Question 1

The Great Recession was the result of:

Accepted Answer

A)  two negative demand shocks.
B)  a negative demand shock and a negative inflation shock.
C)  two positive inflation shocks.
D)  a negative demand shock and a positive inflation shock.

Question 2

A negative demand shock will shift the ______ curve to the ______.

Accepted Answer

A)  AD; left
B)  AD; right
C)  AS; left
D)  AS; right

Question 3

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______.

Accepted Answer

A)  falls; fall; the income-expenditure multiplier
B)  falls; rise; the income-expenditure multiplier
C)  rises; rise; the wealth effect
D)  rises; fall; the wealth effect

Question 4

For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase spending on new capital, then the ______ shifts _____.

Accepted Answer

A)  aggregate demand curve; right
B)  aggregate demand curve; left
C)  aggregate supply curve; left
D)  aggregate supply curve; right

Question 5

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap, is called:

Accepted Answer

A)  short-run equilibrium.
B)  long-run equilibrium.
C)  an inflation shock.
D)  inflation inertia.

Question 6

Technological improvements:

Accepted Answer

A)  decrease aggregate demand.
B)  increase aggregate demand.
C)  decrease aggregate supply.
D)  increase aggregate supply.

Question 7

Starting from potential output, if firms become less optimistic and decide to decrease their investment in new capital, then this will shift the ______ curve to the left and generate ______.

Accepted Answer

A)  aggregate demand; a recessionary output gap
B)  aggregate supply; a recessionary output gap
C)  aggregate demand; an expansionary output gap
D)  aggregate supply; an expansionary output gap

Question 8

Shifts in ______ can push the economy out of long-run equilibrium.

Accepted Answer

A)  the AD curve only
B)  the AS curve only
C)  either the AD curve or the AS curve
D)  the PAE line only

Question 9

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

Accepted Answer

A)  large; high
B)  large; low
C)  small; low
D)  small; high

Question 10

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:

Accepted Answer

A)  a positive demand shock.
B)  a positive inflation shock.
C)  an increase in government spending.
D)  an increase in the inflation rate.

Question 11

The AD curve ______ because, holding all else constant, an increase in ______ causes C, IP and NX to fall.

Accepted Answer

A)  slopes downward; real GDP
B)  slopes downward; the inflation rate
C)  slopes upward; real GDP
D)  is horizontal; the inflation rate

Question 12

Graphically, short-run equilibrium occurs at the intersection of the aggregate demand curve and:

Accepted Answer

A)  the aggregate supply curve and potential output.
B)  the planned aggregate expenditure line.
C)  the aggregate supply curve.
D)  potential output.

Question 13

Due to menu costs, many firms in the economy will increase their output:

Accepted Answer

A)  only after they raise the price at which they are willing to sell their output.
B)  before raising the price at which they are willing to sell their output.
C)  instead of raising the price at which they sell their output.
D)  or raise the price at which they sell their output, but never both.

Question 14

When the economy is in short-run equilibrium, there will be ______ output gap.

Accepted Answer

A)  no
B)  only a recessionary
C)  either a recessionary or an expansionary
D)  only an expansionary C

Question 15

Refer to the figure below.The current level of GDP in this economy is ______; the potential level of GDP is ______. 1; Y1 B) Y2; Y2 C) Y1; Y2 D) Y2; Y1" class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)  Y1; Y1
B)  Y2; Y2
C)  Y1; Y2
D)  Y2; Y1

Question 16

The self-correcting tendency of the economy means that falling inflation eventually eliminates:

Accepted Answer

A)  expansionary gaps.
B)  recessionary gaps.
C)  exogenous spending.
D)  unemployment.

Question 17

When using the AD-AS model to understand business cycles, the question, "what are the fundamental causes of business cycles?" can be thought of as the question:

Accepted Answer

A)  "what factors move the economy away from long-run equilibrium?"
B)  "what factors move aggregate demand and aggregate supply in different directions?"
C)  "what factors increase or decrease potential GDP?"
D)  "what factors increase or decrease the expected rate of inflation?"

Question 18

Starting from long-run equilibrium, a large decrease in government purchases will result in a(n)  ______gap in the short run and ____inflation and ____output in the long run.

Accepted Answer

A)  expansionary; higher; potential
B)  recessionary; lower; potential
C)  expansionary; higher; higher
D)  recessionary; higher; potential

Question 19

Refer to the figure below.Suppose the economy is initially in equilibrium with output Y2 and inflation rate of 3.An increase in military spending will: 2 and inflation rate of 3.An increase in military spending will:   A) shift AD from AD2 to AD1. B) shift AD from AD1 to AD2. C) shift AS from AS2 to AS1. D) shift AS from AS1 to AS2." class="answers-bank-image d-inline" rel="preload" >

Accepted Answer

A)  shift AD from AD2 to AD1.
B)  shift AD from AD1 to AD2.
C)  shift AS from AS2 to AS1.
D)  shift AS from AS1 to AS2. A

Question 20

Changes in the expected rate of inflation will:

Accepted Answer

A)  not shift the AS curve.
B)  shift the AS curve leftward or rightward.
C)  cause the AS curve to become vertical.
D)  cause the AS curve to become downward-sloping. B

Exam 13: Aggregate Demand, Aggregate Supply, and Business Cycles

The Great Recession was the result of:

Correct AnswerverifiedShow Answer

A negative demand shock will shift the ______ curve to the ______.

Correct AnswerverifiedShow Answer

When the inflation rate increases, PAE ______, which in turn causes Y to ______ because of ______.

Correct AnswerverifiedShow Answer

For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase spending on new capital, then the ______ shifts _____.

Correct AnswerverifiedShow Answer

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap, is called:

Correct AnswerverifiedShow Answer

Technological improvements:

Correct AnswerverifiedShow Answer

Starting from potential output, if firms become less optimistic and decide to decrease their investment in new capital, then this will shift the ______ curve to the left and generate ______.

Correct AnswerverifiedShow Answer

Shifts in ______ can push the economy out of long-run equilibrium.

Correct AnswerverifiedShow Answer

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

Correct AnswerverifiedShow Answer

Suppose the economy is currently operating at potential output; an expansionary gap may be caused by each of the following except:

Correct AnswerverifiedShow Answer

The AD curve ______ because, holding all else constant, an increase in ______ causes C, IP and NX to fall.

Correct AnswerverifiedShow Answer

Graphically, short-run equilibrium occurs at the intersection of the aggregate demand curve and:

Correct AnswerverifiedShow Answer

Due to menu costs, many firms in the economy will increase their output:

Correct AnswerverifiedShow Answer

When the economy is in short-run equilibrium, there will be ______ output gap.

Correct AnswerverifiedC

Refer to the figure below.The current level of GDP in this economy is ______; the potential level of GDP is ______.

Correct AnswerverifiedShow Answer

The self-correcting tendency of the economy means that falling inflation eventually eliminates:

Correct AnswerverifiedShow Answer

When using the AD-AS model to understand business cycles, the question, "what are the fundamental causes of business cycles?" can be thought of as the question:

Correct AnswerverifiedShow Answer

Starting from long-run equilibrium, a large decrease in government purchases will result in a(n) ______gap in the short run and ____inflation and ____output in the long run.

Correct AnswerverifiedShow Answer

Refer to the figure below.Suppose the economy is initially in equilibrium with output Y2 and inflation rate of 3.An increase in military spending will:

Correct AnswerverifiedA

Changes in the expected rate of inflation will:

Correct AnswerverifiedB

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A negative demand shock will shift the curve to the .

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When the inflation rate increases, PAE , which in turn causes Y to because of __.

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For a given inflation rate, if bright prospects for the future of the economy cause businesses to increase spending on new capital, then the __ shifts _.

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Starting from potential output, if firms become less optimistic and decide to decrease their investment in new capital, then this will shift the curve to the left and generate .

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High expected inflation leads to increases in wages and costs and to actual inflation.

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The AD curve because, holding all else constant, an increase in causes C, I^{P and NX to fall.}

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C

Refer to the figure below.The current level of GDP in this economy is ; the potential level of GDP is .

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Starting from long-run equilibrium, a large decrease in government purchases will result in a(n) __gap in the short run and inflation and output in the long run.

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Refer to the figure below.Suppose the economy is initially in equilibrium with output Y₂ and inflation rate of ₃.An increase in military spending will:

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A

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B