Question 1

Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs. Which pair of GDP growth rates and unemployment rates is most realistic?

Accepted Answer

A)   -3 percent, 2 percent
B)   -1 percent, 20 percent
C)   1 percent, 7 percent
D)   6 percent, 0 percentE) A) and B)
F) None of the above

Question 2

According to the sticky-price theory, which statement is consistent with an unexpected fall in the price level?

Accepted Answer

A)   Some firms' prices are lower than desired, which increases their sales.
B)   Some firms' prices are lower than desired, which depresses their sales.
C)   Some firms' prices are higher than desired, which increases their sales.
D)   Some firms' prices are higher than desired, which depresses their sales.E) B) and C)
F) C) and D)

Question 3

Why is the long-run aggregate-supply curve vertical?

Accepted Answer

A)   because population grows slowly
B)   because the government controls inflation
C)   because money is neutral
D)   because prices are stableE) None of the above
F) B) and C)

Question 4

According to the sticky-wage theory, which statement is consistent with an unexpected increase in the price level?

Accepted Answer

A)   The real wage rises, and employment rises.
B)   The real wage rises, and employment falls.
C)   The real wage falls, and employment rises.
D)   The real wage falls, and employment falls.E) A) and C)
F) All of the above

Question 5

What is the current estimate of the natural rate of unemployment in Canada?

Accepted Answer

A)   5 percent
B)   7 percent
C)   9 percent
D)   11 percentE) B) and C)
F) All of the above

Question 6

What are the effects of a decrease in the price level?

Accepted Answer

A)   Wealth falls, people lend less, interest rates fall, and the dollar appreciates.
B)   Wealth falls, people lend less, interest rates rise, and the dollar depreciates.
C)   Wealth rises, people lend more, interest rates rise, and the dollar appreciates.
D)   Wealth rises, people lend more, interest rates fall, and the dollar depreciates.E) C) and D)
F) B) and C)

Question 7

What has been suggested as a cause of the Great Depression?

Accepted Answer

A)   a decline in output
B)   a decrease in prices
C)   strong bank regulations
D)   a decrease in the money supplyE) B) and D)
F) B) and C)

Question 8

When output rises, unemployment falls.

Accepted Answer

A) True 
 B)False

Question 9

What does the economy experience during a recession?

Accepted Answer

A)   rising employment and income
B)   rising employment and falling income
C)   rising income and falling employment
D)   falling employment and incomeE) B) and C)
F) A) and B)

Question 10

Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short run?

Accepted Answer

A)   Real GDP will rise, and the price level might rise, fall, or stay the same.
B)   Real GDP will fall, and the price level might rise, fall, or stay the same.
C)   The price level will rise, and real GDP might rise, fall, or stay the same.
D)   The price level will fall, and real GDP might rise, fall, or stay the same.E) All of the above
F) A) and B)

Question 11

According to classical economic theory, which of the following do changes in the money supply affect?

Accepted Answer

A)   incentives to invest
B)   prices
C)   unemployment rates
D)   aggregate supplyE) None of the above
F) C) and D)

Question 12

How does the size of investment as a fraction of GDP compare to its importance in creating economic fluctuations?

Accepted Answer

A)   Investment is a small part of real GDP, and it accounts for a small share of the fluctuation in real GDP.
B)   Investment is a small part of real GDP, yet it accounts for a large share of the fluctuation in real GDP.
C)   Investment is a large part of real GDP, and it accounts for a large share of the fluctuation in real GDP.
D)   Investment is a large part of real GDP, yet it accounts for a small share of the fluctuation in real GDP.E) All of the above
F) None of the above

Question 13

What happens to sales and profit during recessions?

Accepted Answer

A)   sales and profits fall
B)   sales and profits rise
C)   sales rise and profits fall
D)   profits fall and sales riseE) All of the above
F) B) and C)

Question 14

John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following shifts aggregate demand to the left?

Accepted Answer

A)   the price level rises.
B)   the price level falls.
C)   the dollar depreciates.
D)   the prices of stocks fall.E) A) and D)
F) None of the above

Question 16

Figure 14-1

-Refer to the Figure 14-1. If the economy starts at A and there is a fall in aggregate demand, what happens to the economy in the long run?

Accepted Answer

A)   It moves to D and then back to A.
B)   It moves to B and then to C.
C)   It moves to D and then to C.
D)   It moves to B and then back to A.E) A) and B)
F) A) and C)

Question 17

In which situation would stagflation exist?

Accepted Answer

A)   when prices and output rise
B)   when prices rise and output falls
C)   when prices fall and output rises
D)   when prices and output fallE) A) and B)
F) None of the above

Question 18

What happens when the dollar appreciates?

Accepted Answer

A)   Canadian exports decrease while imports increase.
B)   Canadian exports and imports decrease.
C)   Canadian exports and imports increase.
D)   Canadian exports increase while imports decrease.E) B) and C)
F) A) and D)

Question 19

An increase in which of the following (assuming the increase was not due to a price level change)  shifts aggregate demand to the right?

Accepted Answer

A)   interest rates
B)   immigration
C)   government surplus
D)   net exportsE) C) and D)
F) A) and D)

Question 20

In which situation does investment spending increase?

Accepted Answer

A)   when the price level rises, causing interest rates to rise
B)   when the price level rises, causing interest rates to fall
C)   when the price level falls, causing interest rates to rise
D)   when the price level falls, causing interest rates to fallE) A) and C)
F) All of the above

Exam 14: Aggregate Demand and Aggregate Supply

What are the effects of a decrease in the price level?

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What is the current estimate of the natural rate of unemployment in Canada?

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According to classical economic theory, which of the following do changes in the money supply affect?

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What does the economy experience during a recession?

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What happens when the dollar appreciates?

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Which of the following shifts aggregate demand to the left?

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Below are pairs of GDP growth rates and unemployment rates. Economists would be shocked to see most of these pairs. Which pair of GDP growth rates and unemployment rates is most realistic?

Correct AnswerverifiedShow Answer

An increase in which of the following (assuming the increase was not due to a price level change) shifts aggregate demand to the right?

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According to the sticky-wage theory, which statement is consistent with an unexpected increase in the price level?

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In which situation does investment spending increase?

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What has been suggested as a cause of the Great Depression?

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How does the size of investment as a fraction of GDP compare to its importance in creating economic fluctuations?

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John Maynard Keynes advocated policies that would increase aggregate demand as a way to decrease unemployment caused by recessions.

Correct AnswerverifiedShow Answer

In which situation would stagflation exist?

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Figure 14-1 -Refer to the Figure 14-1. If the economy starts at A and there is a fall in aggregate demand, what happens to the economy in the long run?

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What happens to sales and profit during recessions?

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Suppose the economy is in long-run equilibrium. If there is a sharp increase in the minimum wage as well as an increase in pessimism about future business conditions, what would we expect to happen in the short run?

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When output rises, unemployment falls.

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According to the sticky-price theory, which statement is consistent with an unexpected fall in the price level?

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Why is the long-run aggregate-supply curve vertical?

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