Short-answer Problems

1) Explain how GDP would return to equilibrium if it was above or below equilibrium GDP.

2) How does the aggregate expenditures analysis differ from the aggregate demand-aggregate supply analysis?

3) How can the aggregate demand curve be derived from the aggregate expenditures model?

4) Explain the three reasons given for the downward slope of the aggregate demand curve.

5) Define aggregate supply. Describe the characteristics of the aggregate supply curve in the immediate short-run, short-run and long-run perspectives.

6) What is the effect of the multiplier when aggregate demand increases and there is a large increase in the price level? What happens when there only is a small increase in the price level?

Multi-Choice Questions

1. The aggregate expenditures model is built upon which of the following assumptions?

A. Prices are sticky downward.

B. The economy is at full employment.

C. Prices are fully flexible.

D. Government spending policy has no ability to affect the level of output.

2. In a private closed economy, when aggregate expenditures exceed GDP:

A. GDP will decline.

B. business inventories will rise.

C. saving will decline.

D. business inventories will fall.

3. If at some level of GDP the economy is experiencing an unintended decrease in inventories:

A. the aggregate level of saving will decline.

B. the price level will fall.

C. the business sector will lay off workers.

D. domestic output will increase.

4. If an unintended increase in business inventories occurs:

A. we can expect aggregate production to be unaffected.

B. we can expect businesses to increase the level of production.

C. we can expect businesses to lower the level of production.

D. aggregate expenditures must exceed the domestic output.

5. The aggregate demand curve is:

A. vertical if full employment exists.

B. horizontal when there is considerable unemployment in the economy.

C. downsloping because of the interest-rate, real-balances, and foreign purchases effects.

D. downsloping because production costs decrease as real output rises.

6. The foreign purchases effect suggests that an increase in the U.S. price level relative to other countries will:

A. increase the amount of U.S. real output purchased.

B. increase U.S. imports and decrease U.S. exports.

C. increase both U.S. imports and U.S. exports.

D. decrease both U.S. imports and U.S. exports.

7. The determinants of aggregate demand:

A. explain why the aggregate demand curve is downsloping.

B. explain shifts in the aggregate demand curve.

C. demonstrate why real output and the price level are inversely related.

D. include input prices and resource productivity.

8. Which one of the following would not shift the aggregate demand curve?

A. a change in the price level

B. depreciation of the international value of the dollar

C. a decline in the interest rate at each possible price level

D. an increase in personal income tax rates

9. If investment increases by $10 billion and the economy's MPC is 0.8, the aggregate demand curve will shift:

A. leftward by $50 billion at each price level.

B. rightward by $10 billion at each price level.

C. rightward by $50 billion at each price level.

D. leftward by $40 billion at each price level.

10. If investment decreases by $20 billion and the economy's MPC is 0.5, the aggregate demand curve will shift:

A. leftward by $40 billion at each price level.

B. rightward by $20 billion at each price level.

C. rightward by $40 billion at each price level.

D. leftward by $20 billion at each price level.

11. Major increases in oil prices in the mid-1970s, and in the late 1970s created:

A. An increase in long-run aggregate supply

B. A reduction in the unemployment rate

C. Adverse aggregate supply shocks

D. Beneficial aggregate demand shocks