HW Chapter 08: Aggregate Demand and Supply

Starting from short-run equilibrium, the following occurs: the money supply increases and labor
productivity increases. What is the effect on the price level and Real GDP in the short run?
a. Real GDP falls and the price level necessarily rises.
b. Real GDP rises and the price level necessarily rises.
c. Real GDP rises and the effect on the price level cannot be determined.
d. Real GDP falls and the effect on the price level cannot be determined.
e. none of the above
A change in labor productivity affects __________ and a change in the exchange rate affects
__________.
a. SRAS; SRAS
b. AD; AD
c. SRAS; AD
d. AD; SRAS
e. none of the above
An aggregate demand (AD) curve shows the
a. amount of a particular good people are willing and able to buy at a particular price,
ceteris paribus.
b. real output (Real GDP) people are willing and able to sell at different price levels, ceteris
paribus.
c. real output (Real (GDP) people are willing and able to buy and to sell at different price
levels, ceteris paribus.
d. real output (Real GDP) people are willing and able to buy at different price levels, ceteris
paribus.
Which of the following statements is false?
a. The exchange rate is the price of one (country's) currency in terms of another (country's)
currency.
b. A currency has appreciated in value if more of a foreign currency is needed to buy it.
c. A change in the money supply can change aggregate demand.
d. A change in business taxes can change investment, which can change aggregate demand.
e. none of the above
If total expenditures fall at a given price level, then the
a. quantity demanded of Real GDP rises.
b. quantity demanded of Real GDP falls.
c. AD curves shifts to the right.
d. AD curve shifts to the left.
e. none of the above
Can a change in the price level change aggregate demand?
a. Yes, as the price level rises, aggregate demand falls.
b. Yes, but only under the condition that the real balance effect is operational.

c. No, only a change in a nonprice factor can change aggregate demand.

d. No, a change in the price level can only change aggregate supply.
e. none of the above
An appreciation of the U.S. dollar tends to __________ U.S. net exports and shift the U.S. AD
curve to the __________.
a. raise; right
b. raise; left
c. lower; right
d. lower; left
The product of ____________________ and _________________ is equal to the total amount of
spending in an economy.
a. the money supply; the price level
b. velocity; the price level
c. the money supply; velocity
d. velocity; the level of output
Which of the following will cause a movement from one point on an AD curve to another point
on the same AD curve?
a. a change in consumption
b. a change in government expenditures
c. a change in net exports
d. a change in the price level
e. all of the above
As income taxes rise, disposable income __________, causing __________ the AD curve.
a. increases; movement down along
b. increases; a rightward shift of
c. decreases; movement up along
d. decreases; a leftward shift of
A change in the money supply can affect one or more of the components of spending and
therefore shift the short-run aggregate supply (SRAS) curve.
a. TRUE
b. FALSE
Which of the following is an example of an adverse supply shock?
a. a nationwide drought lasting for many months
b. an outbreak of war among several of the Middle Eastern oil-producing countries
c. an influenza virus that affects 50 percent of the labor force for two weeks
d. a, b, and c
e. a and c

If businesses buy fewer capital goods, and nothing else changes, then total expenditures on U.S.
goods and services will decrease. And if total expenditures decrease, then __________ will
decrease; consequently, the __________ curve will shift __________.
a. aggregate demand (AD); AD; rightward
b. short-run aggregate supply (SRAS); SRAS; leftward
c. aggregate demand (AD); AD; leftward
d. interest rates; AD; leftward
e. prices; AD; rightward
A fall in the price level changes the purchasing power of money. This is relevant to the
__________ effect.
a. international trade
b. real balance
c. aggregate demand
d. interest rate
e. aggregate supply
If consumption changes because of a change in a factor other than the price level, then the
a. economy moves from one point on an AD curve to another point on the same curve.
b. AD curve shifts.
c. economy moves from one point on a short-run aggregate supply (SRAS) curve to another
point on the same curve.
d. SRAS curve shifts.
e. none of the above
Refer to Exhibit 8-1. Assume that the economy is originally in equilibrium at point A. If
businesses become more optimistic about future sales, at which point is the economy most likely
to end up in the short run?
a. A
b. B
c. C
d. D
The interest rate effect, the real balance effect, and the international trade effect all result from a
change in the price level.
a. TRUE
b. FALSE
A decrease in the price level
a. shifts the SRAS curve to the right.
b. shifts the SRAS curve to the left.
c. causes an upward movement along the existing SRAS curve.
d. causes a downward movement along the existing SRAS curve.
e. none of the above

Suppose a drop in stock prices makes people feel less wealthy. This would cause __________ the
economy's AD curve.
a. movement down along
b. movement up along
c. a rightward shift of
d. a leftward shift of
An increase in the interest rate __________ purchases of consumer __________.
a. increases; durables
b. increases; nondurables
c. reduces; durables
d. reduces; nondurables
A rise in the price level prompts an increase in the demand for credit. This is relevant to the
__________ effect.
a. international trade
b. real balance
c. aggregate demand
d. interest rate
e. b and c
Refer to Exhibit 8-1. Assume that the economy is originally in equilibrium at point A. If foreign
real national income rises, at which point is the economy most likely to end up in the short run?
a. A
b. B
c. C
d. D
e. A change in foreign real national income would have no impact on the domestic
economy.
An economic policy initiative results in the AD curve shifting to the right. As a result,
a. the price level will rise.
b. the price level will stay constant.
c. the price level will fall.
d. Real GDP will rise in the short run.
e. a and d
Refer to Exhibit 8-2. Based on the given change, what word (rises or falls) should go in blank
(9) and blank (10), respectively, to summarize the resulting impact on short run equilibrium?
a. rises; rises
b. falls; falls
c. rises; falls
d. falls; rises
Part of the story of the interest rate effect is that a lower price level causes __________ in the
supply of credit, which then causes the interest rate to __________.

a.
b.
c.
d.

a decrease; fall
a decrease; rise
an increase; fall
an increase; rise

Which set of changes is definitely predicted to raise Real GDP in the short run?
a. Wealth increases and there is an adverse supply shock.
b. Individuals expect higher (future) incomes and wage rates fall.
c. Business taxes rise and wage rates fall.
d. The U.S. dollar appreciates and there is a beneficial supply shock.
e. none of the above
The AD curve shows that, as the price level falls, the quantity of
a. GDP demanded increases.
b. GDP demand decreases.
c. Real GDP demanded increases.
d. Real GDP demanded decreases.
e. none of the above
If labor productivity rises at the same time that there is a beneficial supply shock, what is the
effect on short-run aggregate supply (SRAS)?
a. SRAS rises.
b. SRAS falls.
c. SRAS remains constant.
d. SRAS may rise, fall, or remain constant.
The change in the purchasing power of dollar-denominated assets (such as cash holdings) is the
a. money effect.
b. interest rate effect.
c. asset effect.
d. real balance effect.
e. none of the above
If foreign input prices increase and the United States purchases those inputs, then the U.S.
a. AD curve will shift leftward and U.S. prices will fall.
b. AD curve will shift rightward and U.S. prices will rise.
c. SRAS curve will shift leftward and U.S. prices will rise.
d. SRAS curve will shift rightward and U.S. prices will fall