1.

Aggregate demand tells us

a. the amount of goods and services being purchased in an economy.
b. the amount of goods and services being produced in an economy.
c. the total demand for labor in an economy.
d. the total demand for capital in an economy.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

2. Aggregate supply tells us

a. the amount of goods and services being purchased in an economy.
b. the amount of goods and services being produced in an economy.
c. the total amount of physical capital in an economy.
d. the total amount of investments in an economy.

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

3. The largest component of aggregate demand is

a. net exports.
b. government spending.
c. investment.
d. consumption.

ANSWER: d
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

4. Purchases of new houses are part of

a. net exports.
b. government spending.
c. investment.
d. consumption.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
5. Consumption spending is about of aggregate demand.
a. 2/3
b. 1/2
c. 3/4
d. 5/6

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

6. A rise in income will cause consumer spending to

a. decline.
b. not change.
c. rise.
d. fall at first, then rise later.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

7. A rise in the real interest rate will cause consumer spending to

a. decline.
b. not change.
c. rise.
d. rise at first, then decline later.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

8. Investment spending on physical capital is about of aggregate demand.

a. 1/10
b. 1/6
c. 1/4
d. 1/2

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
 9. The total amount of physical capital in all firms and households is called the
a. human capital.
b. capital stock.
c. household income.
d. physical product.

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

10. Which of the following is an investment spending?

a. Purchase of stocks
b. Purchase of bonds
c. Purchase of office building
d. Purchase of refrigerator by a household

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

11. A rise in future consumption spending, everything else remaining unchanged, will cause business investment spending
to
a. decline.
b. not change.
c. rise.
d. fall at first, then rise later.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
12. A rise in the real interest rate, everything else remaining unchanged, will cause business investment spending to
a. decline.
b. not change.
c. rise.
d. rise at first, then decline later.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

13. A rise in wealth, everything else remaining unchanged, will cause household investment in housing to
a. decline.
b. not change.
c. rise.
d. fall at first, then rise later.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

14. A rise in the real interest rate, everything else remaining unchanged, will cause household investment in housing
to a. decline.
b. not change.
c. rise.
d. rise at first, then decline later.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

15. A rise in the incomes of foreign consumers, everything else remaining unchanged, causes net exports to
a. decline.
b. not change.
c. rise.
d. rise at first, then decline later.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
16. A rise in the incomes of domestic consumers causes net exports to
a. decline.
b. not change.
c. rise.
d. rise at first, then decline later.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

17. Government spending consitutues about of U.S. economy's aggregate demand.

a. 1/10
b. 1/6
c. 1/4
d. 1/2

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

18. The aggregate-demand curve shows the combinations of and that are consistent with equilibrium in the
market for goods and services and the market for money.
a. the price level; output
b. the price level; the real interest rate
c. the real interest rate; the money supply
d. the money supply; output

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
19. Which of the following equations is true of aggregate demand?
a. Aggregate demand = consumption + investment - government spending - net exports
b. Aggregate demand = consumption - investment - government spending - net exports
c. Aggregate demand = consumption + investment + government spending + net exports
d. Aggregate demand = consumption - investment + government spending + net exports

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

20. With the price level measured on the vertical axis and output measured on the horizontal axis, the aggregate-demand
curve
a. is vertical.
b. is downward-sloping.
c. is horizontal.
d. is upward-sloping.

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

21. When the price level in an economy declines

a. the demand for money in the economy increases.
b. the nominal interest rate in the economy increases.
c. the total consumption in the economy reduces.
d. the aggregate demand in the economy increases.

ANSWER: d
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
22. The nominal interest rate in an economy decreases when
a. the aggregate demand curve shifts to the left.
b. the money supply curve shifts to the left.
c. the aggregate supply curve shifts to the right.
d. the money demand curve shifts to the left.

ANSWER: d
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

23. When all capital and labor are fully utilized, the economy is said to be
a. at the peak of the business cycle.
b. experiencing an expansion.
c. at full employment.
d. sustainable.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

24. The unemployment rate reflecting normal job turnover is called

a. the natural rate of unemployment.
b. the non-accelerating investment rate of unemployment (NAIRU).
c. frictional unemployment.
d. structural unemployment.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

25. Which of the following is true of an economy at full employment?

a. There is no job turnover in the economy.
b. The unemployment rate in the economy is equal to the natural rate of unemployment.
c. The economy's labor and capital are not fully utilized.
d. An increase in price level increases the full-employment level of output.

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
26. The amount of output produced when the unemployment rate equals the natural rate of employment in an economy
is called output.
a. natural
b. aggregate
c. full-employment
d. long-run

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

27. Full-employment output is the amount of output produced when the economy is
a. in recession.
b. above the natural rate of unemployment.
c. utilizing all of its labor and capital.
d. in equilibrium.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

28. Which of the following is an assumption of the aggregate demand-aggregate supply model?
a. Capital stock cannot be varied in the short run.
b. An economy is always at full-employment level in the short run.
c. Producers are reluctant to change prices of their products even in the long run.
d. Long-run aggregate supply curve slopes upward.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
29. With the price level measured on the vertical axis and output measured on the horizontal axis, the long-run
aggregate-supply curve
a. is vertical.
b. is upward-sloping.
c. is horizontal.
d. is downward-sloping.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

30. A rise in the price level in an economy

a. shifts its long-run aggregate supply curve to the right.
b. shifts its long-run aggregate supply curve to the left.
c. does not have any effect on its long-run aggregate supply.
d. does not have any effect on its aggregate demand.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

31. With the price level on the vertical axis and output on the horizontal axis, the short-run aggregate-supply curve
a. is vertical.
b. is downward-sloping.
c. is horizontal.
d. is upward-sloping.

ANSWER: d
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
32. A rise in the price level, everything else remaining unchanged, causes short-run aggregate supply to
a. decline.
b. not change.
c. increase.
d. rise at first, then decline later.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

33. In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in taxes causes
the curve to shift .
a. short-run aggregate-supply; right
b. short-run aggregate-supply; left
c. aggregate-demand; left
d. aggregate-demand; right

ANSWER: c
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual

34. In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in taxes causes
to in the short run.
a. output; increase
b. output; decline
c. output; remain unchanged
d. government spending; increase

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual
35. In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in capital stock
shifts the to the .
a. long-run aggregate supply; right
b. aggregate demand; right
c. short-run aggregate supply; left
d. aggregate demand; left

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual

36. In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in labor force
shifts the to the .
a. long-run aggregate supply; right
b. aggregate demand; right
c. short-run aggregate supply; left
d. aggregate demand; left

ANSWER: c
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual

37. If there is a significant drop in business optimism in an economy

a. the economy's long-run aggregate supply curve shifts to the right.
b. the economy's aggregate demand curve shifts to the left.
c. the labor supply in the economy increases in the long run.
d. the capital stock in the economy increases in the long run.

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual
38. In the aggregate demand-aggregate supply model, a decrease in the expected price level, everything else remaining
unchanged, causes to in the short run.
a. output; increase
b. output; decline
c. output; remain unchanged
d. inflation; increase

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Factual

39. In the aggregate demand-aggregate supply model, an increase in the expected price level, everything else remaining
unchanged, causes the curve to shift .
a. short-run aggregate supply; right
b. short-run aggregate supply; left
c. aggregate-demand; left
d. aggregate-demand; right

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual

40. In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in production
costs shifts the curve to the .
a. long-run aggregate supply; right
b. long-run aggregate supply; left
c. short-run aggregate supply; right
d. short-run aggregate supply; left

ANSWER: d
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual
41. In the aggregate demand-aggregate supply model, everything else remaining unchanged, an increase in money
supply shifts the curve to the .
a. aggregate demand; right
b. aggregate demand; left
c. aggregate supply; right
d. aggregate supply; left

ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual

42. In the aggregate demand-aggregate supply model, everything else remaining unchanged, a decrease in government
spending shifts the curve to the .
a. aggregate demand; right
b. aggregate demand; left
c. aggregate supply; right
d. aggregate supply; left

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
TOPICS: A Model of Aggregate Demand and Aggregate Supply
OTHER: Conceptual

43. Suppose an economy is producing an output above its full-employment level. To return the economy to long-run
equilibrium, a(n) monetary policy can be used, which would cause the price level to .
a. expansionary; increase
b. expansionary; decline
c. contractionary; decline
d. contractionary; increase

ANSWER: c
POINTS: 1
DIFFICULTY: Moderate
TOPICS: Analyzing Policy Using the AD-AS Model
OTHER: Conceptual
44. If an economy is in a recession, with output below its full-employment level, a(n) monetary policy can be used
to return the economy to its long-run equilibrium, which would cause the price level to .
a. expansionary; increase
45. If the Fed does not
b. expansionary; decline c. change its monetary policy
contractionary; decline d. in an economy that is
contractionary; increase producing an output lower
than the full-
ANSWER: a employment e
POINTS: 1 level of output,
the short-run
DIFFICULTY: Moderate aggregate supply c
TOPICS: Analyzing Policy Using the AD-AS Model curve will .
OTHER: Conceptual eventually shift
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DIFFICULTY: Moderate level will
TOPICS: Analyzing Policy Using the AD-AS Model
OTHER: Conceptual

46. If an economy is in a recession, with output below its full-

employment level, a(n) return the economy to its long-run
equilibrium, which would cause the price level to a.
expansionary; increase
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ANSWER: a
POINTS: 1
DIFFICULTY: Moderate
TOPICS: Analyzing Policy Using the AD-AS Model
OTHER: Conceptual
47. If there is no policy action in an economy that is producing an output below its full-employment level, then
a. the output returns to full-employment level quickly.
b. the price level declines slowly.
c. the price level rises quickly.
d. the output stays below full-employment for a short period, then rises quickly.

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
TOPICS: Analyzing Policy Using the AD-AS Model
OTHER: Conceptual

48. In some sophisticated macroeconomic models, if monetary policy is used to combat recession, the real interest rate
, whereas the real interest rate if fiscal policy is used.
a. increases; decreases
b. decreases; increases
c. remains unchanged; increases
d. decreases; remains unchanged

ANSWER: b
POINTS: 1
DIFFICULTY: Moderate
TOPICS: Analyzing Policy Using the AD-AS Model
OTHER: Conceptual

49. Macroeconomic models from the 1950s and 1960s that consist of hundreds of equations that describe the economy
in great detail are called
a. real business-cycle models.
b. large, structural macroeconomic models.
c. VARs.
d. structural VARs.

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: Large Structural Macroeconomic Models
OTHER: Factual
50. The development of the large structural macroeconomic models was spearheaded by economists.
a. Keynesian
b. classical
c. Ricardian
d. institutional

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: Large Structural Macroeconomic Models
OTHER: Factual

51. One of the reasons that led to the inconsistency of the large structural macroeconomic models was
a. that endogenous variables such as foreign output were treated as exogenous.
b. that all equations were estimated together to test their interrelations with one another.
c. that individual equations were estimated in isolation with one another.
d. that exogenous variables such as level of technology were treated as endogenous.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: Large Structural Macroeconomic Models
OTHER: Factual

52. According to , people use all available information in making their economic decisions.
a. Keynesian theory
b. monetarist theory
c. the Lucas critique
d. the theory of rational expectations

ANSWER: d
POINTS: 1
DIFFICULTY: Basic
TOPICS: Policy Perspective: Did Large Macro Models Mislead Policymakers in the 1970s?
OTHER: Factual
53. A key failure of large structural macroeconomic models, according to the theory of rational expectations, is that the
models assumed that expected inflation is independent of
a. monetary policy.
b. past inflation.
c. interest rates.
d. aggregate demand.

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: Policy Perspective: Did Large Macro Models Mislead Policymakers in the 1970s?
OTHER: Factual

54. The argument that a change in policy systematically alters the structure of econometric models is known as the
a. Keynesian cross.
b. cross-equation restriction.
c. Lucas critique.
d. endogeneity principle.

ANSWER: c
POINTS: 1
DIFFICULTY: Basic
TOPICS: Policy Perspective: Did Large Macro Models Mislead Policymakers in the 1970s?
OTHER: Factual

55. The believe that it takes a long time for prices and wages to change to restore equilibrium in an economy.
a. Keynesians
b. classical economists
c. monetarists
d. institutional economists

ANSWER: a
POINTS: 1
DIFFICULTY: Basic
TOPICS: Keynesians versus Classicals
OTHER: Factual
56. The believe that an economy will adjust on its own without any government policy interventions.
a. Keynesians
b. classical economists
c. monetarists
d. institutional economists

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: Keynesians versus Classicals
OTHER: Factual

57. Which of the following is a difference in the views of Keynesian and classical economists?
a. Keynesians believe that prices and wages adjust quickly, whereas the classicals believe they adjust slowly.
b. Keynesians believe that policymakers have full knowledge about the state of an economy, whereas the
classicals believe they don't.
c. Keynesians believe that policymakers cannot offset shocks to an economy, whereas the classicals believe
they can.
d. Keynesians believe that most shocks to an economy are to long-run aggregate supply, whereas the classicals
believe the shocks are to aggregate demand.

ANSWER: b
POINTS: 1
DIFFICULTY: Basic
TOPICS: Keynesians versus Classicals
OTHER: Factual
58. Answer the questions below.

Suppose the economy is initially in long-run equilibrium in the AD-AS model. Draw a diagram
a. showing long-run equilibrium, including the AD, LRAS, and SRAS curves.

Now suppose stock prices decline sharply. Draw a new diagram showing the AD, LRAS, and
b. SRAS curves. How have the level of output and the price level changed? What happens to
consumption spending and investment spending?

Redraw your diagram from part b, then draw new lines to show what would happen if the
Fed changed monetary policy to return the economy to full-employment equilibrium. Does the
money supply increase or decrease? Which curve (AD, LRAS, or SRAS) shifts as a result of
c. the Fed's policy change? What happens to the price level and level of output compared with
what they were in part b? What happens to consumption spending and investment spending
compared with what they were in part b?

ANSWER: a. Standard diagram from the textbook.

The decline in the stock market shifts the AD curve to the left, so output and price level both
b. decline. The decline in output reduces both consumption spending and investment spending.
Standard diagram.

When the Fed increases the money supply, the long-run equilibrium is restored by shifting the
c. AD curve to the right. The price level and level of output are higher than they were in part b;
as a result, consumption and investment are also higher. Standard diagram from the textbook.
POINTS: 1
TOPICS: A Model of Aggregate Demand and Aggregate Supply
59. Suppose business firms collectively become pessimistic about prospects for future profits because of continued
worries about terrorism. Explain how this would affect investment, aggregate demand, output, and the price level in
the short run and the long run.

ANSWER: The reduction in business optimism reduces investment and thus aggregate demand, shifting the AD
curve to the left. In the short run, output and the price level both decline. Over time, the SRAS curve will
shift right to restore long-run equilibrium, reducing the price level further and increasing output back to its
full-employment level.
POINTS: 1
TOPICS: A Model of Aggregate Demand and Aggregate Supply

60. Suppose ATM costs increased because of additional security required to prevent electronic fraud. Explain how this
would affect money demand, aggregate demand, output, and the price level in the short run and the long run.

ANSWER: The increase in ATM costs would lead people to go to the ATM less often, thus increasing money
demand. Assuming the Fed did not increase the money supply in response, the increase in money
demand would raise interest rates, thus leading to a decline in aggregate demand and shifting the AD
curve to the left. In the short run, output and the price level both decline. Over time, the SRAS curve will
shift right to restore long-run equilibrium, reducing the price level further and increasing output back to its
full-employment level.
POINTS: 1
TOPICS: A Model of Aggregate Demand and Aggregate Supply

61. Suppose increased costs for security raised the costs of production for all firms. Explain how this would affect
aggregate supply, output, and the price level in the short run and the long run.

ANSWER: The increase in costs of production would reduce aggregate supply, shifting the SRAS curve to the left.
In the short run, output declines and the price level increases. Over time, the SRAS curve will shift right
to restore long-run equilibrium, reducing the price level and increasing output back to its full-employment
level.
POINTS: 1
TOPICS: A Model of Aggregate Demand and Aggregate Supply

62. Suppose another breakthrough in computer technology greatly increases total factor productivity. Explain how this
would affect aggregate supply, output, and the price level in the short run and the long run.

ANSWER: The increase in total factor productivity would increase long-run and short-run aggregate supply. If the
LRAS and SRAS curves both shifted to the right by about the same amount, but the AD curve did not
shift initially, then in the short run output would increase somewhat and the price level would decline.
But the economy would not be in long-run equilibrium yet. To achieve long-run equilibrium the SRAS
curve would need to shift further to the right as costs of production decline further, thus increasing output
and reducing the price level.
POINTS: 1
TOPICS: A Model of Aggregate Demand and Aggregate Supply

63. Describe the effect of expansionary monetary policy in a recession. Contrast the results with no monetary policy
action.

ANSWER: The AD curve increases. Output quickly returns to full employment and the price levels rises. If there is
no monetary policy change, the SRAS curve gradually increases. Full employment is eventually reached
and the price level drops.
POINTS: 1
TOPICS: Analyzing Policy Using the AD-AS Model
64. Describe what monetary policymakers should do if they want to keep the price level in an economy permanently
low.

ANSWER: The policymakers should use a contractionary monetary policy that reduces money supply. Aggregate
demand in the economy reduces, which results in a temporary reduction output, and a permanent
reduction in the price level.
POINTS: 1
TOPICS: Analyzing Policy Using AD-AS Model

65. Describe the arguement put forward by the Nobel laurete Robert E. Lucas about the flaws in the large structural
macroeconomic models.

ANSWER: Lucas argued that people and firms make decisions that depend on what they think policymakers will do
so that
that any change in policy will systematically alter the structure of econometric models.
POINTS: 1
TOPICS: Policy Perspective: Did Large Macro Models Mislead Policymakers in the 1970s