Aggregate Supply And Demand Chapter 11 Complete Test Bank

Chapter 11 Test Bank KEY

1. Which of the following is NOT a primary focus in the study of macroeconomics?

A. business cycles

B. the unemployment rate

C. inflation

D. market structures

2. Which of the following is a measure of overall economic well-being for the United States?

A. the U.S. unemployment rate

B. U.S. population growth

C. the behavior of U.S. monopolies

D. the price of fuel in Oregon

3. Which of the following is a measure of overall economic well-being for the United States?

A. population growth

B. GDP growth

C. tax policy

D. retirement benefits

4. All of the following are used to measure a country's economic welfare except

A. a change in relative prices.

B. the unemployment rate.

C. the output produced.

D. a change in production capacity.

5. According to the text, which of the following is a macroeconomic outcome?

A. internal market forces

B. policy levers

C. international balance

D. population growth

6. According to the text, which of the following is a determinant of macroeconomic performance?

A. prices

B. policy levers

C. the unemployment rate

D. the international value of the dollar

7. According to the text, which of the following is a primary macroeconomic outcome?

A. technological change

B. a major earthquake

C. economic growth

D. an increase in the money supply

8. As defined in the text, external shocks to an economy include

A. innovation, population growth, and spending behavior.

B. disruptions in trade, wars, and natural disasters.

C. tax policy, government spending, and the availability of money.

D. jobs, prices, and growth.

9. Which of the following are policy levers?

A. population growth, spending behavior, and invention

B. wars, natural disasters, and trade disruptions

C. government regulation, tax policy, and the availability of money

D. jobs, prices, and growth

10. The classical view of the economy is characterized by

A. a laissez-faire approach.

B. the inherent instability of the economy.

C. the belief that demand creates its own supply.

D. overt fiscal policy.

11. Which of the following concepts is NOT consistent with classical theory?

A. self-adjustment of the economy

B. the use of monetary policy

C. flexible prices

D. a laissez-faire approach

12. Quick self-adjustment of markets is assumed in

A. classical economic theory.

B. keynesian theory.

C. supply-side economic theory.

D. the eclectic viewpoint.

13. Which theories of the economy lead to the assertion that markets quickly "self-adjust" to deviations from their long-term growth trend?

A. Keynesian theories

B. Monetarist theories

C. Classical theories

D. Supply-side theories

14. Which of the following is necessary for an economy to self-adjust fairly quickly, according to classical economists?

A. the use of monetary policy

B. flexible wages and prices

C. the use of fiscal policy

D. a high unemployment rate

15. The classical approach dominated modern economic policy during

A. the 1980s.

B. the Vietnam War.

C. World War II.

D. the period before the Great Depression.

16. Say's Law implies that

A. the economy will not experience a long-term decrease in output.

B. economic instability requires government intervention.

C. flexible wages and prices require government intervention.

D. the economy is unlikely to attain full employment.

17. Say's Law states that

A. increased prices lead to increased supply.

B. opportunity costs will always increase.

C. supply creates its own demand.

D. high prices cause unemployment.

18. Say's Law implies that

A. wages and prices are fixed.

B. full employment equilibrium is unlikely.

C. whatever is produced will be sold.

D. unemployment causes inflation.

19. Say's Law is consistent with the _______ view of the economy.

A. classical

B. Keynesian

C. monetarist

D. supply-side

20. According to Say's Law, all goods produced will be sold

A. as long as the government establishes the correct price.

B. because technology is constantly improving.

C. if prices are flexible and free to change.

D. if trade barriers protect domestic production.

21. During the Great Depression, classical theorists believed that

A. wages would rise and full employment would be restored.

B. full employment was unlikely without government spending.

C. monetary policy was necessary to decrease interest rates.

D. decreases in production were temporary.

22. Unlike the classical economists, Keynes asserted that

A. laissez-faire would lead to macro equilibrium.

B. the economy was inherently unstable.

C. markets would naturally self-adjust.

D. wages and prices were flexible.

23. According to Keynes,

A. small disturbances in prices and output are always short term.

B. the economy is inherently stable.

C. government intervention in the economy is necessary at times.

D. high unemployment is always a temporary situation.

24. Keynesian and classical economists disagree about whether

A. government intervention should be used to correct business cycles.

B. unemployment occurs.

C. supply-side policies should be used to correct business cycles.

D. business cycles occur.

25. Keynesian theory became important when classical economic theory did not adequately explain a prolonged period of

A. inflation with low unemployment.

B. inflation with high unemployment.

C. deflation with low unemployment.

D. deflation with high unemployment.

26. A critical macroeconomic controversy is whether a market economy is inherently

A. stable or unstable.

B. fair or unfair.

C. corrupt or uncorrupt.

D. equitable or inequitable.

27. The various quantities of output that all market participants are willing and able to buy at alternative price levels in a given time period is

A. market demand.

B. aggregate demand.

C. market supply.

D. aggregate supply.

28. Aggregate demand

A. refers to the collective behavior of all buyers.

B. reflects the total quantity of output produced.

C. increases when the price level increases.

D. is influenced directly by aggregate supply.

29. The difference between market demand and aggregate demand is that

A. market demand applies to all individuals, and aggregate demand does not.

B. aggregate demand applies to a specific good, and market demand does not.

C. policy levers work through market demand but not aggregate demand.

D. aggregate demand applies to all goods and market demand applies to a specific good.

30. The value of output in constant prices is measured by

A. nominal GDP.

B. real GDP.

C. the CPI.

D. GDP per capita.

31. The aggregate demand curve shows the relationship between the volume of purchases and

A. the amount producers supply.

B. real GDP.

C. which goods and services people will buy.

D. the price level.

32. The aggregate demand curve is

A. vertical.

B. horizontal.

C. downward sloping.

D. upward sloping.

33. Ceteris paribus, based on the aggregate demand curve, if the price level _______ the quantity of real output _______ increases.

A. increases; produced

B. decreases; produced

C. increases; demanded

D. decreases; demanded

34. The aggregate demand curve is downward sloping because, ceteris paribus

A. people are willing and able to buy more goods and services at lower average prices.

B. people buy fewer goods and services at lower average incomes.

C. a higher average price level induces producers to offer more output.

D. a higher average price level causes incomes to increase.

35. Which of the following is not a reason for the downward slope of the aggregate demand curve?

A. the real balances effect

B. the foreign trade effect

C. the cost effect

D. the interest rate effect

36. According to the real balances effect, when the price level

A. falls, cash is worth less and therefore people buy less.

B. falls, cash is worth more and therefore people buy more.

C. rises, cash is worth less and therefore people buy more.

D. rises, cash is worth more and therefore people buy less.

37. Ceteris paribus, if the average price level falls, then the _____ effect will result in _____ in the purchases of goods and services.

A. real balances; an increase

B. foreign trade; a decrease

C. interest rate; a decrease

D. cost; an increase

38. Ceteris paribus, based on the real balances effect, if the price level falls

A. wealth decreases.

B. purchasing power increases.

C. real income decreases.

D. business profits increase.

39. Which of the following is an example of the real balances effect, assuming the U.S. price level decreases?

A. The purchasing power of money increases and people buy more goods.

B. U.S. goods are less expensive for foreigners to buy and exports increase.

C. U.S. production costs stay constant and profits for businesses decrease.

D. The demand for loans decreases so interest rates decline and loan-financed purchases increase.

40. The foreign trade effect states that, ceteris paribus

A. the quantity demanded of domestic goods falls when the domestic price level falls.

B. the quantity demanded of imported goods falls when the price of imported goods falls.

C. foreign consumers have more incentive to buy American-made products when U.S. prices rise.

D. the quantity demanded of domestic goods rises when the domestic price level falls.

41. When the U.S. price level increases relative to the price level in foreign economies, U.S. consumers tend to buy

A. fewer imported goods and fewer domestically produced goods, ceteris paribus.

B. fewer imported goods and more domestically produced goods, ceteris paribus.

C. more imported goods and fewer domestically produced goods, ceteris paribus.

D. more imported goods and more domestically produced goods, ceteris paribus.

42. According to the foreign trade effect, when the U.S. price level decreases, U.S. consumers are likely to buy

A. more American-made products.

B. different American-made products.

C. more foreign-made products.

D. less of all products, both American made and foreign made.

43. Which of the following is an example of the foreign trade effect, assuming the U.S. price level decreases?

A. The purchasing power of money decreases and people buy fewer goods.

B. U.S. goods are less expensive for Americans so they buy fewer imports and more domestic goods.

C. U.S. production costs stay constant and profits for businesses increase.

D. The demand for loans decreases so interest rates decline and loan-financed purchases increase.

44. Which of the following suggests that lower average prices stimulate more borrowing?

A. the cost effect

B. the interest rate effect

C. the real balances effect

D. the profit effect

45. The aggregate demand curve is downward-sloping because, other things being equal

A. people buy more goods and services at lower average incomes.

B. a lower average price level causes lower interest rates, which stimulate loan-financed purchases.

C. a higher average price level will induce producers to offer more output than otherwise.

D. people buy more goods and services at higher average prices.

46. Which of the following is an example of the interest-rate effect, assuming the U.S. price level decreases?

A. The purchasing power of money decreases and people buy more goods.

B. U.S. goods are more expensive for foreigners to buy and exports decrease.

C. U.S. production costs increase and producers charge higher prices.

D. The demand for loans decreases so interest rates decline and loan-financed purchases increase.

47. The total amount of output producers are willing and able to produce at alternative price levels in a given time period is known as

A. aggregate demand.

B. aggregate supply.

C. real GDP.

D. macro equilibrium.

48. The short-run aggregate supply curve is

A. vertical at all levels of output.

B. horizontal at all levels of output.

C. downward sloping.

D. upward sloping.

49. Ceteris paribus, based on the aggregate supply curve, if the price level _______ the quantity of real output _______ increases.

A. increases; produced

B. decreases; produced

C. increases; demanded

D. decreases; demanded

50. The aggregate supply curve is positively sloped because as the price level increases

A. profit margins increase in the short run.

B. costs of production decline in the short run.

C. the purchasing power of money increases.

D. the cost of borrowing declines.

51. One explanation for why production costs tend to rise as output increases is that producers

A. may have to pay overtime wages to workers.

B. may decide to lay off workers.

C. will pay lower prices for necessary inputs.

D. will lower base wages to workers.

52. Which of the following is an explanation of why the aggregate supply curve slopes upward, assuming the price level increases?

A. The purchasing power of money decreases and businesses buy fewer goods.

B. The costs of production increase in the short run and profits become smaller.

C. Production costs increase and producers charge higher prices for their goods.

D. The demand for loans decreases so interest rates decline and businesses borrow more money.

53. The intersection of the aggregate demand and supply curves establishes

A. full-employment GDP.

B. macro equilibrium.

C. an inflation rate of zero.

D. an unemployment rate of zero.

54. At the intersection of the aggregate supply and aggregate demand curves, the economy is experiencing

A. full employment.

B. macro equilibrium.

C. low levels of inflation.

D. population growth.

55. At macro equilibrium

A. exports equal imports.

B. money supply equals money demand.

C. population growth is stable.

D. aggregate demand equals aggregate supply.

56. Macro equilibrium always occurs

A. when aggregate supply is greater than aggregate demand.

B. when the labor force is fully employed.

C. when aggregate demand equals aggregate supply at the current average price level.

D. at a zero inflation rate.

57. Which of the following results if the aggregate quantity supplied exceeds the aggregate quantity demanded?

A. Aggregate demand shifts to the right.

B. Aggregate supply shifts to the right.

C. A surplus pushes the average prices down to macro equilibrium.

D. A shortage pushes the average prices up to macro equilibrium.

58. If the price level is:

A. above equilibrium, this results in excess supply

B. above equilibrium, this results in a shortage

C. below equilibrium, this results in an increase in the quantity of output offered for sale

D. below equilibrium, this results in a surplus

59. Which of the following will occur if the aggregate quantity supplied is less than the aggregate quantity demanded?

A. Aggregate demand will shift to the right.

B. Aggregate supply will shift to the left.

C. There will be a shortage.

D. There will be a surplus.

60. Which of the following will occur if the price level is below the equilibrium level?

A. Consumers will bid the price level up by competing for goods.

B. The quantity demanded will increase as the price level increases.

C. The quantity supplied will decrease as the price level increases.

D. Producers will bid the price level down by competing for buyers.

61. Which of the following is definitely if the economy is in macro equilibrium?

A. The price level is optimal, but the output level may not be.

B. The output level is optimal, but the price level may not be.

C. The price level and the output level are both optimal.

D. The price level and the output level might not be optimal.

62. The inability of labor-force participants to find jobs is known as

A. full employment.

B. unemployment.

C. cyclical employment.

D. underemployment.

63. An increase in the average level of prices of goods and services is known as

A. price elevation.

B. deflation.

C. inflation.

D. the law of demand.

64. Ceteris paribus, a leftward shift of the aggregate supply curve will cause the equilibrium price level to _______ and equilibrium real output to _______.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

65. Which of the following is likely to cause a leftward shift in the aggregate supply curve, ceteris paribus?

A. an increase in consumer confidence

B. a decrease in taxes for businesses

C. an increase in the supply of skilled labor

D. an increase in the cost of natural gas

66. Which of the following is likely to occur if a terrorist attack stops air travel in a country for some time, ceteris paribus?

A. Aggregate supply will decrease.

B. Aggregate supply will increase.

C. Aggregate demand will increase.

D. Aggregate demand will decrease.

67. Ceteris paribus, a rightward shift of the aggregate supply curve will cause the equilibrium price level to _______ and equilibrium real output to _______.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

68. Which of the following is likely to occur if OPEC increases the amount of oil it supplies and domestic energy prices fall, ceteris paribus?

A. Aggregate supply will decrease.

B. Aggregate supply will increase.

C. Aggregate demand will increase.

D. Aggregate demand will decrease.

69. Ceteris paribus, a leftward shift of the aggregate demand curve will cause the equilibrium price level to _______ and equilibrium real output to _______.

A. increase; increase

B. increase; decrease

C. decrease; increase

D. decrease; decrease

70. If the stock market plunged over the next week, consumers would

A. rush to buy more goods and services.

B. buy more stocks to make up for their losses.

C. demand fewer goods and services.

D. cause the aggregate demand curve to shift to the right.

71. Which of the following would cause the aggregate demand curve to decrease, ceteris paribus?

A. higher prices for foreign-produced goods

B. a decrease in interest rates

C. an increase in income taxes

D. an increase in the value of the stock market

72. Which of the following is likely to occur if people reduce their spending because they are worried about an economic downturn, ceteris paribus?

A. Aggregate supply will decrease.

B. Aggregate supply will increase.

C. Aggregate demand will increase.

D. Aggregate demand will decrease.

73. The aggregate demand curve is most likely to shift to the right when

A. consumer spending falls.

B. taxes fall.

C. government spending falls.

D. technology improves.

74. Macro controversies focus primarily on the

A. level of interest rates.

B. federal budget deficit.

C. potential to shift aggregate demand and aggregate supply.

D. potential to change imports and exports.

75. Controversies between Keynesian, monetarist, supply-side, and eclectic theories focus on

A. the shape and sensitivity of aggregate supply and aggregate demand curves.

B. the existence or nonexistence of the aggregate supply curve.

C. the importance of international balances to the economy.

D. the usefulness of aggregate demand and supply in analyzing macro equilibrium.

76. Keynesian theory is referred to as a

A. supply-side theory.

B. demand-side theory.

C. full-employment theory.

D. GDP gap theory.

77. If an economy is experiencing a recession, the Keynesian approach to achieving full employment is to

A. use various supply-side options, such as deregulation.

B. decrease the growth of the money supply.

C. do nothing.

D. employ expansionary fiscal policy.

78. Keynes viewed the economy as inherently unstable and suggested that during a recession policy makers should

A. cut taxes and/or increase government spending.

B. cut taxes and/or reduce government spending.

C. raise taxes and/or increase government spending.

D. raise taxes and/or reduce government spending.

79. According to Keynes, which of the following should occur because of a decrease in government expenditure, ceteris paribus?

A. a leftward shift of the aggregate supply curve

B. a rightward shift of the aggregate supply curve

C. a leftward shift of the aggregate demand curve

D. a rightward shift of the aggregate demand curve

80. Which of the following is a mechanism Keynes advocated for dealing with a situation of depressed output?

A. laissez-faire

B. raising taxes

C. increasing government expenditure

D. increasing supply incentives

81. If an economy is experiencing a recession, the Keynesian approach to achieving full employment is to

A. follow a policy of laissez faire.

B. relax immigration standards.

C. reduce government regulations.

D. use tax cuts, more government spending or both.

82. Which of the following economic theories focus on aggregate demand to explain changes in unemployment and inflation?

A. Classical and supply-side theories

B. Keynesian and monetarist theories

C. Classical and Keynesian theories

D. Classical and monetarist theories

83. Both Keynesian and monetarist theories believe that _______ aggregate _______ causes inflation.

A. an increase in; supply

B. excessive; supply

C. too little; demand

D. excessive; demand

84. Monetary theory is referred to as

A. a factor-market theory.

B. the business-cycle theory.

C. a demand-side theory.

D. a supply-side theory.

85. According to monetary theories, an increase in the money supply shifts the aggregate

A. supply curve to the left.

B. supply curve to the right.

C. demand curve to the left.

D. demand curve to the right.

86. According to monetary theories, a decrease in the money supply shifts the aggregate

A. supply curve to the left.

B. supply curve to the right.

C. demand curve to the left.

D. demand curve to the right.

87. According to supply-side theories, an increase in supply incentives shifts the aggregate

A. supply curve to the left.

B. supply curve to the right.

C. demand curve to the left.

D. demand curve to the right.

88. According to supply-side theories, if producers are less willing and able to supply goods at prevailing prices, then aggregate

A. supply shifts to the left.

B. supply shifts to the right.

C. demand curve to the left.

D. demand curve to the right.

89. According to supply-side theories, if the costs of production rises, then aggregate

A. demand shifts to the left.

B. demand shifts to the right.

C. supply shifts to the left.

D. supply shifts to the right.

90. Which of the following explanations of the business cycle focuses on both aggregate supply and aggregate demand shifts?

A. monetarist explanations.

B. Keynesian explanations.

C. supply-side explanations.

D. eclectic explanations.

91. If an economy is experiencing a recession, the classical approach to achieving full employment is to

A. do nothing and wait for natural market forces to improve the economy.

B. increase the growth of the money supply.

C. use all available supply-side options.

D. cut taxes and increase government spending.

92. Which of the following stresses the inability of the government to improve short-run market outcomes?

A. monetarist economics

B. classical economics

C. supply-side economics

D. Keynesian economics

93. According to Keynesian theory, the correct fiscal policy action to stimulate the economy would be to

A. raise taxes to increase aggregate demand.

B. increase the money supply to increase aggregate supply.

C. increase government expenditures to increase aggregate demand.

D. increase education spending to increase aggregate supply.

94. Keynesian policy levers include

A. deregulation.

B. fiscal policy.

C. supply-side policy.

D. laissez-faire policy.

95. An income tax cut can best be characterized as

A. monetary policy only.

B. fiscal policy only.

C. both monetary and supply-side policy.

D. both fiscal and supply-side policy.

96. Monetary policy

A. is controlled by Congress.

B. refers to the use of government spending.

C. shifts the aggregate supply curve.

D. is controlled by the Federal Reserve.

97. Monetary policy can best cure a recession by

A. reducing interest rate, which shifts aggregate supply to the left.

B. reducing interest rate, which shifts aggregate demand to the right.

C. raising interest rate, which shifts aggregate supply to the right.

D. raising interest rate, which shifts aggregate demand to the left.

98. Individual employment and training programs are levers most likely to be advocated by

A. classical economists.

B. new classical economists.

C. Keynesians.

D. supply-side economists.

99. Which of the following is an example of supply-side policy?

A. the government response to the Great Depression

B. the hyperinflation during the 1970s

C. the tax cuts in 1981

D. government policy before 1930

100. Which of the following causes the aggregate supply curve to shift to the left, ceteris paribus?

A. an increase in the cost of labor

B. a decrease in the money supply

C. an increase in government spending on goods

D. a decrease in interest rates

101. Aggregate Supply and Demand

According to the Aggregate Supply and Demand table, at what price level does macro equilibrium occur?

A. 100

B. 110

C. 120

D. 130

102. Aggregate Supply and Demand

According to the Aggregate Supply and Demand table, at what output level does macro equilibrium occur?

A. $1100

B. $1400

C. $1700

D. $1800

103. Aggregate Supply and Demand

According to the Aggregate Supply and Demand table, at which of the following price levels would a shortage occur?

A. 110

B. 120

C. 130

D. 140

104. Aggregate Supply and Demand

According to the Aggregate Supply and Demand table, at which of the following price levels would a surplus occur?

A. 100

B. 110

C. 120

D. 130

105. According to Keynes, which of the following policy options would be most appropriate for the economy if full-employment output occurs below the current level of output?

A. a decrease in the money supply to control inflation

B. an increase in tax incentives to train workers

C. an increase in the level of government spending

D. a laissez faire approach

106.

Refer to the figure. At what price level does equilibrium occur?

A. P1

B. P2

C. P3

D. P4

107.

Refer to the figure. At what level of output does equilibrium occur?

A. Q2

B. Q3

C. Q4

D. Q5

108.

Refer to the figure. At which of the following price levels would a shortage occur?

A. P1

B. P2

C. P3

D. P4

109.

Refer to the figure. At which of the following price levels would a surplus occur?

A. P1

B. P2, but not P3

C. P2 and P3

D. P3 and P4

110.

Refer to the figure. Given that current equilibrium occurs at a price level of P2, the most desirable price level

A. can be at any price level.

B. must be P2.

C. must be greater than P2.

D. must be less than P2.

111.

Refer to the figure. Ceteris paribus, if consumers lose confidence in the economy and reduce their spending, the new equilibrium is likely to occur at

A. P2 and Q2.

B. P1 and Q2.

C. P3 and Q3.

D. P2 and Q4.

112.

Refer to the figure. Ceteris paribus, if businesses experience higher costs for transporting goods because of an increased price for imported oil, the new equilibrium is likely to occur at

A. P2 and Q5.

B. P1 and Q2.

C. P3 and Q3.

D. P1 and Q5.

113.

Refer to the figure. At what price level does equilibrium occur?

A. P1

B. P2

C. P3

D. P4

114.

Refer to the figure. At what level of output does equilibrium occur?

A. Q2

B. Q3

C. Q4

D. Q5

115.

Refer to the text. At which of the following price levels would a shortage occur?

A. P2

B. P3

C. P4

D. P5

116.

Refer to the figure. At which of the following price levels would a surplus occur?

A. P1

B. P2

C. P3

D. P4

117.

Refer to the figure. If the economy is in equilibrium, at a real output of Q3 then

A. aggregate demand must be AD1.

B. aggregate supply could be either AS1 or AS2, depending on the level of aggregate demand.

C. the equilibrium price level is P2.

D. aggregate demand is AD2 and aggregate supply is AS2.

118.

Refer to the figure. If the equilibrium price level is P1, then aggregate supply is

A. AS2 and the equilibrium output level is Q2.

B. AS2 and the equilibrium output level is Q1.

C. AS1 and the equilibrium output level is Q3.

D. AS1 and the equilibrium output level is Q2.

119.

Refer to the figure. A shift in aggregate demand from AD2 to AD1, ceteris paribus, is most likely to cause

A. an increase in real output and an increase in the price level.

B. an increase in real output and a decrease in the price level.

C. a decrease in real output and an increase in the price level.

D. a decrease in real output and a decrease in the price level.

120.

Refer to the figure. A shift in aggregate supply from AS2 to AS1, ceteris paribus, is most likely to cause

A. a decrease in the price level, but no change in real output.

B. a decrease in the price level and an increase in real output.

C. an increase in the price level, but no change in real output.

D. an increase in the price level and an increase in real output.

121. Ceteris paribus, if production costs increase, then aggregate

A. supply will shift to the left.

B. supply will shift to the right.

C. demand will shift to the left.

D. demand will shift to the right.

122. Increased costs are likely to cause

A. a decrease in the equilibrium price level and a decrease in real equilibrium output.

B. an increase in the equilibrium price level and an increase in real equilibrium output.

C. an increase in the equilibrium price level and a decrease in real equilibrium output.

D. a decrease in the equilibrium price level and an increase in real equilibrium output.

123. Which of the following is most likely to happen as a result of decreased consumer spending?

A. a leftward shift of aggregate supply

B. a rightward shift of aggregate supply

C. a leftward shift of aggregate demand

D. a rightward shift of aggregate demand

124. Macroeconomics is the study of individual businesses and government agencies.

Macroeconomics is the study of aggregate economic behavior, the sum of all individual choices.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-01 Cite the major macro outcomes and their determinants.
Topic: A Macro View

125. Policy levers and external shocks are determinants of macroeconomic performance.

Internal market forces, external shocks, and policy levers are the macro determinants.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-01 Cite the major macro outcomes and their determinants.
Topic: A Macro View

126. Output, jobs, and the price level are considered to be determinants of macroeconomic performance.

Internal market forces, external shocks, and policy levers are the macro determinants while output, jobs, and prices are measurements of economic performance.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-01 Cite the major macro outcomes and their determinants.
Topic: A Macro View

127. The cornerstone of classical theory is constant wages and prices.

The cornerstone of classical theory is self-adjustment of the market and this requires quickly adjusting, flexible prices.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

128. The classical policy approach to the business cycle was to allow the market to correct itself.

The cornerstone of classical theory is quick self-adjustment of the market as a result of flexible prices.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

129. According to the classical economists, if people are out of work they will accept jobs for lower wages and ultimately full employment will occur.

People should be able to find new jobs at lower wages relatively quickly as some employment is preferable to no employment.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

130. According to Keynes, the economy is basically stable and government intervention is not required.

Keynes' view is that the inherent instability of the marketplace requires government intervention.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

131. Keynes believed that small disturbances in the economy would be made even greater by the market mechanism and thus government intervention was required.

Small disturbances in output, prices, or unemployment were likely to be magnified, not muted, by the invisible hand of the marketplace.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

132. According to the real balances effect, if the price level rises then the real value of savings increases and individuals will buy more output.

Lower prices increase the real value of assets and individuals will buy more output as a result.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: The Aggregate Supply-Demand Model

133. According to the foreign trade effect, if the U.S. price level rises, then U.S. exports are more expensive for foreigners to buy so the level of real GDP decreases.

When American products are more expensive, consumers will purchase more foreign goods and so the value of domestically produced goods and services will fall.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: The Aggregate Supply-Demand Model

134. According to the interest-rate effect, if the price level falls then people will need to borrow fewer dollars, which will cause the interest rate to decrease and loan financed sales will increase.

When interest rates are lower, consumers are more willing to purchase "big ticket" items for which they may need to borrow money in order to purchase.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: The Aggregate Supply-Demand Model

135. One reason why the quantity of real output supplied rises with the price level, ceteris paribus, is because profits are higher.

Quantity of real output supplied will go up when suppliers see that they can make more profit.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: The Aggregate Supply-Demand Model

136. One explanation for why the AS curve slopes upward is that when the output level rises, producers experience increased costs such as higher wages.

Aggregate supply reflects the various quantities of real output that firms are willing and able to produce at alternative price levels. As output increases so do costs and so firms will require a higher average price level to be able to produce profitably.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: The Aggregate Supply-Demand Model

137. For macro equilibrium to occur, aggregate demand must equal aggregate supply at a fairly low price level.

For macro equilibrium to occur, aggregate demand must equal aggregate supply, regardless of the price level at which this occurs.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: The Aggregate Supply-Demand Model

138. Inflation and unemployment are macroeconomic failures.

The undesirable outcomes of macro failures are unemployment and inflation.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 11-04 Tell how macro failure occurs.
Topic: Macro Failure

139. Macro equilibrium always occurs at an optimal level of output.

Marco equilibrium occurs where aggregate supply and aggregate demand intersect; this may or may not be at an optimal level.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-04 Tell how macro failure occurs.
Topic: Macro Failure

140. If, at the prevailing price level, the aggregate quantity supplied exceeds the aggregate quantity demanded, the price level will tend to fall.

Price will fall due to surpluses and the fact that suppliers would rather lower their prices than sit on unsold goods and services.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-04 Tell how macro failure occurs.
Topic: Macro Failure

141. Business cycles are the result of changes in real GDP caused by shifts in aggregate demand and aggregate supply.

Business cycles are alternating periods of growth and contraction.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-04 Tell how macro failure occurs.
Topic: Macro Failure

142. Keynesian economists advocate active government policy during periods of high unemployment and low output.

Keynes would argue that government intervention is needed to jump-start the economy in times when prices adjust slowly and the economy is in a recession.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: Competing Theories of Short-Run Instability

143. Monetarists advocate changing the tax rate to shift the aggregate demand curve and achieve full employment.

Monetarists advocate the role of money in financing aggregate demand rather than fiscal policies executed by the federal government.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: Competing Theories of Short-Run Instability

144. Supply-side theories focus on stimulating production by increasing the demand for goods and services.

Supply-side theories focus on stimulating production by facilitating the increase in the supply of goods and services.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-03 Interpret the shapes of the aggregate demand and supply curves.
Topic: Competing Theories of Short-Run Instability

145. Most modern economists believe the economy performs best without government intervention in the form of policy levers.

There are many times when government intervention is not necessary, however most economists agree that there is a time for policy levers.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-05 Outline the major policy options for macro government intervention.
Topic: Policy Options

146. Fiscal policy is the use of the government's tax and spending powers to shift the aggregate demand curve.

The use of government taxes and spending to alter macroeconomic outcomes characterizes fiscal policy.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-05 Outline the major policy options for macro government intervention.
Topic: Policy Options

147. Monetary policy emphasizes the role of money and interest rates in shifting the aggregate supply curve.

Monetary policy refers to the use of money and interest rates to alter economic outcomes by shifting aggregate demand.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 1 Easy
Learning Objective: 11-05 Outline the major policy options for macro government intervention.
Topic: Policy Options

148. What is the cornerstone of Keynes’ theory?

Keynes asserted that the private economy was inherently unstable. Small disturbances in output, prices, or unemployment were likely to be magnified, not muted, by the invisible hand of the marketplace. As a result, an economy that finds itself out of equilibrium may struggle to adjust via flexible prices, as classical economists believe.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

149. Discuss the various changing policy levers from 1960 through 2000.

In the 1960s it looked like fiscal policy, tax cuts, and increased government spending would be the answer. However fiscal policy failed to control inflation as the economy entered the 1970s. In the 1970s, both unemployment was high and inflation was high so fiscal policy could not remedy the issues. Monetary policy was next in the limelight. In the late 1970s, the Fed dominated macro policy. In the 1980s, the Bush administration tried to maintain a hands-off policy. Bush preferred an approach similar to the classical economists. In the 1990s Clinton pushed a tax increase as a form of fiscal policy to slow down the rampant growth of the economy and avoid inflation. In the 2000s, the fiscal policy lever was pulled in the direction of stimulus as the Federal Reserve expanded the money supply and lowered taxes while boosting spending to prevent a recession after 9/11.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 11-05 Outline the major policy options for macro government intervention.
Topic: Policy Perspectives

150. Explain Say’s Law. What is meant by "supply creates its own demand? "

Say’s Law states the supply creates its own demand. In Say’s view, if you produce something, somebody will buy it because prices can adjust to sell any output produced.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-02 Explain how classical and Keynesian macro views differ.
Topic: Stable or Unstable?

151. The cornerstone of Classical economics is which of the following?

A. Prices and wages are flexible downward, but not upward.

B. Prices and wages are flexible upward, but not downward.

C. Prices and wages are flexible both upward and downward.

D. Prices and wages are never flexible.

152. Which of the following represents the internal market forces that affect macroeconomic outcomes?

A. tax policies

B. wars

C. population growth

D. immigration policy

153. When prices fall and the cash balances that you hold in your wallet are worth more, you are able to spend more. This is described by the

A. real balances effect.

B. foreign trade effect.

C. interest rate effect.

D. nominal income effect.

154. Supply-side levers were most utilized during which Presidential administration?

A. Franklin D Roosevelt

B. Barack Obama

C. Ronald Reagan

D. Bill Clinton

155. Explain how macro equilibrium can occur with high levels of unemployment. Explain how an economy can be at equilibrium and yet have high inflation.

The economy can be in equilibrium with high unemployment and/or high inflation when the aggregate supply and demand curves are not at desired levels. For instance, if the aggregate demand shifts too far right, then inflation is likely to occur even though the aggregate demand and supply curves will intersect at equilibrium. If, for instance, the aggregate supply curve decreases to the point where unemployment rises, equilibrium can still occur where the aggregate supply and demand curves intersect there, as well.

AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 11-04 Tell how macro failure occurs.
Topic: Macro Failure

156. Which of these correctly restates Say's Law?

A. It isn't what you say, but how you say it, that matters most.

B. Demand will create its own supply.

C. If you find the right price, you can sell any product.

D. Markets are directed by an invisible hand.

157. During the period of the 1930s,

A. wages and prices adjusted quickly to changing economic conditions.

B. the Classical view of the macroeconomy was validated by prevailing economic conditions.

C. wages adjusted quickly as expected by Say's law but other prices, especially agricultural prices, did not.

D. the sluggish adjustment of the economy caused economists to look at alternatives to the Classical model.

158. Which of these correctly restates Say's Law?

A. Wages and prices adjusted quickly to changing economic conditions.

B. The Classical view of the macroeconomy was validated by prevailing economic conditions.

C. Wages adjusted quickly as expected by Say's Law but other prices, especially agricultural prices, did not.

D. The sluggish adjustment of the economy caused economists to look at alternatives to the Classical model.

159. According to the Keynesian view of the macroeconomy, the economy is

A. inherently stable.

B. not always stable; however, the economy quickly returns to full employment.

C. inherently unstable; however, government intervention would only worsen the situation.

D. inherently unstable, and government has the ability to intervene in a way that will increase economic stability.

160. In 2007, the decline in the demand for housing caused the ____ curve to shift to the ____.

A. aggregate demand; right

B. aggregate demand; left

C. aggregate supply; right

D. aggregate supply; left

161. The equilibrium level of output associated with the intersection of the aggregate demand and aggregate supply curves

A. is always a full-employment level of output.

B. may be less than the full-employment level of output, but is never above the full-employment level of output.

C. may be above the full-employment level of output, but is never less than the full-employment level of output.

D. may occur at output levels that can be either below, at, or above the full-employment level of output.

162. Which of the following is an example of a determinant of macro performance?

A. Real GDP increased 2 percent last quarter.

B. Hurricane Harvey caused severe damage to Texas.

C. The unemployment rate fell to 7 percent last month.

D. The inflation rate is holding steady at 2 percent.

163. Aggregate supply

A. has a curve explained by rising costs.

B. is generally an upward-sloping curve.

C. shows the relationship between the price level and the quantity of total output demanded, ceteris paribus.

D. All of these choices are correct.

164. A decrease (leftward shift) of the aggregate supply curve will ______ the level of output and ______ the price level.

A. increase; increase

B. decrease; decrease

C. increase; decrease

D. decrease; increase

165. An increase in the price level will ______ the quantity of real output supplied, ceteris paribus, but ______ the quantity of real output demanded, ceteris paribus.

A. increase; decrease

B. decrease; increase

C. not change; decrease

D. not change; increase

166. In the early 1930s, President Hoover told Americans that prosperity was just "around the corner." He was expressing the views of ______ economic theory.

A. Keynesian

B. demand-side

C. classical

D. supply-side

167. Examine the following information regarding macroeconomic performance.

Which year would be considered as having optimal levels for the macro economy?

A. Year A

B. Year B

C. Year C

D. Year D

168. Keynesian economics is known as a _____ theory.

A. demand-side

B. supply-side

C. non-activist

D. laissez-faire

169. A decrease in oil prices will tend to shift the aggregate _____ curve to the _____.

A. demand; right

B. demand; left

C. supply; right

D. supply; left

170. The policy levers used by President Obama in 2009 can be described as

A. Keynesian policies.

B. demand-side policies.

C. fiscal policies.

D. All of these choices are correct.