2009 CHAPTER 11 Self Study Questions

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1 CHAPTER 11 Self Study Questions 1) The aggregate supply/aggregate demand model is used to help understand all of the following except A) inflation. B) business cycle fluctuations. C) the aggregate value of stock traded in the stock market. D) growth of potential GDP. 2) Which of the following variables does NOT directly influence aggregate production? A) the state of technology B) the quantity of capital C) the quantity demanded D) the quantity of labor 3) The quantity of real GDP supplied the amount of. A) increases as; labor input decreases B) decreases as; capital input increases C) decreases as; capital and labor input decreases D) is unaffected by; technology 4) An aggregate supply (AS) 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. 5) The quantity of real GDP supplied at full employment is called A) hypothetical GDP. B) short-run equilibrium GDP. C) potential GDP. D) all of the above. 6) The long-run aggregate supply curve A) is negatively sloped. B) is positively sloped. C) is vertical at the level of potential GDP. D) is horizontal at the level of potential GDP. 7) If the economy is at the natural rate of unemployment, A) real GDP > potential GDP. B) real GDP < potential GDP. C) real GDP = potential GDP. D) All of the above can occur when the economy is at the natural rate of unemployment. 8) 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) the economy is always moving away from full employment. D) actual real GDP always equals potential GDP. 9) 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 because of changes in the price level. 1

2 10) In the figure above, potential GDP equals A) $9.5 trillion. B) $10.0 trillion. C) $10.5 trillion. D) None of the above answers is correct. 11) In the figure above, the economy is at point A when the price level falls to 100. Money wages and all other resource prices remain constant. Firms are willing to supply output equal to A) $9.5 trillion. B) $10.0 trillion. C) $10.5 trillion. D) None of the above answers is correct. 12) 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 13) 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 14) 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. 2

3 15) 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. 16) Other things being equal, the curve that shows households and businesses buying more as the price level falls is known as A) aggregate demand curve. B) aggregate supply curve. C) aggregate production curve. D) total expenditures (C + I + G + NX) curve 17) points out that a rise in the price level decreases the value of real wealth, which then decreases consumption. A) The wealth effect B) The substitution effect C) The open-economy effect D) The interest rate effect 18) 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. 19) Which of the following does NOT shift the aggregate demand curve? A) A decrease in the money supply. B) An increase in people s expected future incomes. C) An increase in the price level. D) An increase in current foreign income. 20) 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 are correct. 21) 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 purchases. 3

4 22) 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 purchases. D) an increase in the quantity of money. 23) 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 24) 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. 25) In the above figure, the economy is at point A when 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 $10.0 trillion B) $10.0 trillion C) more than $10.0 trillion D) Without more information, it is impossible to determine which of the above answers is correct. 4

5 26) 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. 27) The aggregate demand curve A) has a negative slope. B) has a positive slope. C) is vertical. D) is horizontal. 28) 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. 29) 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. 30) 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. 31) Which of the following does NOT shift the aggregate demand curve? A) A decrease in the money supply. B) An increase in investment. C) An increase in the price level. D) A decrease in taxes. 5

6 32) A decrease in expected future income A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. 33) An increase in government purchases of goods and services A) decreases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) increases aggregate demand. 34) A decrease in the quantity of money A) increases aggregate demand. B) increases the aggregate quantity demanded. C) decreases the aggregate quantity demanded. D) decreases aggregate demand. 35) 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 36) In 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 less than potential GDP. 37) 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. 6

7 38) 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) None of the above answers are correct. 39) 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. 40) A recessionary gap means that short-run macroeconomic equilibrium GDP 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. 7

8 41) 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. 42) 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 43) 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. 44) In the above figure, at the price level of 140 and real GDP of A) $12 trillion, firms will not be able to sell all their output. B) $4 trillion, firms will not be able to sell all their output. C) $4 trillion, consumers will not be able to buy all the goods and services they demand. D) $12 trillion, consumers will not be able to buy all the goods and services they demand. 45) A recessionary gap means that short-run macroeconomic equilibrium GDP 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. 8

9 46) An inflationary gap means that short-run macroeconomic equilibrium GDP 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. 47) In the above figure, if the economy moves from point a to point b, A) the natural rate of unemployment increases. B) there has been a decrease in the quantity of real GDP supplied. C) there has been a decrease in the quantity of real GDP demanded. D) there has been an increase in the quantity of real GDP demanded. 48) 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. 9

10 49) 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) ) The data in the above table show that when the price level is 120, A) the unemployment rate is below its full-employment level. B) the unemployment rate is above its full-employment level. C) money wages rates will rise in the future. D) the long-run aggregate supply curve will shift leftward in the future. 51) 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 10

11 KEY 1. C 2. C 3. C 4. C 5. C 6. C 7. C 8. A 9. B 10. B 11. A 12. B 13. C 14. B 15. D 16. A 17. A 18. C 19. C 20. B 21. B 22. C 23. A 24. D 25. B 26. A 27. A 28. A 29. A 30. A 31. C 32. D 33. D 34. D 35. C 36. C 37. A 38. A 39. D 40. A 41. C 42. A 43. D 44. A 45. A 46. C 47. D 48. C 49. D 50. A 51. B 11

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