Chapter 08 Aggregate Demand and Supply

Subprime loans generally have a lower loan-to-value ratio than do prime loans.
a. TRUE
b. FALSE
Which of the following statements is false?
a. An increase in wage rates causes producers to move up the SRAS curve.
b. An increase in the price level causes producers to move up the SRAS curve.
c. The SRAS curve is upward sloping.
d. The long-run aggregate supply curve is vertical.
The level of Real GDP that the economy produces in long-run equilibrium is Natural Real GDP.
a. TRUE
b. FALSE
Refer to Exhibit 8-3. A shift in aggregate demand from AD1 to AD2 would have been the result
of
a. a decrease in the price level.
b. an increase in the price level.
c. a decrease in interest rates (which was not prompted by a change in the price level).
d. an increase in interest rates (which was not prompted by a change in the price level).
The purchases made by the foreign sector are called __________; the purchases made by the
household sector are called __________; the purchases made by the government sector are called
__________; and the purchases made by the business sector are called investment.
a. net exports; consumption; net interest
b. net exports; domestic spending; government purchases
c. net exports; consumption; government purchases
d. exports; domestic spending; government product
e. imports; consumption; government expenditures
Refer to Exhibit 8-2. Based on the given change, what word (rises or falls) should go in blank
(5) and blank (6), respectively, to summarize the resulting impact on short run equilibrium?
a. rises; rises
b. falls; falls
c. rises; falls
d. falls; rises
Starting from short-run equilibrium, the following occurs: personal income taxes rise and foreign
real national income rises. What is the effect on the price level and Real GDP in the short run?
1. The price level rises and Real GDP falls.
2. The price level falls and Real GDP falls.
3. The price level rises and Real GDP rises.
4. The price level falls and Real GDP rises.
5. There is not enough information to answer this question.

A decrease in business taxes, causes the expected profitability of investment projects to

__________, which then shifts the AD curve to the __________.
1. rise; right
2. rise; left
3. decline; right
4. decline; left
Which of the following statements represents a correct and sequentially accurate economic
explanation?
1. Wage rates rise, SRAS rises, and the SRAS curve shifts to the left.
2. The prices of nonlabor inputs rise, SRAS decreases, and the SRAS curve shifts to the
right.
3. Labor productivity rises, SRAS increases, and the SRAS curve shifts to the right.
4. An adverse supply shock hits, SRAS decreases, and the SRAS curve shifts to the right.
5. a and c
As the interest rate rises, businesses invest __________ and the AD curve shifts to the
__________.
1. more; right
2. more; left
3. less; right
4. less; left
Refer to Exhibit 8-4. A shift in short-run aggregate supply from SRAS1 to SRAS2 would have
been the result of
1. a decrease in the price level.
2. an increase in the price level.
3. an adverse supply shock.
4. a beneficial supply shock.
If aggregate quantity supplied is greater than aggregate quantity demanded at a particular price
level, then a
1. shortage exists and consumers will bid the price level up.
2. surplus exists and consumers will bid the price level up.
3. surplus exists and the price level will decline.
4. shortage exists and the price level will decline.
5. c and d
An increase in the money supply may __________ total expenditures, leading to a __________
shift of the AD curve.
1. increase; rightward
2. increase; leftward
3. decrease; rightward
4. decrease; leftward

In short-run equilibrium, the quantities supplied and demanded of Real GDP can be less than or
greater than Natural Real GDP.
1. TRUE
2. FALSE
The real balance effect works through a change in the value of
1. monetary assets in response to changes in the unemployment rate.
2. nonmonetary assets in response to changes in the unemployment rate.
3. monetary assets in response to changes in the price level.
4. nonmonetary assets in response to changes in the price level.
A lower income tax rate __________ consumption, causing a __________ the AD curve.
1. stimulates; rightward shift of
2. stimulates; movement down along
3. depresses; leftward shift of
4. depresses; movement up along
Ceteris paribus, Real GDP and the unemployment rate are
1. directly related.
2. inversely related.
3. unrelated.
4. directly related when GDP is below its natural level and inversely related when GDP is
above its natural level.
If investment changes because of a change in the price level, then the
1. economy moves from one point on an AD curve to another point on the same curve.
2. AD curve shifts.
3. economy moves from one point on a SRAS curve to another point on the same curve.
4. SRAS curve shifts.
5. none of the above
The economy suffers an adverse supply shock. As a result, in the short run Real GDP will
__________ and the price level will __________.
1. rise; rise
2. fall; fall
3. fall; remain constant
4. fall; rise
5. rise; fall
In a two-country world, a decrease in foreign input prices, ceteris paribus,
1. shifts the SRAS curve leftward, causing the price level to increase.
2. shifts the SRAS curve leftward, causing the price level to decrease.
3. shifts the SRAS curve rightward, causing the price level to increase.
4. shifts the SRAS curve rightward, causing the price level to decrease.
5. does not affect the SRAS curve or the price level.

Short-run equilibrium exists

1. where the AD curve intersects the short-run aggregate supply (SRAS) curve.
2. where the AD curve intersects the long-run aggregate supply (LRAS) curve.
3. on the AD curve only.
4. on the SRAS curve only.
One of the reasons why the AD curve slopes downward is that as the
1. price level rises, purchasing power rises.
2. price level falls, purchasing power rises.
3. nation's income level rises, purchasing power rises.
4. nation's income level rises, purchasing power falls.
5. This is a trick question, because the AD curve is upward sloping.
Which of the following would cause a rightward shift in the AD curve?
1. an increase in the price level
2. a decrease in the price level
3. an increase in imports
4. a decrease in the quantity of money available in the economy
5. an increase in government purchases of goods and services
A decrease in the price level
1. shifts the AD curve to the right.
2. shifts the AD curve to the left.
3. causes an upward movement along the existing AD curve.
4. causes a downward movement along the existing AD curve.
5. none of the above
One reason the AD curve is downward sloping is the __________ effect.
1. wage rate
2. productivity
3. interest rate
4. structural
5. none of the above
Refer to Exhibit 8-1. If we assume that the unemployment rate and Real GDP are inversely
related, which of the points on this graph is most likely representative of the lowest
unemployment rate?
1. A
2. B
3. C
4. D
The real balance effect helps to create "a change in
1. aggregate demand."
2. the quantity demanded of Real GDP."
3. aggregate supply."
4. the quantity supplied of Real GDP."

Refer to Exhibit 8-3. A shift in aggregate demand from AD2 to AD1 would have been the result
of
1. a decrease in the price level.
2. an increase in the price level.
3. businesses become more optimistic about future sales.
4. businesses become more pessimistic about future sales.
Which of the following statements represents a correct and sequentially accurate economic
explanation?
1. If consumption falls, total expenditures on goods and services rises, and the AD curve
shifts leftward.
2. If investment increases, total expenditures on goods and services falls, and the AD curve
shifts leftward.
3. If net exports rise, total expenditures on goods and services rises, and the AD curve shifts
rightward.
4. If consumption falls, total expenditures on goods and services falls, and the AD curve
shifts leftward.
5. c and d
As the price level rises, ceteris paribus, people holding some of their wealth in monetary form
become
1. less wealthy and they buy less.
2. more wealthy and they buy more.
3. less wealthy and they buy more.
4. more wealthy and they buy less.