Parkin 8e TIF Ch26

Parkin/Bade, Economics: Canada in the Global Environment, 8e
Chapter 26 Aggregate Supply and Aggregate Demand
26.1 Aggregate Supply
Use the figure below to answer the following questions.
Figure 26.1.1
1) Refer to Figure 26.1.1. Which graph illustrates what happens when factor prices decrease?
A) (a)
B) (b)
C) (c)
D) (d)
E) (a) and (b)
Answer: A
Diff: 2 Type: MC
Topic: Aggregate Supply
Source: Study Guide
Copyright © 2013 Pearson Canada Inc. 1023

2) Refer to Figure 26.1.1. Which graph illustrates what happens when factor prices rise?
A) (a)
B) (b)
C) (c)
D) (d)
E) (a) and (b)
Answer: B
Diff: 2 Type: MC
3) Which one of the following newspaper quotations describes a movement along an LAS curve?
A) "The decrease in consumer spending may lead to a recession."
B) "The increase in consumer spending is expected to lead to inflation, without any increase in
real GDP."
C) "Recent higher wage settlements are expected to cause higher inflation this year."
D) "Growth has been unusually high the last few years due to more women entering the labour
force."
E) "The recent tornadoes destroyed many factories in Calgary and Edmonton."
Answer: B
Diff: 3 Type: MC
4) Which one of the following newspaper quotations describes a shift of only the SAS curve?
real GDP."
D) "Growth has been unusually high the last few years due to more women entering the work
force."
Answer: C
Diff: 2 Type: MC
5) Which one of the following newspaper quotations describes a rightward shift of the LAS
curve?
real GDP."
force."
Answer: D
Diff: 2 Type: MC

6) Which one of the following newspaper quotations describes a leftward shift of the LAS curve?
real GDP."
force."
Answer: E
Diff: 2 Type: MC
7) Which of the following does not change short-run aggregate supply?

A) a change in the money wage rate
B) technological change
C) a change in the full-employment quantity of labour
D) an increase in the quantity of capital
E) a change in expected future profits
Answer: E
Diff: 2 Type: MC
8) Complete the following sentence. Potential GDP

A) increases as the price level rises.
B) is the level of real GDP when unemployment is zero.
C) increases as the quantity of money in the economy increases.
D) does not vary with the price level.
E) never changes.
Answer: D
Diff: 2 Type: MC
9) A vertical long-run aggregate supply curve indicates that

A) an increase in the price level will not expand an economy's output in the long run.
B) output rates greater than the long-run output rate are unattainable.
C) an increase in the price level will permit the economy to achieve a higher level of output.
D) an increase in the price level will increase technological change and economic growth.
E) the long-run aggregate supply curve never shifts.
Answer: A
Diff: 2 Type: MC

10) The long-run aggregate supply curve is vertical because

A) potential GDP is independent of the price level.
B) actual output can never exceed, even temporarily, the output rate implied by the economy's
long-run aggregate supply curve.
C) a vertical long-run aggregate supply curve indicates the maximum output rate that an
economy can ever reach.
D) a vertical long-run supply curve indicates that an increase in aggregate demand will lead to a
larger real GDP, but not a larger nominal GDP.
E) potential GDP never changes.
Answer: A
Diff: 2 Type: MC
11) The short-run aggregate supply curve indicates

A) the relationship between the price level and real GDP demanded by consumers, investors,
governments, and net exporters.
B) the relationship between the price level and the natural unemployment rate.
C) the relationship between the purchasing power of wages and the quantity of labour supplied
by households.
D) the relationship between the quantity of real GDP supplied and the price level when the
money wage rate, the prices of other resources, and potential GDP remain constant.
E) the various quantities of real GDP producers supply at different income levels.
Answer: D
Diff: 1 Type: MC
12) The long-run aggregate supply curve is

A) vertical.
B) negatively sloped.
C) positively sloped but extremely steep.
D) almost flat.
E) positively sloped at low levels of real GDP and vertical at high levels of real GDP.
Answer: A
Diff: 1 Type: MC
13) The short-run aggregate supply curve is the relationship between the quantity of real GDP
supplied and
A) the quantity of real GDP demanded.
B) real income.
C) the inflation rate.
D) the real interest rate.
E) the price level.
Answer: E
Diff: 1 Type: MC

14) Everything else remaining the same, the short-run aggregate supply curve shifts rightward if
A) the money wage rate increases.
B) aggregate demand increases.
C) the full-employment quantity of labour increases.
D) factor prices increase.
E) the quantity of capital decreases.
Answer: C
Diff: 2 Type: MC
15) Which one, if any, of the following events shift the short-run aggregate supply curve but not
the long-run aggregate supply curve?
A) A change in factor prices.
B) A change in the quantity of capital.
C) An advance in technology.
D) An increase in the full-employment quantity of labour.
E) None of the above.
Answer: A
Diff: 2 Type: MC
16) Suppose there is an increase in the quantity of capital. As a result, the SAS
A) and the LAS curves both shift leftward.
B) and the LAS curves both shift rightward.
C) curve does not shift but the LAS curve shifts rightward.
D) curve does not shift but the LAS curve shifts leftward.
E) shifts rightward, but the LAS curve does not shift.
Answer: B
Diff: 2 Type: MC
17) Potential GDP is the level of real GDP at which

A) aggregate demand equals short-run aggregate supply.
B) there is full employment.
C) there is a recessionary gap.
D) there is over-full employment.
E) prices are sure to rise.
Answer: B
Diff: 1 Type: MC
Source: Study Guide

18) A technological advance shifts

A) both SAS and AD rightward.
B) both SAS and LAS leftward.
C) SAS rightward but leaves LAS unchanged.
D) LAS rightward but leaves SAS unchanged.
E) both SAS and LAS rightward.
Answer: E
Diff: 2 Type: MC
Source: Study Guide
19) An increase in oil prices to a country that is a net importer of oil shifts
A) both the short-run aggregate supply and long-run aggregate supply curves rightward.
B) both the short-run aggregate supply and long-run aggregate supply curves leftward.
C) the short-run aggregate supply curve leftward, but leaves the long-run aggregate supply curve
unchanged.
D) the long-run aggregate supply curve rightward, but leaves the short-run aggregate supply
curve unchanged.
E) the short-run aggregate supply curve leftward, but shifts the long-run aggregate supply curve
rightward.
Answer: C
Diff: 2 Type: MC
20) If the money wage rate falls, then

A) the AD curve shifts rightward.
B) firms hire less labour.
C) the LAS curve shifts rightward.
D) the SAS curve shifts rightward.
E) C and D.
Answer: D
Diff: 2 Type: MC
21) Long-run aggregate supply will increase for all of the following reasons except
A) a fall in the money wage rate.
B) an increase in human capital.
C) the introduction of new technology.
D) an increase in the full-employment quantity of labour.
E) an increase in the quantity of capital.
Answer: A
Diff: 2 Type: MC
Source: Study Guide

22) An increase in the money wage rate shifts

A) both SAS and LAS rightward.
B) both SAS and LAS leftward.
C) SAS leftward, but leaves LAS unchanged.
D) LAS rightward, but leaves SAS unchanged.
E) SAS rightward, but leaves LAS unchanged.
Answer: C
Diff: 2 Type: MC
Source: Study Guide

26.2 Aggregate Demand
1) Aggregate demand
A) measures the amount of a nation's goods and services that people are willing to buy.
B) measures the amount of a nation's labour, capital, and technology that people are willing to
buy.
C) is the relationship between the quantity of real GDP demanded and the price level.
D) increases when the price level falls.
E) both C and D are correct.
Answer: C
Diff: 1 Type: MC
Topic: Aggregate Demand
2) Which of the following situations illustrates how fiscal policy can influence aggregate
demand?
A) The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a
result, the aggregate demand curve shifts leftward.
B) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As
a result, aggregate demand decreases.
C) The government reduces the goods and services tax. As a result, consumption expenditure
increases and aggregate demand increases.
D) The exchange rate value of the Canadian dollar rises. As a result, people living near the U.S.-
Canada border increase their imports of goods and net exports decrease.
E) Both A and C are examples of fiscal policy.
Answer: C
Diff: 2 Type: MC
3) Which of the following situations illustrates how monetary policy can influence aggregate
demand?
A) The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a
result, the aggregate demand curve shifts leftward.
B) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As
a result, aggregate demand decreases.
C) The government reduces the goods and services tax. As a result, consumption expenditure
increases and aggregate demand increases.
D) The exchange rate value of the Canadian dollar rises. As a result, people living near the U.S.-
Canada border increase their imports of goods and net exports decrease.
E) Both A and D are examples of monetary policy.
Answer: A
Diff: 2 Type: MC

4) Disposable income is aggregate income

A) minus taxes and benefits.
B) minus taxes plus transfer payments.
C) minus fixed expenses such as rent and utilities.
D) plus transfer payments.
E) minus taxes.
Answer: B
Diff: 1 Type: MC
5) The quantity of real GDP demanded is composed of the purchases of

A) households and net exporters only.
B) firms, bondholders, and net exporters only.
C) firms and governments only.
D) consumers, firms, governments, and net exporters.
E) consumers, firms, and governments only.
Answer: D
Diff: 2 Type: MC
6) The quantity of real GDP demanded does not depend on decisions made by
A) foreigners.
B) households.
C) suppliers.
D) governments.
E) firms.
Answer: C
Diff: 1 Type: MC
7) The quantity of real GDP demanded is the sum of real consumption expenditure (C),
investment (I),
A) government expenditure (G), exports (X), and imports (M).
B) government expenditure (G), and exports (X) minus imports (M).
C) exports (X), and imports (M).
D) and exports (X) minus imports (M).
E) and government expenditure (G).
Answer: B
Diff: 2 Type: MC

8) The aggregate demand curve is a relationship between

A) real aggregate expenditure and real GDP.
B) real income and real GDP.
C) real prices and real GDP.
D) the price level and the quantity of real GDP demanded.
E) the price level and nominal GDP.
Answer: D
Diff: 1 Type: MC
9) Which one of the following variables is not held constant along a given aggregate demand
curve?
A) fiscal policy
B) real income
C) tax rates
D) expectations about inflation
E) the price level
Answer: E
Diff: 2 Type: MC
10) Which one of the following variables can change without creating a shift of the aggregate
demand curve?
A) the interest rate
B) price level
C) the tax rate
D) expectations about inflation
E) monetary policy
Answer: B
Diff: 2 Type: MC
11) Your total wealth is $1,000, which you are holding in your savings account. If the price level
rises by 10 percent, your wealth
A) increases by an unknown amount.
B) is unchanged.
C) decreases to $990.
D) is worth 10 percent less than before the price level change.
E) increases to $1,100.
Answer: D
Diff: 2 Type: MC

12) If the price level rises, then the wealth effect leads to
A) an increase in real wealth, an increase in current consumption expenditure, and an increase in
saving.
B) an increase in real wealth, an increase in current consumption expenditure, and a decrease in
saving.
C) a decrease in real wealth, an increase in current consumption expenditure, and an increase in
saving.
D) a decrease in real wealth, an increase in current consumption expenditure, and a decrease in
saving.
E) a decrease in real wealth, a decrease in current consumption expenditure, and an increase in
saving.
Answer: E
Diff: 3 Type: MC
13) Which one of the following factors will not shift the aggregate demand curve?
A) an increase in the interest rate
B) an increase in the expected inflation rate
C) an increase in the price level
D) an increase in expected future profits
E) an increase in the quantity of money
Answer: C
Diff: 2 Type: MC
14) If a change in wealth is induced by a change in the price level, then this would be shown as a
A) movement along the aggregate demand curve.
B) shift of the aggregate demand curve due to the substitution effects.
C) movement along the aggregate demand curve due to the substitution effects.
D) movement along the aggregate supply curve.
E) shift of the aggregate demand curve due to the wealth effect.
Answer: A
Diff: 2 Type: MC

15) Everything else remaining the same, an increase in the quantity of money
A) shifts the aggregate demand curve rightward.
B) shifts the aggregate demand curve leftward.
C) shifts the aggregate supply curve leftward.
D) shifts the aggregate supply curve rightward.
E) creates a movement down along the aggregate demand curve.
Answer: A
Diff: 2 Type: MC
16) Everything else remaining the same, which one of the following increases aggregate
demand?
A) an increase in taxes
B) an increase in transfer payments
C) a decrease in government spending
D) a decrease in the price level
E) a decrease in the quantity of money
Answer: B
Diff: 2 Type: MC
17) Everything else remaining the same, an increase in the interest rate increases saving and
A) increases aggregate demand through the international substitution effect.
B) decreases aggregate demand through the international substitution effect.
C) increases aggregate demand through the intertemporal substitution effect.
D) decreases aggregate demand through the intertemporal substitution effect.
E) increases aggregate demand through the wealth effect.
Answer: D
Diff: 3 Type: MC
18) Everything else remaining the same, an increase in foreign income

A) increases Canada's aggregate supply.
B) increases Canada's aggregate demand.
C) decreases Canada's aggregate demand.
D) creates a movement downward along Canada's aggregate demand curve.
E) decreases Canada's aggregate supply.
Answer: B
Diff: 2 Type: MC

19) Which one of the following is a reason for the negative slope of the aggregate demand
curve?
A) the real wage effect
B) the substitution effects
C) the expected inflation effect
D) the nominal balance effect
E) the income effect
Answer: B
Diff: 2 Type: MC
20) Which one of the following shifts the aggregate demand curve leftward?
A) a decrease in the interest rate
B) an increase in expected inflation
C) an increase in taxes
D) an increase in the price level
E) an increase in the money wage rate
Answer: C
Diff: 2 Type: MC

Figure 26.2.1
21) Refer to Figure 26.2.1. Which graph illustrates what happens when government expenditure
increases?
A) (a)
B) (b)
C) (c)
D) (d)
E) None of the above
Answer: C
Diff: 2 Type: MC
Source: Study Guide

22) Refer to Figure 26.2.1. Which graph illustrates what happens when the quantity of money
decreases?
A) (a)
B) (b)
C) (c)
D) (d)
E) None of the above
Answer: D
Diff: 2 Type: MC
Source: Study Guide
23) Refer to Figure 26.2.1. Which graph illustrates what happens when expected future income
increases?
A) (a)
B) (b)
C) (c)
D) (d)
Answer: C
Diff: 2 Type: MC
Source: Study Guide
24) Refer to Figure 26.2.1. Which graph illustrates what happens when government expenditure
decreases?
A) (a)
B) (b)
C) (c)
D) (d)
E) (a) and (b)
Answer: D
Diff: 2 Type: MC
25) Refer to Figure 26.2.1. Which graph illustrates what happens when the quantity of money
increases?
A) (a)
B) (b)
C) (c)
D) (d)
E) (a) and (b)
Answer: C
Diff: 2 Type: MC

26) Which of the following does not change aggregate demand?

A) an increase in expected future income
B) a change in fiscal policy
C) a change in monetary policy
D) an advance in technology
E) a rise in the exchange rate
Answer: D
Diff: 2 Type: MC
27) Everything else remaining the same, an increase in the expected inflation rate
A) shifts the aggregate demand curve rightward.
B) shifts the aggregate demand curve leftward.
C) shifts the short-run aggregate supply curve leftward.
D) shifts the long-run aggregate supply curve rightward.
E) creates a movement up along the aggregate demand curve.
Answer: A
Diff: 2 Type: MC

26.3 Explaining Macroeconomic Trends and Fluctuations
1) Which one of the following newspaper quotations describes a movement along an SAS curve?
real GDP."
D) "Growth has been unusually high the last few years due to more women entering the labour
force."
Answer: A
Diff: 3 Type: MC
Topic: Explaining Macroeconomic Fluctuations
Source: Study Guide
2) Full-employment equilibrium occurs when

A) aggregate demand equals short-run aggregate supply.
B) all who are willing and able to work, are working.
C) real GDP equals potential GDP.
D) real GDP equals potential GDP and the wage level is set so that the GDP deflator equals 100.
E) all who are willing and able to work, are working and the wage level is set so that the GDP
deflator equals 100.
Answer: C
Diff: 1 Type: MC
3) A recessionary gap is the amount by which

A) potential GDP exceeds real GDP.
B) demand will increase to achieve full employment at a given price level.
C) the supply curve must increase to achieve full employment at a given price level.
D) the price level must adjust to achieve full employment.
E) real GDP exceeds potential GDP.
Answer: A
Diff: 1 Type: MC
4) An inflationary gap is the amount by which

A) potential GDP exceeds real GDP.
B) demand must increase to achieve full employment at a given price level.
C) supply must increase to achieve full employment at a given price level.
D) the price level must adjust to achieve full employment.
E) real GDP exceeds potential GDP.
Answer: E
Diff: 1 Type: MC

5) When the actual unemployment rate is equal to the natural unemployment rate, then the
A) inflation rate must be zero.
B) long-run aggregate supply curve is upward sloping.
C) short-run aggregate supply curve is vertical.
D) economy is operating at potential GDP.
E) the money wage rate will rise.
Answer: D
Diff: 2 Type: MC
6) When an economy is operating on its long-run aggregate supply curve,

A) the actual inflation rate is greater than the anticipated inflation rate.
B) the actual unemployment rate equals the natural unemployment rate.
C) unemployment will fall to an unusually low rate that is not likely to last into the future.
D) real GDP demanded exceeds real GDP supplied.
E) inflation must be positive.
Answer: B
Diff: 2 Type: MC
Figure 26.3.1
7) Refer to Figure 26.3.1. Short-run macroeconomic equilibrium real GDP in Econoworld is

A) $360 billion.
B) $400 billion.
C) $440 billion.
D) $480 billion.
E) $520 billion.
Answer: B
Diff: 1 Type: MC
8) Refer to Figure 26.3.1. When the economy of Econoworld is in short-run macroeconomic

equilibrium, the price level is
A) 100.
B) 90.
C) 75.
D) 70.
E) 85.
Answer: E
Diff: 1 Type: MC
9) Refer to Figure 26.3.1. Econoworld is at its short-run macroeconomic equilibrium. There is a

difference between ________ real GDP and potential GDP of $________ billion.
A) above full-employment equilibrium; 40
B) above full-employment equilibrium; 20
C) below full-employment equilibrium; 40
D) below full-employment equilibrium; 20
E) full-employment equilibrium; 0
Answer: C
Diff: 2 Type: MC
10) Refer to Figure 26.3.1. As Econoworld automatically adjusts to long-run equilibrium, the
A) SAS curve shifts rightward.
B) AD curve shifts rightward.
C) SAS curve shifts leftward.
D) AD curve shifts leftward.
E) LAS curve shifts leftward.
Answer: A
Diff: 2 Type: MC
11) Refer to Figure 26.3.1. If Econoworld automatically adjusts to a long-run equilibrium, then
in the long-run macroeconomic equilibrium
A) the price level is 70.
B) real GDP is $440 billion.
C) actual unemployment exceeds the natural unemployment rate.
D) potential GDP is greater than in the short run.
E) both A and B.
Answer: E
Diff: 2 Type: MC

12) Refer to Figure 26.3.1. Consider statements (1) and (2) and select the correct answer.
(1) The economy of Econoworld is experiencing an above full-employment equilibrium.
(2) SAS will automatically shift rightward as the economy adjusts to long-run equilibrium.
A) (1) is true; (2) is false.
B) (2) is true; (1) is false.
C) (1) and (2) are false.
D) (1) and (2) are true.
E) (1) is true; (2) is true if unemployment is below the natural rate.
Answer: B
Diff: 3 Type: MC
(1) The actual unemployment rate exceeds the natural unemployment rate.
(2) Short-run aggregate supply will automatically shift leftward as the economy adjusts to long-
run equilibrium.
E) (1) is true; (2) is true if the money wage rate falls.
Answer: A
Diff: 3 Type: MC
(1) The economy of Econoworld is experiencing a below full-employment equilibrium.
(2) The actual unemployment rate equals the natural unemployment rate.
E) (1) is true; (2) is true if the natural unemployment rate is too high.
Answer: A
Diff: 3 Type: MC

Figure 26.3.2
15) Refer to Figure 26.3.2. Short-run macroeconomic equilibrium real GDP in Mythlo is
________ billion.
A) $500
B) $650
C) $550
D) $600
E) $475
Answer: D
Diff: 1 Type: MC
16) Refer to Figure 26.3.2. When the economy of Mythlo is in short-run macroeconomic
equilibrium, the price level is
A) 65.
B) 95.
C) 70.
D) 75.
E) 80.
Answer: E
Diff: 1 Type: MC

17) Refer to Figure 26.3.2. In Mythlo there is a difference between the ________ equilibrium
real GDP and potential GDP of ________ billion.
A) above full-employment; $50
B) above full-employment; $25
C) below full-employment; $50
D) below full-employment; $25
E) full employment; 0
Answer: A
Diff: 2 Type: MC
18) Refer to Figure 26.3.2. As the economy of Mythlo automatically adjusts to long-run
equilibrium, the
A) SAS curve shifts rightward.
B) AD curve shifts rightward.
C) SAS curve shifts leftward.
E) LAS curve shifts rightward.
Answer: C
Diff: 2 Type: MC
19) Refer to Figure 26.3.2. Currently in Mythlo

A) there is a below full-employment equilibrium.
B) the actual unemployment rate is less than the natural unemployment rate.
C) potential GDP is greater than equilibrium GDP.
D) the actual unemployment rate is equal to the natural unemployment rate.
E) there is a recessionary gap.
Answer: B
Diff: 2 Type: MC
20) Refer to Figure 26.3.2. If the economy of Mythlo automatically adjusts to long-run
equilibrium, then
A) the price level rises to 90.
B) real GDP is $600 billion.
C) the actual unemployment rate exceeds the natural unemployment rate.
D) potential GDP decreases.
E) the SAS curve shifts rightward.
Answer: A
Diff: 2 Type: MC

(1) The economy of Mythlo is experiencing an above full-employment equilibrium.
(2) SAS will automatically shift rightward as the economy adjusts to long-run equilibrium.
E) (1) is true; (2) is true only if the LAS curve shifts rightward at the same time.
Answer: A
Diff: 3 Type: MC
(1) The actual unemployment rate exceeds the natural unemployment rate in the short run.
(2) SAS automatically shifts rightward as the economy adjusts to long-run equilibrium.
E) (1) is false; (2) is true if the LAS curve shifts rightward at the same time.
Answer: C
Diff: 3 Type: MC
23) Short-run macroeconomic equilibrium always occurs when the

A) economy is at full employment.
B) economy is below full employment.
C) economy is above full employment.
D) quantity of real GDP demanded equals the quantity of real GDP supplied.
E) AD curve intersects the LAS curve.
Answer: D
Diff: 1 Type: MC
Source: Study Guide

Figure 26.3.3
24) Refer to Figure 26.3.3. Which one of the graphs illustrates a below full-employment
equilibrium?
A) (a) only
B) (b) only
C) (c) only
D) (d) only
E) both (c) and (d)
Answer: A
Diff: 1 Type: MC
Source: Study Guide

25) Refer to Figure 26.3.3. Which of the graphs illustrates an above full-employment
equilibrium?
A) (a) only
B) (b) only
C) (c) only
D) (d) only
E) both (c) and (d)
Answer: E
Diff: 1 Type: MC
Source: Study Guide
26) Refer to Figure 26.3.3. In which of the graphs would we predict that eventually the price
level will rise and real GDP will fall, all else remaining the same?
A) (a) only
B) (d) only
C) (b) only
D) (c) and (d)
E) (c) only
Answer: D
Diff: 2 Type: MC
level will fall and real GDP will decrease, all else remaining the same?
A) (a)
B) (b)
C) (c)
D) (d)
E) none of the graphs
Answer: E
Diff: 2 Type: MC
28) Refer to Figure 26.3.3. Which one of the graphs illustrates a full-employment equilibrium?
A) (a) only
B) (b) only
C) (c) only
D) (d) only
E) (c) and (d)
Answer: B
Diff: 1 Type: MC

level will fall and real GDP will increase, all else remaining the same?
A) (a) only
B) (b) only
C) (c) only
D) (d) only
E) (c) and (d)
Answer: A
Diff: 2 Type: MC
30) Refer to Figure 26.3.3(a). You might expect the government to

A) do nothing except maintain the current equilibrium.
B) cut government expenditure.
C) increase government expenditure.
D) pursue trade policies that reduce exports.
E) raise taxes.
Answer: C
Diff: 2 Type: MC
31) Refer to Figure 26.3.3(b). You might expect the government to

A) do nothing except maintain the current equilibrium.
B) cut government expenditure.
C) increase government expenditure.
D) pursue trade policies that reduce exports.
E) raise taxes.
Answer: A
Diff: 2 Type: MC
32) If real GDP is greater than potential GDP, the economy is

A) not in short-run equilibrium.
B) in a recessionary equilibrium.
C) in an above full-employment equilibrium.
D) in a below full-employment equilibrium.
E) in long-run equilibrium.
Answer: C
Diff: 1 Type: MC
Source: Study Guide

33) If factor prices remain constant , an increase in aggregate demand

A) increases the price level and increases real GDP.
B) increases the price level and decreases real GDP.
C) decreases the price level and increases real GDP.
D) decreases the price level and decreases real GDP.
E) increases the price level, and leaves real GDP unchanged.
Answer: A
Diff: 2 Type: MC
Source: Study Guide
34) Beginning at a long-run equilibrium, an increase in aggregate demand

A) increases the price level and in the long run increases real GDP.
B) increases the price level and in the long run decreases real GDP.
C) decreases the price level and in the long run increases real GDP.
D) decreases the price level and in the long run decreases real GDP.
E) increases the price level, but in the long run there is no change in real GDP.
Answer: E
Diff: 2 Type: MC
35) We observe an increase in the price level and a decrease in real GDP. Which of the following
is a possible explanation?
A) an increase in expected future profits
B) an increase in expected future income
C) an increase in factor prices
E) an increase in the quantity of money
Answer: C
Diff: 2 Type: MC
Source: Study Guide
36) We observe an increase in the price level and an increase in real GDP. Which of the
following is a possible explanation?
A) a decrease in the quantity of money
B) a decrease in expected future income
E) an increase in expected future profits
Answer: E
Diff: 2 Type: MC

37) We observe a decrease in the price level and a decrease in real GDP. Which of the following
B) an increase in expected future income
Answer: A
Diff: 2 Type: MC
38) We observe a decrease in the price level and an increase in real GDP. Which of the following
B) a decrease in expected future income
Answer: D
Diff: 2 Type: MC
39) The economy cannot remain indefinitely with real GDP greater than potential GDP because
the money wage rate will
A) decrease, shifting the LAS curve rightward.
B) decrease, shifting the SAS curve rightward.
C) increase, shifting the LAS curve leftward.
D) increase, shifting the SAS curve leftward.
E) increase, shifting the SAS curve rightward.
Answer: D
Diff: 2 Type: MC
40) If real GDP is less than potential GDP, then the economy is
A) not in short-run equilibrium.
B) in a full-employment equilibrium.
C) in an above full-employment equilibrium.
D) in a below full-employment equilibrium.
E) in long-run equilibrium.
Answer: D
Diff: 2 Type: MC

Use the table below to answer the following questions.
Table 26.3.1
41) Refer to Table 26.3.1. Consider the economy represented in the table. In short-run
macroeconomic equilibrium, the price level is ________ and the level of real GDP is ________
billion.
A) 120; $600
B) 120; $500
C) 125; $550
D) 130; $600
E) 130; $500
Answer: C
Diff: 2 Type: MC
Source: Study Guide
42) Refer to Table 26.3.1. Consider the economy represented in the table. The economy is in
A) a long-run equilibrium, and resource prices will not change.
B) an above full-employment equilibrium, and factor prices will increase.
C) an above full-employment equilibrium, and factor prices will decrease.
D) a below full-employment equilibrium, and factor prices will decrease.
E) a below full-employment equilibrium, and factor prices will increase.
Answer: D
Diff: 3 Type: MC
Source: Study Guide
43) Refer to Table 26.3.1. Consider the economy represented in the table. There is
A) an inflationary gap equal to $100 billion.
B) an inflationary gap equal to $50 billion.
C) a recessionary gap equal to $50 billion.
D) a recessionary gap equal to $100 billion.
E) neither an inflationary nor a recessionary gap because the economy is at full employment.
Answer: C
Diff: 3 Type: MC
Source: Study Guide

44) Refer to Table 26.3.1. Consider the economy represented in the table. The economy
eventually moves to its long-run equilibrium. In long-run equilibrium, the price level is
________ and real GDP is ________ billion.
A) 125; $550
B) 120; $600
C) 120; $500
D) 130; $600
E) 130; $500
Answer: B
Diff: 2 Type: MC
45) Refer to Table 26.3.1. As this economy moves to long-run equilibrium, the
A) SAS curve shifts leftward.
B) SAS curve shifts rightward.
C) AD curve shifts rightward.
E) LAS curve shifts leftward.
Answer: B
Diff: 2 Type: MC
46) Consider an economy starting from a position of full employment. Which one of the
following changes does not occur as a result of a decrease in aggregate demand?
A) The price level decreases.
B) The level of real GDP decreases in the short run.
C) A recessionary gap arises.
D) Factor prices decrease in the long run, shifting the short-run aggregate supply curve
rightward.
E) The long-run aggregate supply curve shifts leftward to create the new long-run equilibrium.
Answer: E
Diff: 2 Type: MC
Source: Study Guide
following occurs as a result of an advance in technology?
A) The price level falls.
B) Real GDP decreases in the short run.
C) An inflationary gap arises.
D) Factor prices rise in the long run, shifting the short-run aggregate supply curve leftward.
E) The long-run aggregate supply curve shifts leftward to create the new long-run equilibrium.
Answer: A
Diff: 2 Type: MC

following changes does not occur as a result of an increase in aggregate demand?
A) The price level rises.
B) Real GDP increases in the short run.
C) An inflationary gap arises.
D) Factor prices rise in the long run, shifting the short-run aggregate supply curve to the left.
E) The long-run aggregate supply curve shifts rightward to create the new long-run equilibrium.
Answer: E
Diff: 2 Type: MC
Use the figure below to answer the following question.
Figure 26.3.4
49) Refer to Figure 26.3.4. The changes represented

A) cannot occur because aggregate demand and short-run aggregate supply cannot change at the
same time.
B) lead to an inflationary gap.
C) lead to a recessionary gap.
D) cause a proportionate increase in long run aggregate supply.
E) increase real GDP.
Answer: E
Diff: 3 Type: MC

50) All of the following will raise the price level except
A) aggregate demand increases and short-run aggregate supply decreases.
B) aggregate demand increases.
C) short-run aggregate supply decreases.
D) an increase in the quantity of capital.
E) an increase in the quantity of money.
Answer: D
Diff: 2 Type: MC
51) Which of the following will lower the price level for sure?
A) The AD curve shifts rightward and the SAS curve shifts leftward.
B) The AD curve shifts rightward and the SAS curve remains unchanged.
C) The SAS curve shifts leftward.
D) The LAS curve shifts leftward.
Answer: E
Diff: 2 Type: MC
52) If real GDP is greater than potential GDP, we would expect

A) the money wage rate to fall.
B) the money wage rate to rise.
C) potential GDP to increase.
D) potential GDP to decrease.
E) A and C.
Answer: B
Diff: 2 Type: MC
53) If real GDP is less than potential GDP, we would expect

A) the money wage rate to fall.
B) the money wage rate to rise.
C) potential GDP to increase.
D) potential GDP to decrease.
E) A and C.
Answer: A
Diff: 2 Type: MC

Use the table below to answer the following question.
Table 26.3.2
2004 2005 2006

Real GDP growth
8.1 8.3 7.3
rate
Inflation 4.2 4.7 4.6
54) Refer to Table 26.3.2. The International Monetary Fund's World Economic Outlook database
provides the data given in the table for India in 2004, 2005 and 2006.
The numbers in the table are consistent with
A) increases in long-run and short-run aggregate supply and even greater increases in aggregate
demand.
B) increases in short-run aggregate supply and increases in aggregate demand, but the increases
in aggregate demand are smaller than the increases in short-run aggregate supply.
C) increases in long-run and short-run aggregate supply and even larger decreases in aggregate
demand.
D) decreases in long-run and short-run aggregate supply and even greater decreases in aggregate
demand.
E) increases in short-run aggregate supply and no change in aggregate demand.
Answer: A
Type: MC
Source: MyEconLab
55) Economic growth results when there are increases in

A) aggregate demand.
B) the real wage rate.
C) long-run aggregate supply.
D) the inflationary gap.
E) short-run aggregate supply resulting from falling money wage rates and falling factor prices.
Answer: C
Type: MC
Source: MyEconLab

Use the table below to answer the following questions.
Table 26.3.3
56) Refer to Table 26.3.3. When the economy is at its short-run macroeconomic equilibrium, the
price level is
A) 90.
B) 110.
C) 100.
D) 120.
E) 130.
Answer: D
Type: MC
57) Refer to Table 26.3.3. When the economy is at its short-run macroeconomic equilibrium,
A) the unemployment rate is below its natural rate.
B) the unemployment rate is above its natural rate.
C) the money wage rate will rise.
D) the long-run aggregate supply curve will shift eventually shift leftward to return to full
employment.
E) potential GDP will eventually increase.
Answer: B
Type: MC
58) Refer to Table 26.3.3. When the economy is at its short-run macroeconomic equilibrium, the
economy
A) is also in a long-run macroeconomic equilibrium.
B) has an inflationary gap.
C) has a recessionary gap.
D) has neither an inflationary nor a recessionary gap.
E) Both A and D are correct.
Answer: C
Type: MC

59) Refer to Table 26.3.3. With no interference from the central bank or the government, the
A) money wage rate will eventually rise.
B) money wage rate will eventually fall.
C) short-run aggregate supply curve will shift leftward.
D) long-run aggregate supply curve will shift leftward.
E) aggregate demand curve will shift rightward.
Answer: B
Type: MC
60) Refer to Table 26.3.3. With no interference from the central bank or the government, the
A) short-run aggregate supply curve will shift rightward.
B) short-run aggregate supply curve will shift leftward.
C) long-run aggregate supply curve will shift rightward.
D) long-run aggregate supply curve will shift leftward.
E) Both A and C will occur.
Answer: A
Type: MC
Figure 26.3.5
61) Refer to Figure 26.3.5. At point B the economy has

A) an inflationary gap with real GDP in excess of potential GDP.
B) an inflationary gap with real GDP less than potential GDP.
C) a recessionary gap with real GDP in excess of potential GDP.
D) a recessionary gap with real GDP less than potential GDP.
E) neither an inflationary gap nor a recessionary gap.
Answer: A
Type: MC

62) Refer to Figure 26.3.5. When the economy is at full employment, real GDP is
A) $13 trillion.
B) $13.5 trillion.
C) more than $13 trillion and less than $13.5 trillion.
D) less than $13 trillion.
E) 100.
Answer: A
Type: MC
63) Refer to Figure 26.3.5. If the aggregate demand curve is AD2, real GDP is
A) $13 trillion.
B) $13.5 trillion.
E) 100
Answer: B
Type: MC
64) Refer to Figure 26.3.5. Potential GDP is

A) $13 trillion.
B) $13.5 trillion.
E) 100
Answer: A
Type: MC
65) Refer to Figure 26.3.5. The shift of the aggregate demand curve from AD0 to AD1 might
have been the result of
A) an increase in government expenditure.
B) a decrease in taxes.
C) an increase in the quantity of money.
D) a fall in the foreign exchange rate
E) all of the above.
Answer: D
Type: MC

26.4 Macroeconomic Schools of Thought
1) Which of the following news quotes best describes a Keynesian view of a recession?
A) "Rapid computerization is creating obsolete workers and higher unemployment."
B) "The unexpectedly tight fiscal policy is raising spending and lowering unemployment."
C) "The anti-inflationary policy of the Bank of Canada is increasing spending."
D) "The cuts in government spending have helped lower consumer spending and created
unemployment."
E) "Businesses are very worried about future sales and have lowered their purchases of capital
equipment."
Answer: E
Type: MC
Topic: Macroeconomic Schools of Thought
Source: Study Guide
2) Which of the following news quotes best describes a new classical view of a recession?
A) "Rapid computerization is creating obsolete workers and higher unemployment."
B) "The unexpectedly tight fiscal policy is raising spending and lowering unemployment."
C) "The anti-inflationary policy of the Bank of Canada is increasing spending."
D) "The cuts in government spending have helped lower consumer spending and created
unemployment."
E) "Businesses are very worried about future sales and have lowered their purchases of capital
equipment."
Answer: A
Type: MC
Source: Study Guide
3) A ________ macroeconomist believes that the economy is self-regulating and always at full
employment.
A ________ macroeconomist believes the economy requires active help from fiscal policy and
monetary policy to maintain full employment.
A) Keynesian; new Keynesian
B) classical; monetarist
C) classical; Keynesian
D) new classical; monetarist
E) monetarist; classical
Answer: C
Type: MC
Source: MyEconLab

4) A ________ macroeconomist believes that business cycle fluctuations are the efficient
responses of a well-functioning market economy that is bombarded by shocks that arise from the
uneven pace of technological change.
A ________ macroeconomist believes that the short-run aggregate supply curve is horizontal at a
fixed price level.
A) new classical; monetarist
B) classical; monetarist
C) Keynesian; new Keynesian
D) new classical; new Keynesian
E) monetarist; new classical
Answer: D
Type: MC
Source: MyEconLab
5) Which of the following statements about the monetarist view of the macroeconomy is
incorrect?
A) The money wage rate is sticky.
B) Taxes should be kept low to avoid disincentive effects that decrease potential GDP.
C) All recessions result from inappropriate monetary policy.
D) Left alone, the economy rarely operates at full employment.
E) Provided that the quantity of money is kept on a steady growth path, no active stabilization is
needed to offset changes in aggregate demand.
Answer: D
Type: MC
Source: MyEconLab
6) Which of the following statements about the Keynesian view of the macroeconomy is
incorrect?
A) Technological change is the most significant influence on both aggregate demand and
aggregate supply.
B) To achieve and maintain full employment, active help from fiscal policy and monetary policy
is required.
C) Expectations are based on "animal spirits."
D) The money wage rate is extremely sticky in the downward direction so there is no automatic
mechanism for eliminating a recessionary gap.
E) Expectations are the most significant influence on aggregate demand.
Answer: A
Type: MC
Source: MyEconLab

7) The defining feature of the classical view of macroeconomics is that the economy is
A) rarely at full employment.
B) driven by expectations called "animal spirits."
C) self-regulating and always at full employment.
D) constantly bombarded by shocks that arise from the uneven pace of technological change.
E) the most significant influence on aggregate demand is expectations.
Answer: C
Type: MC
Source: MyEconLab
8) Classical macroeconomists recommend

A) policies that actively offset changes in long-run aggregate supply that result in negative
economic growth.
B) an increase in the quantity of money to offset decreases in aggregate demand and a decrease
in the quantity of money to offset increases in aggregate demand.
C) policies that actively offset changes in aggregate demand that bring recession.
D) policies that minimize the disincentive effects of taxes on employment, investment, and
technological change.
E) all of the above.
Answer: D
Type: MC
Source: MyEconLab
9) The defining feature of the Keynesian view of macroeconomics is that the economy is
A) rarely at full employment.
B) self-regulating and always at full employment.
C) that the quantity of money is the most significant influence on aggregate demand.
D) constantly bombarded by shocks that arise from the uneven pace of technological change.
E) no active stabilization is needed to offset changes in aggregate demand.
Answer: A
Type: MC
Source: MyEconLab

10) Keynesian macroeconomists recommend

A) an increase in the quantity of money to offset decreases in aggregate demand and a decrease
in the quantity of money to offset increases in aggregate demand.
B) policies that actively offset changes in long-run aggregate supply that result in negative
economic growth.
C) policies that minimize the disincentive effects of taxes on employment, investment, and
technological change.
D) policies that actively offset changes in aggregate demand that bring recession.
E) none of the above.
Answer: D
Type: MC
Source: MyEconLab

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Parkin/Bade, Economics: Canada in the Global Environment, 8e

Chapter 26 Aggregate Supply and Aggregate Demand

26.1 Aggregate Supply

Use the figure below to answer the following questions.

Copyright © 2013 Pearson Canada Inc. 1023

Copyright © 2013 Pearson Canada Inc. 1024

7) Which of the following does not change short-run aggregate supply?

8) Complete the following sentence. Potential GDP

9) A vertical long-run aggregate supply curve indicates that

Copyright © 2013 Pearson Canada Inc. 1025

10) The long-run aggregate supply curve is vertical because

11) The short-run aggregate supply curve indicates

12) The long-run aggregate supply curve is

Copyright © 2013 Pearson Canada Inc. 1026

17) Potential GDP is the level of real GDP at which

Copyright © 2013 Pearson Canada Inc. 1027

18) A technological advance shifts

20) If the money wage rate falls, then

Copyright © 2013 Pearson Canada Inc. 1028

22) An increase in the money wage rate shifts

Copyright © 2013 Pearson Canada Inc. 1029

26.2 Aggregate Demand

Copyright © 2013 Pearson Canada Inc. 1030

4) Disposable income is aggregate income

5) The quantity of real GDP demanded is composed of the purchases of

Copyright © 2013 Pearson Canada Inc. 1031

8) The aggregate demand curve is a relationship between

Copyright © 2013 Pearson Canada Inc. 1032

Copyright © 2013 Pearson Canada Inc. 1033

18) Everything else remaining the same, an increase in foreign income

Copyright © 2013 Pearson Canada Inc. 1034

Copyright © 2013 Pearson Canada Inc. 1035

Use the figure below to answer the following questions.

Copyright © 2013 Pearson Canada Inc. 1036

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26) Which of the following does not change aggregate demand?

Copyright © 2013 Pearson Canada Inc. 1038

26.3 Explaining Macroeconomic Trends and Fluctuations

2) Full-employment equilibrium occurs when

3) A recessionary gap is the amount by which

4) An inflationary gap is the amount by which

Copyright © 2013 Pearson Canada Inc. 1039

6) When an economy is operating on its long-run aggregate supply curve,

Use the figure below to answer the following questions.

7) Refer to Figure 26.3.1. Short-run macroeconomic equilibrium real GDP in Econoworld is

8) Refer to Figure 26.3.1. When the economy of Econoworld is in short-run macroeconomic

9) Refer to Figure 26.3.1. Econoworld is at its short-run macroeconomic equilibrium. There is a

Copyright © 2013 Pearson Canada Inc. 1041

Copyright © 2013 Pearson Canada Inc. 1042

Use the figure below to answer the following questions.

Copyright © 2013 Pearson Canada Inc. 1043

19) Refer to Figure 26.3.2. Currently in Mythlo

Copyright © 2013 Pearson Canada Inc. 1044

23) Short-run macroeconomic equilibrium always occurs when the

Copyright © 2013 Pearson Canada Inc. 1045

Use the figure below to answer the following questions.

Copyright © 2013 Pearson Canada Inc. 1046

Copyright © 2013 Pearson Canada Inc. 1047

30) Refer to Figure 26.3.3(a). You might expect the government to

31) Refer to Figure 26.3.3(b). You might expect the government to