Chapter 30: Aggregate Demand and Aggregate Supply

Chapter 30: Aggregate Demand and Aggregate Supply Multiple-Choice Questions 1. The aggregate demand curve slopes downward because I. as the price level falls, the real value of personal assets increases, leading personal consumption spending to increase II. as the price level falls, interest rates decrease, causing investment and interest-sensitive spending to increase III. as the price level falls, exports increase and imports decrease, resulting in a positive change in net trade (A) I only (B) II only (C) III only (D) I and II only (E) I, II, and III (E) If the price level falls, the real value of personal assets increases and personal spending increases. If interest rates fall, business investment and personal spending increase. When the price level falls, domestic products become less expensive relative to foreign products, so foreign purchases of domestic goods increase and domestic spending on imported goods decreases. All three lead to increases in real output. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Aggregate Demand Book Section: Aggregate Demand Curve 2. Consumer spending as a component of aggregate demand increases when I. consumer wealth increases II. consumer borrowing decreases III. consumer expectations about the economy are optimistic IV. personal taxes increase (A) I only (B) II and IV only (C) I and III only (D) II, III, and IV only (E) I, II, III, and IV (C) Increases in wealth and optimism about economic performance lead consumers to increase their demand for products at all prices. A decrease in consumer borrowing and an increase in personal taxes would leave consumers with less available income, reducing aggregate demand. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Determinants of Aggregate Demand Book Section: Aggregate Demand Curve 3. An increase in each of the following would result in an increase in aggregate demand EXCEPT (A) interest rates (B) exports (C) government spending (D) firms' expected return on investment (E) incomes in countries buying U.S. exports (A) An increase in interest rates makes it more expensive for consumers and firms to borrow, so their demand for products would decrease. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Determinants of Aggregate Demand Book Section: Changes in Aggregate Demand 4. Aggregate supply increases as the result of an increase in (A) the cost of production (B) worker productivity (C) business taxes (D) government regulation of business (E) the price of oil (B) Increases in productivity lower per-unit costs of production, causing an increase in aggregate supply. Difficulty: Easy Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Determinants of Aggregate Supply Book Section: Changes in Aggregate Supply 5. If a nation in full-employment equilibrium found itself in stagflation, this would have most likely been caused by (A) an increase in aggregate demand (B) a decrease in aggregate demand (C) an increase in short-run aggregate supply (D) a decrease in short-run aggregate supply (E) a simultaneous increase in both short-run aggregate supply and aggregate demand (D) A decrease in short-run aggregate supply increases price the level, decreases real GDP, and creates unemployment levels above full-employment real GDP. When both the price level and unemployment increase, stagflation occurs. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Macroeconomic Equilibrium Book Section: Decreases in AS: Cost-Push Inflation 6. The equilibrium point of aggregate supply and aggregate demand determines (A) wages and spending (B) saving and investment (C) taxes and government spending (D) profit and saving (E) real GDP and price level (E) Real GDP and price level are the axes of the aggregate expenditures model graph. The equilibrium point occurs where AS=AD, and that point determines the real output and the price level of the economy. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Real Output and Price Level Book Section: Equilibrium in the AD-AS Model 7. Which of the following situations would most likely result in a decrease in the price level and a decrease in real GDP? (A) A decrease in consumer confidence (B) An increase in wages (C) A decrease in interest rates (D) An increase in productivity (E) An increase in exports (A) If consumers lose confidence in future economic performance, they reduce aggregate demand out of concern for the potential loss of a job. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Macroeconomic Equilibrium Book Section: Decreases in AD: Recession and Cyclical Unemployment 8. If short-run aggregate supply increases, which of the following is the likely effect on output and price level? Output Price Level (A) Increase Increase (B) Decrease No change (C) No change Decrease (D) Increase Decrease (E) Decrease Increase (D) An increase in short-run aggregate supply shifts the curve to the right, resulting in an increase in output and a decrease in price level. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Macroeconomic Equilibrium Book Section: Increases in AS: Full Employment with Price-Level Stability 9. How will an increase in government spending affect price level, output, and employment in the short run? Price Level Output Employment (A) Increase Increase Increase (B) Decrease Decrease Decrease (C) No change Increase Increase (D) Decrease No change No change (E) Increase Decrease Decrease (A) An increase in government spending increases output, so employment rises. The increased aggregate demand causes demand-pull inflation, so the price level rises. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Macroeconomic Equilibrium Book Section: Increases in AD: Demand-Pull Inflation 10. How will an increase in interest rates affect price level, real output, and unemployment in the short run? Price Level Real Output Unemployment (A) Increase Increase Increase (B) Decrease Decrease Decrease (C) Increase Decrease Decrease (D) Decrease Decrease Increase (E) Increase Increase Decrease (D) Higher interest rates reduce aggregate demand, so price level and output will fall. If output decreases, fewer workers are needed, leading to a rise in the unemployment rate. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Macroeconomic Equilibrium Book Section: Decreases in AD: Recession and Cyclical Unemployment 11. A change in any of the following factors will cause household consumption and aggregate demand to change EXCEPT (A) consumer wealth (B) consumer expectations (C) price levels (D) household borrowing (E) taxes (C) A change in the price level will cause a movement along the existing aggregate demand curve, but not a change (shift) in aggregate demand. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Determinants of Aggregate Demand Book Section: Consumer Spending 12. A change in any of the following factors will cause investment spending and aggregate demand to change EXCEPT (A) real interest rates (B) expected future returns created by new technology (C) expected business taxes (D) the interest rate effect (E) expected business conditions (D) Changes within the interest rate effect will not shift the investment demand curve. Businesses will only alter their demand for investment based on the existing investment demand curve. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Determinants of Aggregate Demand Book Section: Investment Spending 13. Net export spending and domestic aggregate demand will change as a result of a change in I. foreign national income II. the interest rate effect III. exchange rates (A) I only (B) II only (C) III only (D) I and III only (E) II and III only (D) If foreign national income changes, there will be a change in the demand for U.S. exports, changing aggregate demand. A change in exchange rates alters the relative prices of imports and exports, which would also cause a change in net exports and aggregate demand. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement Macroeconomics: Determinants of Aggregate Demand Book Section: Net Export Spending 14. The short-run aggregate supply curve is upward-sloping and assumes (A) input and output prices are both relatively flexible (B) input and output prices are both relatively inflexible (C) input prices are relatively inflexible and output prices are relatively flexible (D) input prices are relatively flexible and output prices are relatively inflexible (E) input prices are relatively flexible and output prices may or may not be flexible (C) Unlike input prices (factor costs) that take considerable time to change due to labor and supplier contracts already in place, output prices are flexible. Because of this, the short-run aggregate supply curve slopes upward. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Sticky versus Flexible Wages and Prices Book Section: Aggregate Supply in the Short Run 15. The long-run aggregate supply curve is (A) horizontal because in the long-run, price levels are constant (B) upward-sloping but not vertical, as both input and output prices are flexible (C) upward-sloping but not vertical, as output prices are flexible and input prices are inflexible (D) vertical at full-employment output, as both input and output prices are flexible (E) vertical at full-employment output, as both input and output prices are inflexible (D) When input and output prices are flexible in the long run, profit levels will always adjust to give firms the profit incentive to produce at full-employment output. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Sticky versus Flexible Wages and Prices Book Section: Aggregate Supply in the Long Run 16. A change in each of the following factors will cause the short-run aggregate supply to shift EXCEPT (A) input prices (B) level of real output (C) input productivity (D) business taxes (E) business subsidies (B) A change in real output will result in a movement along the existing short-run aggregate supply curve, not a shift in the curve. Difficulty: Medium Style: Factual AP Economics Curricular Requirement Macroeconomics: Short-Run and Long-Run Analyses Book Section: Changes in Aggregate Supply 17. A substantial increase in immigration of new workers into the domestic workforce will most likely result in the following changes to wages, per-unit production costs, real GDP, price level, and short-run aggregate supply. Per-Unit Short-Run Production Real Aggregate Price Wages Costs GDP Supply Level (A) Decrease Decrease Decrease Increase Decrease (B) Decrease Decrease Increase Increase Increase (C) Increase Increase Decrease Decrease Increase (D) Increase Increase Increase Increase Increase (E) Decrease Decrease Increase Increase Decrease (E) A substantial increase in immigration of workers will increase the supply of labor, lower wages, reduce the per-unit production costs, increase real GDP, shift the short-run aggregate supply rightward, and lower the price level. Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Short-Run and Long-Run Analyses Book Section: Input Prices 18. A substantial increase in the cost of energy will most likely result in the following changes to per-unit production costs, short-run aggregate supply, price level, and real GDP. Per-Unit Short-Run Production Aggregate Price Real Costs Supply Level GDP (A) Decrease Increase Decrease Decrease (B) Decrease Increase Increase Increase (C) Increase Decrease Increase Decrease (D) Increase Increase Increase Increase (E) Decrease Increase Decrease Increase (C) An increase in the cost of energy will increase the per-unit production costs, shift the short-run aggregate supply leftward, increase the price level, and decrease real GDP. Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Short-Run and Long-Run Analyses Book Section: Input Prices 19. A substantial decrease in the cost of technology will most likely result in the following changes to per-unit production costs, short-run aggregate supply, price level, and real GDP. Per-Unit Short-Run Production Aggregate Price Real Costs Supply Level GDP (A) Decrease Increase Decrease Decrease (B) Decrease Increase Decrease Increase (C) Decrease Increase Increase Increase (D) Increase Decrease Increase Decrease (E) Increase Increase Increase Increase (B) A decrease in the cost of technology will decrease the per-unit production costs, shift the short-run aggregate supply rightward, decrease the price level, and increase real GDP. Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Short-Run and Long-Run Analyses Book Section: Productivity 20. Cost-push inflation would most likely result in the following changes to per-unit production costs, short-run aggregate supply, price level, and real GDP Per-Unit Short-Run Production Aggregate Price Real Costs Supply Level GDP (A) Decrease Increase Decrease Decrease (B) Decrease Increase Decrease Increase (C) Decrease Increase Increase Increase (D) Increase Decrease Increase Decrease (E) Increase Increase Increase Increase (D) Cost-push inflation would increase the per-unit production costs, shift the short-run aggregate supply leftward, increase the price level, and decrease real GDP. Difficulty: Hard Style: Application AP Economics Curricular Requirement Macroeconomics: Short-Run and Long-Run Analyses Book Section: Decreases in AS: Cost-Push Inflation 21. Aggregate demand is the sum of the demand from all of the following sectors of the economy EXCEPT (A) the import sector (B) the export sector (C) the government sector (D) the consumer sector (E) the investment sector (A) Imports are manufactured in other countries and would not count in national GDP. Difficulty: Easy Style: Factual AP Economics Curricular Requirement: Determinants of Aggregate Demand Book Section: Aggregate Demand 22. According to the real balances effect, consumers buy less at higher price levels because (A) exports become more expensive (B) the purchasing power of assets decreases (C) interest rates increase (D) interest rates decrease (E) fewer exports are purchased (B) The real value of assets falls, so because consumers hold relatively less wealth, they are less willing to make new purchases. Difficulty: Medium Style: Conceptual AP Economics Curricular Requirement: Determinants of Aggregate Demand Book Section: Aggregate Demand Curve 23. Assume the government significantly increases spending for infrastructure, and taxes and interest rates do not change as a result of the spending. How will that change in government spending affect aggregate demand, short-run aggregate supply, the price level, and real GDP? Short-Run Aggregate Demand Aggregate Supply Price Level Real GDP (A) Decrease No change Decrease Decrease (B) No change Increase Decrease Increase (C) Increase No change Increase Increase (D) No change Decrease Increase Decrease (E) Increase Increase Indeterminate Increase (C) An increase in government spending increases the aggregate demand, price level, and real GDP. Difficulty: Hard Style: Application AP Economics Curricular Requirement: Short-Run and Long-Run Analyses Book Section: Government Spending 24. How will an increase in business taxes affect per-unit production costs, short-run aggregate supply, the price level, and real GDP? Per-Unit Short-Run Production Costs Aggregate Supply Price Level Real GDP (A) Decrease Decrease Decrease Decrease (B) Increase Increase Decrease Increase (C) Decrease Decrease Increase Increase (D) Increase Decrease Increase Decrease (E) Decrease Increase Decrease Increase (D) A business tax increases the cost of production, lowering the short-run aggregate supply, raising the price level, and reducing real GDP. Difficulty: Hard Style: Application AP Economics Curricular Requirement: Short-Run and Long-Run Analyses Book Section: Legal-Institutional Environment 25. During the Great Recession, the government implemented the stimulus package in an effort to (A) increase aggregate supply (B) increase aggregate demand (C) decrease aggregate supply (D) decrease aggregate demand (E) increase long-run aggregate supply (B) Because aggregate demand had decreased significantly during the Great Recession, the government used fiscal policy to try to increase aggregate demand to its initial level. Difficulty: Easy Style: Application AP Economics Curricular Requirement: Demand-Side Effects Book Section: Stimulus and the Great Recession