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practice test chapter 4

Chapter 4. AD – AS model

Indicate whether the statement is true or false.

1. A change in the supply of labor, all else remaining the same, will shift the short-run aggregate-supply curve.
  a. True
  b. False

2. Policymakers who influence aggregate demand can potentially mitigate the severity of economic fluctuations.
  a. True
  b. False

3. Increased optimism of households about the future leads to rising prices and falling unemployment in the
short run.
  a. True
  b. False

4. The downward slope of the aggregate demand curve is based on logic that as the price level rises,
consumption, investment, and net exports all fall.
  a. True
  b. False

5. We can explain continued increases in both output and the price level by supposing that only aggregate
demand shifted right over time.
  a. True
  b. False

6. The aggregate demand and aggregate supply model helps us to understand both short-run economic
fluctuations and how the economy moves from the short to the long run.
  a. True
  b. False

7. The model of aggregate demand and aggregate supply is nothing more than a large version of the model of
market demand and market supply.
  a. True
  b. False

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8. When the price level rises unexpectedly, some businesses may mistake part of the increase for an increase in
the price of their product relative to others and so decrease their production.
  a. True
  b. False

9. If speculators bid up the value of the dollar in the market for foreign-currency exchange, U.S. aggregate
demand would shift to the left due to the decrease of net export
  a. True
  b. False

10. An increase in the money supply shifts the long-run aggregate supply curve to the right.
  a. True
  b. False

11. Most economists agree that money changes real GDP in both the short and long run.
  a. True
  b. False

Indicate the answer choice that best completes the statement or answers the question.

Figure 33-4

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12. Refer to Figure 33-4. The short-run equilibrium is defined by the given AD and SRAS curves. Which of
the long-run aggregate-supply curves is consistent with the economy being in an expansion?
  a. LRAS3
  b. LRAS2
  c. LRAS1
  d. Both LRAS3 and LRAS1

13. Recessions come at
  a. regular intervals. During recessions consumption spending falls relatively more than investment
spending.
  b. regular intervals. During recessions investment spending falls relatively more than consumption
spending.
  c. irregular intervals. During recessions consumption spending falls relatively more than investment
spending.
  d. irregular intervals. During recessions investment spending falls relatively more than consumption
spending.

14. In 2008, the United States was in recession. Which of the following things would you not expect to have
happened?
  a. Increased layoffs and firings
  b. A higher rate of bankruptcy
  c. Increased claims for unemployment insurance
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  d. Increased real GDP

Figure 33-2

15. Refer to Figure 33-2. If the economy is at S and there is a reduction in aggregate demand, in the short run
the economy
  a. stays at S.
  b. moves to T.
  c. moves to U.
  d. moves to V.

Figure 33-4

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16. Refer to Figure 33-4. The short-run equilibrium is defined by the given AD and SRAS curves. Which of
the long-run aggregate-supply curves is consistent with a short-run economic a recession?
  a. LRAS3
  b. LRAS2
  c. LRAS1
  d. Both LRAS3 and LRAS1

17. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more
than expected, production is 
  a. more profitable and employment and output rises.
  b. more profitable and employment and output falls.
  c. less profitable and employment and output rises.
  d. less profitable and employment and output falls.

18. Other things the same, if technology increases, then in the long run
  a. both output and prices are higher.
  b. output is higher and prices are lower.
  c. output is lower and prices are higher.
  d. both output and prices are lower.

19. Which of the following would shift the long-run aggregate supply curve right?
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  a. Both an increase in the capital stock and an increase in the price level
  b. An increase in the capital stock, but not an increase in the price level
  c. An increase in the money supply, but not an increase in the capital stock
  d. Neither an increase in the money supply nor an increase in the capital stock

20. Classical economist David Hume observed that as the money supply expanded after gold discoveries it took
some time for prices to rise and in the meantime the economy enjoyed higher employment and production. This
is inconsistent with monetary neutrality because monetary neutrality would mean that 
  a. neither prices nor production should have risen.
  b. production should have risen, but prices should not have.
  c. the prices should have risen, but production should not have changed.
  d. the prices and production should both have fallen.

21. The effect of an increase in the price level on the aggregate-demand curve is represented by a
  a. shift to the right of the aggregate-demand curve.
  b. shift to the left of the aggregate-demand curve.
  c. movement to the left along a given aggregate-demand curve.
  d. movement to the right along a given aggregate-demand curve.

22. From 2001 to 2005 there was a dramatic rise in the value of houses. If this rise made homeowners feel
wealthier, then it would have shifted aggregate 
  a. demand right.
  b. demand left.
  c. supply right.
  d. supply left.

23. Suppose workers notice a fall in their nominal wage but are slow to notice that the price of things they
consume have fallen by the same percentage. They may infer that the reward to working is temporarily 
  a. low and so supply a smaller quantity of labor.
  b. low and so supply a larger quantity of labor.
  c. high and so supply a smaller quantity of labor.
  d. high and so supply a larger quantity of labor.

24. Which of the following shifts the long-run aggregate supply curve to the left?
  a. Either an increase in the price of imported natural resources or a reduction in trade restrictions
  b. Neither an increase in the price of imported natural resources or a reduction in trade restrictions
  c. An increase in the price of imported natural resources and an increase in trade restrictions
  d. An increase in trade restrictions and a decrease in the price of imported natural resources

Figure 33-3
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25. Refer to Figure 33-3. In Figure 33-3, Point B represents a 

  a. short-run equilibrium and a long-run equilibrium.
  b. short-run equilibrium, and Point A represents a long-run equilibrium.
  c. long-run equilibrium, and Point A represents a short-run equilibrium.
  d. long-run equilibrium, and Point C represents a short-run equilibrium.

26. Which of the following would cause stagflation?

  a. Aggregate demand shifts right.
  b. Aggregate demand shifts left.
  c. Aggregate supply shifts right.
  d. Aggregate supply shifts left.

Scenario 33-2
Imagine that in the current year the economy is in long-run
equilibrium. Then stock prices rise more than expected and stay high for some time.

27. Refer to Scenario 33-2. How is the new long-run equilibrium different from the original one?
  a. The price level and real GDP are higher.
  b. The price level and real GDP are lower.
  c. The price level is higher and real GDP is the same.
  d. The price level is the same and real GDP is higher.
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Short answer.

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28. Appling AD-AS model in short-run to show the effect of an increase in Investment to the price level and
output of the economy

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29. Appling AD-AS model in short-run to show the effect of an increase in imported natural resource to the
price level and output of the economy

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30. Appling AD-AS model in short-run to show the effect of an decrease in Export to the price level and output
of the economy

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