Chapter 9
1. If the AE curve is represented by AE = 300 + 0.5Y, a shift in the AE curve of 50 will be
depicted as a shift in the AD curve of
A) 50.
B) 100.
C) 300.
D) 600.
Use the following to answer question 2:
2. Refer to the graph above. In the graph, if the price level is P0 and the aggregate demand curve
is AD0, then the economy is in
A) a recessionary gap.
B) an inflationary gap.
C) long-run equilibrium.
D) short-run equilibrium but not a long-run equilibrium.
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Use the following to answer question 3:
3. Refer to the graph above. From 1980 to 1985, the U.S. dollar appreciated over 60%. The effect
of this appreciation on the AD curve can be shown by a movement from
A) A to B.
B) A to C.
C) A to D.
D) B to A.
4.
A)
B)
C)
D)
A fall in a foreign country's income will most likely cause
a reduction in Canadian exports, so the Canadian aggregate demand curve shifts left.
a reduction in Canadian exports, so the Canadian aggregate demand curve shifts right.
an increase in Canadian exports, so the Canadian aggregate demand curve shifts left.
an increase in Canadian exports, so the Canadian aggregate demand curve shifts right.
5.
A)
B)
C)
D)
The slope of the SAS curve is determined by
opportunity cost.
the law of diminishing marginal returns.
institutional realities.
the wealth effect, the international effect and the interest rate effect.
Page 2
Use the following to answer question 6:
Curve A
Price level
Curve B
Curve C
Curve D
Real output
6.
A)
B)
C)
D)
Refer to the graph above. The aggregate demand curve is best shown by
curve A.
curve B.
curve C.
curve D.
7.
A)
B)
C)
D)
A change in the distribution of income affects the AD curve because
workers are more likely than stockholders to spend the income they receive.
stockholders are more likely than workers to spend the income they receive.
workers and stockholders are equally likely to spend the income they receive.
the distribution of income is always shifting in favour of stockholders.
8. In late 2005, the Government of Canada announced increases in expenditures and cuts in taxes.
At the same time, the Bank of Canada raised interest rates. In the long run, this combination
will
A) increase output above its potential.
B) reduce output beneath its potential.
C) have an indeterminate effect on potential output.
D) not cause output to deviate from its potential.
9.
A)
B)
C)
D)
If productivity decreases by 4%, but wages decrease by 2%, then it is most likely that
the SAS curve will shift to the left.
the SAS curve will shift to the right.
the SAS curve will not shift.
the AD curve will shift to the left.
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10. If potential output is less than aggregate demand, eventually the short-run aggregate supply
curve will shift
A) left and eliminate the recessionary gap.
B) right and eliminate the recessionary gap.
C) left and eliminate the inflationary gap.
D) right and eliminate the inflationary gap.
Use the following to answer question 11:
Curve A
Price level
Curve B
Curve C
Curve D
Real output
11.
A)
B)
C)
D)
Refer to the graph above. Curve B best represents
a short-run aggregate supply curve.
a long-run aggregate supply curve.
an aggregate demand curve.
a market supply curve.
Price level
Use the following to answer question 12:
P1
P0
Aggregate
demand
Ye
Y0
Real output
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12. Refer to the graph above. Given the price increase in the graph, we can infer that the
international effect
A) raises the quantity of aggregate demand by Yo - Ye.
B) raises the quantity of aggregate demand by less than Yo - Ye.
C) reduces the quantity of aggregate demand by Yo - Ye.
D) reduces the quantity of aggregate demand by less than Yo - Ye.
13. In the mid-1990s, the U.S. was pressuring Japan to institute policies to shore up its ailing
economy. Policies that increased Japanese growth would increase U.S. exports and
A) cause the U.S. to move up its aggregate demand curve.
B) cause the U.S. to move down its aggregate demand curve.
C) shift the U.S. aggregate demand curve left.
D) shift the U.S. aggregate demand curve right.
14. In the first half of 1999, Brazil pursued an expansionary fiscal policy and a contractionary
monetary policy. Assuming Brazil was initially in a long-run equilibrium, the long-run effect
of this policy combination is
A) a higher price level but an uncertain effect on output.
B) the same price level but an uncertain effect on output.
C) the same output level but an uncertain effect on inflation.
D) a higher output level but an uncertain effect on inflation.
Use the following to answer question 15:
15.
A)
B)
C)
D)
Refer to the graph above. The curve in the graph is called
an aggregate demand curve.
a short-run aggregate supply curve.
a long-run aggregate supply curve.
an aggregate expenditure curve.
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16.
A)
B)
C)
D)
The AD curve
will shift as much as the initial shift factor.
will shift by more than initial shift factor due to the multiplier.
will shift by less than the initial shift factor due to leakages.
could shift by more or less than the initial shift factor.
17. Suppose policy makers do not know what potential output is but do know that inflation is
increasing. Based on this information, policy makers are most likely to conclude that the
economy is
A) in the Keynesian range.
B) in the intermediate range.
C) in the Classical range.
D) at potential output.
18.
A)
B)
C)
D)
Prices are most likely to be flexible when
menu costs are large.
firms use cost-based pricing rules.
firms are afraid to antagonize their customers.
firms do not engage in strategic pricing.
19. If the multiplier effect is 4, a $15 billion increase in government expenditures will shift the AD
curve
A) to the right by $15 billion.
B) to the left by $15 billion.
C) to the right by $60 billion.
D) to the left by $60 billion.
20. If productivity increases by 6%, but wages increase by 2%, then it is most likely that the price
level will
A) rise by 4 percent.
B) fall by 4 percent.
C) rise by 8 percent.
D) fall by 8 percent.
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21.
A)
B)
C)
D)
In the long run, the position of the aggregate demand curve determines
output.
the price level.
both output and the price level.
neither output nor the price level.
22.
A)
B)
C)
D)
If the price level falls but people don't feel richer, then the AD curve would likely
shift in.
shift out.
become flatter.
become steeper.
Use the following to answer question 23:
23.
A)
B)
C)
D)
Which of the following distances in the above graph is the inflationary gap?
A.
B.
C.
D.
24.
A)
B)
C)
D)
If the price level rises, the interest rate effect will cause
investment and the quantity of aggregate demand to increase.
investment and the quantity of aggregate demand to decrease.
investment to increase and the quantity of aggregate demand to decrease.
investment to decrease and the quantity of aggregate demand to increase.
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25.
A)
B)
C)
D)
In the long run, the position of the short-run aggregate supply curve determines
output.
the price level.
both output and the price level.
neither output nor the price level.
26.
A)
B)
C)
D)
According to real business cycle economists, the economy is
always in long-run equilibrium.
never in long-run equilibrium.
always in short-run equilibrium.
never in short-run equilibrium.
27.
A)
B)
C)
D)
Which of the following would shift the aggregate demand curve to the right?
An increase in foreign income.
An appreciation of the value of a country's currency.
A lower future expected price level.
An increase in imports.
28.
A)
B)
C)
D)
If productivity increases by 3%, but wages also increase by 3%, then it is most likely that
the SAS curve will shift to the left.
the SAS curve will shift to the right.
the SAS curve will not shift.
the AD curve will shift left.
Use the following to answer question 29:
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29.
A)
B)
C)
D)
Refer to the graph above. A movement from D to B is most likely to be caused by
an increase in input prices.
a decrease in input prices.
an increase in aggregate demand.
a decrease in aggregate demand.
30.
A)
B)
C)
D)
A doubling of prices
doubles potential output.
more than doubles potential output.
increases potential output but by less than double.
does not affect potential output.
Use the following to answer question 31:
31. Refer to the graph above. In the graph, if the price level is P1 and the aggregate demand curve
is AD0 then the economy
A) is in a recessionary gap.
B) is in an inflationary gap.
C) is in long-run equilibrium.
D) is fully employed.
32. If the government increases its expenditures (without any changes in taxes) while the Bank of
Canada decreases the money supply,
A) the AD curve would likely shift to the left.
B) the AD curve would likely shift to the right.
C) the AD curve would likely remain unchanged.
D) what happens to the AD curve is unclear.
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33.
A)
B)
C)
D)
The shapes of the curves in the AS/AD model are based
upon the principle of substitution.
upon the principle of opportunity cost.
upon the relationship between a single good and its price.
on the relationship between the price level and total output.
Use the following to answer question 34:
34.
A)
B)
C)
D)
Refer to the graph above. A movement from A to C is most likely to be caused by
an increase in input prices.
a decrease in input prices.
an increase in exports.
an increase in imports.
35.
A)
B)
C)
D)
If an economy is at its potential output, a contractionary monetary policy will cause output to
fall in the short run and the long run.
fall in the short run but not the long run.
fall in the long run but not the short run.
rise in the short run and the long run.
36. If productivity increases by 4%, but wages increase by 8%, then it is most likely that the price
level will
A) rise by 4 percent.
B) fall by 4 percent.
C) rise by 12 percent.
D) fall by 12 percent.
Page 10
Use the following to answer question 37:
37.
A)
B)
C)
D)
Refer to the graph above. If the price level is P1, then
input prices will fall and output will rise in the long run.
both input prices and output will fall in the long run.
input prices will rise and output will fall in the long run.
both input prices and output will rise in the long run.
38.
A)
B)
C)
D)
A change in which of the following will shift the long-run aggregate supply curve?
The price level.
Government fiscal policy.
Aggregate demand.
Technology.
Use the following to answer question 39:
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39.
A)
B)
C)
D)
Refer to the graph above. There exists
an inflationary gap.
a recessionary gap.
neither an inflationary nor a recessionary gap.
an economy that is in both short-run and long-run equilibrium.
40. If firms interpret a higher-than-expected price level as a signal of an increase in the demand for
their product, then the short-run aggregate supply curve will tend to
A) have a negative slope.
B) have a positive slope.
C) be vertical.
D) be horizontal.
41.
A)
B)
C)
D)
All of the following effects cause the AD curve to slope downward EXCEPT the
international effect.
interest rate effect.
substitution effect.
wealth effect.
42.
A)
B)
C)
D)
In the short run, a contractionary fiscal policy
reduces output, but not the price level, in the Classical range.
reduces the price level, but not output, in the Keynesian range.
reduces both output and the price level in the intermediate range.
reduces the price level but not output, which is always at its potential in the short run.
43.
A)
B)
C)
D)
An increase in real money balances resulting from a lower price level will
reduce both interest rates and investment.
reduce interest rates and increase investment.
increase interest rates and reduce investment.
increase both interest rates and investment.
44. During the Vietnam War, the U.S. increased government expenditures while raising taxes. As a
result,
A) the AD curve likely shifted to the left.
B) the AD curve likely shifted to the right
C) the AD curve likely remained unchanged.
D) what happened to the AD curve is unclear.
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45.
A)
B)
C)
D)
If a fall in foreign income decreases domestic aggregate expenditures by 20, the AD curve will
shift left by more than 20.
shift left by less than 20.
shift left by exactly 20.
not shift at all.
46.
A)
B)
C)
D)
Expansionary monetary policy will likely
shift the AD curve in to the left.
shift the AD curve out to the right.
make the AD curve steeper.
make the AD curve flatter.
47.
A)
B)
C)
D)
Which of the following would shift the aggregate demand curve to the left?
An increase in foreign income.
A depreciation in the value of the country's currency.
A higher future expected price level.
A decrease in exports.
48.
A)
B)
C)
D)
If productivity rises by 2% and wages rise by 6%, the AS curve will
likely shift up.
likely shift down.
become flatter.
become steeper.
49.
A)
B)
C)
D)
The wealth effect, the interest rate effect, and the international effect cause the AD curve to
shift to the right.
shift to the left.
slope downward.
slope upward.
50.
A)
B)
C)
D)
An increase in the price level might cause
a decrease in the quantity of aggregate demand because of the substitution effect.
an increase in the quantity of aggregate demand because of the wealth effect.
a decrease in the quantity of aggregate demand because of the interest rate effect.
an increase in the quantity of aggregate demand because of the multiplier effect.
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Answer Key
1. B
Response:
This question requires students to draw on material from both chapters 8 and 9. Multiply the
multiplier (2) by the change in autonomous expenditures (50) to find the shift in the AD curve.
2. C
Response:
Since output equals potential output at this combination, the economy is in a long-run
equilibrium.
3. C
Response:
An appreciation of a country's currency makes its goods more expensive relative to foreign
goods. This reduces its exports and increases its imports, shifting its AD curve to the left.
4. A
Response:
A fall in foreign income reduces Canadian aggregate demand, shifting its AD curve left.
5. C
Response:
The SAS curve is not a derived curve; it is an empirical curve determined by institutional
realities.
6. D
Response:
The aggregate demand curve is downward-sloping.
7. A
Response:
People tend to spend more out of wage income than out of other income, so a change in the
distribution of income that alters the wage share of income shifts the AD curve.
8. D
Response:
Monetary and fiscal policy affect the position of the aggregate demand curve, but they do not
affect the level of potential output, which is determined on the supply side of the economy.
Since prices adjust in the long run to bring output to its potential, output in the long run will not
be affected by this policy combination.
9. A
Response:
This combination raises production costs since wages are not falling as fast as productivity.
Firms raise prices as a result, causing the SAS curve to shift up.
10. C
Response:
In this case, input prices will be bid up, raising production costs and forcing firms to increase
output prices. As this occurs, the short-run aggregate supply curve shifts to the left.
11. A
Response:
The short-run aggregate supply curve is upward-sloping in the short-run.
12. D
Response:
Some portion of the reduction in the quantity of aggregate demand caused by the higher price
level is due to other effects, such as the wealth and multiplier effects.
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13. D
Response:
Foreign income is a shift factor of the AD curve.
14. C
Response:
In the long run, output is always at its potential, so the policy combination does not affect
output. The impact on inflation is unclear because the expansionary fiscal policy tends to
increase it while the contractionary monetary policy tends to reduce it.
15. B
Response:
The short-run aggregate supply curve is upward-sloping.
16. B
Response:
The multiplier effect makes the AD curve shift by more than the initial shift factor.
17. C
Response:
Rising inflation is most likely to occur in the Classical range, where the price level is most
flexible.
18. D
Response:
See the box titled "Knowing the Tools: Why Prices are Inflexible" in the text.
19. C
Response:
The multiplier effect implies that a $1 increase in government expenditures will increase
aggregate demand by $4, so the AD curve will shift to the right by $60 billion.
20. B
Response:
The percentage change in the price level is the difference between the percentage change in
wages and the percentage change in productivity.
21. B
Response:
In the long run, output attains its potential, so aggregate demand determines only the price level.
22. D
Response:
Since the wealth effect would become inoperative, the AD curve would become steeper.
23. A
Response:
The inflationary gap occurs when the price level is such that the quantity of aggregate demand
exceeds the quantity of potential income.
24. B
Response:
A higher price level reduces real cash balances, causing people to save less. The result is
higher interest rates, lower investment, and a lower level of aggregate demand.
25. D
Response:
In the long run, output attains its potential and the price level is determined by aggregate
demand.
26. A
Response:
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27.
28.
29.
30.
31.
32.
33.
34.
35.
36.
37.
38.
39.
Real business cycle economists argue that output is always at potential, and this implies that the
economy is always in a long-run equilibrium.
A
Response:
Only an increase in foreign income shifts the AD curve to the right. The others shift it left.
C
Response:
This combination does not affect production costs since wages are growing as fast as
productivity. As a consequence, the SAS curve will not shift.
D
Response:
A decrease in aggregate demand causes firms to cut output and prices.
D
Response:
Potential output is unaffected by the price level.
A
Response:
Since aggregate demand is less than potential output at this combination, the economy is in a
recessionary gap.
D
Response:
An increase in government spending shifts the AD curve to the right while a cut in the money
supply shifts it to the left. The overall effect on the AD curve depends on the relative sizes of the
two shifts.
D
Response:
The AS/AD model describes how the price level and the total demand and supply of output are
related to one another.
C
Response:
An increase in imports increases aggregate demand. In turn, an increase in aggregate demand
causes firms to raise output and prices.
B
Response:
Because a contractionary monetary policy reduces aggregate demand, and because output is at
its potential, the drop in aggregate demand should reduce output in the short run. In the long
run, however, the drop in output will reduce the price level until the economy once again attains
its potential output.
A
Response:
The percentage change in the price level is the difference between the percentage change in
wages and the percentage change in productivity.
A
Response:
Because there is an recessionary gap at P0, input prices will fall in the long run, pushing down
output prices and increasing aggregate demand and output.
D
Response:
See discussion in textbook.
B
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40.
41.
42.
43.
44.
45.
46.
47.
48.
49.
50.
Response:
See the definition of a recessionary gap in the text.
B
Response:
The SAS will be upward-sloping if firms misinterpret changes in the price level to be changes in
relative prices and expand their output.
C
Response:
The substitution effect is not relevant for the discussion of the aggregate economy.
C
Response:
Both prices and output are partially flexible in the short run in the intermediate range. Prices
would fall in the Classical range but not in the Keynesian range while output would drop in all
ranges in the short run.
B
Response:
An increase in real balances lowers the interest rate, making it cheaper for businesses to borrow.
The lower cost of borrowing leads to higher levels of business investment.
D
Response:
An increase in government expenditures shifts the AD curve to the right while an increase in
taxes shifts it to the left. Depending on the relative shifts, the AD curve could shift to the left, to
the right, or not at all.
A
Response:
The multiplier effect causes the AD curve to shift left by more than the initial shift.
B
Response:
Expansionary monetary policy will increase aggregate demand, shifting the AD curve out to the
right.
D
Response:
Only a decrease in exports shifts the AD curve to the left. The others shift it right.
A
Response:
Because wages are rising by more than productivity costs will rise and the AS curve will shift
up.
C
Response:
These effects explain why a lower price level raises aggregate demand.
C
Response:
A higher price level reduces real cash balances, causing people to save less. The result is
higher interest rates, lower investment, and a lower quantity of aggregate demand.
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