Macro Chapter 10 study guide questions

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1 Macro Chapter 10 study guide questions Multiple Choice Identify the choice that best completes the statement or answers the question. 1. Which of the following will reduce aggregate demand? a. an increase in real wealth b. lower real incomes of the country s foreign trade partners c. increased consumer and business optimism about the future d. an increase in the expected rate of inflation 2. An increase in the long-run aggregate supply curve shifts a. both LRAS and AD to the right. b. both LRAS and SRAS to the right. c. both LRAS and AD to the left. d. only LRAS to the right. 3. During recessions, interest rates tend to fall because a. consumers attempt to borrow money to make up for their falling income. b. business borrowing for investment purposes tends to fall during recessions. c. lower real resource prices create profit opportunities for banks. d. recessions shift the economy's long-run aggregate supply curve to the left. 4. In the short run, equilibrium output in the goods and services market may be either above or below the fullemployment level, but in the long run, it a. must be less than full-employment output. b. must be greater than full-employment output. c. will move to full-employment output. d. depends on aggregate demand, not just long-run aggregate supply. 5. Which of the following is most likely to result from an unanticipated increase in short-run aggregate supply due to favorable weather conditions in agricultural areas? a. an increase in the inflation rate b. an increase in the unemployment rate c. a decrease in the price level d. a decrease in the natural rate of unemployment 6. Which of the following is most likely to accompany an unanticipated reduction in aggregate demand? a. an increase in the price level b. a decrease in unemployment c. an increase in real GDP d. an increase in the unemployment rate 7. Which of the following is most likely to accompany an unanticipated increase in short-run aggregate supply? a. an increase in real GDP b. a decrease in real GDP c. an increase in the price level d. an increase in the unemployment rate

2 _ 8. In the aggregate demand/aggregate supply model, an economy operating below its long-run potential capacity will experience a. falling real wages and resource prices that will increase SRAS, moving the economy back toward full employment. b. rising interest rates that willl increase SRAS, moving the economy back toward full employment. c. inflation that will stimulate additional spending and thereby restoree full employment. d. a prolonged economic depression unless consumer optimism is increased. For the following question(s), assume that the economy is in long-run equilibrium in the aggregate demand/aggregate supply model and that some sort of event takes place. In each case, mark the most likely impact of the event on the aggregate demand/aggregate supply diagram given below. Figure _ 9. Refer to Figure Good weather allows agricultural output to double. a. The aggregate demand curve would shift to the right. b. The aggregate demand curve would shift to the left. c. The short-run aggregate supply curve would shift to the right. d. The short-run aggregate supply curve would shift to the left. _ 10. Refer to Figure There is an increase in the expected rate of inflation. a. The aggregate demand curve would shift to the right. b. The short-run aggregate supply curve would shift to the left. c. The price levell would rise and real GDP would remain the same. d. All of the above are correct. _ 11. Refer to Figure Consumers and businesses all suddenly decide that the future looks much better than it previously had. a. The aggregate demand curve would shift to the right. b. The aggregate demand curve would shift to the left. c. The short-run aggregate supply curve would shift to the right. d. The short-run aggregate supply curve would shift to the left.

3 12. Refer to Figure A major technological advance occurs. a. The aggregate demand curve would shift to the right. b. The aggregate demand curve would shift to the left. c. Both the short-run and the long-run aggregate supply curves would shift to the right. d. Both the short-run and the long-run aggregate supply curves would shift to the left. 13. Which of the following would not cause a shift in the short-run aggregate supply curve? a. a supply shock b. a decrease in the real interest rate c. a decrease in the expected rate of inflation d. an increase in resource prices 14. If an economy is in equilibrium at a given price level and a given output level, the aggregate demand/aggregate supply (AD/AS) model indicates that an unanticipated decrease in aggregate demand will cause a. real output to decline. b. the price level to fall. c. unemployment to increase. d. all of the above. 15. Which of the following is most likely to accompany a fully anticipated reduction in short-run aggregate supply? a. an increase in the price level b. a decrease in the price level c. a decrease in real GDP d. both a and c 16. During the 1990s, a financial crisis spread throughout Asia causing those economies to drop into recessions. Other things constant, how would such a decrease in the income of foreign trading partners have influenced the price level and output of the United States? a. Both real output and the price level would have fallen. b. Both real output and the price level would have risen. c. Real output would have fallen, and the price level would have risen. d. Real output would have risen, and the price level would have fallen. 17. Which of the following will most likely occur in the United States as the result of an unexpected rapid growth in real income in Japan and Europe? a. a short-run increase in U.S. employment and output b. a short-run decrease in U.S. employment and output c. a short-run decline in prices in the United States d. a reduction in the natural rate of unemployment in the United States 18. If there is an unanticipated increase in aggregate demand, which of the following is most likely to occur? a. an increase in the price level (inflation) b. an increase in the rate of unemployment c. a reduction in the growth rate of real GDP d. a decrease in LRAS to restore full employment 19. Which of the following will most likely increase the economy's long-run aggregate supply? a. advances in technology b. unfavorable weather conditions in agricultural areas c. an increase in the expected inflation rate d. a low rate of investment

4 20. If improvements in education and training programs increased the productivity of persons in the labor force, a. aggregate demand would decrease. b. short-run aggregate supply would increase, but long-run aggregate supply would not change. c. long-run aggregate supply would increase, but short-run aggregate supply would not change. d. both short-run and long-run aggregate supply would increase. 21. If an economy was initially in long-run equilibrium, an unanticipated increase in aggregate demand will tend to cause a. an increase in unemployment. b. a decrease in the price of resources. c. a reduction in real output that will spiral downward into a prolonged recession. d. a temporarily high level of output and employment that cannot be maintained. 22. When an economy is in a recession, a. strong demand for investment funds will push interest rates upward. b. strong demand for resources will push the prices of resources upward. c. weak demand for investment funds will cause the real interest rate to decline. d. the unemployment rate will be less than its natural rate. 23. Which of the following statements is most consistent with the view that the economy has a self-corrective mechanism? a. When the economy is in a recession, it will remain there until the government steps in to bring the economy out of the recession. b. When the economy is in a recession, falling resource prices and declining interest rates will direct the economy back to full employment. c. During economic booms, interest rates will fall, causing the economy to fall into a recession. d. In a market economy, resource prices, such as wages, can only increase; they can never decrease. Critical Thinking and Application 24. Explain how each of the following factors would influence aggregate demand in the United States. Be sure to explain which component of aggregate demand would be affected. a. a stock market crash b. an increase in the personal income tax rate c. a decrease in the real interest rate d. an increase in government purchases e. a decline in income in Canada 25. Show the short-run impact of the following factors on GDP using a graph of the aggregate goods and services market. Assume the economy was originally in long-run equilibrium. a. a stock market crash b. a decrease in the real interest rate c. a flood that destroys most agricultural crops d. a decrease in resource prices e. an increase in the labor force f. an increase in the expected inflation rate

5 26. Suppose there is an unexpected increase in real interest rates. Using the AD/AS model, describe the effects of this policy in the long run and the short run, assuming everything else equal. 27. For the following changes in the economy, indicate whether short-run aggregate supply or long-run aggregate supply will be affected. Indicate the direction of the change. a. an improvement in manufacturing technology b. an increase in the world price of antimony (a chemical that the U.S. imports) c. a bumper potato crop in the southern potato belt 28. How does the self-correcting mechanism act to pull the economy out of a recession?

6 Macro Chapter 10 study guide questions Answer Section 1. B 2. B 3. B 4. C 5. C 6. D 7. A 8. A 9. C 10. D 11. A 12. C 13. B 14. D 15. A 16. A 17. A 18. A 19. A 20. D 21. D 22. C 23. B