a.Which of the followingexplain why the aggregate demand curve slopes downward?

• The interest-rate effect, the real-balances effect, and the foreign-trade effect
• The investment effect, the real-balances effect, and the international effect
• The investment effect, the real-purchases effect, and the foreign-purchases effect
• The interest-rate effect, the real-purchases effect, and the foreign-purchases effect

b.The real-balances effect says that as the price level

• rises, the real value of money will decrease, resulting in a decrease in the quantity demanded of real output.
• falls, the real value of money will decrease, resulting in a decrease in the quantity demanded of real output.
• rises, the real value of money will increase, resulting in an increase in the quantity demanded of real output.
• rises, the real value of money will increase, resulting in a decrease in the quantity demanded of real output.

c.The interest-rate effect says that as the price level rises,

• the increased demand for money will drive up the rate of interest, decreasing the buying of goods with borrowed money, and decreasing the amount of real output demanded.
• the decreased demand for money will drive down the rate of interest, decreasing the buying of goods with borrowed money, and decreasing the amount of real output demanded.
• the increased demand for money will drive down the rate of interest, increasing the buying of goods with borrowed money, and increasing the amount of real output demanded.
• the decreased demand for money will drive down the rate of interest, increasing the buying of goods with borrowed money, and increasing the amount of real output demanded.

d.The foreign-trade effect says that as the Canadian price level rises relative to other countries,

• Canadians will buy more abroad, and foreigners will decrease their buying of Canadian exports.
• Canadians will buy less abroad, and foreigners will decrease their buying of Canadian exports.
• Canadians will buy more abroad, and foreigners will increase their buying of Canadian exports.
• Canadians will buy less abroad, and foreigners will increase their buying of Canadian exports.

e.The demand curve for a single product is downsloping because of the

• income and substitution effects but these effects don't apply to the aggregate demand curve.
• income and substitution effects and these effects also apply to the aggregate demand curve.
• wealth and real interest rate effects but these effects don't apply to the aggregate demand curve.
• wealth and real interest rate effects and these effects also apply to the aggregate demand curve.

f.With the aggregate demand curve, moving down the curve means

• all prices are dropping, the price level is dropping, and with regard to the circular flow of economic activity, it also indicates lower incomes. With the single product demand curve the consumer's income is assumed to be fixed.
• all prices are dropping, the price level is dropping, and with regard to the circular flow of economic activity, it also indicates lower incomes. With the single product demand curve the consumer's income also drops with movement down the curve.
• all prices are rising, the price level is rising, and with regard to the circular flow of economic activity, it also indicates higher incomes. With the single product demand curve the consumer's income is assumed to be fixed.
• all prices are rising, the price level is rising, and with regard to the circular flow of economic activity, it also indicates higher incomes. With the single product demand curve the consumer's income also rises with movement down the curve.

a.According to the "real-balances effect," if prices

• increase, the purchasing power of assets will decrease, so spending at each income level should rise.
• decline, the purchasing power of assets will decrease, so spending at each income level should rise.
• increase, the purchasing power of assets will rise, so spending at each income level should rise.
• decline, the purchasing power of assets will rise, so spending at each income level should rise.

b.According to the "wealth effect," a change in consumer wealth causes a

• change in the price level and a shift of the aggregate expenditures curve.
• shift in consumer spending and the aggregate expenditures curve.
• shift in consumer spending and a movement along the aggregate expenditures curve.
• change in the price level and a movement along the aggregate expenditures curve.

c.Which of the following statements is true concerningthe real-balances effect and the wealth effect?

• The real-balances effect and the wealth effect cause shifts of the aggregate demand curve.
• The real-balances effect explains the shape of the aggregate demand curve, whereas the wealth effect causes shifts of the aggregate demand curve.
• The real-balances effect and the wealth effect explain the shape of the aggregate demand curve.
• The real-balances effect causes shifts of the aggregate demand curve, whereas the wealth effect explains the shape of the aggregate demand curve.

a.The immediate short-run supply curve is horizontal because of

• contractual agreements for both input and output prices that span the immediate short-run timeframe and imply that prices do not change during that time.
• contractual agreements for both input and output prices that span the long-run timeframe and imply that prices do not change.
• contractual agreements for labour wages that span the immediate short-run timeframe and imply that wage costs do not change during that time.
• menu costs that span the immediate short-run timeframe and imply that prices do not change during that time.

b.The long-run aggregate supply curve is vertical because the economy's potential output is determined by

• the availability and productivity of real resources, not by the price level.
• the availability and productivity of real resources, not by the output level.
• changes in wages, and these are unchanged in the long run.
• changes in price and output that occur in the long run.

c.The shape of the short-run aggregate supply curve is

• upsloping because wages adjust more slowly than the price level, increasing profits and output.
• upsloping because wages adjust more rapidly than the price level.
• horizontal because wages adjust at the same rate as the price level.
• vertical because wages adjust at the same rate as the price level.

d.The short-run aggregate supply curveis relatively flat to the left of the full employment output because

• most resources are already employed.
• there are large amounts of unused capacity and idle human resources.
• of menu costs.
• there are shortages of capital.

e.The short-run aggregate supply curve is relatively steep to the right of the full employment output because

• most resources are already employed.
• there are large amounts of unused capacity and idle human resources.
• there are shortages of capital.
• of menu costs.

a.An upsloping aggregate supply curve weakens the impact of a rightward shift of the aggregate demand curve by

• weakening the effect of the mulitplier on the change in aggregate demand.
• strengthening the effect of the mulitplier on the change in aggregate demand.
• weakening the effect of the mulitplier on the change in aggregate supply.
• strengthening the effect of the mulitplier on the change in aggregate supply.

b.The effect of this weakened impact is that

• some of the increase in aggregate demand is absorbed by the higher prices such that real output does not change by the full extent of the change in aggregate demand.
• some of the increase in aggregate supply is absorbed by the higher prices such that real output does not change by the full extent of the change in aggregate demand.
• some of the increase in aggregate demand is absorbed by the higher wages such that revenue does not change by the full extent of the change in aggregate demand.
• some of the increase in aggregate supply is absorbed by the higher wages such that revenue does not change by the full extent of the change in aggregate demand.

a.In practice in the actual economy, a reduction in aggregate demand reduces real output rather than the price level because

• output is sticky or inflexible downward as a result of wage contracts, minimum wage laws, and menu costs among other reasons.
• prices are sticky or inflexible downward as a result of resource scarcity, production costs, and interest rate costs among other reasons.
• prices are sticky or inflexible downward as a result of wage contracts, minimum wage laws, and menu costs among other reasons.
• output is sticky or inflexible downward as a result of resource scarcity, production costs, and interest rate costs among other reasons.

b.A full-strength multiplier, where price doesn't change to mitigate the effects of an aggregate demand change, applies to a decrease in aggregate demand when the aggregate

(Click to select)

supply curve is horizontal

demand curve is horizontal

supply curve is vertical

demand curve is vertical

.

Consider the following statement: "Unemployment can be caused by a decrease in aggregate demand or a decrease in aggregate supply."Note whether this is true or false and specify the effect on the price-level in each case.

• True. A decrease in aggregate supply will unambiguously increase the price level. A decrease in aggregate demand will reduce the price level if economy is operating above its full-employment output or if prices are not sticky.
• False. A decrease in aggregate supply will unambiguously increase the price level. A decrease in aggregate demand will reduce the price level if economy is operating above its full-employment output or if prices are not sticky.
• True. A decrease in aggregate supply will decrease the price level. A decrease in aggregate demand will increase the price level.
• False. A decrease in aggregate supply will decrease the price level. A decrease in aggregate demand will increase the price level.

a.The Canadian experience of strong economic growth, full employment, and price stability between 2006 and early 2008 can be explained by a

• an equal leftward shift of the aggregate demand and supply curves.
• an equal rightward shift of the aggregate demand and supply curves.
• rightward shift of aggregate demand and a leftward shift of aggregate supply.
• leftward shift of aggregate demand and a rightward shift of aggregate supply.

b.A strong negative wealth effect from, say, a precipitous drop in the stock market could cause a recession even though productivity is surging if aggregate demand shifts

• leftward by more than the aggregate supply curve shifts rightward.
• rightward by more than the aggregate supply curve shifts leftward.
• rightward by more than the aggregate supply curve shifts rightward.
• leftward by more than the aggregate supply curve shifts leftward.

In late 2008 consumption and investment spending sharply declined in Canada because of the spread of the global financial crisis.

a.Using AD-AS analysis,the decline in consumption and spending would cause

• a leftward shift in aggregate demand, and the initial declines in spending would have been multiplied. This would cause real GDP to drop and, assuming flexible prices, a drop in the price level.
• a rightward shift in aggregate demand, and the initial declines in spending would have been multiplied. This would cause real GDP to drop and, assuming flexible prices, a drop in the price level.
• a leftward shift in aggregate demand, and the initial declines in spending would have been multiplied. This would cause real GDP to drop and, assuming flexible prices, the price level would rise.
• a rightward shift in aggregate demand, and the initial declines in spending would have been multiplied. This would cause real GDP to drop and, assuming flexible prices, the price level would rise.

b.To the extent the drop in investment spending affected productivity

• it could have either shifted AS left (if productivity dropped) or slowed the rightward movement of AS.
• it could have either shifted AS right (if productivity dropped) or slowed the leftward movement of AS.
• it could have either shifted AD left (if productivity dropped) or slowed the rightward movement of AD.
• it could have either shifted AD right (if productivity dropped) or slowed the leftward movement of AD.