University of Luzon

College of Business Administration

Midterm Examination in Macroeconomics

Name: _____________________________________________________ Permit Number: __________ Score: /40

Reminder: Strictly NO ERASURE, ALTERATIONS and SUPERIMPOSITIONS allowed.
Part 1. Write TRUE if the statement is correct and write the correct answer if you think that there is something wrong
in the statement.
1. The economy’s output of goods and services measured by nominal GDP.
2. Prices have a tendency of remaining constant or declining very slowly.
3. Long-run fluctuations in output and the price level should be viewed as deviations from the
continuing long-run trends of output growth and inflation.
4. According to the misperception theory, unexpected changes in the economy can lead to changes in
output and employment, even if those changes are permanent.
5. Changing prices could theoretically maximize profit, but fluctuation in prices can confuse and annoy
consumers.
6. Firms may assume that an unexpected increase in the overall price level is due to a decrease in the
demand for their product, causing them to decrease production and employment in response.
7. A lower price level raises the real value of money and makes consumers wealthier, which encourages
them to spend more.
8. The downward slope of the aggregate-supply curve shows that a fall in the price level raises the
overall quantity of goods and services demanded.
9. Price stickiness refers to the market tendency where price remains constant after hikes, it does not
fall back to optimal levels.
10. If the quantity of money in the economy were to double, prices would double and so would incomes.
11. Changes in the money supply affect nominal variables but not real variables in the long run.
12. Although many macroeconomic variables fluctuate together, they fluctuate by different amounts.
13. A recession is a period of declining real incomes, and rising underemployment.
14. Sticky wage theory argues that employee pay is resistant to increase even under deteriorating
economic conditions.
15. In the short run, the aggregate-supply curve is upward sloping.
16. The long-run aggregate supply represents the classical dichotomy and money neutrality.
17. Nominal wages adjust immediately to a fall in the price level.
18. All three theories suggest that output deviates in the short run from the natural rate when the actual
price level deviates from the price level.
19. The increase in net export spending means a smaller quantity of goods and services demanded.
20. A lower price level reduces the interest rate and makes borrowing less expensive, which encourages
greater spending on investment goods.

Part 2. Multiple Choice. Choose the letter of the best answer. Write the letter before the number.
1. Which of the following would not be considered investment under aggregate demand?
a. Education b. Machinery c. Used Housing d. Factories
2. What information is needed in order to maximize the usefulness of the aggregate demand curve?
a. The interest rate b. The price level c. The aggregate supply curve d. The output levels
3. What is the effect of a decrease in the price level on wealth?
a. It decreases wealth c. It increases wealth
 b. b. it has no effect in wealth d. It has an indeterminate effect on wealth
4. According to the short run aggregate supply curve, what happens as the price level rises?
a. Output decreases b. Output is unchanged c. Output increases d. Output is infinitely changed
5. Which of the following is not a model for the upward sloping aggregate supply curve?
a. Sticky Wage b. Worker-misperception c. Sticky Price d. Employer-misperception
6. Which of the following curves does not appear in the AS-AD model?
a. Short-run aggregate supply c. Long-run aggregate supply
b. Aggregate demand d. Long-run aggregate demand
7. What is the effect of a high price level on interest rates?
a. Interest rates tend to be low c. There is no relationship between the price level and interest rates
b. Interest rates tend to be high d. Interest rates remain the same.
8. What do you call the intersection of the short-run aggregate supply curve and the aggregate demand curve?
a. Short-run equilibrium b. Long-run equilibrium c. Unstable equilibrium d. Marginal equilibrium
9. When the real exchange rate decreases, what happens to net exports?
a. Net exports rise b. Net exports fall c. Net exports are unaffected d. There is no relationship.
10. Which model of short run aggregate supply involves menu costs?
a. Imperfect information b. Sticky wage c. Worker-misperception d. Sticky price
11. What happens when the aggregate demand curve shifts left?
a. Output increase in all price level c. Input decreases at all price level
b. Output decreases at all price level d. Input increase at all price level
12. What happens to the aggregate demand curve when the savings rate increases?
a. It shifts left b. It shifts right c. it is inverted d. It does not shift
13. Which of the following is not a reason that prices may be sticky?
a. To make bookkeeping easier c. Contractual obligations
b. To avoid annoying consumers d. Menu costs
14. What is aggregate supply fixed by in the long run?
a. Aggregate demand b. Interest rates c. Output d. Factor of production
15. What information can be obtained from the AS-AD model of the economy?
a. Equilibrium in the foreign market for goods and services
b. Changes in the domestic market for goods only
c. Equilibrium in the domestic market for goods and services
d. Changes in the foreign market for goods only

Part 3. Draw the aggregate demand and aggregate supply curve model. (5 points)