Chapter 11: Aggregate Demand and Supply: The Model of the Self-Correcting
Economy
Multiple Choice Questions
3) According to the real balance effect, a decrease in the overall price level will
A) decrease the quantity of real output demanded because households will feel poorer.
B) decrease the quantity of real output demanded because the value of savings accounts
and other financial assets will decline.
C) increase the quantity of real output demanded because cheaper products will be
substituted in the place of more expensive items.
D) increase the quantity of real output demanded because the purchasing power of
financial assets will increase.
E) increase the quantity of real output demanded because interest rates will tend to
decline, and this will stimulate spending.
Answer: D
6) According to the interest rate effect, an increase in the price level should
A) raise interest rates and increase spending on GDP; the aggregate demand curve should
shift to the right.
B) lower interest rates and decrease spending on GDP; the aggregate demand curve
should shift to the left.
C) raise interest rates and decrease spending on GDP; the aggregate demand curve should
shift to the right.
D) lower interest rates and increase spending on GDP; the aggregate demand curve
should be downward sloping.
E) raise interest rates and decrease spending on GDP; the aggregate demand curve should
be downward sloping.
Answer: E
7) Which of the following would tend to increase aggregate demand?
A) a reduction in the overall wealth of the society
B) pessimistic expectations about the future
C) a reduction in the money supply
D) a reduction in tax rates
E) a reduction in government spending
Answer: D
8) A reduction in aggregate demand could be caused by
A) a reduction in income taxes.
B) increased business optimism.
C) a substantial decline in the stock market.
D) increased spending by government for social programs.
E) an expansionary monetary policy.
Answer: C
9) An increase in aggregate demand could be caused by all of the following EXCEPT
A) increased government spending on highways.
B) Federal Reserve policy to expand the money supply.
C) a reduction in the overall price level.
D) widespread optimism about the future.
E) a reduction in interest rates.
Answer: C
10) When government spending increases, the aggregate demand curve
A) shifts to the left because private spending is being crowded out.
B) shifts to the right because more output is being demanded at every price level.
C) shifts to the right because a reduction in the price level causes the interest rate to be
reduced and thereby stimulates spending.
D) shifts to the left because the higher level of government spending raises the interest
rate and lowers total spending.
E) does not shift.
Answer: B
12) The short-run aggregate supply curve slopes
A) downward because lower price levels tend to stimulate spending for goods and
services.
B) upward because higher price levels mean higher incomes and greater spending for
goods and services.
C) downward because prices tend to fall as the overall economy expands its output of
goods and services.
D) upward because businesses can generally purchase labor and other inputs at fixed
costs for some period of time.
E) upward because an increase in the price level will increase the real value of financial
assets and thereby stimulate spending.
Answer: D
13) The short-run aggregate supply curve will be upward sloping if
A) wages and input prices are highly flexible in the short run.
B) producers cannot expand or contract output in the short run.
C) some input prices tend to be fixed in the short run.
D) product prices are unable to change in the short run.
E) output never deviates from potential GDP.
Answer: C
14) When the overall price level in the economy FALLS,
A) businesses may supply more or less output depending on the size of the reduction in
the price level.
B) businesses will supply more output since some input costs are fixed in the short run.
C) the economy's potential GDP will increase.
D) businesses will supply less output since wage rates and some other input costs are
fixed by long-term contracts.
E) businesses will tend to supply more output since more output can be sold at the lower
price level.
Answer: D
17) Which of the following would cause the short-run aggregate supply curve to shift
upward (to the left)?
A) a decrease in the level of government spending
B) a general increase in raw materials prices
C) an increase in the economy's productive capacity
D) a reduction in the money supply
E) a reduction in the minimum wage
Answer: B
18) A supply shock such as an increase in the price of imported oil would tend to
A) reduce equilibrium GDP and the price level.
B) increase both equilibrium GDP and the price level.
C) reduce both unemployment and inflation.
D) generate unemployment but lower the price level.
E) increase unemployment while also raising the price level.
Answer: E
19) An increase in aggregate supply could be caused by
A) an increase in the money supply and would tend to lower both equilibrium GDP and
the price level.
B) a reduction in the minimum wage and would tend to raise both equilibrium GDP and
the price level.
C) an increase in labor productivity and would tend to increase real GDP while lowering
the price level.
D) an increase in input prices and would tend to increase real GDP while lowering the
price level.
E) an abundant agricultural harvest and would tend to increase real GDP while raising the
price level.
Answer: C
22) A supply shock which reduces aggregate supply
A) may increase the level of equilibrium output as it raises the price level.
B) may lower the price level and the level of equilibrium output.
C) may reduce the equilibrium output as it raises the price level.
D) is represented by shifting the aggregate supply curve downward.
E) is represented by shifting the aggregate demand curve to the right.
Answer: C
23) Given a stationary short-run aggregate supply curve, a reduction in aggregate demand
will tend to
A) decrease the level of equilibrium GDP and the overall price level.
B) increase the level of equilibrium GDP and the overall price level.
C) increase the level of equilibrium GDP but decrease the overall price level.
D) decrease the level of equilibrium GDP but increase the overall price level.
E) decrease potential GDP and the overall price level.
Answer: A
24) A decrease in aggregate demand, coupled with an increase in aggregate supply,
would tend to
A) increase both real GDP and the price level.
B) decrease both real GDP and the price level.
C) decrease the level of real GDP, but the impact on the price level is indeterminate.
D) increase the level of real GDP, but the impact on the price level is indeterminate.
E) decrease the price level, but the impact on real GDP is indeterminate.
Answer: E
26) Shocks to the economy such as OPEC oil price increases and higher grain prices due
to poor growing conditions would be represented graphically by
A) shifting the aggregate demand curve to the right.
B) shifting the aggregate supply curve to the right.
C) shifting the aggregate demand curve to the left.
D) shifting the aggregate supply curve to the left.
E) shifting the total expenditure function to the right.
Answer: D
27) Adverse supply shocks present policymakers with a dilemma because
A) if aggregate demand is stimulated to reduce unemployment, the inflation rate also
falls.
B) if aggregate demand is reduced to combat inflation, unemployment also falls.
C) any change in aggregate demand will aggravate both unemployment and inflation.
D) any expansion in aggregate supply will reduce inflation but intensify unemployment.
E) any expansion in aggregate demand will reduce unemployment but raise the price
level.
Answer: E
29) Stagflation poses a dilemma for policymakers because
A) if aggregate demand is reduced to combat inflation, equilibrium GDP will tend to rise.
B) if aggregate demand is increased to combat unemployment, the price level will tend to
fall.
C) if aggregate demand is stimulated to expand the economy, the price level will tend to
rise.
D) any reduction in aggregate demand will tend to lower both the price level and the
unemployment rate.
E) any expansion in aggregate demand will tend to raise both the price level and the
unemployment rate.
Answer: C