward sloping because

A) a lower price level creates a wealth effect.
B) lower taxes motivate people to work more.
C) money wage rates do not immediately change when the price level changes.
D) most business firms operate with long-term contracts for output but not labor.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

34) The short-run aggregate supply curve

A) is vertical.
B) shows the impact changes in the price level have on the quantity of real GDP when resource
prices are constant.
C) illustrates the level of potential real GDP.
D) shifts whenever the price level changes.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

35) In the short-run

A) the aggregate supply curve is upward sloping.
B) real GDP is always equal to potential GDP.
C) the money wage rate can change.
D) the price level does not change.
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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36) Along a short-run aggregate supply curve, a decrease in the price level means that
A) more output is produced as consumer demand increases.
B) less output is produced as firms decrease production.
C) more output is produced as firms increase production because wages fall more than the price
level falls, making it profitable to hire more workers.
D) output does not change because firms do not change the quantity they produce.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

37) In the short run, firms expand their production when the price level rises because
A) the money wage rate remains constant so the higher prices for their products makes it
profitable for firms to expand production.
B) each firm must keep its production up to the level of its rivals, and some firms will expand
production as the price level increases.
C) the higher prices allow the firm to hire more workers by offering higher wages, thereby
increasing productivity and profits.
D) firms can increase their profits by increasing their maintenance.
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

38) Moving along the short-run aggregate supply curve, ________.

A) the real wage rate is constant
B) real GDP equals potential GDP
C) the money wage rate, the prices of other resources, and potential GDP remain constant
D) real GDP equals nominal GDP
Answer: C
Topic: Short-Run Aggregate Supply Curve
Skill: Recognition
AACSB: Reflective thinking

39) If the money wage rate and other resource prices do not change when the price level rises by
10 percent, ________.
A) the long-run aggregate supply curve shifts leftward
B) the short-run aggregate supply curve shifts leftward
C) the long-run aggregate supply curve shifts rightward
D) there is movement along the short-run aggregate supply curve
Answer: D
Topic: Movements Along the SAS Curve
Skill: Conceptual
AACSB: Reflective thinking

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40) A change in ________ results in a movement along the short-run aggregate supply curve but
does not shift the short-run aggregate supply curve.
A) the money wage rate
B) technology
C) the quantity of capital
D) the price level
Answer: D
Topic: Movements Along the SAS Curve
Skill: Conceptual
AACSB: Reflective thinking

41) Which of the following does NOT shift the short-run aggregate supply curve?
A) a change in the money wage rate
B) technological progress
C) a reduction in the price of a raw material
D) a change in the price level
Answer: D
Topic: Movements Along the SAS Curve
Skill: Conceptual
AACSB: Reflective thinking

42) Which of the following occurs while moving along a short-run aggregate supply curve?
A) The money wage rate and the price level change by the same percentage.
B) The money wage rate changes and the price level is constant.
C) The price level changes and the money wage rate is constant.
D) Neither the price level nor the money wage rate changes.
Answer: C
Topic: Movements Along the SAS Curve
Skill: Recognition
AACSB: Reflective thinking

43) For movements along the short-run aggregate supply curve

A) the money wage rate is constant.
B) the real wage rate changes.
C) potential GDP remains constant.
D) All of the above are correct.
Answer: D
Topic: Movements Along the SAS Curve
Skill: Conceptual
AACSB: Reflective thinking

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44) Moving along a short-run aggregate supply curve, resource prices ________, the money rate
wage ________, and potential GDP ________.
A) do not change; changes; does not change
B) do not change; does not change; changes
C) change; does not change; does not change
D) do not change; does not change; does not change
Answer: D
Topic: Movements Along the SAS Curve
Skill: Conceptual
AACSB: Reflective thinking

45) A decrease in the price level accompanied by no change in the money wage rate leads to
________ movement along the ________ aggregate supply curve.
A) a downward; short-run
B) an upward; short-run
C) a downward; long-run
D) an upward; long-run
Answer: A
Topic: Movements Along the SAS Curve
Skill: Conceptual
AACSB: Reflective thinking

46) The SAS curve and the LAS curve

A) intersect at potential GDP.
B) are parallel at potential GDP.
C) are perpendicular to one another at potential GDP.
D) None of the above answers is correct.
Answer: A
Topic: The LAS and SAS Curves
Skill: Recognition
AACSB: Reflective thinking

47) Suppose the price level, the money wage, and the price of all other resources rise by 10
percent. This set of changes leads to
A) an upward movement along the LAS curve.
B) a downward movement along the LAS curve.
C) an upward movement along the SAS curve.
D) a leftward shift of the LAS curve.
Answer: A
Topic: Movements Along the LAS and SAS Curves
Skill: Recognition
AACSB: Reflective thinking

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48) Suppose the price level rises and the money wage remains constant. This set of changes leads
to
A) an upward movement along the LAS curve.
B) an upward movement along the SAS curve.
C) a leftward shift of the SAS curve.
D) a leftward shift of the SAS curve and the LAS curve.
Answer: B
Topic: Movements Along the LAS and SAS Curves
Skill: Recognition
AACSB: Reflective thinking

49) Which of the following statements regarding aggregate supply are CORRECT?
A) Moving along the long-run aggregate supply curve, both the price level and the money wage
rate change by the same percentage.
B) Moving along the short-run aggregate supply curve, both the price level and the money wage
rate change by the same percentage.
C) Moving along the long-run aggregate supply curve, the money wage rate changes but the
price level is constant.
D) Moving along the short-run aggregate supply curve, the money wage rate changes but the
price level is constant.
Answer: A
Topic: Movements Along the LAS and SAS Curves
Skill: Recognition
AACSB: Reflective thinking

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50) In the figure above, potential GDP equals
A) $15.5 trillion.
B) $16.0 trillion.
C) $16.5 trillion.
D) None of the above answers is correct.
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

51) In the figure above, the economy is at point A when the price level rises to 120. Money wage
rates and other resource prices remain constant. Firms are willing to supply output equal to
A) $15.5 trillion.
B) $16.0 trillion.
C) $16.5 trillion.
D) None of the above answers is correct.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

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52) In the figure above, the economy is at point A when the price level falls to 100. Money wage
rates and all other resource prices remain constant. Firms are willing to supply output equal to
A) $15.5 trillion.
B) $16.0 trillion.
C) $16.5 trillion.
D) None of the above answers is correct.
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

53) In the above figure, the economy will be at full employment if the price level
A) is 110.
B) is above 110.
C) is below 100.
D) All of the above are possible because the economy will be at full employment at any price
level at, above, or below 110.
Answer: A
Topic: Short-Run and Long-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

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54) In the above figure, which movement illustrates the impact of a falling price level and a
constant money wage rate?
A) E to I
B) E to F
C) E to J
D) E to H
Answer: A
Topic: Movements Along the LAS and SAS Curves
Skill: Analytical
AACSB: Analytical thinking

55) In the above figure, which movement illustrates the impact of a rising price level and a
constant money wage rate?
A) E to I
B) E to F
C) E to G
D) E to K
Answer: B
Topic: Movements Along the LAS and SAS Curves
Skill: Analytical
AACSB: Analytical thinking

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56) In the above figure, which movement illustrates the impact of the price level and money
wage rate falling at the same rate?
A) E to H
B) E to K
C) E to J
D) E to G
Answer: C
Topic: Movements Along the LAS and SAS Curves
Skill: Analytical
AACSB: Analytical thinking

57) In the above figure, which movement illustrates the impact of the price level and money
wage rate rising at the same rate?
A) E to H
B) E to K
C) E to G
D) E to J
Answer: C
Topic: Movements Along the LAS and SAS Curves
Skill: Analytical
AACSB: Analytical thinking

58) In the above figure, which movement illustrates the impact of a constant price level and a
rising money wage rate?
A) E to I
B) E to F
C) E to J
D) E to H
Answer: D
Topic: Movements Along the LAS and SAS Curves
Skill: Analytical
AACSB: Analytical thinking

59) Which of the following events will increase short-run aggregate supply?
A) an advance in technology
B) an increase in resource prices
C) an increase in the natural unemployment rate
D) an increase in foreign income
Answer: A
Topic: Changes in Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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60) The short-run aggregate supply curve shifts when
I. the full-employment quantity of capital changes.
II. technology advances.
A) I only
B) II only
C) neither I nor II
D) I and II
Answer: D
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

61) The SAS curve shifts if there is a change in

A) the price level.
B) real GDP.
C) nominal GDP.
D) potential GDP.
Answer: D
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

62) Which of the following changes does NOT shift the short-run aggregate supply curve?
A) an increase in the price level
B) an increase in technology
C) an increase in the quantity of capital
D) an increase in the money wage rate
Answer: A
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

63) Which of the following changes does NOT shift the long-run aggregate supply curve?
A) a decrease in the labor force
B) a fall in the price level
C) a rise in number of college graduates in the labor force
D) a tax hike that reduces the capital stock
Answer: B
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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64) In a change to immigration policy during 2012, "people younger than 30 who came to the
United States before the age of 16, pose no criminal or security threat, and were successful
students or served in the military can get a two-year deferral from deportation", Homeland
Security Secretary Janet Napolitano said, according to CNN, 06/16/2012. If many of these
immigrants had previously been afraid to work, now as a result of being able to work legally
A) both the short-run and long-run aggregate supply curves shift rightward.
B) only the long-run aggregate supply curve shifts rightward.
C) only the short-run aggregate supply curve shifts rightward.
D) neither the short-run nor the long-run supply curve shift.
Answer: A
Topic: Fluctuations in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

65) In a change to immigration policy during 2012, "people younger than 30 who came to the
United States before the age of 16, pose no criminal or security threat, and were successful
students or served in the military can get a two-year deferral from deportation", Homeland
Security Secretary Janet Napolitano said, according to CNN, 06/16/2012. If many of these
immigrants had previously been afraid to work, now as a result of being able to work legally
A) the long-run aggregate supply curve shifts leftward and potential GDP decreases.
B) the short-run aggregate supply curve shifts rightward but potential GDP does not increase.
C) the long-run aggregate supply curve shifts rightward and potential GDP increases.
D) neither the short-run nor the long-run supply curve shifts.
Answer: C
Topic: Fluctuations in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

66) All of the following shift the LAS curve EXCEPT

A) a change in the capital stock.
B) an increase in the money wage rate.
C) an increase in the stock of human capital.
D) technological progress.
Answer: B
Topic: Changes in Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

67) All of the following shift the short-run aggregate supply curve EXCEPT
A) a change in the price level.
B) a change in the money wage rate.
C) a change in the price of a raw material.
D) technological progress.
Answer: A
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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68) Which of the following directly shifts the short-run aggregate supply curve?
A) a change in aggregate demand
B) a change in the price level
C) a change in resource prices
D) all of the above
Answer: C
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

69) Which of the following shifts the short-run aggregate supply curve?
I. changes in the size of the labor force
II. changes in the money wage rate
A) I only
B) II only
C) both I and II
D) neither I nor II
Answer: C
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

70) The short-run aggregate supply curve shifts leftward when the
A) price level increases.
B) general level of technology advances.
C) money wage rate increases.
D) availability of on-the-job training expands to all workers.
Answer: C
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

71) Suppose there is a temporary increase in the price of oil. This is represented by
A) a leftward shift of the SAS and the LAS curve.
B) a leftward shift of the LAS curve.
C) a rightward shift of the SAS curve.
D) a leftward shift of the SAS curve.
Answer: D
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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72) Which of the following shifts both the short-run aggregate supply curve and the long-run
aggregate supply curve?
I. changes in the size of the labor force
II. changes in the money wage rate
III. changes in the quantity of capital
A) II only
B) both I and II
C) both I and III
D) I, II and III
Answer: C
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

73) In the above figure, the short-run aggregate supply curve is SAS1. Suppose that the price
level in the economy increases. As a result there is
A) an upward movement along SAS1.
B) a downward movement along SAS1.
C) a shift to SAS0.
D) a shift to SAS2.
Answer: A
Topic: Changes in Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

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74) In the above figure, the short-run aggregate supply curve is SAS1. If technology advances,
there is
A) an upward movement along SAS1.
B) a downward movement along SAS1.
C) a shift to SAS0.
D) a shift to SAS2.
Answer: D
Topic: Changes in Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

75) In the above figure, the short-run aggregate supply curve is SAS1. If the money wage rate
increases, there is
A) an upward movement along SAS1.
B) a downward movement along SAS1.
C) a shift to SAS0.
D) a shift to SAS2.
Answer: C
Topic: Changes in Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

76) In the above figure, the short-run aggregate supply curve is SAS1. If the prices of resources
fall, there is
A) an upward movement along SAS1.
B) a downward movement along SAS1.
C) a shift to SAS0.
D) a shift to SAS2.
Answer: D
Topic: Changes in Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

77) A change in the full-employment quantity of labor ________ the short-run aggregate supply
curve and ________ the long-run aggregate supply curve.
A) shifts; shifts
B) shifts; does not shift
C) does not shift; shifts
D) does not shift; does not shift
Answer: A
Topic: Change in Aggregate Supply; Full Employment Quantity of Labor
Skill: Conceptual
AACSB: Reflective thinking

22
Copyright 2016 Pearson Education, Ltd.
78) If the full-employment quantity of labor increases, then the
A) LAS curve shifts rightward and the SAS curve does not shift.
B) SAS curve shifts rightward and the LAS curve does not shift.
C) SAS curve shifts rightward and the LAS curve shifts rightward.
D) SAS curve shifts rightward and the LAS curve does shifts leftward.
Answer: C
Topic: Changes in Aggregate Supply; Full-Employment Quantity of Labor
Skill: Conceptual
AACSB: Reflective thinking

79) When the quantity of capital increases, then the

A) LAS curve shifts rightward and the SAS curve does not shift.
B) SAS curve shifts rightward and the LAS curve does not shift.
C) SAS curve shifts rightward and the LAS curve shifts rightward.
D) SAS curve shifts rightward and the LAS curve does shifts leftward.
Answer: C
Topic: Changes in Aggregate Supply, Capital
Skill: Conceptual
AACSB: Reflective thinking

80) With an increase in the capital stock, the short-run aggregate supply curve
A) remains as it is.
B) shifts rightward.
C) shifts leftward.
D) becomes steeper.
Answer: B
Topic: Changes in Aggregate Supply, Capital
Skill: Conceptual
AACSB: Reflective thinking

81) An increase in the amount of human capital ________ the short-run aggregate supply curve
and ________ the long-run aggregate supply curve.
A) shifts; shifts
B) shifts; does not shift
C) does not shift; shifts
D) does not shift; does not shift
Answer: A
Topic: Changes in Aggregate Supply, Capital
Skill: Conceptual
AACSB: Reflective thinking

23
Copyright 2016 Pearson Education, Ltd.
82) A change in the capital stock ________ the short-run aggregate supply curve and ________
the long-run aggregate supply curve.
A) shifts; shifts
B) shifts; does not shift
C) does not shift; shifts
D) does not shift; does not shift
Answer: A
Topic: Changes in Aggregate Supply, Capital
Skill: Conceptual
AACSB: Reflective thinking

83) The land of Mordor increases its capital stock. As a result, the long-run aggregate supply
curve shifts ________ and so does the ________ curve.
A) rightward; aggregate demand
B) leftward; aggregate demand
C) rightward; short-run aggregate supply
D) leftward; short-run aggregate supply
Answer: C
Topic: Changes in Aggregate Supply, Capital
Skill: Conceptual
AACSB: Reflective thinking

84) Which of the following shifts both the LAS and SAS curves?
A) a change in the price level
B) a change in the money wage rate
C) a simultaneous change in both the price level and the money wage rate
D) an advance in technology
Answer: D
Topic: Changes in Aggregate Supply, Technology
Skill: Conceptual
AACSB: Reflective thinking

85) A technological advance ________ the long-run aggregate supply curve and ________ the
short-run aggregate supply curve.
A) shifts; shifts
B) shifts; does not shift
C) does not shift; shifts
D) does not shift; does not shift
Answer: A
Topic: Changes in Aggregate Supply, Technology
Skill: Conceptual
AACSB: Reflective thinking

24
Copyright 2016 Pearson Education, Ltd.
86) Technological progress will
A) shift the LAS curve rightward but will not shift the SAS curve.
B) not shift either the LAS or the SAS curve.
C) shift both the LAS and SAS curves rightward.
D) shift the SAS curve rightward but will not shift the LAS curve.
Answer: C
Topic: Changes in Aggregate Supply, Technology
Skill: Conceptual
AACSB: Reflective thinking

87) The short-run aggregate supply curve shifts because of changes in all of the following
EXCEPT
A) the capital stock.
B) technological progress.
C) money wage rates.
D) the price level.
Answer: D
Topic: Changes in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

88) If the money prices of resources changes

A) the LAS curve shifts.
B) the SAS curve shifts.
C) the AD curve shifts.
D) the macroeconomic equilibrium is unaffected.
Answer: B
Topic: Change in Aggregate Supply-Money Wages & Prices of Resources
Skill: Conceptual
AACSB: Reflective thinking

89) If the money wage rate rises, then the

A) SAS curve shifts rightward.
B) SAS curve shifts leftward.
C) LAS curve shifts rightward.
D) LAS curve shifts leftward.
Answer: B
Topic: Change in Aggregate Supply-Money Wages & Prices of Resources
Skill: Conceptual
AACSB: Reflective thinking

25
Copyright 2016 Pearson Education, Ltd.
90) If the money price of a resource such as oil falls, then the
A) LAS curve shifts rightward.
B) LAS curve shifts leftward.
C) SAS curve shifts leftward.
D) SAS curve shifts rightward.
Answer: D
Topic: Change in Aggregate Supply-Money Wages & Prices of Resources
Skill: Conceptual
AACSB: Reflective thinking

91) Suppose that the money wage in the economy increases by 8 percent. As a result the
A) long-run aggregate supply will decrease.
B) long-run and the short-run aggregate supply both decrease.
C) short-run aggregate supply will decrease.
D) long-run aggregate supply will increase and the short-run aggregate supply will decrease.
Answer: C
Topic: Change in Aggregate Supply-Money Wages & Prices of Resources
Skill: Conceptual
AACSB: Reflective thinking

92) A decrease in the money wage rate

A) increases the long-run aggregate supply.
B) decreases the long-run aggregate supply.
C) increases the short-run aggregate supply.
D) decreases the short-run aggregate supply.
Answer: C
Topic: Changes in Money Wages and Other Resource Prices
Skill: Conceptual
AACSB: Reflective thinking

93) An increase in the money wage rate

A) increases the long-run aggregate supply.
B) decreases the long-run aggregate supply.
C) increases the short-run aggregate supply.
D) decreases the short-run aggregate supply.
Answer: D
Topic: Changes in Money Wages and Other Resource Prices
Skill: Conceptual
AACSB: Reflective thinking

26
Copyright 2016 Pearson Education, Ltd.
94) A change in the money wage rate shifts
A) both the SAS and LAS curves.
B) the LAS curve but not the SAS curve.
C) the SAS curve but not the LAS curve.
D) neither the SAS nor the LAS curve.
Answer: C
Topic: Changes in Money Wages and Other Resource Prices
Skill: Conceptual
AACSB: Reflective thinking

95) An increase in the money wage rate shifts the short-run aggregate supply curve ________; an
increase in technology shifts the long-run aggregate supply curve ________.
A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward
Answer: C
Topic: Changes in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

96) A decrease in the money wage rate increases ________ and an increase in the full-
employment quantity of labor increases ________.
A) the SAS and the LAS; only the SAS
B) the SAS and the LAS; only the LAS
C) only the SAS; the SAS and the LAS
D) only the LAS; the SAS and the LAS
Answer: C
Topic: Changes in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

97) An increase in the quantity of capital increases ________ and increase in the full-
employment quantity of labor increases ________.
A) the SAS and the LAS; only the SAS
B) the SAS and the LAS; only the LAS
C) the SAS and the LAS; the SAS and the LAS
D) only the LAS; the SAS and the LAS
Answer: C
Topic: Changes in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

27
Copyright 2016 Pearson Education, Ltd.
98) Suppose there is an increase in the short-run aggregate supply with no change in the long-run
aggregate supply. This situation could be the result of
A) an increase in the price of oil.
B) a decrease in the money wage rate.
C) a technological advancement.
D) an increase in the quantity of capital.
Answer: B
Topic: Changes in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

99) In the above figure, the economy is currently at point A. Suppose that the money wage rate
and the price level both fall by 10 percent. Firms will be willing to supply output equal to
A) less than $16.0 trillion.
B) $16.0 trillion.
C) more than $16.0 trillion.
D) Without more information, it is impossible to determine which of the above answers is
correct.
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

28
Copyright 2016 Pearson Education, Ltd.
100) In the above figure, the economy is at point A. Then the price level falls to 90 while the
money wage rate does not change. Firms will be willing to supply output equal to
A) less than $16.0 trillion.
B) $16.0 trillion.
C) more than $16.0 trillion.
D) Without more information, it is impossible to determine which of the above answers is
correct.
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

101) In the above figure, the economy is at point A. Then the price level rises to 110 while the
money wage rate remains constant. Firms will be willing to supply output equal to
A) less than $16.0 trillion.
B) $16.0 trillion.
C) more than $16.0 trillion.
D) Without more information, it is impossible to determine which of the above answers is
correct.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

102) In the above figure, the economy is at point A and the money wage rate falls by 10 percent.
If the price level is constant, firms will be willing to supply output equal to
A) less than $16.0 trillion.
B) $16.0 trillion.
C) more than $16.0 trillion.
D) Without more information, it is impossible to determine which of the above answers is
correct.
Answer: C
Topic: Changes in Money Wages and Other Resource Prices
Skill: Analytical
AACSB: Analytical thinking

103) In the above figure, the economy is at point A and the money wage rate rises by 10 percent.
If the price level is constant, firms will be willing to supply output equal to
A) less than $16.0 trillion.
B) $16.0 trillion.
C) more than $16.0 trillion.
D) Without more information, it is impossible to determine which of the above answers is
correct.
Answer: A
Topic: Changes in Money Wages and Other Resource Prices
Skill: Analytical
AACSB: Analytical thinking

29
Copyright 2016 Pearson Education, Ltd.
104) In the above figure, B is the current long-run aggregate supply curve and E is the current
short-run aggregate supply curve. If there is an increase in the full-employment quantity of labor,
then the long-run aggregate supply curve and the short-run aggregate supply curve
A) remain B and E.
B) shift to A and D, respectively.
C) shift to C and F, respectively.
D) remain at B and shift at F, respectively.
Answer: C
Topic: Changes in Aggregate Supply; Full-Employment Quantity of Labor
Skill: Analytical
AACSB: Analytical thinking

105) In the above figure, B is the current long-run aggregate supply curve and E is the current
short-run aggregate supply curve. Technological advances mean the long-run aggregate supply
curve and short-run aggregate supply curve
A) remain B and E.
B) shift to A and D, respectively.
C) shift to C and F, respectively.
D) shift to C and remain E, respectively.
Answer: C
Topic: Changes in Aggregate Supply, Technology
Skill: Analytical
AACSB: Analytical thinking

30
Copyright 2016 Pearson Education, Ltd.
106) In the above figure, which part corresponds to a destruction of part of the nation's capital
stock?
A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: A
Topic: Changes in Aggregate Supply, Capital
Skill: Analytical
AACSB: Analytical thinking

107) In the above figure, which point corresponds to an increase in technology?

A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: C
Topic: Changes in Aggregate Supply, Technology
Skill: Analytical
AACSB: Analytical thinking

31
Copyright 2016 Pearson Education, Ltd.
108) In the above figure, which part corresponds to an increase in the money wage rate?
A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: B
Topic: Changes in Money Wages and Other Resource Prices
Skill: Analytical
AACSB: Analytical thinking

109) In the above figure, which part corresponds to a fall in the money wage rate?
A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: D
Topic: Changes in Money Wages and Other Resource Prices
Skill: Analytical
AACSB: Analytical thinking

110) In the above figure, which point corresponds to an increase in human capital?
A) Figure A
B) Figure B
C) Figure C
D) Figure D
Answer: C
Topic: Changes in Aggregate Supply, Technology
Skill: Analytical
AACSB: Analytical thinking

111) Moving along which curve does the money wage rate and the price level change in the same
proportions?
A) the AD curve
B) the SAS curve
C) the LAS curve
D) None of the above because there is no curve along which both the money wage rate and the
price level change in the same proportions.
Answer: C
Topic: Study Guide Question, Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

32
Copyright 2016 Pearson Education, Ltd.
112) Long-run aggregate supply will decrease for all of the following reasons EXCEPT
A) reduced money wages.
B) decreased human capital.
C) decrease in the level of full employment.
D) decreased capital.
Answer: A
Topic: Study Guide Question, Long-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

113) A fall in the money wage rate shifts

A) both the SAS and LAS curves rightward.
B) both the SAS and LAS curves leftward.
C) the SAS curve rightward but leaves the LAS curve unchanged.
D) the LAS curve rightward but leaves the SAS curve unchanged.
Answer: C
Topic: Study Guide Question, Change in Money Wages & Other Resource
Skill: Conceptual
AACSB: Reflective thinking

2 Aggregate Demand

1) The aggregate demand curve shows

A) total expenditures at different levels of national income.
B) the quantity of real GDP demanded at different price levels.
C) that real income is directly (positively) related to the price level.
D) All of the above answers are correct.
Answer: B
Topic: The Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

2) The AD curve shows the sum of

A) the price level, employment, and real GDP.
B) consumption expenditure, investment, and real GDP.
C) consumption expenditure, investment, government expenditures on goods and services, and
net exports.
D) consumption expenditure, investment, the price level, and real GDP.
Answer: C
Topic: The Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

33
Copyright 2016 Pearson Education, Ltd.
3) The aggregate demand curve
A) has a negative slope.
B) has a positive slope.
C) is vertical.
D) is horizontal.
Answer: A
Topic: Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

4) Aggregate demand is the relationship between the quantity of real GDP demanded and the
________.
A) price level
B) money wage rate
C) real wage rate
D) nominal GDP demanded
Answer: A
Topic: Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

5) Moving along the aggregate demand curve, a decrease in the quantity of real GDP demanded
is a result of
A) an increase in the price level.
B) a decrease in the price level.
C) an increase in income.
D) a decrease in income.
Answer: A
Topic: Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

6) Other things constant, the economy's aggregate demand curve shows that
A) as the price level falls, real GDP decreases.
B) any change in the price level shifts the aggregate demand curve.
C) the quantity of real GDP demanded decreases when the price level rises.
D) the quantity of real GDP demanded and the price level are not related.
Answer: C
Topic: The Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

34
Copyright 2016 Pearson Education, Ltd.
7) The aggregate demand curve shows the ________ relationship between the price level and
________.
A) positive; the quantity of real GDP demanded
B) negative; aggregate labor demanded
C) positive; aggregate labor demand
D) negative; the quantity of real GDP demanded
Answer: D
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

8) Other things equal, along the aggregate demand curve, a higher price level is associated with
A) an increase in the quantity of real GDP demanded.
B) a decrease in the quantity of real GDP demanded.
C) a decrease in the quantity of nominal GDP demanded.
D) higher income levels.
Answer: B
Topic: Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

9) The aggregate demand curve shows that, if other factors are held constant, the higher the price
level, the
A) greater the quantity of real GDP demanded.
B) smaller the quantity of real GDP demanded.
C) larger consumption expenditure.
D) None of the above answers is correct.
Answer: B
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

10) The aggregate demand curve shows that, if other factors are held constant, a
A) higher price level results in a decrease in the quantity of real GDP demanded.
B) higher price level results in an increase in the quantity of real GDP demanded.
C) higher price level results in a lower interest rate.
D) lower price level results in a higher interest rate.
Answer: A
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

35
Copyright 2016 Pearson Education, Ltd.
11) The quantity of real GDP demanded equals $16.2 trillion when the price level is 90. If the
price level rises to 95, the quantity of real GDP demanded equals
A) less than $16.2 trillion.
B) $16.2 trillion.
C) more than $16.2 trillion.
D) more information is needed to determine if the quantity of real GDP demanded increases,
decreases, or does not change.
Answer: A
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Analytical thinking

12) The quantity of real GDP demanded equals $16.4 trillion when the price level is 95. If the
price level falls to 90, the quantity of real GDP demanded equals
A) less than $16.4 trillion.
B) $16.4 trillion.
C) more than $16.4 trillion.
D) more information is needed to determine if the quantity of real GDP demanded increases,
decreases, or does not change.
Answer: C
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Analytical thinking

13) Which of the following changes while moving along the aggregate demand curve?
A) future incomes of households
B) the price level
C) the amount of money in the economy
D) future profits from investment projects
Answer: B
Topic: Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

14) The AD curve slopes

A) downward due to the wealth and price effects.
B) downward due to the wealth and substitution effects.
C) upward due to the price and substitution effects.
D) upward due to the wealth and substitution effects.
Answer: B
Topic: The Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

36
Copyright 2016 Pearson Education, Ltd.
15) Your real wealth is measured as the
A) amount of assets you have in dollar terms.
B) amount of money you have.
C) amount of goods and services your wealth will buy.
D) amount of goods you have divided by the price level.
Answer: C
Topic: Aggregate Demand, Wealth Effect
Skill: Recognition
AACSB: Reflective thinking

16) As the price level falls and other things remain the same, real wealth ________ and
________.
A) decreases; the short-run aggregate supply decreases
B) decreases; the quantity of real GDP demanded decreases
C) increases; aggregate demand increases
D) increases; the quantity of real GDP demanded increases
Answer: D
Topic: Aggregate Demand, Wealth Effect
Skill: Recognition
AACSB: Reflective thinking

17) If you have $1,000 of money in the bank and the price level rises by 5 percent, your
A) money is worth more in terms of what it can purchase.
B) money is worth less in terms of what it can purchase.
C) money is worth the same in terms of what it can purchase.
D) purchasing power has increased.
Answer: B
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

18) According to the wealth effect, if real wealth decreases then people
A) decrease their consumption expenditure.
B) increase their consumption expenditure.
C) do not respond if their nominal wealth does not change.
D) decrease their consumption expenditure only if their nominal wealth also decreases.
Answer: A
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

37
Copyright 2016 Pearson Education, Ltd.
19) An individual holds $10,000 in a checking account and the price level rises significantly.
Hence
A) the individual's real wealth and consumption expenditure decrease.
B) the individual's real wealth decreases but real national wealth increases.
C) there is no change in the individual's real wealth.
D) the individual's real wealth increases.
Answer: A
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

20) If you have $1,000 in wealth and the price level increases by 20 percent, then
A) the $1,000 will buy fewer goods and services.
B) the $1,000 dollars will buy 20 percent more goods and services.
C) the real value of the $1,000 increases.
D) you will be able to buy fewer goods, but the real value of those goods will increase.
Answer: A
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

21) If you have $5,000 in wealth and the price level decreases by 20 percent, then
A) the $5,000 will buy fewer goods and services.
B) the $5,000 will buy more goods and services.
C) the real value of the $5,000 decreases.
D) the real value of the $5,000 remains constant.
Answer: B
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

22) A rise in the price level changes aggregate demand because

A) firms increase their investment when prices are higher.
B) the real value of people's wealth varies directly with the price level and so does their
spending.
C) the real value of people's wealth decreases and so they decrease their consumption.
D) the more money people have, the more it is worth and hence the more goods and services
they demand.
Answer: C
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

38
Copyright 2016 Pearson Education, Ltd.
23) One reason that the aggregate demand curve has a negative slope is because
A) people buy fewer goods and save more when the price level rises because their real wealth
decreases.
B) firms produce more when the price rises.
C) people earn more money when output rises.
D) The premise of the question is wrong because the aggregate demand curve has a positive
slope.
Answer: A
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Reflective thinking

24) The intertemporal substitution effect refers to substitution of

A) goods for services.
B) goods and services for less expensive goods and services.
C) goods and services today for goods and services in the future.
D) goods and services produced domestically for goods and services produced in another
country.
Answer: C
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Recognition
AACSB: Reflective thinking

25) According to the intertemporal substitution effect, when the price level rises and other things
remain the same
A) the interest rate falls.
B) the interest rate rises.
C) the quantity of money increases.
D) government taxes rise.
Answer: B
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Recognition
AACSB: Reflective thinking

26) Substitution effects help explain the slope of the aggregate demand curve. One substitution
effect refers to the
A) inverse relationship between the interest rate and the price level.
B) direct relationship between the interest rate and the real value of wealth.
C) effect on investment expenditures that result from a change in interest rates produced by a
change in the price level.
D) change in wealth that results from a change in the interest rate.
Answer: C
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

39
Copyright 2016 Pearson Education, Ltd.
27) According to the intertemporal substitution effect, a fall in the price level will
A) decrease the real value of wealth, which increases the quantity of real GDP demanded.
B) cause the interest rate to fall so that investment increases and the quantity of real GDP
demanded increases.
C) increase net exports, which causes the quantity of real GDP demanded to increase.
D) increase the real value of wealth, which raises the interest rate so that the quantity of real
GDP demanded decreases.
Answer: B
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

28) According to the intertemporal substitution effect, when the price level increases, the interest
rate
A) rises and the quantity of real GDP demanded increases.
B) rises and the quantity of real GDP demanded decreases.
C) falls and the quantity of real GDP demanded decreases.
D) is not affected.
Answer: B
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

29) According to the intertemporal substitution effect, a higher price level

A) decreases the quantity of real GDP demanded.
B) lowers the costs of building new plants and equipment.
C) increases the quantity of real GDP demanded.
D) makes it less costly for people to buy houses and cars.
Answer: A
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

30) The intertemporal substitution effect of the price level on aggregate demand
A) is the same as the real wealth effect.
B) is one reason that the aggregate demand curve has a negative slope.
C) explains why aggregate demand increases when the amount of money increases.
D) is one reason that the aggregate demand curve has a positive slope.
Answer: B
Topic: Aggregate Demand, Intertemporal Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

40
Copyright 2016 Pearson Education, Ltd.
31) One reason that the aggregate demand curve has a negative slope is that when the domestic
price level rises,
A) firms produce more goods and services.
B) firms produce fewer goods and services.
C) people substitute toward more imported goods and services.
D) peoples' wealth increases.
Answer: C
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

32) One reason that the aggregate demand curve has a negative slope is because
A) firms supply more when prices rise.
B) people buy more foreign goods when the domestic price level rises.
C) the amount of money in the economy increases when the price level rises.
D) firms supply less when prices rise.
Answer: B
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

33) There are several reasons why the aggregate demand curve is downward sloping. Which of
the following CORRECTLY describes one of these explanations?
A) A rise in the price level raises the purchasing power wealth and increases desired
consumption.
B) A rise in the price level raises interest rates and increases investment spending.
C) A fall in the price level, holding foreign prices and the exchange rate constant, increases net
exports.
D) A rise in the price level lowers the interest rate and increases investment spending.
Answer: C
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

34) When the prices of U.S.-produced goods rise and the price of foreign-produced goods do not
change, the result is
A) an increase in exports.
B) a decrease in exports.
C) a decrease in imports.
D) no change in imports or exports.
Answer: B
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

41
Copyright 2016 Pearson Education, Ltd.
35) When the price level in France increases while the exchange rate and the price level in the
United States remain the same, the result is
A) U.S.-made goods become relatively cheaper compared to French-made goods.
B) French citizens are more likely to buy U.S.-made goods.
C) U.S. citizens are less likely to buy French-made goods.
D) All of the above answers are correct.
Answer: D
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

36) A change in ________ creates a movement along the aggregate demand curve but does not
shift the aggregate demand curve.
A) tax rates
B) the price level
C) fiscal policy
D) None of the above because they all shift the aggregate demand curve.
Answer: B
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

42
Copyright 2016 Pearson Education, Ltd.
37) In the above figure, the economy is initially at point B. Then the price level falls by 10. The
wealth effect will help
A) move the economy to point A.
B) move the economy to point C.
C) move the economy to point D.
D) keep the economy to point B.
Answer: A
Topic: Aggregate Demand, Wealth Effect
Skill: Analytical
AACSB: Analytical thinking

38) In the above figure, the economy initially is at point B. Then price level rises by 10. The
wealth effect will help
A) move the economy to point A.
B) move the economy to point C.
C) move the economy to point D.
D) keep the economy to point B.
Answer: B
Topic: Aggregate Demand, Wealth Effect
Skill: Analytical
AACSB: Analytical thinking

43
Copyright 2016 Pearson Education, Ltd.
39) In the above figure, the economy initially is at point C. Then the domestic price level rises by
10. A
A) substitution effect would help move the economy to point D.
B) substitution effect would help move the economy to point B.
C) substitution effect would keep the economy at point C.
D) wealth effect would help move the economy to point B.
Answer: A
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Analytical
AACSB: Analytical thinking

40) An increase in aggregate demand is shown by a

A) rightward shift of the AD curve.
B) movement upward along the AD curve.
C) movement downward along the AD curve.
D) leftward shift of the AD curve.
Answer: A
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

41) Which of the following does NOT shift the aggregate demand curve?
A) a decrease in the quantity of money
B) an increase in people's expected future incomes
C) an increase in the price level
D) an increase in current foreign income
Answer: C
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

42) Which of the following would NOT shift the U.S. aggregate demand curve?
A) a change in income in Canada
B) a change in the quantity of capital in the United States
C) an expectation that inflation will be lower in the future
D) U.S. monetary and fiscal policy
Answer: B
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

44
Copyright 2016 Pearson Education, Ltd.
43) Which of the following changes would NOT shift the aggregate demand curve?
A) a change in fiscal policy
B) a change in monetary policy
C) a change in expectations about future income
D) an increase in technology
Answer: D
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

44) Aggregate demand increases when

A) foreign incomes fall.
B) interest rates rise.
C) the exchange rate rises.
D) None of the above answers is correct.
Answer: D
Topic: Changes in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

45) Which of the following does NOT shift the aggregate demand curve?
A) a decrease in the quantity of money
B) an increase in investment
C) an increase in the price level
D) a decrease in taxes
Answer: C
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

46) A key issue in the presidential election of 2012 between President Obama and Mr. Romney
concerned tax rates. President Obama favored increasing taxes, especially on the rich. As a result
of a tax increase
A) the aggregate demand curve shifts leftward.
B) the aggregate demand curve shifts rightward.
C) the aggregate supply curve shifts leftward.
D) the aggregate supply curve shifts rightward.
Answer: A
Topic: Changes in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

45
Copyright 2016 Pearson Education, Ltd.
47) Which of the following issues prominent in the presidential election of 2012 shifts the
aggregate demand curve rightward?
A) raising taxes on the rich
B) increasing Medicare, Medicaid, and Social Security payments
C) loosening immigration policies
D) allowing more oil drilling on Federal lands
Answer: B
Topic: Changes in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

48) A change in ________ creates a movement along the aggregate demand curve, while a
change in ________ shifts the aggregate demand curve.
A) expected profits; tax rates
B) the price level; government expenditures
C) foreign income; the foreign exchange rate
D) real wealth; human capital
Answer: B
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

49) Which of the following shifts the aggregate demand curve rightward?
A) a decrease in consumption
B) an increase in investment
C) a decrease in net exports
D) a decrease in government expenditure on goods and services
Answer: B
Topic: Changes in Aggregate Demand, Investment
Skill: Conceptual
AACSB: Reflective thinking

50) Which of the following shifts the aggregate demand curve rightward?
A) an increase in tax rates
B) an increase in government expenditure
C) an increase in the exchange rate
D) an increase in imports
Answer: B
Topic: Changes in Aggregate Demand, Investment
Skill: Conceptual
AACSB: Reflective thinking

46
Copyright 2016 Pearson Education, Ltd.
51) Suppose consumers decrease their consumption expenditure because they worry about what
their income will be in the future. There is
A) a rightward shift of the aggregate demand curve.
B) an upward movement along the aggregate demand curve.
C) a downward movement along the aggregate demand curve.
D) a leftward shift of the aggregate demand curve.
Answer: D
Topic: Changes in Aggregate Demand, Expectations
Skill: Conceptual
AACSB: Reflective thinking

52) If the expected future inflation rate decreases, then

A) aggregate demand increases.
B) short-run aggregate supply increases.
C) aggregate demand decreases.
D) long-run aggregate supply decreases.
Answer: C
Topic: Changes in Aggregate Demand, Expectations
Skill: Conceptual
AACSB: Reflective thinking

53) If higher inflation is expected in the future, then the

A) SAS curve shifts rightward.
B) AD curve shifts rightward.
C) LAS curve shifts rightward.
D) None of the above answers is correct.
Answer: B
Topic: Changes in Aggregate Demand, Expectations
Skill: Conceptual
AACSB: Reflective thinking

54) People expect their incomes will decrease next year. As a result, the ________ will shift
________.
A) short-run aggregate supply curve; rightward
B) aggregate demand curve; rightward
C) aggregate demand curve; leftward
D) long-run aggregate supply curve; rightward
Answer: C
Topic: Changes in Aggregate Demand, Expectations
Skill: Conceptual
AACSB: Reflective thinking

47
Copyright 2016 Pearson Education, Ltd.
55) People expect that the El Nio effect will cause drought in Australia in coming years. If most
Australian firms expect their profits will fall during the next five years, Australia's ________ this
year.
A) aggregate demand will increase
B) long-run aggregate supply will increase
C) aggregate demand will decrease
D) short-run aggregate supply will increase
Answer: C
Topic: Changes in Aggregate Demand, Expectations
Skill: Conceptual
AACSB: Reflective thinking

56) Which of the following statements is FALSE?

A) Fiscal policy is the attempt to influence the economy using taxes, transfer payments, and
government expenditures.
B) Government expenditure affects aggregate demand directly because government expenditure
is a component of aggregate demand.
C) Taxes and transfer payments affect aggregate demand by changing disposable income.
D) An increase in disposable income leads to a decrease in aggregate demand.
Answer: D
Topic: Changes in Aggregate Demand, Fiscal Policy
Skill: Conceptual
AACSB: Reflective thinking

57) A decrease in government transfer payments

A) increases aggregate demand.
B) increases the aggregate quantity demanded.
C) decreases the aggregate quantity demanded.
D) decreases aggregate demand.
Answer: D
Topic: Changes in Aggregate Demand, Transfer Payments
Skill: Conceptual
AACSB: Reflective thinking

58) An increase in government expenditure on goods and services

A) increases aggregate demand.
B) increases the aggregate quantity demanded.
C) decreases the aggregate quantity demanded.
D) decreases aggregate demand.
Answer: A
Topic: Changes in Aggregate Demand, Government Expenditure
Skill: Conceptual
AACSB: Reflective thinking

48
Copyright 2016 Pearson Education, Ltd.
59) A decrease in government expenditure on goods and services
A) increases aggregate demand.
B) increases the aggregate quantity demanded.
C) decreases the aggregate quantity demanded.
D) decreases aggregate demand.
Answer: D
Topic: Changes in Aggregate Demand, Government Expenditure
Skill: Conceptual
AACSB: Reflective thinking

60) A decrease in government expenditure shifts the AD curve ________ and a decrease in taxes
shifts the AD curve ________.
A) rightward; rightward
B) rightward; leftward
C) leftward; rightward
D) leftward; leftward
Answer: C
Topic: Changes in Aggregate Demand, Government Expenditure
Skill: Conceptual
AACSB: Reflective thinking

61) Which of the following events shifts the aggregate demand curve leftward?
A) an increase in consumption expenditures
B) a decrease in taxes
C) a decrease in government expenditures on goods and services
D) an increase in net exports of goods and services
Answer: C
Topic: Changes in Aggregate Demand, Government Expenditure
Skill: Conceptual
AACSB: Reflective thinking

62) Disposable income ________ when ________.

A) decreases; taxes increase
B) decreases; transfer payments increase
C) increases; government expenditures decrease
D) decreases; aggregate income increases
Answer: A
Topic: Changes in Aggregate Demand, Taxes
Skill: Conceptual
AACSB: Reflective thinking

49
Copyright 2016 Pearson Education, Ltd.
63) The aggregate demand curve
A) shifts rightward when the price level increases and leftward when the price level falls.
B) shifts rightward when taxes are decreased.
C) shifts rightward when foreign incomes decrease and shifts leftward when foreign incomes
increase.
D) does not shift, unlike market demand curves.
Answer: B
Topic: Changes in Aggregate Demand, Taxes
Skill: Conceptual
AACSB: Reflective thinking

64) If taxes are increased, the AD curve

A) is not affected because a change in taxes is a nominal change not real change.
B) shifts rightward and aggregate demand decreases.
C) shifts leftward and aggregate demand decreases.
D) does not shift but there is a movement down along the curve.
Answer: C
Topic: Changes in Aggregate Demand, Taxes
Skill: Conceptual
AACSB: Reflective thinking

65) Which of the following shifts the aggregate demand curve rightward?
A) a decrease in government expenditure
B) expectations that future incomes will fall
C) a decrease in the quantity of money and an increase in interest rates
D) a tax cut
Answer: D
Topic: Changes in Aggregate Demand, Taxes
Skill: Conceptual
AACSB: Reflective thinking

66) Which of the following decreases aggregate demand?

A) The government increases taxes on both business and personal income.
B) Foreign incomes rise.
C) The quantity of money in the economy increases.
D) Households believe that the economy is headed for good times, with higher future incomes.
Answer: A
Topic: Changes in Aggregate Demand, Taxes
Skill: Conceptual
AACSB: Reflective thinking

50
Copyright 2016 Pearson Education, Ltd.
67) Which of the following increases aggregate demand?
A) a decrease in taxes
B) a decrease in foreign income
C) a decrease in government expenditure
D) a rise in the interest rate
Answer: A
Topic: Changes in Aggregate Demand, Taxes
Skill: Conceptual
AACSB: Reflective thinking

68) Which of the following shifts the aggregate demand curve rightward?
A) an increase in the tax rate
B) a decrease in the price level
C) an increase in the quantity of money
D) an increase in the exchange rate
Answer: C
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

69) Which of the following increases aggregate demand?

A) an increase in taxes
B) an increase in the quantity of money
C) an increase in the exchange rate
D) a decrease in government expenditures
Answer: B
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

70) If the quantity of money increases, the

A) price level rises and the AD curve does not shift.
B) AD curve shifts leftward and aggregate demand decreases.
C) AD curve does not shift and there is a movement upward along the curve.
D) AD curve shifts rightward and aggregate demand increases.
Answer: D
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

51
Copyright 2016 Pearson Education, Ltd.
71) Which of the following shifts the aggregate demand curve rightward?
A) a decrease in the price level
B) a decrease in government expenditures
C) an increase in the quantity of money
D) a decrease in transfer payments
Answer: C
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

72) The U.S. aggregate demand curve shifts leftward if

A) the economic conditions in Europe improve so that European incomes increase.
B) there is a tax cut.
C) the Federal Reserve increases the interest rate.
D) the exchange rate falls.
Answer: C
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

73) Which of the following increases aggregate demand and shifts the AD curve rightward?
A) a fall in the price level
B) an increase in the quantity of money and a resulting fall in the interest rate
C) predictions of a recession that lead to expectations of lower future income
D) an increase in the exchange rate that makes imports less expensive
Answer: B
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

74) Aggregate demand increases if the quantity of money ________.

A) decreases or tax rates increase
B) or transfer payments decrease
C) remains constant or tax rates increase
D) increases or tax rates decrease
Answer: D
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

52
Copyright 2016 Pearson Education, Ltd.
75) The U.S. exchange rate rises. As a result, there is a
A) movement along the U.S. aggregate demand curve but the curve does not shift.
B) rightward shift in the U.S. aggregate demand curve.
C) leftward shift in the U.S. aggregate demand curve.
D) rightward shift in the long-run U.S. aggregate supply curve.
Answer: C
Topic: Changes in Aggregate Demand, Foreign Exchange Rate
Skill: Conceptual
AACSB: Reflective thinking

76) When the exchange rises, then the

A) AD curve shifts rightward.
B) AD curve shifts leftward.
C) LAS curve shifts rightward.
D) LAS curve shifts leftward.
Answer: B
Topic: Changes in Aggregate Demand, Foreign Exchange Rate
Skill: Conceptual
AACSB: Reflective thinking

77) Suppose the exchange rate falls from $1.20 Canadian per U.S. dollar to $1.10 Canadian per
U.S. dollar. U.S. exports will ________, U.S. imports will ________, and U.S. aggregate demand
will ________.
A) decrease; increase; decrease
B) decrease; increase; increase
C) increase; decrease; increase
D) increase; increase; increase
Answer: C
Topic: Changes in Aggregate Demand, Foreign Exchange Rate
Skill: Conceptual
AACSB: Reflective thinking

78) A decrease in foreign incomes

A) increases aggregate demand in the United States.
B) increases the aggregate quantity demanded in the United States.
C) decreases the aggregate quantity demanded in the United States.
D) decreases aggregate demand in the United States.
Answer: D
Topic: Changes in Aggregate Demand, Foreign Incomes
Skill: Conceptual
AACSB: Reflective thinking

53
Copyright 2016 Pearson Education, Ltd.
79) An increase in foreign incomes
A) increases aggregate demand in the United States.
B) increases the aggregate quantity demanded in the United States.
C) decreases the aggregate quantity demanded in the United States.
D) decreases aggregate demand in the United States.
Answer: A
Topic: Changes in Aggregate Demand, Foreign Incomes
Skill: Conceptual
AACSB: Reflective thinking

80) In the above figure, the economy is initially at point B. If the government decreases transfer
payments, there is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: C
Topic: Changes in Aggregate Demand, Transfer Payments
Skill: Analytical
AACSB: Analytical thinking

81) In the above figure, the economy is initially at point B. If taxes increase, there is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: C
Topic: Changes in Aggregate Demand, Taxes
Skill: Analytical
AACSB: Analytical thinking
54
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82) In the above figure, the economy is initially at point B. If the Fed decreases the quantity of
money, there is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: C
Topic: Changes in Aggregate Demand, Money
Skill: Analytical
AACSB: Analytical thinking

83) In the above figure, the economy is initially at point B. If the Fed increases the quantity of
money, there is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: D
Topic: Changes in Aggregate Demand, Money
Skill: Analytical
AACSB: Analytical thinking

84) In the above figure, the economy is initially at point B. If the exchange rate falls, there is
A) a movement to point C.
B) a movement to point A.
C) a shift to AD2.
D) a shift to AD1.
Answer: D
Topic: Changes in Aggregate Demand, Money
Skill: Analytical
AACSB: Analytical thinking

55
Copyright 2016 Pearson Education, Ltd.
85) In the above figure, if the economy is at point a, an increase in ________ will move the
economy to ________.
A) real wealth from the fall in the price level; point b
B) real wealth from the fall in the price level; point c
C) expected future income; point c
D) expected future income; point d
Answer: B
Topic: Aggregate Demand, Wealth Effect
Skill: Analytical
AACSB: Analytical thinking

86) In the above figure, if the economy is at point a, an increase in ________ will move the
economy to ________.
A) real wealth; point d
B) real wealth from a fall in the price level; point d
C) expected future income; point b
D) expected future income; point d
Answer: C
Topic: Changes in Aggregate Demand, Expectations
Skill: Analytical
AACSB: Analytical thinking

56
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87) In the above figure, the movement from point B to point A might be the result of
A) an increase in government expenditures because of a war.
B) an increase in government expenditures because of increases in education expenditures.
C) an increase in the demand for manufacturing goods because of new technology.
D) a fall in the price level.
Answer: D
Topic: The Aggregate Demand Curve
Skill: Analytical
AACSB: Analytical thinking

88) In the above figure, the shift from point C to point B might be the result of
A) an increase in the price level.
B) a decrease in the price level.
C) a decrease in government expenditures.
D) an increase in the quantity of money.
Answer: C
Topic: Changes in Aggregate Demand, Government Expenditure
Skill: Analytical
AACSB: Analytical thinking

57
Copyright 2016 Pearson Education, Ltd.
89) The curve labeled A in the above figure is
A) a short-run aggregate supply curve.
B) an aggregate demand curve.
C) a long-run aggregate supply curve.
D) a production possibilities curve.
Answer: B
Topic: The Aggregate Demand Curve
Skill: Recognition
AACSB: Analytical thinking

90) In the above figure, the curve labeled A shifts rightward if

A) expected future profits decrease.
B) the quantity of money decreases.
C) the substitution effect occurs.
D) taxes decrease.
Answer: D
Topic: Changes in Aggregate Demand, Taxes
Skill: Analytical
AACSB: Analytical thinking

58
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91) The U.S. fiscal policy implemented in 2008 was an attempt to
A) give billions of dollars to businesses and low- and middle-income Americans in order to
stimulate business investment and consumption expenditure, and thereby increasing AD.
B) give billions of dollars to businesses and low- and middle-income Americans in order to
stimulate business investment and consumption expenditure, and thereby increasing SAS.
C) decrease interest rates in order to stimulate business investment and consumption expenditure,
and thereby increasing AD.
D) decrease the exchange rate in order to boost net exports, and thereby increasing AD.
Answer: A
Topic: Changes in Aggregate Demand, Fiscal Policy
Skill: Recognition
AACSB: Reflective thinking

92) The U.S. monetary policy implemented in 2008 was an attempt to

A) give billions of dollars to businesses and low- and middle-income Americans in order to
stimulate business investment and consumption expenditure and thereby increasing AD.
B) decrease interest rates in order to stimulate business investment and consumption expenditure,
thereby increasing SAS.
C) decrease interest rates in order to stimulate business investment and consumption expenditure,
thereby increasing AD.
D) decrease the exchange rate in order to boost net exports, thereby increasing AD.
Answer: C
Topic: Changes in Aggregate Demand, Monetary Policy
Skill: Recognition
AACSB: Reflective thinking

93) The aggregate demand curve illustrates that, as the price level rises
A) the quantity of real GDP demanded increases.
B) the quantity of real GDP demanded decreases.
C) the AD curve shifts rightward.
D) the AD curve shifts leftward.
Answer: B
Topic: Study Guide Question, Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

94) As the price level falls, the quantity of real wealth ________ and the aggregate quantity of
real GDP demanded ________.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: A
Topic: Study Guide Question, Aggregate Demand, Wealth Effect
Skill: Recognition
AACSB: Reflective thinking

59
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3 Explaining Macroeconomic Trends and Fluctuations

1) The AS/AD model studies the relationship between

A) the price level and unemployment.
B) the price level and real GDP.
C) unemployment and real GDP.
D) nominal GDP and inflation.
Answer: B
Topic: The AS-AD Model
Skill: Recognition
AACSB: Reflective thinking

2) By using only the aggregate demand curve, we can determine

A) only the price level.
B) only the quantity of real GDP.
C) both the price level and quantity of real GDP.
D) neither the price level nor the quantity of real GDP.
Answer: D
Topic: Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

3) In the short-run macroeconomic equilibrium

A) real GDP equals potential GDP and aggregate demand determines the price level.
B) the price level is fixed and short-run aggregate supply determines real GDP.
C) real GDP and the price level are determined by short-run aggregate supply and aggregate
demand.
D) real GDP is always less than potential GDP.
Answer: C
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

4) The economy is in its short run equilibrium at the point where the
A) price level is stable.
B) SAS curve intersects the LAS curve.
C) AD curve intersects the LAS curve.
D) AD curve intersects the SAS curve.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

60
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5) Short-run equilibrium occurs at the intersection of
A) the SAS and AD curves.
B) the SAS, LAS, and AD curves.
C) the SAS and LAS curves.
D) the LAS and AD curves.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

6) If the economy is in short run equilibrium then

A) real GDP equals potential GDP.
B) nominal GDP equals potential GDP.
C) real GDP cannot be equal to potential GDP.
D) real GDP can be greater than, less than, or equal to potential GDP.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

7) In the short-run, real GDP can be greater than or less than potential GDP because in the short
run the
A) money wage rate is fixed.
B) quantity of capital is fixed.
C) full-employment level of employment is fixed.
D) price level is fixed.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

8) Short-run macroeconomic equilibrium occurs when the quantity of real GDP demanded
________.
A) equals potential GDP
B) equals full-employment GDP
C) does not equal full-employment GDP
D) equals the quantity of real GDP supplied
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

61
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9) In the short run, the equilibrium level of real GDP
A) is necessarily less than potential GDP.
B) is necessarily equal to potential GDP.
C) is necessarily greater than potential GDP.
D) could be less than, equal to, or greater than potential GDP.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

10) In the short run, the intersection of the aggregate demand and the short-run aggregate supply
curves,
A) determines the equilibrium price level.
B) is a point where there is neither a surplus nor a shortage of goods.
C) determines the equilibrium level of real GDP.
D) All of the above answers are correct.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

11) A short-run macroeconomic equilibrium occurs

A) at the intersection of the short-run aggregate supply curve and the long-run aggregate supply
curve.
B) at the intersection of the short-run aggregate supply curve and the aggregate demand curve.
C) at the intersection of the short-run aggregate supply curve, the long-run aggregate supply
curve, and the aggregate demand curve.
D) when the rate at which prices of goods and services increase equals the rate at which money
wage rates increase.
Answer: B
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

12) Last year in the country of Union, the price level increased and real GDP increased. Such an
outcome might have occurred because short-run aggregate supply ________ and aggregate
demand ________.
A) decreased; decreased
B) increased; did not change
C) increased; decreased
D) did not change; increased
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

62
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13) At long-run macroeconomic equilibrium, ________.
A) an inflationary gap exists
B) real GDP equals potential GDP
C) a recessionary gap exists
D) real GDP is less than potential GDP but is as close as it is possible to be
Answer: B
Topic: Long-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

14) If the economy is at long run equilibrium then

A) real GDP equals potential GDP.
B) nominal GDP equals potential GDP.
C) real GDP cannot be equal to potential GDP.
D) real GDP can be greater than, less than, or equal to potential GDP.
Answer: A
Topic: Long-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

15) Full-employment equilibrium occurs when

A) real GDP exceeds potential GDP.
B) real GDP equals potential GDP.
C) potential GDP exceeds real GDP.
D) None of the above answers are correct.
Answer: B
Topic: Long-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

16) In long-run macroeconomic equilibrium

A) real GDP equals potential GDP.
B) the price level is fixed and aggregate demand determines real GDP.
C) real GDP and the price level are determined by short-run aggregate supply and aggregate
demand and long-run aggregate supply is irrelevant.
D) real GDP is less than potential GDP.
Answer: A
Topic: Long-Run Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

63
Copyright 2016 Pearson Education, Ltd.
 Real GDP supplied
Real GDP
Short run Long run
Price level demanded
(dollars) (dollars)
(dollars)
90 700 300 600
100 600 400 600
110 500 500 600
120 400 600 600

17) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land.
With no changes in aggregate demand or long-run aggregate supply, in long-run macroeconomic
equilibrium, the price level will be ________ and real GDP will be ________.
A) 120; $400
B) 110; $500
C) 90; $400
D) 100; $600
Answer: D
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

Short-run Long-run
Aggregate
aggregate aggregate
Price demand
supply supply
level (trillions of
(trillions of (trillions of
2009 dollars)
2009 dollars) 2009 dollars)
130 8 12 10
120 9 11 10
110 10 10 10
100 11 9 10
90 12 8 10

18) The data in the above table indicate that when the price level is 120
A) inventories fall and the price level rises.
B) the economy is in a long-run macroeconomic equilibrium.
C) inventories rise and the price level falls.
D) the unemployment rate is at its equilibrium level.
Answer: C
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

64
Copyright 2016 Pearson Education, Ltd.
19) The data in the above table indicate that when the price level is 100
A) inventories fall and the price level rises.
B) the economy is in a long-run macroeconomic equilibrium.
C) inventories rise and the price level falls.
D) the unemployment rate is at its equilibrium level.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

20) The data in the above table indicate that when the price level is 100
A) firms have unexpectedly low inventories, so prices will rise.
B) inventories are at levels planned by firms.
C) firms will plan to decrease the level of output.
D) firms have unexpectedly high inventories, so prices fall.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

21) The data in the above table indicate that when the price level is 120
A) firms have unexpectedly low inventories, so prices will rise.
B) inventories are at levels planned by firms.
C) firms will plan to increase the level of output.
D) firms have unexpectedly high inventories, so prices fall.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

65
Copyright 2016 Pearson Education, Ltd.
22) In the above figure, curve A is the ________ curve, curve B is the ________ curve, and curve
C is the ________ curve.
A) long-run aggregate supply; short-run aggregate supply; aggregate demand
B) aggregate demand; short-run aggregate supply; long-run aggregate supply
C) short-run aggregate supply; long-run aggregate supply; aggregate demand
D) long-run aggregate supply; aggregate demand; short-run aggregate supply
Answer: A
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

23) In the above figure, the short-run macroeconomic equilibrium is at the price level ________
and the real GDP level ________.
A) 110; $16.5 trillion
B) 120; $16 trillion
C) 100; $16 trillion
D) 110; $16 trillion
Answer: A
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

66
Copyright 2016 Pearson Education, Ltd.
24) In the figure above, in the short-run macroeconomic equilibrium
A) there is no structural unemployment.
B) real GDP is greater than potential GDP.
C) real GDP equals potential GDP.
D) real GDP is less than potential GDP.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

67
Copyright 2016 Pearson Education, Ltd.
25) The above figure depicts an economy with a short-run equilibrium
A) at full employment.
B) below full employment.
C) at higher than full employment.
D) at zero unemployment
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

68
Copyright 2016 Pearson Education, Ltd.
26) In the above figure, at the price level of 140 and real GDP of
A) $15 trillion, firms will not be able to sell all their output.
B) $5 trillion, firms will not be able to sell all their output.
C) $5 trillion, consumers will not be able to buy all the goods and services they demand.
D) $15 trillion, consumers will not be able to buy all the goods and services they demand.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

27) Based on the figure above, short-run equilibrium occurs at the price level of
A) 120 and real GDP of $5 trillion.
B) 130 and real GDP of $10 trillion.
C) 140 and real GDP of $15 trillion.
D) 130 and real GDP of $15 trillion.
Answer: B
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

28) The data in the above figure indicate that the economy will be in a long-run macroeconomic
equilibrium at a price level of
A) 140.
B) 130.
C) 100.
D) 120.
Answer: D
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking
69
Copyright 2016 Pearson Education, Ltd.
29) Which of the following can be said about economic growth?
I. Economic growth is the result of increases in long-run aggregate supply.
II. Economic growth is the result of increases in aggregate demand.
A) I only
B) II only
C) I and II
D) neither I or II
Answer: A
Topic: Economic Growth Rate
Skill: Recognition
AACSB: Reflective thinking

30) Economic growth is best defined as

A) decreases in potential GDP.
B) increases in potential GDP.
C) rightward shifts of the AD curve.
D) rightward shifts of the SAS curve.
Answer: B
Topic: Economic Growth Rate
Skill: Recognition
AACSB: Reflective thinking

31) Which of the following helps determine the growth rate of potential GDP?
I. capital accumulation
II. technology advances
III. growth in the quantity of money
A) I
B) I and II
C) I and III
D) I, II and III
Answer: B
Topic: Economic Growth Rate
Skill: Conceptual
AACSB: Reflective thinking

32) Economic growth

A) occurs when the long-run aggregate supply curve shifts upward.
B) is an increase in potential GDP as the long-run aggregate supply curve shifts rightward.
C) requires a compensating decrease in aggregate demand to offset the increase in aggregate
supply.
D) All of the above answers are correct.
Answer: B
Topic: Economic Growth Rate
Skill: Conceptual
AACSB: Reflective thinking

70
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33) Over time in a growing economy, the long-run aggregate supply curve will
A) become horizontal at the long-run potential price level.
B) shift rightward.
C) shift leftward.
D) become increasingly steep.
Answer: B
Topic: Economic Growth Rate
Skill: Conceptual
AACSB: Reflective thinking

34) The country of Epsilon has continuous strong economic growth and a steady price level. This
situation is most likely the result of aggregate demand growing ________ aggregate supply.
A) at the same pace as long-run
B) slower than long-run
C) slower than short-run
D) faster than long-run
Answer: A
Topic: Economic Growth Rate
Skill: Conceptual
AACSB: Reflective thinking

35) If aggregate demand grows only slightly faster than potential GDP, then the economy will
________.
A) experience economic growth with high inflation
B) experience recession
C) experience economic growth with low inflation
D) be at a business-cycle peak
Answer: C
Topic: Economic Growth Rate
Skill: Conceptual
AACSB: Reflective thinking

36) In the United States, of the following decades economic growth was most rapid during the
________.
A) 1960s
B) 1990s
C) 1970s
D) 2000s
Answer: A
Topic: Economic Growth Rate
Skill: Recognition
AACSB: Reflective thinking

71
Copyright 2016 Pearson Education, Ltd.
37) In the United States, of the following decades inflation was highest during the ________.,
A) 1970s
B) 1990s
C) 1960s
D) 2000s
Answer: A
Topic: Inflation
Skill: Recognition
AACSB: Reflective thinking

38) Inflation occurs over time as a result of

A) long-run aggregate supply increasing faster than aggregate demand.
B) long-run aggregate supply increasing faster than short-run aggregate supply.
C) decreases in aggregate demand.
D) aggregate demand increasing faster than long-run aggregate supply.
Answer: D
Topic: Inflation
Skill: Conceptual
AACSB: Reflective thinking

39) If the aggregate demand curve shifts ________ faster than the long-run aggregate supply
curve, then ________ occurs.
A) leftward; economic growth
B) leftward; inflation
C) rightward; economic growth
D) rightward; inflation
Answer: D
Topic: Inflation
Skill: Conceptual
AACSB: Reflective thinking

40) When an increase in aggregate demand exceeds the increase in aggregate supply
A) real GDP decreases while nominal GDP increases.
B) the price level falls while real GDP increases.
C) nominal GDP decreases and real GDP decreases.
D) the economy will experience inflation as the price level rises.
Answer: D
Topic: Inflation
Skill: Conceptual
AACSB: Reflective thinking

72
Copyright 2016 Pearson Education, Ltd.
41) Business cycles are the result of
A) regular shifts of the AD curve only.
B) irregular shifts of the SAS curve only.
C) regular shifts of both the AD and SAS curves.
D) irregular shifts of both the AD and SAS curves.
Answer: D
Topic: Business Cycle
Skill: Recognition
AACSB: Reflective thinking

42) One result of a decrease in aggregate demand and no change in aggregate supply is
A) a recession.
B) an increase in employment levels.
C) an economic expansion.
D) a rise in the price level.
Answer: A
Topic: Business Cycle
Skill: Conceptual
AACSB: Reflective thinking

43) Starting at full employment, a business cycle can be described by the following sequence:
________ equilibrium, ________ equilibrium, ________ equilibrium.
A) full-employment; below full-employment; above full-employment
B) below full-employment; full-employment; above full-employment
C) above full-employment; below full-employment; full-employment
D) below full-employment; full-employment; below full-employment
Answer: B
Topic: Business Cycle
Skill: Conceptual
AACSB: Reflective thinking

44) When real GDP exceeds potential GDP, then the economy has
A) an inflationary gap.
B) a below-full-employment equilibrium.
C) a recessionary gap.
D) None of the above answers are correct.
Answer: A
Topic: Inflationary Gap
Skill: Recognition
AACSB: Reflective thinking

73
Copyright 2016 Pearson Education, Ltd.
45) An inflationary gap is occurs when
A) real GDP is less than potential GDP.
B) real GDP exceeds potential GDP.
C) real GDP equals potential GDP.
D) the economy is at full employment.
Answer: B
Topic: Inflationary Gap
Skill: Recognition
AACSB: Reflective thinking

46) When the economy is at an above full-employment equilibrium, ________.

A) nominal GDP exceeds real GDP
B) an inflationary gap exists
C) a recessionary gap exists
D) real GDP is less than potential GDP
Answer: B
Topic: Inflationary Gap
Skill: Recognition
AACSB: Reflective thinking

47) An above full-employment equilibrium is

A) a theoretical possibility but cannot happen in reality.
B) the equilibrium in which the economy is in most of the time.
C) when real GDP exceeds potential GDP.
D) the period of time when prices are falling.
Answer: C
Topic: Inflationary Gap
Skill: Recognition
AACSB: Reflective thinking

48) A recessionary gap means that the level of real GDP at the short-run macroeconomic
equilibrium
A) is less than full-employment GDP.
B) equals full-employment GDP.
C) is more than full-employment GDP.
D) may be less than, more than, or the same as full-employment GDP depending on the level of
potential GDP.
Answer: A
Topic: Recessionary Gap
Skill: Recognition
AACSB: Reflective thinking

74
Copyright 2016 Pearson Education, Ltd.
49) If real GDP is less than potential GDP, then the economy is ________ equilibrium.
A) at an above-full-employment
B) not in short-run macroeconomic
C) at a below-full-employment
D) in long-run macroeconomic
Answer: C
Topic: Recessionary Gap
Skill: Recognition
AACSB: Reflective thinking

50) A recessionary gap occurs when

A) real GDP is less than potential GDP.
B) nominal GDP is less than potential GDP.
C) high rates of inflation occur.
D) nominal GDP is greater than potential GDP.
Answer: A
Topic: Recessionary Gap
Skill: Recognition
AACSB: Reflective thinking

51) If aggregate demand decreases and neither short-run nor long-run aggregate supply changes,
then
A) the price level increases in the short-run and decreases in the long run.
B) there is an inflationary gap.
C) there is a recessionary gap.
D) in the long run, the long-run aggregate supply will decrease.
Answer: C
Topic: Recessionary Gap
Skill: Conceptual
AACSB: Reflective thinking

52) A below-full-employment equilibrium

A) is not possible in the U.S. economy.
B) occurs when real GDP is less than potential GDP.
C) occurs when the price level is rising very quickly.
D) occurs when real GDP exceeds potential GDP.
Answer: B
Topic: Recessionary Gap
Skill: Conceptual
AACSB: Reflective thinking

75
Copyright 2016 Pearson Education, Ltd.
53) An economy is at full employment. Which of the following events can create a recessionary
gap?
A) an increase in foreign income
B) an increase in taxes
C) a decrease in the quantity of capital
D) a decrease in money wages
Answer: B
Topic: Recessionary Gap
Skill: Conceptual
AACSB: Reflective thinking

54) The Great Depression, in which real GDP fell and unemployment rose, can be characterized
as a ________.
A) inflationary gap
B) long-run equilibrium
C) recessionary gap
D) full-employment equilibrium
Answer: C
Topic: Recessionary Gap
Skill: Conceptual
AACSB: Reflective thinking

55) Suppose the economy is experiencing a recessionary gap. In the long run, if aggregate
demand does not change, the following events happen: the money wage rate ________,
unemployment ________, and the price level ________.
A) falls; rises; falls
B) falls; falls; falls
C) rises; rises; rises
D) rises; falls; rises
Answer: B
Topic: Recessionary Gap
Skill: Conceptual
AACSB: Reflective thinking

56) An above-full-employment equilibrium occurs when

A) aggregate demand decreases while neither the short-run nor long-run aggregate supply
changes.
B) short-run aggregate supply decreases while neither aggregate demand nor long-run aggregate
supply changes.
C) the equilibrium level of real GDP is greater than potential GDP.
D) the equilibrium level of real GDP is less than potential GDP.
Answer: C
Topic: Above Full-Employment Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

76
Copyright 2016 Pearson Education, Ltd.
 Real GDP supplied
Real GDP
Short run Long run
Price level demanded
(dollars) (dollars)
(dollars)
90 700 300 600
100 600 400 600
110 500 500 600
120 400 600 600

57) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land.
The short-run macroeconomic equilibrium is a price level of ________ and a real GDP of
________.
A) 90; $400
B) 100; $400
C) 110; $500
D) 120; $400
Answer: C
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

58) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land.
In short-run equilibrium, there is ________.
A) an inflationary gap of $100
B) a recessionary gap of $100
C) a recessionary gap of $200
D) an inflationary gap of $200
Answer: B
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

59) The table above gives the aggregate demand and aggregate supply schedules in Lotus Land.
Lotus Land is in short-run macroeconomic equilibrium. In the long run, if aggregate demand
does not change, then Lotus Land will return to full employment as ________.
A) the money wage rate rises
B) the money wage rate falls
C) businesses cut their imports
D) the government cuts taxes
Answer: B
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

77
Copyright 2016 Pearson Education, Ltd.
60) In the above figure, the inflationary gap when AD2 is the aggregate demand curve equals
A) the difference between 110 and 100.
B) the difference between $16.5 trillion and $16.0 trillion.
C) LAS minus SAS at a price level of 100.
D) AD1.
Answer: B
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

61) The reason that it is possible for the economy in the above figure to be at equilibrium point
E2 rather than at equilibrium point E1 is that
A) in the long run there is always less than full employment.
B) in the short run the economy can produce more than it can in a long-run situation.
C) AD always shifts rightward and never shifts leftward.
D) the economy must be in a recession.
Answer: B
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

78
Copyright 2016 Pearson Education, Ltd.
62) The above figure illustrates
A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) an equilibrium at the economy's physical limits.
Answer: B
Topic: Full-Employment Equilibrium
Skill: Analytical
AACSB: Analytical thinking

63) An inflationary gap means that the level of real GDP at the short-run macroeconomic
equilibrium
A) is less than full-employment GDP.
B) equals full-employment GDP.
C) is more than full-employment GDP.
D) may be less than, more than, or the same as full-employment GDP depending on the level of
potential GDP.
Answer: C
Topic: Inflationary Gap
Skill: Conceptual
AACSB: Reflective thinking

79
Copyright 2016 Pearson Education, Ltd.
64) The above figure illustrates
A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) an equilibrium at the economy's physical limits.
Answer: C
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

80
Copyright 2016 Pearson Education, Ltd.
65) In the above figure, point A represents
A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) an increase in aggregate demand.
Answer: A
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

66) In the above figure, point B represents

A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) a decrease in aggregate demand.
Answer: B
Topic: Full-Employment Equilibrium
Skill: Analytical
AACSB: Analytical thinking

67) In the above figure, point C represents

A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) a decrease in aggregate demand.
Answer: C
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

81
Copyright 2016 Pearson Education, Ltd.
68) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand
curve is AD. A recessionary gap exists
A) if the long-run aggregate supply curve is LAS1.
B) if the long-run aggregate supply curve is LAS2.
C) if the long-run aggregate supply curve is LAS3.
D) All of the above answers are correct.
Answer: C
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

69) In the above figure, the short-run aggregate supply curve is SAS and the aggregate demand
curve is AD. An inflationary gap exists
A) if the long-run aggregate supply curve is LAS1.
B) if the long-run aggregate supply curve is LAS2.
C) if the long-run aggregate supply curve is LAS3.
D) All of the above answers are correct.
Answer: A
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

82
Copyright 2016 Pearson Education, Ltd.
70) In the above figure, if the economy is at point A, which of the following is TRUE?
A) Point A is the long-run equilibrium point.
B) The economy is in a recession.
C) Money wages can be expected to fall.
D) The economy might be at point A as a result of a recent cut in the tax rate.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

71) In the above figure, if the economy is at point A, which of the following is TRUE?
A) There is a recessionary gap.
B) There is an inflationary gap.
C) Point A is the long-run equilibrium point.
D) None of the above answers are correct.
Answer: B
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

83
Copyright 2016 Pearson Education, Ltd.
72) The above figure depicts an economy
A) with an inflationary gap.
B) with a recessionary gap.
C) producing at full employment.
D) None of the above answers is correct.
Answer: A
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

73) In the above figure, the short-run equilibrium will eventually adjust to a long-run equilibrium
with a
A) lower price level and smaller real GDP
B) higher price level and larger real GDP.
C) higher price level and smaller real GDP.
D) lower price level and larger real GDP.
Answer: C
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

84
Copyright 2016 Pearson Education, Ltd.
74) The above figure illustrates
A) a recessionary gap.
B) a full-employment equilibrium.
C) an inflationary gap.
D) an equilibrium at the economy's physical limits.
Answer: A
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

75) In the above figure, if aggregate demand does not change, the short-run equilibrium will
A) eventually adjust to a long-run equilibrium with a higher price level.
B) not adjust on its own.
C) eventually adjust to a long-run equilibrium with a lower price level.
D) None of the above answers are correct.
Answer: C
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

76) In the above figure, if aggregate demand does not change, the long-run equilibrium will be at
the price level of ________ and real GDP of ________.
A) 100; $15.5 trillion
B) 120; $16 trillion
C) 100; $16 trillion
D) 110; $15.5 trillion
Answer: C
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking
85
Copyright 2016 Pearson Education, Ltd.
77) In the above figure, the short-run equilibrium is at the price level of ________ and real GDP
of ________.
A) 100; $15.5 trillion
B) 120; $16 trillion
C) 110; $15.5 trillion
D) 100; $16 trillion
Answer: C
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

78) Suppose the economy was initially in a long-run equilibrium. Then the world economy
expands so that foreign incomes rise. U.S. aggregate demand ________ and eventually the
money wage rate ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
Answer: A
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

79) If the economy is in long run equilibrium and aggregate demand increases, then in the short
run
A) nothing happens because the economy is in long run equilibrium.
B) the price level rises and real GDP does not change.
C) real GDP increases and the price level does not change.
D) the price level rises and real GDP increases.
Answer: D
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

80) The Federal Reserve lowers interest rates. As a result, in the short run, real GDP ________
and the price level ________.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
Answer: A
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

86
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81) The government increases taxes. As a result, in the short run, real GDP ________ and the
price level ________.
A) increases; rises
B) decreases; falls
C) decreases; rises
D) increases; falls
Answer: B
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

82) In the short run, an increase in government expenditure on goods and services ________ real
GDP and ________ the price level.
A) increases; rises
B) increases; falls
C) decreases; rises
D) decreases; falls
Answer: A
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

83) In the short run, a decrease in government expenditure ________ real GDP and ________
the price level.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: D
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

84) In the short run, an increase in aggregate demand

A) lowers the price level and decreases real GDP.
B) lowers the price level and increases real GDP.
C) raises the price level and increases real GDP.
D) raises the price level and decreases real GDP.
Answer: C
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

87
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85) A lower price level combined with a decrease in real GDP occurs when the
A) short-run aggregate supply curve shifts rightward.
B) short-run aggregate supply curve shifts leftward.
C) aggregate demand curve shifts rightward.
D) aggregate demand curve shifts leftward.
Answer: D
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

86) In the above figure, suppose the economy had been at point A and now is at B. What could
have led to the movement to B?
A) a tax hike
B) an increase in government expenditures on goods and services
C) Winter storms cause factories in the north to be shut down for several weeks.
D) an increase in the money wage rates
Answer: B
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

88
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87) Suppose the economy is at point B. If firms expect profits will be higher in the future, to
what point might the economy's move in the short run?
A) It stays at point B.
B) It shifts to a point such as A.
C) It shifts to a point such as C.
D) None of the above answers are correct because it is the SAS curve that shifts, not the AD
curve.
Answer: C
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

88) Suppose the economy is at point B. If a recession in another country decreases exports, to
what point might economy move in the short run?
A) It stays at point B.
B) It shifts to a point such as A.
C) It shifts to a point such as C.
D) None of the above answers are correct because it is the SAS curve that shifts, not the AD
curve.
Answer: B
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

89
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89) The figure illustrates aggregate demand and aggregate supply in Sparta. Which of the
following events will decrease Sparta's real GDP in the short run?
A) a decrease in taxes
B) a fall in resource prices
C) a decrease in government expenditure
D) an increase in investment
Answer: C
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Analytical thinking

90) The figure above illustrates aggregate demand and aggregate supply in Sparta. Sparta's price
level will rise above 100 if ________.
A) government expenditure decreases
B) the quantity of money increases
C) the quantity of capital increases
D) taxes increase
Answer: B
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Analytical thinking

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91) In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on
how to reduce the federal deficit, automatic tax increases and drastic cuts in government
spending would take effect. What would happen if the fiscal cliff occurred?
A) The aggregate demand curve shifts leftward, the price level falls and real GDP decreases.
B) The aggregate demand curve shifts rightward, the price level rises and real GDP increases.
C) The short run aggregate supply curve shift leftward, the price level rises and real GDP
decreases.
D) The short run aggregate supply curve shifts rightward, the price level falls and real GDP
increases.
Answer: A
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

92) In November, 2012, U.S. lawmakers were faced with a "fiscal cliff:" if they did not agree on
how to reduce the federal deficit, automatic tax increases and drastic cuts in government
spending would take effect. What would be the result if the fiscal cliff occurred?
A) a recessionary gap
B) an inflationary gap
C) stagflation
D) nothing
Answer: A
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

93) In a short-run macroeconomic equilibrium, potential GDP exceeds real GDP. If aggregate
demand does not change, then the
A) short-run aggregate supply curve will shift rightward as the money wage rate falls.
B) short-run aggregate supply curve will shift leftward as the money wage rate rises.
C) long-run aggregate supply curve will shift leftward as the money wage rate rises.
D) long-run aggregate supply curve will shift leftward as the money wage rate falls.
Answer: A
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

94) In a short-run macroeconomic equilibrium, real GDP exceeds potential GDP. If aggregate
demand does not change, then the
A) short-run aggregate supply curve will shift rightward as the money wage rate falls.
B) short-run aggregate supply curve will shift leftward as the money wage rate rises.
C) long-run aggregate supply curve will shift leftward as the money wage rate rises.
D) long-run aggregate supply curve will shift leftward as the money wage rate falls.
Answer: B
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking
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95) The country of Stanley is at an above-full-employment equilibrium. Which of the following
events will return Stanley to full employment?
A) an increase in government expenditures
B) a decrease in the interest rate
C) an increase in the money wage rate
D) an increase in the quantity of money
Answer: C
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

96) An economy currently has an inflationary gap. An increase in the money wage rate will
________ the inflationary gap and ________ the price level.
A) decrease; decrease
B) increase; increase
C) increase; decrease
D) decrease; increase
Answer: D
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

97) Suppose the current situation is such that the price level is 120, real GDP is $17 trillion, and
GDP along the long-run aggregate supply curve is $16.6 trillion. What will take place to restore
the long-run equilibrium?
A) The price level will fall until long-run aggregate supply increases to $17 trillion.
B) The price level will fall and money wage rates will rise until real GDP along the long-run
aggregate supply curve is $17 trillion.
C) Money wage rates will rise until real GDP reaches $16.6 trillion.
D) Aggregate demand will increase until both short-run and long-run aggregate supply equal $17
trillion.
Answer: C
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

92
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98) The long-run aggregate supply curve is vertical at $16 trillion but the short-run aggregate
supply curve intersects the aggregate demand curve at $17 trillion. We know that
A) the economy is producing below full employment in the short run, and will adjust by hiring
more workers, thus decreasing unemployment.
B) the price level is too high. The long-run equilibrium will occur with a lower price level.
C) adjustments will occur so that the long-run aggregate supply equals $17 trillion.
D) adjustments will occur so that the short-run aggregate supply eventually intersects the
aggregate demand curve at $16 trillion.
Answer: D
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

99) In long-run macroeconomic equilibrium, the

A) real wage rate has adjusted so that the economy is on the short-run aggregate supply curve but
not on the long-run aggregate supply curve.
B) long-run aggregate supply curve has shifted in response to a money wage rate increase so that
potential GDP equals real GDP.
C) aggregate demand curve adjusts to the point where the long-run aggregate supply curve and
the short-run aggregate supply curve intersect.
D) None of the above answers is correct.
Answer: D
Topic: Movement to the Long-Run Equilibrium
Skill: Conceptual
AACSB: Analytical thinking

100) If the economy is in long run equilibrium and then aggregate demand increases, in the long
run the increase in aggregate demand means that the
A) price level will be higher but real GDP will be unaffected.
B) real GDP will be larger but the price level will be unaffected.
C) the price level will be higher and real GDP will be larger.
D) neither the price level nor real GDP will be unaffected.
Answer: A
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

101) In the long-run equilibrium, an increase in the quantity of capital leads to

A) an increase in the equilibrium price level and an increase in equilibrium real GDP.
B) a decrease in the equilibrium price level and an increase in equilibrium real GDP.
C) a decrease in the equilibrium price level, but no change in equilibrium real GDP.
D) no change in the equilibrium price level, but an increase in equilibrium real GDP.
Answer: B
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

93
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102) In the above figure, at the point where AD equals SAS
A) real GDP exceeds potential GDP.
B) potential GDP exceeds real GDP.
C) the economy is in a recession.
D) the unemployment rate is zero.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

103) In the above figure, as the economy adjusts toward equilibrium, the
A) AD curve will shift rightward.
B) SAS curve will shift rightward.
C) AD curve will shift leftward.
D) SAS curve will shift leftward.
Answer: D
Topic: Movement to the Long-Run Equilibrium
Skill: Analytical
AACSB: Analytical thinking

104) In the above figure, when the economy is in a long-run equilibrium, the price level will be
A) 90.
B) 100.
C) 110.
D) 120.
Answer: D
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

94
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105) In the above figure, when the economy is in a long-run equilibrium, real GDP will be
A) $15.5 trillion.
B) $16.0 trillion.
C) $17.5 trillion.
D) $17.0 trillion.
Answer: B
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

Short-run Long-run
Aggregate
aggregate aggregate
Price demand
supply supply
level (trillions of
(trillions of (trillions of
2009 dollars)
2009 dollars) 2009 dollars)
140 9.0 11.5 10.0
130 9.5 11.0 10.0
120 10.0 10.5 10.0
110 10.5 10.0 10.0
100 11.0 9.5 10.0

106) The data in the above table indicate that the economy will be in a short-run macroeconomic
equilibrium at a price level
A) between 130 and 121.
B) between 119 and 111.
C) of 120.
D) of 110.
Answer: B
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

107) From the data in the above table, when the economy is in short-run equilibrium, if
aggregate demand does not change, then as time passes the
A) short-run aggregate supply curve shifts rightward.
B) short-run aggregate supply curve shifts leftward.
C) long-run aggregate supply curve shifts rightward.
D) long-run aggregate supply curve shifts leftward.
Answer: B
Topic: Movement to the Long-Run Equilibrium
Skill: Analytical
AACSB: Analytical thinking

95
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 Aggregate demand Short-run aggregate Long-run aggregate
Price level (trillions of 2009 supply (trillions of supply (trillions of
dollars) 2009 dollars) 2009 dollars)
100 11 7 10
110 10 8 10
120 9 9 10
130 8 10 10
140 7 11 10

108) Based on the data in the table above, the economy will be in short-run equilibrium at a price
level of
A) 90.
B) 110.
C) 100.
D) 120.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

109) Based on the data in the table above, at the short-run equilibrium
A) the unemployment rate is less than the natural unemployment rate.
B) the unemployment rate is greater than the natural unemployment rate.
C) the money wage rate will rise in the long run.
D) the economy is at full employment.
Answer: B
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

110) Based on the data in the table above, in the adjustment towards the long-run equilibrium
A) money wage rates will rise.
B) the aggregate demand curve will shift leftward.
C) the short-run aggregate supply curve will shift leftward.
D) the short-run aggregate supply curve will shift rightward.
Answer: D
Topic: Movement to the Long-Run Equilibrium
Skill: Analytical
AACSB: Analytical thinking

96
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 Short-run Long-run
Aggregate
aggregate aggregate
Price demand
supply supply
level (trillions of
(trillions of (trillions of
2009 dollars)
2009 dollars) 2009 dollars)
140 4 8 7
130 5 7 7
120 6 6 7
110 7 5 7
100 8 4 7

111) The data in the above table show that the economy will be in a short-run macroeconomic
equilibrium at a price level of
A) 90.
B) 110.
C) 100.
D) 120.
Answer: D
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

112) The data in the above table show that when the price level is 120
A) the unemployment rate is below its natural rate.
B) the unemployment rate is above its natural rate.
C) money wages rates will rise in the future.
D) the long-run aggregate supply curve will shift leftward in the future.
Answer: B
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

113) The data in the above table show that when the price level is 120, the economy
A) is in a long-run macroeconomic equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) will have falling money wage rates sometime in the future.
Answer: C
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

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114) The data in the above table show that when the price level is 120, if aggregate demand does
not change then the
A) money wage rate will rise in the future.
B) money wage rate will fall in the future.
C) short-run aggregate supply curve will shift leftward.
D) long-run aggregate supply curve will shift leftward.
Answer: B
Topic: Movement to the Long-Run Equilibrium
Skill: Analytical
AACSB: Analytical thinking

115) The data in the above table show that when the price level is 120, if aggregate demand does
not change then the
A) short-run aggregate supply curve will shift rightward.
B) short-run aggregate supply curve will shift leftward.
C) long-run aggregate supply curve will shift rightward.
D) long-run aggregate supply curve will shift leftward.
Answer: A
Topic: Movement to the Long-Run Equilibrium
Skill: Analytical
AACSB: Analytical thinking

98
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116) In the above figure, point B depicts
A) an inflationary gap with real GDP in excess of potential GDP.
B) an inflationary gap with real GDP less than potential GDP.
C) a recessionary gap with real GDP in excess of potential GDP.
D) a recessionary gap with real GDP less than potential GDP.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

117) In the above figure, real GDP at full employment is

A) $16 trillion.
B) $16.5 trillion.
C) more than $16 and less than $16.5 trillion.
D) None of the above answers is correct.
Answer: A
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

118) In the above figure, the aggregate demand curve is AD2, so the short-run equilibrium level
of real GDP is
A) $16 trillion.
B) $16.5 trillion.
C) more than $16 and less than $16.5 trillion.
D) None of the above answers is correct.
Answer: B
Topic: Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking
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119) In the above figure, the aggregate demand curve is AD2, so the long-run equilibrium level
of real GDP is
A) $16 trillion.
B) $16.5 trillion.
C) more than $16 and less than $16.5 trillion.
D) None of the above answers is correct.
Answer: A
Topic: Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

120) In the above figure, the shift from AD1 to AD2 might have been the result of
A) an increase in government expenditure.
B) a decrease in taxes.
C) an increase in the quantity of money.
D) All of the above answers are correct.
Answer: D
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

121) Higher resource costs shift the

A) long-run aggregate supply curve leftward, decreasing real GDP and increasing potential GDP.
B) short-run aggregate supply curve leftward, raising the price level and decreasing potential
GDP.
C) short-run aggregate supply curve leftward, raising the price level and decreasing real GDP so
it is less than potential GDP.
D) short-run aggregate supply curve rightward, raising the price level and decreasing real GDP
so it is less than potential GDP.
Answer: C
Topic: Fluctuations in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

122) Suppose that the economy begins at a long-run equilibrium. Which of the following raises
the price level and decrease real GDP in the short run?
A) a decrease in the quantity of money
B) an increase in the price of oil that decreases aggregate supply
C) an increase in the stock of capital that increases aggregate supply
D) an increase in government expenditures
Answer: B
Topic: Fluctuations in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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123) A decrease in short-run aggregate supply ________ the equilibrium price level and
________ the equilibrium quantity of real GDP.
A) increases; increases
B) increases; decreases
C) decreases; increases
D) decreases; decreases
Answer: B
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

124) In the short run, a rightward shift of the short-run aggregate supply curve ________ real
GDP and ________ the price level.
A) decreases; lowers
B) increases; raises
C) decreases; raises
D) increases; lowers
Answer: D
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

125) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward
________ real GDP and ________ the price level.
A) increases; raises
B) decreases; raises
C) increases; lowers
D) decreases; lowers
Answer: B
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

126) Assume that the economy is at a long run equilibrium and oil prices rise. As a result, the
________ shifts ________.
A) AD; rightward
B) AD; leftward
C) SAS; rightward
D) SAS; leftward
Answer: D
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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127) In the short-run, a rise in the money wage rate leads to
A) an increase in the price level and an increase in real GDP.
B) an increase in the price level and a decrease in real GDP.
C) an increase in the price level, but no change in real GDP.
D) no change in the price level, but an increase in real GDP.
Answer: B
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

128) Stagflation is the combination of

A) inflation and increasing real GDP.
B) deflation and recession.
C) inflation and recession.
D) deflation with increasing real GDP.
Answer: C
Topic: Stagflation
Skill: Recognition
AACSB: Reflective thinking

129) In the above figure, the economy is at point A when changes occur. If the new equilibrium
has a price level of 120 and real GDP of $15.0 trillion, then it must be the case that
A) aggregate demand has increased.
B) aggregate demand has decreased.
C) aggregate supply has decreased.
D) aggregate supply has increased.
Answer: C
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking
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130) In the above figure, the economy is at point A when changes occur. If the new equilibrium
has a price level of 100 and real GDP of $17.0 trillion, then it must be the case that
A) aggregate demand has decreased.
B) aggregate supply has decreased.
C) aggregate demand has increased.
D) aggregate supply has increased.
Answer: D
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

131) In the above figure, the economy is at point A when changes occur. If the new equilibrium
has a price level of 100 and real GDP of $15.0 trillion, then it must be the case that
A) aggregate demand has increased.
B) aggregate demand has decreased.
C) aggregate supply has decreased.
D) aggregate supply has increased.
Answer: B
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

132) If real GDP is less than potential GDP, the economy is

A) not in macroeconomic equilibrium.
B) at full employment.
C) in an above-full-employment equilibrium.
D) in a below-full-employment equilibrium.
Answer: D
Topic: Study Guide Question, Below Full-Employment Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

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 Short-run Long-run
Aggregate
aggregate aggregate
Price demand
supply supply
level (trillions of
(trillions of (trillions of
2009 dollars)
2009 dollars) 2009 dollars)
100 13 9 10
105 12 10 10
110 11 11 10
115 10 13 10

133) Using the data in the above table, in the short-run macroeconomic equilibrium, the price
level is ________ and the level of real GDP is ________.
A) 105; $10 trillion
B) 110; $10 trillion
C) 110; $11 trillion
D) 115; $10 trillion
Answer: C
Topic: Study Guide Question, Short-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

134) Using the data in the above table, in the short-run macroeconomic equilibrium, there is
A) an inflationary gap of $1 trillion.
B) an inflationary gap of $2 trillion.
C) a recessionary gap of $1 trillion.
D) a recessionary gap of $2 trillion.
Answer: A
Topic: Study Guide Question, Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

135) Using the data in the above table, in the long-run macroeconomic equilibrium, the price
level is ________ and the level of real GDP is ________.
A) 115; $10 trillion
B) 110; $10 trillion
C) 105; $11 trillion
D) 115; $11 trillion
Answer: A
Topic: Study Guide Question, Long-Run Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

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4 Macroeconomic Schools of Thought

1) ________ economists believe that the economy is self-regulating and always at full
employment.
A) Keynesian
B) Monetarist
C) Classical
D) All
Answer: C
Topic: Classical View
Skill: Recognition
AACSB: Reflective thinking

2) A classical economist believes that

A) if the economy was left alone, it would rarely operate at full employment.
B) the economy is self-regulating and always at full employment.
C) the economy is self-regulating and will normally, though not always, operate at full
employment if monetary policy is not erratic.
D) the economy is self-regulating and will normally, though not always, operate at full
employment if fiscal policy is not erratic.
Answer: B
Topic: Classical View
Skill: Recognition
AACSB: Reflective thinking

3) Which of the following statements is INCORRECT?

A) A monetarist believes that recessions are the result of erratic monetary policy.
B) A new classical macroeconomist believes the business cycle is the efficient response to the
uneven pace of technological change.
C) A Keynesian believes the business cycle is mainly influenced by changes in people's
expectations.
D) A classical macroeconomist believes that the money wage rate adjusts slowly.
Answer: D
Topic: Classical View
Skill: Recognition
AACSB: Reflective thinking

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4) Which of the following statements CORRECTLY describes the policy stance of a
macroeconomist?
A) A monetarist believes that the quantity of money should be constantly changed in order to
offset changes in aggregate demand.
B) A new classical macroeconomist believes that fiscal and monetary policy are required to
maintain full employment.
C) A Keynesian believes that if taxes are always kept low and the quantity of money is kept on a
steady growth path, no policy actions will be needed to maintain full employment.
D) A classical macroeconomist believes that maintaining consistently low taxes will allow the
economy to expand at an appropriate and rapid pace.
Answer: D
Topic: Schools of Thought
Skill: Recognition
AACSB: Reflective thinking

5) A Keynesian economist believes that

A) if the economy was left alone, it would rarely operate at full employment.
B) the economy is self-regulating and always at full employment.
C) the economy is self-regulating and will normally, though not always, operate at full
employment if monetary policy is not erratic.
D) the economy is self-regulating and will normally, though not always, operate at full
employment if fiscal policy is not erratic.
Answer: A
Topic: Keynesian View
Skill: Recognition
AACSB: Reflective thinking

6) ________ economists believe that active help from fiscal and monetary policy is needed to
insure that the economy is operating at full employment.
A) Keynesian
B) Monetarist
C) Classical
D) All
Answer: A
Topic: Keynesian View
Skill: Recognition
AACSB: Reflective thinking

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7) In 2009, just after taking office, President Obama approved an $800 billion stimulus package
of tax cuts and increased government spending to combat the recession brought on by the
financial crisis of 2007. Which group of economists most approved of President Obama's
actions?
A) Keynesian economists
B) classical economists
C) monetarists
D) free market economists
Answer: A
Topic: Keynesian View
Skill: Conceptual
AACSB: Reflective thinking

8) What could Keynes have meant by his now famous statement, "in the long run we are all
dead?"
A) Government intervention is destabilizing, will lead to slower growth in the long run, and will
prevent an economy from self-regulating.
B) Government intervention in the economy is necessary in times of recession because an
economy rarely restores itself to full employment.
C) Government intervention in the economy is useless because it takes too long to take effect.
D) Government intervention in the economy is only effective if it is not erratic.
Answer: B
Topic: Keynesian View
Skill: Conceptual
AACSB: Reflective thinking

9) ________ economists believe that the economy is self-regulating and will be at full
employment as long as monetary policy is not erratic.
A) Keynesian
B) Monetarist
C) Classical
D) All
Answer: B
Topic: Monetarist View
Skill: Recognition
AACSB: Reflective thinking

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10) A monetarist economist believes that
A) if the economy was left alone, it would rarely operate at full employment.
B) the economy is self-regulating and always at full employment.
C) the economy is self-regulating and will normally, though not always, operate at full
employment if monetary policy is not erratic.
D) the economy is self-regulating and will normally, though not always, operate at full
employment if fiscal policy is not erratic.
Answer: C
Topic: Monetarist View
Skill: Recognition
AACSB: Reflective thinking

11) Which school of thought believes that recessions are the result of inappropriate monetary
policy?
A) only classical
B) only Keynesian
C) Monetarist
D) both Keynesian and classical
Answer: C
Topic: Study Guide Question, Monetarist View
Skill: Recognition
AACSB: Reflective thinking

12) Which school of thought believes that real GDP always equals potential GDP?
A) only classical
B) only Keynesian
C) Monetarist
D) both Keynesian and classical
Answer: A
Topic: Study Guide Question, Classical View
Skill: Recognition
AACSB: Reflective thinking

5 News Based Questions

1) Consider a BMW automobile plant. If the price of BMWs increase by 10 percent and the
money wage rate and other costs ________, there will be ________.
A) increase by 10 percent; an increase in BMWs profits
B) do not change; an increase in BMW's production and profit
C) increase by 10 percent; an increase in BMWs production
D) do not change; no change in production
Answer: B
Topic: Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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2) In Japan in 2000 the price level fell by 5 percent and the money wage rate did not change. As
a result, there was a
A) movement down along Japan's short-run aggregate demand curve.
B) movement down along Japan's short-run aggregate supply curve.
C) rightward shift in Japan's short-run aggregate supply curve.
D) movement down along Japan's long-run aggregate supply curve.
Answer: B
Topic: Short-Run Aggregate Supply Curve
Skill: Analytical
AACSB: Analytical thinking

3) In recent years, Japan's capital stock has increased by about 6 percent from one year to the
next. As a result, we would expect
A) a leftward shift in Japan's aggregate demand curve.
B) a movement up along Japan's short-run aggregate supply curve.
C) only Japan's long-run aggregate supply curve to shift rightward.
D) rightward shifts in both Japan's short-run aggregate supply and long-run aggregate supply
curves.
Answer: D
Topic: Short-Run and Long-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

4) According to www.oecd.org, the United States spends a larger portion of expenditures on

higher education compared to any other country. Increasing the amount of higher education
produces
I. rightward shifts in the U.S. long-run aggregate supply curve.
II. movements up along the U.S. aggregate demand curve.
III. increases in U.S. human capital.
A) I and III only
B) I, II and III
C) II and III only
D) III only
Answer: A
Topic: Aggregate Supply
Skill: Analytical
AACSB: Reflective thinking

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5) In 2008 the money wage rate in Ireland increased by 4 percent while the price level increased
by 8 percent. As a result, Ireland's
A) short-run aggregate supply curve shifted leftward.
B) short-run aggregate supply curve shifted rightward.
C) long-run aggregate supply curve shifted rightward.
D) short-run and long-run aggregate supply curves shifted rightward.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Analytical
AACSB: Analytical thinking

6) If the price level in Great Britain increases from 102 to 105 (holding all else constant), real
wealth ________ and there is a movement ________ along Great Britain's aggregate demand
curve.
A) decreases; upward
B) increases; upward
C) decreases; downward
D) increases; downward
Answer: A
Topic: Aggregate Demand, Wealth Effect
Skill: Conceptual
AACSB: Analytical thinking

7) The price level in India increases from 131 to 137 while its trading partners' price levels
remain constant. As a result, people will buy ________ Indian-made goods and there will be a
movement ________ along India's aggregate demand curve.
A) more; upward
B) more; downward
C) less; downward
D) less; upward
Answer: D
Topic: Aggregate Demand, International Price Substitution Effect
Skill: Analytical
AACSB: Analytical thinking

8) In 2008, the Bank of England increased the country's money supply and lowered its interest
rate. This policy was designed to
A) encourage people to buy more goods and services.
B) shift the aggregate demand curve rightward.
C) cause a movement up along the aggregate demand curve.
D) Both A and B are correct.
Answer: D
Topic: Changes in Aggregate Demand, Monetary Policy
Skill: Analytical
AACSB: Analytical thinking

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9) In 2008, Japan's government approved a $1 trillion fiscal stimulus plan comprised of both tax
cuts and government expenditure increases. As a result
A) Japan's aggregate demand curve shifted rightward.
B) Japan's aggregate supply curve shifted leftward.
C) Japan's aggregate demand curve shifted leftward.
D) Japan's long-run aggregate supply curve shifted leftward.
Answer: A
Topic: Changes in Aggregate Demand, Fiscal Policy
Skill: Analytical
AACSB: Analytical thinking

10) China is one of the world's largest exporters. As the world's economies slipped into a
worldwide recession in 2008, there was a ________ China's aggregate demand curve as China's
exports ________.
A) rightward shift of; decreased
B) movement upward along; increased
C) leftward shift of; decreased
D) movement upward along; decreased
Answer: C
Topic: Changes in Aggregate Demand, Foreign Incomes
Skill: Analytical
AACSB: Analytical thinking

11) In 2008, the dollar appreciated relative to the euro. This appreciation caused ________ and a
________.
A) a movement up along the U.S. aggregate demand curve; decrease in U.S. exports to Europe
B) a decrease in U.S. exports to Europe; leftward shift in the U.S. aggregate demand curve
C) an increase in U.S. exports to Europe; movement up along the U.S. aggregate demand curve
D) a decrease in U.S. exports to Europe; a movement up along the U.S. aggregate demand curve
Answer: B
Topic: Changes in Aggregate Demand, Foreign Exchange Rate
Skill: Analytical
AACSB: Analytical thinking

12) As world economies start to recover from the 2008 financial crisis and firms expect profits to
increase
A) the price level in the U.S. will decrease as firms increase investment.
B) the U.S. short-run aggregate supply curve immediately will shift rightward.
C) investment will increase and there will be a movement up along the aggregate demand curve.
D) both investment and aggregate demand will increase.
Answer: D
Topic: Changes in Aggregate Demand, Investment
Skill: Analytical
AACSB: Analytical thinking

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13) Use the figure above to answer this question. At a price level of 110
A) real GDP is greater than the aggregate quantity demanded and firms will cut production.
B) real GDP is less than the aggregate quantity demanded and firms will increase production.
C) inventories will decrease.
D) real GDP less than the aggregate quantity demanded and firms will increase prices.
Answer: A
Topic: Equilibrium GDP and the Price Level
Skill: Analytical
AACSB: Analytical thinking

14) Use the figure above to answer this question. At a price level of 90
A) people will be forced to cut consumption so that aggregate demand will decrease.
B) the aggregate quantity demanded exceeds real GDP and inventories will decrease.
C) inventories increase and firms will increase production.
D) the aggregate quantity demanded exceeds real GDP, inventories increase and the price level
will rise.
Answer: B
Topic: Equilibrium GDP and the Price Level
Skill: Analytical
AACSB: Analytical thinking

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15) The table below shows data for India's economy. Real GDP is measured in millions of
rupees.

Real GDP
Price level supplied in the short Real GDP demanded
run
a 114 23,501 35,898
b 120 25,355 32,341
c 125 27,670 27,670
d 131 30,366 18,569
e 138 33,164 15,898

If potential GDP in India is ________ million rupees, India is experiencing ________.

A) 26,500; an inflationary gap
B) 28,500; an above-full-employment gap
C) 26,500; a recessionary gap
D) 30,000; a potential GDP gap
Answer: A
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

16) Economic growth in India has averaged about 8.5 percent in recent years and while inflation
averaged almost 9 percent. The AS-AD model shows this process as
A) rightward shifts in the short-run aggregate supply curve.
B) rightward shifts in the both the aggregate demand and long-run aggregate supply curves.
C) movements upward along the aggregate demand curve.
D) rightward shifts in the aggregate demand curve and leftward shifts in the short-run aggregate
supply curve.
Answer: B
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

17) Aggregate demand in India increased in 2008. In addition, real GDP grew strongly and
inflation approached 10 percent. The best explanation for this inflation is that
A) aggregate supply did not change.
B) potential GDP decreased.
C) there was a movement up along the aggregate demand curve in 2008.
D) potential GDP increased, but at a slower rate than aggregate demand.
Answer: D
Topic: Fluctuations in Aggregate Demand
Skill: Analytical
AACSB: Analytical thinking

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18) The table below shows data for India's economy. Real GDP is measured in millions of
rupees. Suppose that full employment occurs when real GDP is 27,000 million rupees.

Real GDP
Price level supplied in the short Real GDP demanded
run
a 114 23,501 35,898
b 120 25,355 32,341
c 125 27,670 27,670
d 131 30,366 18,569
e 138 33,164 15,898

The economy is experiencing ________ gap and firms will ________.

A) an inflationary gap; increase production
B) an inflationary gap; increase money wages paid to workers
C) a recessionary gap; increase production
D) a recessionary gap; decrease money wages paid to workers
Answer: B
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

19) In the first half of 2008, food and energy costs in the United States increased. At the same
time, the financial crisis slowed production. As a result, economists warned that the economy
would
A) suffer an inflationary gap.
B) see a decrease in aggregate demand and an increase in long-run aggregate supply.
C) experience stagflation.
D) see an increase in potential GDP.
Answer: C
Topic: Stagflation
Skill: Conceptual
AACSB: Reflective thinking

20) In the first half of 2008, food and energy costs in the United States increased. At the same
time, the financial crisis slowed production as firms predicted lower profits. A ________
macroeconomist would support the use of ________.
A) classical; taxes to push the economy back to full employment
B) Keynesian; fiscal or monetary policy to stimulate aggregate demand
C) classical; monetary policy to stimulate aggregate demand
D) Keynesian; technology to push the economy back to full employment
Answer: B
Topic: Keynesian Theory
Skill: Conceptual
AACSB: Reflective thinking

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21) In 2008, Japan's economy suffered as world economies slowed. If authorities in Japan
followed the monetarist viewpoint, ________ to bring the economy back to full employment.
A) taxes would be decreased and the money supply should be increased
B) nothing should be done
C) aggregate supply would shift leftward
D) the money supply would be kept growing at a steady pace
Answer: D
Topic: Monetarist Theory
Skill: Conceptual
AACSB: Reflective thinking

22) In 2008, Germany passed a stimulus package of $29 billion as its economy slowed. This
policy action follows the ________ to restore full employment.
A) Keynesian viewpoint that supports increases in federal government expenditure
B) Keynesian viewpoint that supports increases in the money supply
C) monetarist viewpoint that supports increases in expenditure by the federal government
D) new classical viewpoint that discourages the use of expenditure by the federal government
Answer: A
Topic: Keynesian Theory
Skill: Conceptual
AACSB: Reflective thinking

6 Essay Questions

1) In the aggregate demand-aggregate supply framework, how does an increase in the price level
affect potential GDP?
Answer: An increase in the price level has no effect on potential GDP. Potential GDP is
independent of the price level, so increases or decreases in the price level have no effect on
potential GDP.
Topic: Changes in Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

2) How are potential GDP, full employment and the LAS curve related?
Answer: When the economy is at full employment there is no cyclical unemployment and the
economy is at its potential level of real GDP. The LAS curve is vertical at the level of potential
real GDP.
Topic: Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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3) Give examples of factors that decrease short-run aggregate supply. Which way does the SAS
curve shift?
Answer: Aggregate supply decreases if potential GDP decreases. In addition, cost hikes such as
a rise in the money wage rate or the price of oil, decreases short-run aggregate supply. Whenever
short-run aggregate supply decreases, the SAS curve shifts leftward.
Topic: Changes in Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

4) What is the difference between the long-run aggregate supply and the short-run aggregate
supply curves?
Answer: The long-run aggregate supply curve, LAS, is the relationship between the price level
and real GDP when real GDP equals potential GDP. The LAS curve is vertical. Along the LAS
curve, both the prices of goods and services and the prices of resources, such as the money wage
rate, change. The short-run aggregate supply curve, SAS, is the relationship between the price
level and the quantity of real GDP supplied in the short run when the money wage rate and other
resource prices are constant. The SAS curve slopes upward. Along the SAS curve, only the price
level changes; the money wage rate and other resource prices are constant. The SAS curve shifts
leftward when the money wage rate (or other costs) rise.
Topic: Long-Run and Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Written and oral communication

5) How do changes in the money wage rate affect the LAS and SAS curves? Explain your answer.
Answer: If the money wage rate changes, the LAS curve is not affected but the SAS curve shifts.
For instance, if the money wage rate rises, the LAS curve does not change but the SAS curve
shifts leftward. The difference occurs because moving along the LAS curve both the money wage
rate and price level change in the same proportion. So in this case, a change in the money wage
rate is matched by a change in the price level and firms have no incentive to change their
production of goods and services. But moving along the SAS curve, only the price level changes.
So when the money wage rate changes and the price level does not change, firms have an
incentive to change their production. For instance, if the money wage rate rises and the price
level does not change, then firms decrease their production of goods and services and the SAS
curve shifts leftward.
Topic: Long-Run and Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Written and oral communication

6) What are the factors that can shift the short-run aggregate supply curve but not the long-run
aggregate supply curve? Explain your answer.
Answer: The only factor that shifts the short-run aggregate supply curve but not the long-run
aggregate supply curve is a change in the money wage rate or the money prices of other
resources. For instance, an increase in the money wage rate shifts the SAS curve leftward, but
does not shift the LAS curve.
Topic: Long-Run and Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

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7) Explain the reasons why the AD curve slopes downward.
Answer: There are two reasons why the AD curve slopes downward: the wealth effect and
substitution effects.
The wealth effect points out how changes in the price level cause changes in the real value of
wealth. Price increases decrease real wealth and so people consume less in order to increase their
wealth through saving. As a result, an increase in the price level decreases the aggregate quantity
of goods and services demanded.
There are two substitution effects. The first is the intertemporal substitution effect: an increase in
the price level raises the interest rate because the amount of real loans banks can make decreases.
The higher interest rate leads consumers to decrease their consumption expenditure and firms to
decrease their investment spending. The second substitution effect is the international price
substitution effect: an increase in the U.S. price level raises the price of U.S.-made goods relative
to foreign-made goods. So people and firms decrease the quantity of U.S.-made goods they
purchase and increase the quantity of foreign-made goods they purchase. So both substitution
effects also lead to a rise in the price level decreasing the aggregate quantity demanded.
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Written and oral communication

8) What is the effect on the aggregate demand curve from an increase in the price level? In
particular, does the aggregate demand curve shift leftward or rightward?
Answer: When the price level increases, there is a movement along the aggregate demand curve.
The quantity of real GDP demanded decreases in response to an increase in the price level.
However, the aggregate demand curve does not shift. Factors that change aggregate demand and
shift the aggregate demand curve are changes in the interest rate, in the quantity of money, in
government expenditure, in taxes, in the exchange rate, and in real GDP in the rest of the world.
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

9) What are the substitution effects that affect aggregate demand?

Answer: There are two substitution effects that affect aggregate demand and help account for the
negative slope of the AD curve. First, an increase in the price level raises the interest rate, which
reduces the quantity of real GDP demanded. Second, an increase in the U.S. price level raises the
price of U.S. goods relative to foreign goods which also decreases the quantity of U.S. real GDP
demanded.
Topic: Aggregate Demand, Substitution Effect
Skill: Conceptual
AACSB: Reflective thinking

10) How does the aggregate demand curve reflect an increase in aggregate demand?
Answer: A rightward shift of the aggregate demand curve reflects an increase in aggregate
demand.
Topic: Changes in Aggregate Demand
Skill: Recognition
AACSB: Reflective thinking

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11) Give examples of factors that decrease aggregate demand. Which way does the aggregate
demand curve shift?
Answer: Anything that decreases aggregate spending decreases aggregate demand. A rise in the
interest rate, a decrease in the quantity of money, a decrease in government expenditure, a tax
hike, a rise in the exchange rate, and a decrease in real GDP in the rest of the world all decrease
aggregate demand. The aggregate demand curve shifts leftward.
Topic: Changes in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

12) What are fiscal and monetary policies? Do they have an immediate effect on the AD curve or
the SAS curve?
Answer: Fiscal policy is defined as changes in government spending and taxation to affect the
level of economic activity. Monetary policy consists of changing interest rates and changing the
quantity of money in the economy in order to affect the level of economic activity. Both policies
have an impact on the AD curve.
Topic: Changes in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

13) What are the components of fiscal policy? Explain how fiscal policy affects aggregate
demand.
Answer: Fiscal policy affects aggregate demand through government expenditure, transfer
payments and taxes. Because government purchases are a component of total spending, a change
in government expenditure directly changes aggregate demand. A change in transfer payments
changes disposable income which, in turn, changes consumption expenditure and aggregate
demand. Finally, taxes alter disposable income and thus impact consumption expenditure and
aggregate demand.
Topic: Changes in Aggregate Demand, Fiscal Policy
Skill: Conceptual
AACSB: Reflective thinking

14) What happens to the aggregate demand curve in the United States if the exchange rate
increases so that U.S.-made products become more expensive?
Answer: Net exports decrease so U.S. aggregate demand decreases.
Topic: Changes in Aggregate Demand, Foreign Exchange Rate
Skill: Conceptual
AACSB: Reflective thinking

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15) What two variables are determined in an aggregate supply-aggregate demand figure? Is the
slope of the short-run aggregate supply curve positive or negative? Is the slope of the aggregate
demand curve positive or negative?
Answer: The aggregate supply-aggregate demand framework determines the equilibrium price
level and equilibrium real GDP. The aggregate supply curve is positively sloped, indicating that
an increase in the price level increases the aggregate quantity of goods and services supplied.
The aggregate demand curve is negatively sloped, indicating that an increase in the price level
decreases the aggregate quantity of goods and services demanded.
Topic: Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

16) Explain the relationship of the long-run aggregate supply curve, the short-run aggregate
supply curve and the aggregate demand curve in determining a long-run and short-run
macroeconomic equilibrium.
Answer: Short-run macroeconomic equilibrium occurs when the quantity of GDP demanded
equals the quantity supplied, which is where the AD and SAS curves intersect. The short-run
equilibrium does not necessarily take place at full employment. The long-run macroeconomic
equilibrium occurs when real GDP equals potential GDP. This means that the economy is on the
LAS curve, where the AD and SAS curves both intersect the LAS curve.
Topic: Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

17) Assume the equilibrium price level is 140 and the equilibrium real GDP is $15 trillion. What
happens if the current price level equals 125?
Answer: The quantity of real GDP demanded is greater than the quantity of real GDP supplied.
The price level rises to 140 because of the excess aggregate demand and when the price level
reaches 140, macroeconomic equilibrium would be established.
Topic: Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

18) Suppose that during 2009, the actual real GDP of Chile was 3.5 billion pesos at the same
time the potential GDP was 3.4 billion pesos. What sort of equilibrium existed in Chile?
Answer: Chile's actual real GDP exceeded its potential GDP, so Chile was in an above-full-
employment, inflationary gap equilibrium.
Topic: Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

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19) What is the difference between a recessionary gap and an inflationary gap?
Answer: A recessionary gap exists when the economy is in a below-full-employment
equilibrium when potential GDP exceeds real GDP. The recessionary gap is the amount by which
potential GDP exceeds real GDP. An inflationary gap occurs when the economy is in an above-
full-employment equilibrium when real GDP exceeds potential GDP. In this case, the inflationary
gap is the difference between real GDP and potential GDP.
Topic: Inflationary Gap and Recessionary Gap
Skill: Conceptual
AACSB: Reflective thinking

20) What happens if the economy is at its long-run equilibrium and aggregate demand increases?
Answer: The increase in aggregate demand means that the AD curve shifts rightward. Initially
short-run aggregate supply does not change, so the SAS curve remains stationary. As a result, the
price level rises and real GDP increases. The economy is an above-full-employment equilibrium.
Eventually, however, the tight labor market leads to a rise in the money wage rate. When the
money wage rate rises, short-run aggregate supply decreases and the SAS curve shifts leftward.
The price level rises and real GDP decreases. In the long run, the short-run aggregate supply
decreases so that real GDP returns to potential level of GDP and the only effect is that the price
level is permanently higher.
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Written and oral communication

21) If the world economy expands so that foreign demand for U.S.-made goods increases, in the
short run what will happen to aggregate demand, the price level, and real GDP in the U.S.?
Answer: Net exports increase so U.S. aggregate demand increases. The U.S. price level and real
GDP both increase.
Topic: Fluctuations in Aggregate Demand
Skill: Conceptual
AACSB: Reflective thinking

22) Compare the policy prescriptions of Keynesian, Classical, and Monetarist economists.
Answer: Keynesians believe that without assistance the economy would almost never be at full
employment. They prescribe activist fiscal and monetary policy to drive the economy to full
employment. Classical economists believe the economy is self-regulating and will always tend
towards full employment. Their main policy initiatives center on removing tax created
disincentives for growth. Monetarists call for low taxes and consistent money growth because
Monetarists believe that recessions are the result of fluctuations in the quantity of money.
Topic: Schools of Thought
Skill: Conceptual
AACSB: Reflective thinking

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7 Numeric and Graphing Questions

Quantity of real Quantity of real

Price level
GDP demanded GDP supplied
(GDP deflator,
(trillions of 2009 (trillions of 2009
2009 = 100)
dollars) dollars)
115 8.8 12.0
110 9.4 11.0
105 10.0 10.0
100 10.6 9.0
95 11.2 8.0
90 11.8 7.0

1) Based on the table above,

a) What is the equilibrium price level and real GDP?
b) If potential GDP is $11.0 trillion, what does that imply about the economy's level of
employment?
c) If potential GDP is $9.0 trillion, what does that imply about the economy's level of
employment?
Answer:
a) The equilibrium price level is 105; the equilibrium real GDP is $10.0 trillion.
b) If potential GDP is $11.0 trillion, then the economy is at an equilibrium that is a below-full-
employment equilibrium.
c) If potential GDP is $9.0 trillion, then the economy is at an equilibrium that is an above-full-
employment equilibrium.
Topic: Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

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2) In the above figure, what is the short-run equilibrium real GDP and the short-run equilibrium
price level?
Answer: The short-run equilibrium occurs where the AD curve intersects the SAS curve. So in
the figure the short run equilibrium real GDP is $16.5 trillion and the short-run equilibrium price
level is 110.
Topic: Macroeconomic Equilibrium
Skill: Analytical
AACSB: Analytical thinking

8 True or False

1) The long-run aggregate supply curve is upward sloping.

Answer: FALSE
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

2) The long-run aggregate supply curve is vertical.

Answer: TRUE
Topic: Long-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

3) The level of output when there is full employment is called actual GDP.
Answer: FALSE
Topic: Short-Run Aggregate Supply
Skill: Recognition
AACSB: Reflective thinking

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4) In the long-run, the quantity of real GDP supplied increases when the price level increases.
Answer: FALSE
Topic: Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

5) The short-run aggregate supply curve shows a positive relationship between the price level
and real GDP.
Answer: TRUE
Topic: Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

6) The SAS curve shifts if there is a change in the price level.

Answer: FALSE
Topic: Changes in Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

7) If there is an increase in technology, the long-run aggregate supply curve shifts rightward, but
the short-run aggregate supply curve does not shift.
Answer: FALSE
Topic: Changes in Aggregate Supply, Technology
Skill: Conceptual
AACSB: Reflective thinking

8) If the money prices of resources changes, the LAS curve shifts.

Answer: FALSE
Topic: Change in Aggregate Supply-Money Wages & Prices of Resources
Skill: Conceptual
AACSB: Reflective thinking

9) If the money prices of resources changes, the SAS curve shifts.

Answer: TRUE
Topic: Change in Aggregate Supply-Money Wages & Prices of Resources
Skill: Conceptual
AACSB: Reflective thinking

10) An increase in the quantity of capital shifts both the long-run and short-run aggregate supply
curves.
Answer: TRUE
Topic: Changes in Aggregate Supply, Capital
Skill: Conceptual
AACSB: Reflective thinking

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11) If the money wage rate increases, the short-run aggregate supply curve shifts rightward.
Answer: FALSE
Topic: Changes in Money Wages and Other Resource Prices
Skill: Conceptual
AACSB: Reflective thinking

12) The aggregate demand curve shows total expenditures at different levels of national income.
Answer: FALSE
Topic: The Aggregate Demand Curve
Skill: Recognition
AACSB: Reflective thinking

13) A change in the price level does not shift the aggregate demand curve.
Answer: TRUE
Topic: The Aggregate Demand Curve
Skill: Conceptual
AACSB: Reflective thinking

14) The wealth effect points out that consumption decreases when people's real wealth decreases.
Answer: TRUE
Topic: Aggregate Demand Curve, Wealth and Substitution Effects
Skill: Conceptual
AACSB: Reflective thinking

15) Wealth and substitution effects explain why the aggregate demand curve has a positive slope.
Answer: FALSE
Topic: Aggregate Demand Curve, Wealth and Substitution Effects
Skill: Conceptual
AACSB: Reflective thinking

16) An increase in the quantity of money shifts the aggregate demand curve rightward.
Answer: TRUE
Topic: Changes in Aggregate Demand, Money
Skill: Conceptual
AACSB: Reflective thinking

17) In the short-run, real GDP can be greater than or less than potential GDP because in the short
run the money wage rate is fixed.
Answer: TRUE
Topic: Short-Run Macroeconomic Equilibrium
Skill: Recognition
AACSB: Reflective thinking

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18) The level of output at which the short-run aggregate supply curve and the aggregate demand
curve intersect is the full-employment level of GDP.
Answer: FALSE
Topic: Short-Run Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

19) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward
raises the price level and increases real GDP.
Answer: FALSE
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

20) In the short run, a supply shock that shifts the short-run aggregate supply curve leftward
raises the price level and decreases real GDP.
Answer: TRUE
Topic: Fluctuations in Short-Run Aggregate Supply
Skill: Conceptual
AACSB: Reflective thinking

21) Long-run macroeconomic equilibrium is achieved when the money wage rate has adjusted so
that employment is such that real GDP equals potential GDP.
Answer: TRUE
Topic: Long-Run Macroeconomic Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

22) During an above-full-employment equilibrium, actual GDP is greater than potential GDP.
Answer: TRUE
Topic: Above Full-Employment Equilibrium
Skill: Conceptual
AACSB: Reflective thinking

23) Fluctuations in aggregate demand and aggregate supply explain why real GDP fluctuates.
Answer: TRUE
Topic: U.S. Economic Growth, Inflation and Cycles
Skill: Conceptual
AACSB: Reflective thinking

24) The business cycle occurs because aggregate demand and aggregate supply change at uneven
rates.
Answer: TRUE
Topic: U.S. Economic Growth, Inflation and Cycles
Skill: Conceptual
AACSB: Reflective thinking

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25) The Keynesian theory of business cycle views volatile expectations of future sales and
profits as the main source of economic fluctuations.
Answer: TRUE
Topic: Keynesian Theory
Skill: Recognition
AACSB: Reflective thinking

26) A monetarist economist believes that if the economy was left alone, it would rarely operate at
full employment.
Answer: FALSE
Topic: Monetarist View
Skill: Recognition
AACSB: Reflective thinking

9 Extended Problems

Real GDP
Real GDP
demanded
Price level supplied (billions
(billions of 2009
of 2009 dollars)
dollars)
70 825 375
80 750 450
90 675 525
100 600 600
110 525 675
120 450 750
130 375 825
140 300 900

1) The table above shows Purpleland's economy aggregate demand and supply schedules.
Purpleland's potential GDP is $675 billion.
a) Plot the aggregate demand curve, the short-run aggregate supply curve, and the long-run
aggregate supply curve.
b) What are the short-run equilibrium real GDP and price level in Purpleland?
c) What is the long-run equilibrium real GDP?
d) Is Purpleland's short-run macroeconomic equilibrium a full-employment equilibrium, below
full-employment equilibrium, or above full-employment equilibrium? What is the recessionary
gap (if any)? What is the inflationary gap (if any)?
e) Suppose aggregate demand increases by $150 billion. Plot the new aggregate demand curve.
How do real GDP and the price level change in the short run?
f) Is Purpleland's new short-run macroeconomic equilibrium a full-employment equilibrium,
below full-employment equilibrium, or above full-employment equilibrium? What is the
recessionary gap (if any)? What is the inflationary gap (if any)?

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Answer:

a) See the figure above. The aggregate demand curve is AD0.

b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD0,
intersects the short-run aggregate supply curve, SAS. As the figure shows, the short-run
equilibrium real GDP is $600 billion, and the short-run equilibrium price level is 100.
c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP
in Purpleland is $675 billion.
d) Purpleland's short-run macroeconomic equilibrium is a below-full-employment equilibrium
because the short-run equilibrium GDP is less than potential GDP. The amount by which
potential GDP exceeds real GDP is a recessionary gap, so the recessionary gap is $75 billion. An
inflationary gap exists when real GDP is above potential GDP, so there is no inflationary gap in
Purpleland.
e) As the figure above shows, the aggregate demand curve shifts from AD0 to AD1. As a result,
real GDP increases from $600 billion to $675 billion, and the price level rises from 100 to 110.
f) Purpleland's new short-run macroeconomic equilibrium is a full-employment equilibrium
because the equilibrium real GDP equals the potential GDP. When real GDP equals potential
GDP, there is neither a recessionary gap nor an inflationary gap.
Topic: Recessionary Gap
Skill: Analytical
AACSB: Analytical thinking

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Copyright 2016 Pearson Education, Ltd.
 Real GDP demanded Real GDP supplied
Price level (billions of 2009 (billions of 2009
dollars) dollars)
90 450 150
100 400 250
110 350 350
120 300 450
130 250 550

2) The table above shows Yellowland's economy aggregate demand and supply schedules.
Yellowland's potential GDP is $300 billion.
a) Plot the aggregate demand curve, the short-run aggregate supply curve, and the long-run
aggregate supply curve.
b) What are the short-run equilibrium real GDP and price level in Yellowland?
c) What is the long-run equilibrium real GDP?
d) Is Yellowland's short-run macroeconomic equilibrium a full-employment equilibrium, below
full-employment equilibrium, or above full-employment equilibrium? What is the recessionary
gap (if any)? What is the inflationary gap (if any)?
e) Suppose aggregate supply decreases by $150 billion. Plot the new aggregate supply curve.
How do real GDP and the price level change in the short run?
f) Is Yellowland's new short-run macroeconomic equilibrium a full-employment equilibrium,
below full-employment equilibrium, or above full-employment equilibrium? What is the
recessionary gap (if any)? What is the inflationary gap (if any)?
Answer:

a) See the figure above. The short-run aggregate supply curve is SAS0.
b) A short-run macroeconomic equilibrium occurs where the aggregate demand curve, AD,
intersects the short-run aggregate supply curve, SAS0. As the figure shows, the short-run
equilibrium real GDP is $350 billion, and the short-run equilibrium price level is 110.

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Copyright 2016 Pearson Education, Ltd.
c) Long-run equilibrium real GDP equals potential GDP. So the long-run equilibrium real GDP
in Yellowland is $300 billion.
d) Yellowland's short-run macroeconomic equilibrium is an above-full-employment equilibrium
because the short-run equilibrium GDP exceeds potential GDP. The amount by which real GDP
exceeds potential GDP is an inflationary gap. So the inflationary gap is $50 billion. A
recessionary gap exists when real GDP is below potential GDP. So there is no recessionary gap
in Yellowland.
e) As the figure above shows, the short-run aggregate supply curve shifts from SAS0 to SAS1.
As a result, real GDP decreases from $350 billion to $300 billion, and the price level rises from
110 to 120.
f) Yellowland's new short-run macroeconomic equilibrium is a full-employment equilibrium
because the equilibrium real GDP equals the potential GDP. When real GDP equals potential
GDP, there is neither a recessionary gap nor an inflationary gap.
Topic: Inflationary Gap
Skill: Analytical
AACSB: Analytical thinking

129
Copyright 2016 Pearson Education, Ltd.