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1 Mods Practice Multiple Choice Identify the choice that best completes the statement or answers the question. 1. The aggregate demand curve shows the relationship between the aggregate price level and: A. aggregate productivity. B. the aggregate unemployment rate. C. the aggregate quantity of output demanded by households, businesses, the government, and the rest of the world. D. the aggregate quantity of output demanded by businesses only. E. the aggregate quantity of goods and services consumed by households. 2. The _ curve shows the negative relationship between the aggregate price level and the quantity of aggregate output demanded in the economy. A. aggregate demand B. short-run aggregate supply C. long-run aggregate supply D. investment demand E. Phillips curve 3. The aggregate demand curve: A. slopes downward for the same reasons that an ordinary demand curve does. B. slopes downward in part because when the price level falls the real wealth of the public falls, and this induces people to change their consumption. C. slopes downward in part because as the price level falls the ability of households and firms to borrow cheaply increases. D. slopes upward, unlike an ordinary demand curve. E. is vertical, unlike an ordinary demand cure. 4. According to the interest rate effect, an increase in the price level causes people to: A. increase their money holdings, which increases interest rates and decreases investment B. decrease their money holdings, which increases interest rates and decreases investment C. to increase their money holdings, which decreases interest rates and decreases investment D. to decrease their money holdings, which decreases interest rates and increases investment E. to decrease their money holdings, which decreases interest rates and decreases investment 5. Increasing the quantity of money in circulation shifts the: A. aggregate demand curve to the left. B. long-run aggregate supply curve to the right. C. aggregate demand curve to the right. D. short-run aggregate supply curve to the right. E. short-run aggregate supply curve to the left. 6. The only government policy that has a DIRECT effect on the aggregate demand curve is: A. changing the quantity of money.

2 B. changing the tax rate. C. changing the level of government purchases of final goods and services. D. changing the level of government transfers. E. changing the interest rate. 7. Aggregate demand will decrease if: A. the aggregate price level falls. B. net exports rises. C. productivity declines. D. the money supply increases. E. the government raises the tax rate. 8. An increase in aggregate demand is seen as a(n): A. shift to the right in the aggregate demand curve. B. downward movement along the aggregate demand curve. C. upward movement along the aggregate demand curve. D. shift to the left in the aggregate demand curve. E. movement from a horizontal to a vertical aggregate demand curve. 9. A decrease in aggregate demand is seen as a(n): A. downward movement along the aggregate demand curve. B. upward movement along the aggregate demand curve. C. shift to the left in the aggregate demand curve. D. shift to the right in the aggregate demand curve. E. movement from a vertical to a horizontal aggregate demand curve. 10. Changes in aggregate demand can be caused by changes in: A. production technology. B. business costs. C. raw materials costs. D. worker productivity. E. government 11. A rise in labor productivity is most likely to result in: A. an increase in aggregate demand. B. a decrease in aggregate demand. C. a decrease in short-run aggregate supply. D. a decrease in long-run aggregate supply. E. an increase in short-run aggregate supply. 12. Nominal wages are sticky because: A. in the short run these payments are slow to rise when there are labor shortages and slow to fall even when there is significant level of unemployment. B. in the long run these payments remain fixed thereby increasing the profitability of the firms. C. in the short run these payments are slow to fall when there are labor shortages and slow to rise even when there is significant level of unemployment. D. in the long run all wages become adjusted for inflation. E. workers will never ask for increases to their wages. 13. Stagflation is a combination of: A. increasing unemployment and increasing inflation. B. decreasing unemployment and decreasing inflation.

3 C. increasing unemployment and decreasing inflation. D. decreasing unemployment and increasing inflation. E. increasing unemployment and deflation. Figure 19-2: Macroeconomics Equilibrium 14. Use the Macroeconomics Equilibrium Figure In the accompanying figure, curve 1 refers to _, curve 2 refers to _, and curve 3 refers to _. 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. aggregate demand; long-run aggregate supply; short-run aggregate supply E. short-run aggregate supply; aggregate demand; long-run aggregate supply 15. The intersection of the economy's aggregate demand and long-run aggregate supply curves: A. determines its equilibrium real GDP in both the long run and the short run. B. determines its equilibrium price level in both the long run and the short run. C. occurs at the economy's potential output. D. occurs at high levels of cyclical unemployment. E. occurs at the level of output that corresponds to an unemployment rate of 0%. Figure 19-3: Inflationary and Recessionary Gaps

4 16. Use the Inflationary and Recessionary Gaps Figure In Panel (a), the intersection of SRAS with AD indicates: A. an economy experiencing a recessionary gap. B. an economy experiencing an inflationary gap. C. that the economy is in long-run equilibrium. D. that the economy has an unusually low unemployment rate. E. that the economy is operating at potential output. Figure 19-4: An Increase in Aggregate Demand 17. Use the An Increase in Aggregate Demand Figure Because of the pressures existing at the short-run equilibrium at Y 2 and P 2: A. the SRAS curve will shift to the right. B. the SRAS curve will shift to the left. C. unemployment will decrease. D. LRAS will shift to the right. E. the price level will decrease. Figure 19-5: Policy Alternatives 18. Use the Policy Alternatives Figure In Panel (a), suppose that the initial equilibrium is at real GDP level Y 1 and price level P 2. At real GDP level Y 1 there is:

5 A. an inflationary gap. B. a recessionary gap. C. No cyclical unemployment. D. long-run equilibrium. E. full employment. 19. A self-correcting inflationary gap results in: A. short-run aggregate supply that gradually increases. B. short-run aggregate supply that gradually decreases. C. aggregate demand that gradually increases. D. aggregate demand that gradually decreases. E. long-run aggregate supply that gradually decreases. 20. If government decides to increase spending, in the short run, this will: A. increase aggregate output and aggregate price levels. B. increase aggregate output, but lead to a decrease in aggregate price levels. C. decrease both aggregate output and aggregate price levels. D. decrease aggregate output, but increase aggregate price level. E. increase aggregate output with no impact on the aggregate price level.

6 Mods Practice Answer Section MULTIPLE CHOICE 1. ANS: C PTS: 1 DIF: M REF: Module 17 SKL: Definitional 2. ANS: A PTS: 1 DIF: E REF: Module 17 SKL: Definitional 3. ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: E PTS: 1 DIF: M REF: Module 17 SKL: Fact-Based 11. ANS: E PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: E REF: Module 19 SKL: Definitional 14. ANS: D PTS: 1 DIF: E REF: Module ANS: C PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module ANS: B PTS: 1 DIF: D REF: Module 19 SKL: Analytical Thinking 18. ANS: B PTS: 1 DIF: E REF: Module ANS: B PTS: 1 DIF: M REF: Module ANS: A PTS: 1 DIF: M REF: Module 19

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