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1 Chapter The aggregate demand curve: A. is upward sloping because a higher price level is necessary to make production profitable as production costs rise. B. is downward sloping because production costs decline as real output increases? C. shows the amount of expenditures required to induce the production of each possible level of real output. D. shows the amount of real output which will be purchased at each possible price level. 2. The aggregate demand curve shows the: A. inverse relationship between the price level and real GDP purchased. B. direct relationship between the price level and real GDP produced. C. inverse relationship between interest rates and real GDP produced. D. direct relationship between real-balances and real GDP purchased. 3. Other things being equal, the higher the price level, the lower the level of domestic output purchased. This occurs because of: A. the real-balances effect. B. consumer spending on capital goods. C. the full-employment-unemployment rate. D. the sensitivity to demand-pull inflation. 4. The real-balances effect suggests that a: A.lower price level will decrease the demand for money, decrease interest rates, and increase consumption and investment spending. B. lower price level will decrease the real value of many financial assets and therefore cause an increase in spending. C. lower price level will increase the real value of many financial assets and therefore cause an increase in spending. D. higher price level will increase the real value of many financial assets and therefore cause an increase in spending. 5. The real-balances effect indicates that: A an increase in the price level will increase the demand for money, increase interest rates, and reduce. consumption and investment spending. B. a lower price level will decrease the real value of many financial assets and therefore reduce spending. C. a higher price level will increase the real value of many financial assets and therefore increase spending. D. a higher price level will decrease the real value of many financial assets and therefore reduce spending. 6. Which effect best explains the downward slope of the aggregate demand curve? A. a multiplier effect B. an income effect C. a substitution effect D. a real-balances effect

2 The following table is for a particular country in which C is consumption expenditures, I g is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. Each question is independent of the other questions. 7. Refer to the above table. The wealth or real balances effect of changes in the price level is: A. shown by columns (1) and (2) of the table. B. shown by columns (1) and (5) of the table. C. shown by columns (1) and (4) of the table. D. not shown by the data in the table. 8. Which of the following is incorrect? A.As the Canadian price level rises, Canadian goods become relatively more expensive so that its exports fall and its imports rise. B.As the price level falls, the demand for money declines, the interest rate declines, and interest ratesensitive spending increases. C When the price level increases, real balances increase, businesses and households find themselves. D. wealthier and therefore increase their spending. Given aggregate demand, an increase in aggregate supply increases real output and, assuming downward flexible prices, reduces the price level. 9. The interest-rate and real-balances effects are important because they help explain: A. rightward and leftward shifts of the aggregate demand curve. B. why demand-management policy cannot be used effectively to curb stagflation. C. the shape of the aggregate demand curve. D. the shape of the aggregate supply curve. 10. The real-balances, interest rate, and foreign trade effects all help explain: A. why the aggregate demand curve is downward sloping. B. why the aggregate supply curve is upward sloping. C. shifts in the aggregate demand curve. D. shifts in the aggregate supply curve. 11. Which of the following explains why the aggregate demand schedule is downward sloping? A. the real-balances effect B. the interest rate effect C. the foreign trade effect D. all of the above 12. The shape of the aggregate demand curve is explained by the: A. interest rate, real balances, and foreign trade effects. B. rate of inflation and the natural rate of unemployment. C. policies to stabilize prices and reduce unemployment. D. ratchet effect.

3 13. Which of the factors below best explain the downward slope of aggregate demand curve? The following list of factors, are related to the aggregate demand curve. A. 2, 4, and 6 B. 7, 9, and 10 C. 1, 3, and 8 D. 4, 6, and The aggregate demand curve is: A. vertical if full employment exists. B. horizontal when there is considerable unemployment in the economy. C. downward sloping because of the interest-rate, real balances, and foreign trade effects. D. downward sloping because production costs decrease as real output increases. 15. The interest-rate effect suggests that: A.a decrease in the supply of money will increase interest rates and reduce interest-sensitive consumption and investment spending. B an increase in the price level will increase the demand for money, reduce interest rates, and decrease. consumption and investment spending. C an increase in the price level will increase the demand for money, increase interest rates, and decrease. D. consumption and investment spending. an increase in the price level will decrease the demand for money, reduce interest rates, and increase consumption and investment spending. 16. The interest rate effect indicates that a(n): A decrease in the price level will increase the demand for money, increase interest rates, and decrease. consumption and investment spending. B decrease in the price level will decrease the demand for money, decrease interest rates, and increase. consumption and investment spending. C increase in the price level will increase the demand for money, reduce interest rates, and decrease. consumption and investment spending. D.increase in the supply of money will increase interest rates and decrease interest-sensitive consumption and investment spending. 17. Which effect best explains the downward slope of the aggregate demand curve? A. a multiplier effect B. an income effect C. a substitution effect D. an interest rate effect 18. When the price level decreases: A. the demand for money falls and the interest rate falls. B. holders of financial assets with fixed money values decrease their spending. C. holders of financial assets with fixed money values have less purchasing power. D. there is a decrease in consumer spending that is sensitive to changes in interest rates.

4 The following table is for a particular country in which C is consumption expenditures, I g is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. 19. Refer to the above table. The interest rate effect of changes in the price level is shown by columns: A. (1) and (4) of the table. B. (5) and (6) of the table. C. (1) and (3) of the table. D. (2) and (4) of the table. 20. A decrease in interest rates caused by a change in the price level would cause a(n): A. decrease in aggregate demand. B. increase in aggregate demand. C. decrease in the quantity of real domestic output demanded. D. increase in the quantity of real domestic output demanded. 21. The foreign trade effect suggests that an increase in the Canadian price level relative to other countries will: A. increase the amount of Canadian real output purchased. B. increase Canadian imports and decrease Canadian exports. C. increase both Canadian imports and Canadian exports. D. decrease both Canadian imports and Canadian exports. 22. The foreign trade effect suggests that a decrease in the Canadian price level relative to other countries will: A. shift the aggregate demand curve leftward. B. shift the aggregate supply curve leftward. C. decrease Canadian exports and increase Canadian imports. D. increase Canadian exports and decrease Canadian imports. 23. The foreign trade effect: A. shifts the aggregate demand curve rightward. B. shifts the aggregate demand curve leftward. C. shifts the aggregate supply curve rightward. D. does none of the above. 24. "If the price level increases in Canada relative to foreign countries, then Canadian consumers will purchase more foreign goods and fewer Canadian goods." This statement describes: A. the output effect. B. the foreign trade effect. C. the real-balances effect. D. the shift-of-spending effect. 25. The factors which affect the amounts that consumers, businesses, government, and foreigners wish to purchase at each price level are the: A. wealth, interest rate, and foreign trade effects. B. determinants of aggregate supply. C. determinants of aggregate demand. D. sole determinants of the equilibrium price level and the equilibrium real output.

5 26. The determinants of aggregate demand: A. explain why the aggregate demand curve is downward sloping. B. explain shifts in the aggregate demand curve. C. demonstrate why real output and the price level are inversely related. D. include input prices and resource productivity. 27. Which one of the following would not shift the aggregate demand curve? A. a change in the price level B. depreciation of the international value of the dollar C. a decline in the interest rate at each possible price level D. an increase in personal income tax rates 28. Changes in which of the two factors below would most likely cause a change in consumer spending? The following list of factors, are related to the aggregate demand curve. A. 1 and 3 B. 2 and 4 C. 5 and 10 D. 8 and Which of the diagrams below best portrays the effects of an increase in consumer spending? A. A B. B C. C D. D

6 30. An increase in taxes will cause a(n): A. decrease in the quantity of real domestic output demanded. B. increase in the quantity of real domestic output demanded. C. decrease in aggregate demand. D. increase in aggregate demand. 31. An expected decline in the prices of consumer goods will: A. decrease aggregate demand. B. increase the quantity of real domestic output demanded. C. increase aggregate demand. D. decrease the quantity of real domestic output demanded. 32. An increase in household borrowing for consumption will: A. decrease aggregate demand. B. increase aggregate supply. C. increase aggregate demand. D. decrease aggregate supply. 33. An increase in aggregate demand is most likely to be caused by a decrease in: A. the wealth of consumers. B. consumer confidence. C. business confidence. D. the tax rates on household income. 34. A decrease in taxes will cause a(n): A. decrease in the quantity of real domestic output demanded. B. increase in the quantity of real domestic output demanded. C. increase in aggregate demand. D. decrease in aggregate demand. 35. An increase in the GDP price level will: A. decrease aggregate demand. B. increase the quantity of real domestic output demanded. C. increase aggregate demand. D. decrease the quantity of real domestic output demanded. 36. A n expected rise in the rate of inflation for consumer goods will: A. decrease aggregate demand. B. increase aggregate supply. C. increase aggregate demand. D. decrease aggregate supply. 37. A decrease in aggregate demand is most likely to be caused by: A. an increase in the wealth of consumers. B. an increase in consumer confidence. C. an increase in interest rates for home mortgages. D. a decrease in tax rates on household income. 38. We would expect a decline in personal and corporate income taxes to: A. shift the aggregate demand curve rightward. B. increase consumption and investment spending. C. increase the real output. D. do all of the above. 39. An increase in investment spending caused by a decline in the interest rate will: A. shift the aggregate supply curve to the left. B. move the economy up along an existing aggregate demand curve. C. shift the aggregate demand curve to the left. D. shift the aggregate demand curve to the right.

7 40. When the excess capacity of business rises, aggregate: A. demand increases. B. demand decreases. C. supply increases. D. supply decreases. 41. Refer to the information below. Investment spending would most likely be influenced by changes in: The following list of factors, are related to the aggregate demand curve. A. 1 and 3. B. 4 and 6. C. 5 and 10. D. 8 and Refer to the list below. Which two factors would most likely cause a change in investment spending? The following list of items is related to aggregate demand. A. 2 and 5 B. 3 and 10 C. 2 and 7 D. 6 and A decrease in government spending will cause a(n): A. increase in the quantity of real domestic output demanded. B. decrease in the quantity of real domestic output demanded. C. decrease in aggregate demand. D. increase in aggregate demand.

8 44. Which of the above diagrams best portrays the effects of a substantial reduction in government spending? A. A B. B C. C D. D 45. Which of the above diagrams best portrays the effects of an increase in foreign spending on our products? A. A B. B C. C D. D 46. Which of the above diagrams best portrays the effects of declines in the incomes of other major nations with whom we trade? A. A B. B C. C D. D

9 47. Refer to the information below. A change in net export spending would most likely be caused by changes in: The following list of factors is related to the aggregate demand curve. A. 2 and 3. B. 5 and 6. C. 7 and 8. D. 6 and Other things being equal, if the national incomes of our major international lending partners were to rise, our: A. aggregate demand curve would shift to the right. B. aggregate supply curve would shift to the left. C. aggregate supply curve would shift to the right. D. aggregate demand curve would shift to the left. 49. Refer to the diagram below. Which of the following would shift the aggregate demand curve from AD 2 to AD 1? A. a decline in personal income tax rates B. an increase in the international value of the dollar C. an increase in government spending D. an upward revision of profit expectations on investment projects 50. In terms of aggregate supply, in the immediate short run: A. the price level is variable. B. real output is fixed. C. nominal wages are variable. D. both input prices and output prices are fixed. 51. With output and input prices fixed, the immediate short run aggregate supply curve is: A. vertical. B. upward sloping. C. horizontal. D. downward sloping.

10 52. The horizontal shape of the immediate short run aggregate supply implies that: A. the total amount of output in the economy depends only on the general price level. B. the total amount of output in the economy depends only on the volume of spending. C. the total amount of output in the economy is fixed. D. the total amount of spending depends on the price of inputs. 53. In terms of aggregate supply, the short run is a period in which: A. the price level is fixed. B. employment is fixed. C. real output is fixed. D. nominal wages and other input prices are fixed. 54. The short-run aggregate supply curve is upward-sloping because: A. of the interest-rate effect. B. higher price levels create incentives to expand output when resource prices remain constant. C. of the net export effect. D. higher price levels create an expectation among producers of still higher price levels. 55. Other things equal, a decrease in the price level will: A. shift the short run aggregate supply curve to the left. B. shift the aggregate demand curve to the left. C. cause a movement up a short-run aggregate supply curve. D. cause a movement down a short run aggregate supply curve. 56. Other things equal, an increase in the price level will: A. shift the short run aggregate supply curve to the right. B. shift the aggregate demand curve to the right. C. cause a movement up along a short-run aggregate supply curve. D. cause a movement down a short run aggregate supply curve. 57. The short run aggregate supply curve: A. shows the various amounts of real output which businesses will produce at each price level. B. is downward sloping because real purchasing power increases as the price level falls. C. contains a vertical range where real output is variable and the price level is constant. D. is explained by the interest rate, wealth, and foreign trade effects. 58. Refer to the above diagram relating to short-run and long-run aggregate supply. The A. short-run aggregate supply curve is A. B. short-run aggregate supply curve is B. C. long-run aggregate supply curve is B. D. long-run aggregate supply curve is D.

11 59. Refer to the above diagram. If the price level rises above P 1 because of an increase in aggregate demand, the: A. economy will move up along curve B and output will temporarily increase. B. long-run aggregate supply curve C will shift upward. C. short-run aggregate supply curve B will automatically shift to the right. D. economy's output first will decline, then increase, and finally return to Q Which of the following would not shift the aggregate supply curve? A. an increase in labour productivity B. a decline in the price of imported oil C. a decline in business taxes D. an increase in the price level 61. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P 2 and that the economy initially is operating at its full-employment level of output Q f. In the short run, an increase in the price level from P 2 to P 3 will: A. change aggregate supply from AS 2 to AS 3. B. increase real output from Q 1 to Q 2. C. change aggregate supply from AS 2 to AS 1. D. increase real output from Q f to Q 2. Suppose the full-employment level of real output (Q) for a hypothetical economy is $500 and that the price level (P) initially is 100. Use the following short-run aggregate supply schedules to answer the next question. 62. Refer to the information above. If the price level unexpectedly increases from 100 to 125, the level of real output in the short run will: A. rise from $500 to $560. B. fall from $500 to $440. C. fall from $560 to $500. D. rise from $440 to $ Refer to the information above. If the price level unexpectedly declines from 100 to 75, the level of real output in the short run will: A. rise from $500 to $560. B. fall from $500 to $440. C. fall from $560 to $500. D. rise from $440 to $500.

12 64. Refer to the information above. In the long run, an increase in the price level from 100 to 125 will: A. increase real output from $500 to $560. B. decrease real output from $500 to $440. C. change the aggregate supply schedule from (a) to (c) and result in an equilibrium level of real output of $560. D. change the aggregate supply schedule from (a) to (b) and result in an equilibrium level of real output of $ Refer to the information above. In the long run, a fall in the price level from 100 to 75 will: A. decrease real output from $500 to $440. B. increase real output from $500 to $620. C. change the aggregate supply schedule from (a) to (c) and produce an equilibrium level of real output of $500. D. change the aggregate supply schedule from (a) to (b) and produce an equilibrium level of real output of $ In terms of aggregate supply, the difference between the long run and the short run is that in the long run: A. the price level is variable. B. employment is variable. C. real output is variable. D. nominal wages and other input prices are variable. 67. The long-run aggregate supply curve is vertical: A. because the rate of inflation is steady in the long run. B. because resource prices eventually catch up with product prices. C. because product prices always increase at a faster rate than resource prices. D. only when the money supply increases at the same rate as real GDP. 68. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P 2 and that the economy initially is operating at its full-employment level of output Q f. In the long run, an increase in the price level from P 2 to P 3 will: A. increase real output from Q f to Q 2. B. change aggregate supply from AS 2 to AS 1. C. decrease real output from Q 2 to Q 1. D. not change the level of real output. 69. Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P 2 and that the economy initially is operating at its full-employment level of output Q f. In terms of this diagram, the long-run aggregate supply curve: A. is AS 2. B. is a vertical line extending from Q f upward through e, b, and d. C. may be either AS 1, AS 2, or AS 3 depending on whether the price level is P 1, P 2, or P 3. D. is a horizontal line extending from P 2 rightward through f, b, and g.

13 70. Refer to the data below. The vertical range of the aggregate supply curve is associated with price levels: The following aggregate demand and supply schedules are for a hypothetical economy: A. 150 and 200. B. 150 and 300. C. 200 and 250. D. 250 and Refer to the table below. If this nation's aggregate supply schedule graphs as a vertical line at the $25 billion level of real GDP, its price level will be: The following table is for a particular country in which C is consumption expenditures, I g is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. A B C D Refer to the above diagram. The long-run aggregate supply curve is: A. A. B. B. C. C. D. D. 73. The long run aggregate supply: A. is downward sloping. B. is vertical. C. is horizontal. D. is upward sloping.

14 74. Which of the following is true of aggregate supply in the long run? A. Nominal wages and output prices are both fixed. B. Nominal wages are fixed but output prices can vary. C. Output prices are fixed. D. Nominal wages are fully responsive to changes in the price level. 75. A change in aggregate supply would be caused by a change in: A. the price level. B. aggregate demand. C. an aggregate supply determinant. D. the quantity of real output supplied. 76. Shifts in the aggregate supply curve are caused by changes in: A. consumption spending. B. the quantity of real output demanded. C. the quantity of real output supplied. D. one or more of the determinants of aggregate supply. 77. Other things equal, the short-run aggregate supply curve shifts positions when: A. the price level changes. B. the rate of inflation changes. C. input prices change. D. aggregate demand changes. 78. An increase in productivity will shift the aggregate: A. demand curve leftward. B. demand curve rightward. C. supply curve rightward. D. supply curve leftward. 79. The determinants of aggregate supply: A. are consumption, investment, government, and net export spending. B. explain why real domestic output and the price level are directly related. C. explain the three distinct ranges of the aggregate supply curve. D. include input prices and r productivity. 80. Suppose that nominal wages fall and productivity rises in a particular economy. Other things equal, the aggregate: A. demand curve will shift leftward. B. supply curve will shift rightward. C. supply curve will shift leftward. D. expenditures curve will shift downward. 81. A rightward shift in the aggregate supply curve might best be explained by: A. an increase in business taxes. B. a decrease in productivity. C. an increase in nominal wages. D. a decrease in the price of imported resources. 82. Other things being equal, if world oil prices increased by 70 percent then the most likely effect would be to: A. shift the aggregate demand curve right. B. shift the aggregate supply curve right. C. shift the aggregate supply curve left. D. shift the aggregate demand curve right and the aggregate supply curve left.

15 83. Other things equal, if the international value of the dollar were to depreciate, the: A. aggregate demand curve would remain fixed in place. B. aggregate supply curve would shift to the left. C. aggregate supply curve would shift to the right. D. aggregate demand curve would shift to the left. 84. Which one of the following would increase per unit production cost and therefore shift the aggregate supply curve to the left? A. a reduction in business taxes B. an increase in the number of resources used in production C. an increase in the price of imported resources D. deregulation of industry 85. Which would most likely shift the aggregate supply curve? A change in: A. consumer expectations. B. government spending. C. excess capacity in business. D. prices of imported resources. 86. Other things equal, an improvement in productivity will: A. tend to increase the equilibrium price level. B. shift the aggregate supply curve to the left. C. shift the aggregate supply curve to the right. D. shift the aggregate demand curve to the left. 87. Per unit production cost is: A. real output divided by inputs. B. total input cost divided by total output. C. units of output divided by total input cost. D. a determinant of aggregate demand. The following table gives information about the relationship between input quantities and real domestic output in a hypothetical economy: 88. Refer to the above information, the level of productivity is: A. 2. B..5. C. 4. D If the price of each input is $5, the per unit cost of production in the above economy is: A. $5. B. $2.75. C. $2.50. D. $ Suppose that the price of each input increased from $5 to $8. The per unit cost of production in the above economy would: A. rise by $1.50 and the aggregate supply curve would shift to the right. B. rise by 60 percent and the aggregate supply curve would shift to the left. C. rise by 60 percent and the aggregate demand curve would shift to the left. D. fall by $1.50 and the aggregate demand curve would shift to the right.

16 91. Other things equal, an improvement in productivity will: A. shift the aggregate demand curve to the left. B. shift the aggregate supply curve to the left. C. shift the aggregate supply curve to the right. D. increase the price level. An economy is employing 2 units of capital, 5 units of raw materials, and 8 units of labour to produce its total output of 640 units. Each unit of capital costs $10, each unit of raw materials, $4, and each unit of labour, $ Refer to the above information. The per unit cost of production in this economy is: A. $.05. B. $.10. C. $.50. D. $ Refer to the above information. If the per unit price of raw materials rises from $4 to $8 and all else remains constant, the per unit cost of production will rise by about: A. 100 percent. B. 50 percent. C. 40 percent. D. 30 percent. 94. Refer to the above information. As a result of the change indicated in the previous question, the aggregate: A. supply curve would shift to the left. B. supply curve would shift to the right. C. demand curve would shift to the left. D. demand curve would shift to the right. Suppose that real domestic output in an economy is 20 units, the quantity of inputs is 10, and the price of each input is $ Refer to the information above, the level of productivity is: A. 20. B. 10. C. 5. D The per unit cost of production in the economy described above is: A. $.50. B. $1. C. $2. D. $ Refer to the above information. All else being equal, if the price of each input increased from $4 to $6, productivity would: A. fall from 2 to 3. B. fall from.50 to.33. C. rise from 1 to 2. D. remain unchanged. 98. Refer to the above information. Given an increase in input price from $4 to $6, we would expect the aggregate: A. supply curve to shift to the left. B. supply curve to shift to the right. C. demand curve to shift to the left. D. demand curve to shift to the right.

17 99. Productivity measures: A. real output per unit of input. B. per unit production costs. C. the changes in real wealth caused by price level changes. D. the amount of capital goods used per worker. 100.Other things equal, appreciation of the dollar: A.increases aggregate demand in Canada and may increase aggregate supply by reducing the prices of imported resources. B.increases aggregate demand in Canada and may decrease aggregate supply by reducing the prices of imported resources. C.decreases aggregate demand in Canada and may increase aggregate supply by reducing the prices of imported resources. D.decreases aggregate demand in Canada and may reduce aggregate supply by increasing the prices of imported resources. 101.If the dollar price of foreign currencies falls (that is, the dollar appreciates), we would expect: A. aggregate demand to decrease and aggregate supply to increase. B. both aggregate demand and aggregate supply to decrease. C. both aggregate demand and aggregate supply to increase. D. aggregate demand to increase and aggregate supply to decrease. 102.Which of the above diagrams best portrays the effects of an increase in productivity? A. A B. B C. C D. D 103.Which of the above diagrams best portrays the effects of a decrease in the availability of key natural resources? A. A B. B C. C D. D

18 104.Which of the above diagrams best portrays the effects of declines in the prices of imported resources? A. A B. B C. C D. D 105.Which of the above diagrams best portrays the effects of a dramatic increase in energy prices? A. A B. B C. C D. D 106.If personal taxes were decreased and input productivity increased simultaneously, the equilibrium: A. output would rise. B. output would fall. C. price level would necessarily fall. D. price level would necessarily rise. The following list of items are related to aggregate demand and/or aggregate supply. 107.Refer to the above list. Changes in which combination of factors best explain why the aggregate supply curve would shift? A. 1 and 2 B. 2 and 10 C. 3 and 6 D. 7 and Refer to the above list. A change in which factor is most likely to change both aggregate demand and aggregate supply? A. 3 B. 5 C. 7 D Other things equal, a reduction in personal and business taxes can be expected to: A. increase aggregate demand and decrease aggregate supply. B. increase both aggregate demand and aggregate supply. C. decrease both aggregate demand and aggregate supply. D. decrease aggregate demand and increase aggregate supply. 110.The passage of new legislation requiring more extensive government regulation of business will most likely: A. increase aggregate demand. B. increase aggregate supply. C. decrease aggregate demand. D. decrease aggregate supply. 111.Which would be considered to be one of the factors that shift the aggregate supply curve? A change in: A. consumer spending. B. net export spending. C. government regulation. D. profit expectations on investment projects.

19 112.Refer to the diagram below. Other things equal, a shift of the aggregate supply curve from AS 0 to AS 1 might be caused by a(n): A. increase in government regulation. B. increase in aggregate demand. C. increase in productivity. D. decline in nominal wages. 113.Which would increase aggregate supply? A. an increase in business regulation B. a decline in productivity C. an increase in business subsidies D. a decrease in the capital stock 114.The equilibrium price level and level of real output occur where: A. real output is at its highest possible level. B. exports equal imports. C. the price level is at its lowest level. D. the aggregate demand and supply curves intersect. The following table shows the aggregate demand and aggregate supply schedule for a hypothetical economy. 115.Refer to the above table. The equilibrium price level and quantity of real domestic output will be: A. 150 and $1000. B. 150 and $1500. C. 200 and $2000. D. 250 and $ Refer to the above table. If the quantity of real domestic output demanded decreased by $500 and the quantity of real domestic output supplied increased by $500 at each price level, the new equilibrium price level and quantity of real domestic output would be: A. 150 and $1500. B. 150 and $2000. C. 200 and $2000. D. 250 and $2000.

20 The following aggregate demand and supply schedules are for a hypothetical economy: 117.Refer to the above data. The equilibrium price level will be: A B C D Refer to the above data. If the price level is 150 and producers supply $300 of real output: A. a shortage of real output of $200 will occur. B. a shortage of real output of $100 will occur. C. a surplus of real output of $300 will occur. D. neither a shortage nor a surplus of real output will occur. The following table is for a particular country in which C is consumption expenditures, I g is gross investment expenditures, G is government expenditures, X is exports, and M is imports. All figures are in billions of dollars. Each question is independent of the other questions. 119.Refer to the above table. If the aggregate supply schedule intersects the aggregate demand at price level 119 in this country, its equilibrium level of real GDP will be: A. $37 billion. B. $35 billion. C. $26 billion. D. $43 billion. 120.Refer to the above table. If the equilibrium level of real GDP is $43 billion in this country, its level of consumption will be: A. $18 billion. B. $20 billion. C. $22 billion. D. $26 billion.

21 121.Refer to the above diagram. If equilibrium real output is Q 2, then: A. aggregate demand is AD 1. B. the equilibrium price level is P 1. C. producers will supply output level Q 1. D. the equilibrium price level is P Refer to the above diagram. If the equilibrium price level is P 1, then: A. aggregate demand is AD 2. B. the equilibrium output level is Q 3. C. the equilibrium output level is Q 2. D. producers will supply output level Q Refer to the above diagram. At the equilibrium price and quantity: A. aggregate demand exceeds aggregate supply. B. the amount of real output demanded and supplied are equal. C. aggregate demand equals aggregate supply. D. aggregate supply exceeds aggregate demand. 124.Refer to the diagram below. If the initial aggregate demand and supply curves are AD 0 and AS 0, the equilibrium price level and level of real domestic output will be: A. F and C, respectively. B. G and B, respectively. C. F and A, respectively. D. E and B, respectively. 125.Refer to the diagram below. Suppose that aggregate demand increased from AD 1 to AD 2. For the price level to stay constant: A. the aggregate supply curve would have to shift rightward. B. the aggregate supply curve would have to shift leftward. C. real domestic output would have to remain constant. D. the aggregate supply curve would have to be vertical.

22 126.If the current price level was such that the aggregate quantity demanded exceeded the aggregate quantity supplied, we would expect: A. inflation to occur. B. the aggregate demand curve to shift rightward. C. the aggregate demand curve to shift leftward. D. the ratchet effect to be applicable. 127.In which of the following sets of circumstances can we confidently expect inflation? A. aggregate supply and aggregate demand both increase B. aggregate supply and aggregate demand both decrease C. aggregate supply decreases and aggregate demand increases D. aggregate supply increases and aggregate demand decreases 128.Refer to the above diagram. If AD 1 shifts to AD 2, then the equilibrium output and price level are: A. P 1 and Q 3. B. P 2 and Q 3. C. P 1 and Q 2. D. P 2 and Q Refer to the above diagram. When AD 1 shifts to AD 2, then at P 1 Q 3 output demanded will: A. equal output supplied. B. exceed output supplied. C. be less than output supplied. D. be at stable full-employment GDP.

23 130.Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P 2 and that the economy initially is operating at its full-employment level of output Q f. In the short run, demand-pull inflation could best be shown as: A. a move from b to c on AS 2. B. a move from b to c to d. C. a change of aggregate supply from AS 2 to AS 3. D. a move from b to d. 131.Refer to the above diagram. Assume that nominal wages initially are set on the basis of the price level P 2 and that the economy initially is operating at its full-employment level of output Q f. In the long run, demand-pull inflation could best be shown as: A. a move from b to c on AS 2. B. a move from b to f to d. C. a change of aggregate supply from AS 2 to AS 1. D. a move from b to d. 132.Refer to the diagram below. A shift in the aggregate demand curve from AD 1 to AD 0 might be caused by a(n): A. decrease in aggregate supply. B. decrease in the amount of output supplied. C. increase in investment spending. D. decrease in net export spending. The following aggregate demand and supply schedules are for a hypothetical economy: 133.Refer to the above data. If the amount of real output demanded at each price level falls by $200, the equilibrium price level and equilibrium level of real domestic output will fall to: A. 250 and $200, respectively. B. 200 and $300, respectively. C. 150 and $300, respectively. D. 150 and $200, respectively. 134.Refer to the above data. The change in aggregate demand indicated in the previous question might have been caused by: A. an increase in net exports. B. a worsening of business expectations. C. an increase in consumer wealth. D. a decrease in the personal income tax.

24 135.Aggregate demand decreases and real output falls but the price level remains the same. Which factor most likely contributes to downward price inflexibility? A. the multiplier effect B. the wealth effect C. fear of price wars D. business taxes 136.Wage contracts, efficiency wages, and the minimum wage are explanations for why: A. competition results in price wars. B. wages tend to be inflexible downward. C. the aggregate demand curve slopes downward. D. there is little support for the existence of a real-balances effect. 137.Collective bargaining agreements that prohibit wage cuts for the duration of the contract contribute to: A. a wealth effect. B. a multiplier effect. C. an increase in aggregate supply. D. a price level that is inflexible downward. 138.Menu costs will: A. increase the amount of training of workers. B. result in price wars between businesses. C. increase the legal minimum wage. D. make prices inflexible downward. 139.Efficiency wages will: A. make wages inflexible downward. B. elicit minimum work effort from workers. C. impose a legal price floor on wages. D. increase the number of strikes. 140.Cost-push inflation arises from: A. a decrease in aggregate demand. B. a decrease in aggregate supply. C. an increase in aggregate demand. D. an increase in aggregate supply. 141.Cost-push inflation is characterized by a(n): A. increase in aggregate supply and a decrease in aggregate demand. B. increase in aggregate demand and no change in aggregate supply. C. decrease in aggregate supply and no change in aggregate demand. D. decrease in both aggregate supply and aggregate demand. 142.Cost-push inflation occurs because of a: A. rightward shift in the aggregate demand curve. B. leftward shift in the aggregate demand curve. C. rightward shift in the aggregate supply curve. D. leftward shift in the aggregate supply curve. 143.The economy experiences an increase in the price level and a decrease in real domestic output. Which is a likely explanation? A. productivity has increased B. input prices have increased C. excess capacity has decreased D. government regulations have been reduced

25 144.Refer to the above diagram. If aggregate supply shifts from AS 1 to AS 2, then the price level will: A. increase and real domestic output will increase. B. decrease and real domestic output will increase. C. increase and real domestic output will decrease. D. decrease and real domestic output will decrease. 145.Refer to the above diagram. Cost-push inflation can be illustrated by a: A. shift in the aggregate supply curve from AS 1 to AS 2. B. shift in the aggregate supply curve from AS 1 to AS 3. C. shift in the aggregate supply curve from AS 2 to AS 3. D. movement along the aggregate demand curve from e 1 to e Refer to the diagram below. Assume that nominal wages initially are set on the basis of the price level P 2 and that the economy initially is operating at its full-employment level of output Q f. In the short run, costpush inflation could best be shown as: A. a leftward shift of aggregate supply from AS 2 to AS 3. B. a move from b to c on AS 2. C. a move from b to c to d. D. a move from b to f to d.

26 147.Refer to the above diagram. If the aggregate supply curve shifted from AS 0 to AS 1, we could say that: A. aggregate supply has increased, equilibrium output has decreased, and the price level has increased. B. aggregate supply has decreased, equilibrium output has decreased, and the price level has increased. C. an increase in the amount of output supplied has occurred. D. aggregate supply has increased and the price level has risen to G. 148.Refer to the above diagram. If aggregate supply is AS 1 and aggregate demand is AD 0, then: A. at any price level above G a shortage of real output would occur. B. F represents a price level which would result in a surplus of real output of AC. C. a surplus of real output of GH would occur. D. F represents a price level which would result in a shortage of real output of AC. 149.If real output rises and the price level falls, this would likely be due to a: A. rightward shift of the aggregate demand curve. B. leftward shift of the aggregate demand curve. C. rightward shift of the aggregate supply curve. D. leftward shift of the aggregate supply curve. 150.In the above figure AD 1 and AS 1 represent the original aggregate supply and demand curves and AD 2 and AS 2 show the new aggregate demand and supply curves. At the original equilibrium price and quantity, this economy is experiencing: A. inflation. B. economic growth. C. full employment. D. less than full-capacity output. 151.In the above figure AD 1 and AS 1 represent the original aggregate supply and demand curves and AD 2 and AS 2 show the new aggregate demand and supply curves. The change in aggregate supply from AS 1 to AS 2 could be caused by: A. a reduction in the price level. B. the increased availability of entrepreneurial talent. C. an increase in business taxes. D. the real balances, interest-rate, and foreign trade effects.

27 152.In the above figure AD 1 and AS 1 represent the original aggregate supply and demand curves and AD 2 and AS 2 show the new aggregate demand and supply curves. The changes in aggregate demand and supply in the above diagram produce: A. a higher price level. B. an expansion of real output and a stable price level. C. an expansion of real output and a higher price level. D. a decline in real output and a stable price level. 153.The economy experiences a decrease in the price level and an increase in real domestic output. Which is a likely explanation? A. consumer incomes and the quantity of labour have decreased B. interest rates and wage rates have decreased C. the prices of imported resources have increased D. national income abroad has increased 154.Refer to the above diagram. If aggregate supply shifts from AS 1 to AS 3, then real domestic output will: A. increase and the price level will increase. B. increase and the price level will decrease. C. decrease and the price level will increase. D. decrease and the price level will decrease. 155.Refer to the above diagram. When output increases from Q 1 and the price level decreases from P 1, this change will: A. be caused by a shift in the aggregate supply curve from AS 1 to AS 2. B. be caused by a shift in the aggregate supply curve from AS 1 to AS 3. C. result in a movement along the aggregate demand curve from e 1 to e 2. D. result in a movement along the aggregate demand curve from e 3 to e Refer to the above diagram. When output decreases from Q 1 and the price level increases from P 1, then this change will: A. be caused by a shift in the aggregate supply curve from AS 1 to AS 3. B. be caused by a shift in the aggregate supply curve from AS 2 to AS 1. C. result in a movement along the aggregate demand curve from e 2 to e 1. D. result in a movement along the aggregate demand curve from e 1 to e The Canadian economy was able to achieve full employment with relative price level stability in the early 2000 because aggregate: A. demand increased. B. supply decreased. C. demand increased and aggregate supply increased. D. demand decreased and aggregate supply increased.

28 158.The Great Moderation refers to: A. the period from 1982 to 2008 when business cycles were longer and relatively mild. B. the recession that began in 2008 and continued through to C. the fact that businesses and governments cannot smooth out the business cycle. D. the period from 1982 to 2008 when cycles were shorter. 159.In the late 1990s and early 2000s: A. both AD and AS increased B. inflation was relatively high. C. AD increased but AS decreased. D. AD decreased but AS increased. 160.The aggregate demand curve can be derived from the aggregate expenditures model as indicated by the fact that: A. a decrease in the price level shifts the aggregate expenditures schedule downward and decreases real GDP. B. a decrease in the price level shifts the aggregate expenditures schedule upward and decreases real GDP. C. an increase in the price level shifts the aggregate expenditures schedule upward and increases real GDP. D. an increase in the price level shifts the aggregate expenditures schedule downward and decreases real GDP. 161.In deriving the aggregate demand curve from the aggregate expenditures model we note that: A. the wealth or real balances effect is irrelevant to both models. B. a change in the price level will have no impact on the aggregate expenditures schedule. C. an increase (decrease) in the price level shifts the aggregate expenditures schedule upward (downward). D. an increase (decrease) in the price level shifts the aggregate expenditures schedule downward (upward). 162.The aggregate expenditures model and the aggregate demand curve can be reconciled because, other things being equal, in the aggregate expenditures model: A. changes in the price level have no effect on the equilibrium level of GDP. B. an increase in the price level increases the real value of wealth. C. the level of aggregate expenditures and therefore the level of real GDP vary inversely with the price level. D. the level of aggregate expenditures and therefore the level of real GDP vary directly with the price level. 163.An increase in aggregate expenditures resulting from a decrease in the price level is equivalent to a: A. rightward shift of the aggregate demand curve. B. leftward shift of the aggregate demand curve. C. movement downward along a fixed aggregate demand curve. D. decrease in aggregate supply. 164.The relationship between the aggregate demand curve and the aggregate expenditures model is shown in the fact that: A. a decrease in the price level shifts the aggregate expenditures schedule downward and decreases real GDP. B. a decrease in the price level shifts the aggregate expenditures schedule upward and increases real GDP. C. an increase in the price level shifts the aggregate expenditures schedule upward and increases real GDP. D. an increase in the price level shifts the aggregate expenditures schedule downward and increases real GDP.

29 165.If there is a decrease in the price level, then it will increase aggregate expenditures and this change is equivalent to a(n): A. increase in aggregate supply. B. increase in aggregate demand. C. decrease in aggregate demand. D. movement along an aggregate demand curve. 166.A movement upward along an existing aggregate demand curve that changes the price level is equivalent to a(n): A. decrease in aggregate demand. B. increase in aggregate demand. C. upward shift in the aggregate expenditures schedule. D. downward shift in the aggregate expenditures schedule. 167.A movement downward along an existing aggregate demand curve is equivalent to a(n): A. decrease in aggregate demand. B. increase in aggregate demand. C. upward shift in the aggregate expenditures schedule. D. downward shift in the aggregate expenditures schedule. 168.Refer to the above diagrams. A decline in aggregate expenditures from AE 2 to AE 1 resulting from the wealth, interest rate, and foreign trade effects would be depicted as: A. a movement from A to B along aggregate demand curve AD 1. B. a movement from B to A along aggregate demand curve AD 1. C. a shift of aggregate demand from AD 1 to AD 2. D. a shift of aggregate demand from AD 2 to AD Refer to the above diagrams. Assuming a constant price level, an increase in aggregate expenditures from AE 1 to AE 2 would: A. move the economy from A to B along AD 1. B. move the economy from B to A along AD 1. C. increase aggregate demand from AD 1 to AD 2. D. decrease aggregate demand from AD 2 to AD 1.

30 170.An increase in net exports can be expected to shift the: A. aggregate expenditures curve upward and the aggregate demand curve rightward. B. aggregate expenditures curve upward and the aggregate demand curve leftward. C. aggregate expenditures curve downward and the aggregate demand curve rightward. D. aggregate expenditures curve downward and the aggregate demand curve leftward. 171.An increase in aggregate expenditures resulting from some factor other than a change in the price level is equivalent to: A. a rightward shift of the aggregate demand curve in the AD-AS model. B. a leftward shift of the aggregate demand curve in the AD-AS model. C. a movement downward along a fixed aggregate demand curve in the AD-AS model. D. a decrease in aggregate supply in the AD-AS model. 172.When deriving the aggregate demand (AD) curve from the aggregate expenditure model, an increase in Canadian product prices would cause: A. an increase in the value of household wealth and reduced consumption expenditures. B. an increase in interest rates and lower investment expenditures. C. an increase in exports and imports. D. an increase in Canadian resource prices and an increase in aggregate supply. 173.Suppose higher taxes on businesses cause a decrease in spending on plant and equipment. How will this affect the aggregate expenditure (AE) and the aggregate demand (AD) schedules? A. AE shifts up; AD shifts to the left B. AE shifts down; AD shifts to the left C. AE shifts up; AD shifts to the right D. AE shifts down; AD shifts to the right 174.All else equal, an increase in imports will shift the aggregate expenditures curve: A. upward and the aggregate demand curve rightward. B. upward and the aggregate demand curve leftward. C. downward and the aggregate demand curve rightward. D. downward and the aggregate demand curve leftward. 175.An increase in the price level, other things equal, will shift the: A. consumption, investment, and net exports schedules of the aggregate expenditures model downward. B. consumption, investment, and net exports schedules of the aggregate expenditures model upward. C.consumption, and investment schedules of the aggregate expenditures model upward, but the net exports schedule downward. D.consumption, and net exports schedules of the aggregate expenditures model upward, but the investment schedule downward. 176.Assume that an initial change in spending of $10 billion results in a rightward shift in aggregate demand that increases real GDP by $40 billion. The multiplier is: A. $10 billion. B. $40 billion. C. 4. D A decrease in the price level in the aggregate expenditures model would: A. decrease aggregate expenditures and real GDP. B. increase aggregate expenditures and real GDP. C. decrease aggregate expenditures and increase real GDP. D. increase aggregate expenditures and decrease real GDP. 178.An increase in the price level in the aggregate expenditures model would: A. decrease aggregate expenditures and real GDP. B. increase aggregate expenditures and real GDP. C. increase aggregate expenditures and decrease real GDP. D. decrease aggregate expenditures and increase real GDP.

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