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Chapter 08 Macroeconomic Equilibrium: Aggregate Demand and Supply
MULTIPLE CHOICE
1. Business cycles are linked to the interaction between:

a. the foreign exchange rate and the balance of payments account.
b. the aggregate demand and aggregate supply curves.
c. the demand and supply curves for a particular good.
d. the substitution and the wealth effect.
e. the long-run aggregate supply curve and the aggregate resource curve.
ANS: B DIF: Easy REF: Ch 8, 1 OBJ: ch. 08, 1
NAT: Analytic | Aggregate Demand and Aggregate Supply
TOP: Aggregate Demand, Aggregate Supply, and Business Cycles
MSC: Knowledge
2. Aggregate demand represents the _____ at alternative price levels.

a. total spending in the economy
b. total saving in the economy
c. total investment in the economy
d. total output of the economy
e. total money supply in the economy
ANS: A DIF: Easy REF: 1 OBJ: ch. 08, 1
MSC: Knowledge
3. Which of the following is an incorrect statement?

a. Macroeconomic equilibrium occurs at the intersection of the aggregate demand and
aggregate supply curves.
b. The aggregate supply curve indicates a positive relationship between the price level and
GDP.
c. Other things equal, a downward shift of the aggregate demand curve implies that the
economy is entering a contractionary phase.
d. Aggregate demand and aggregate supply determine the equilibrium price and quantity of
any given good.
e. The aggregate demand curve indicates a negative relationship between the price level and
GDP.
ANS: D DIF: Moderate REF: Ch 8, 1 OBJ: ch. 08, 1
MSC: Knowledge
4. Which of the following is most likely to lead to an economic contraction?

a. A decrease in the average price level
b. An increase in aggregate supply
c. A decrease in aggregate demand
d. A decrease in taxes
e. An increase in transaction demand for money
ANS: C DIF: Easy OBJ: ch. 08, 1
NAT: Reflective Thinking | Aggregate Demand and Aggregate Supply
MSC: Comprehension
5. Which of the following is true of the aggregate demand curve?

a. The aggregate demand curve shows the various levels of expenditures in the economy at
alternative price levels.
b. The aggregate demand curve implies a positive relationship between inflation and
unemployment.
c. The aggregate demand curve is identical to the income consumption curve.
d. The aggregate demand curve has the same slope as the aggregate supply curve.
e. The aggregate demand curve relates relative prices to the quantity demanded of a
particular good.
ANS: A DIF: Moderate REF: Ch 8, 1 OBJ: ch. 08, 1
MSC: Knowledge
6. _____ is the relation between total expenditures, or total spending, and the price level.
a. Gross National Product
b. Inflation
c. Real Gross Domestic Product
d. Aggregate supply
e. Aggregate demand
ANS: E DIF: Easy REF: 2 OBJ: ch. 08, 1
TOP: Factors that Influence Aggregate Demand MSC: Knowledge
7. Which of the following is not a component of the aggregate expenditures of a country?

a. Investment
b. Government spending
c. Net exports
d. Consumption
e. Transfer payments
ANS: E DIF: Easy REF: 2 OBJ: ch. 08, 1
8. Which of the following economic changes will decrease household expenditures?

a. Population growth
b. Lower income taxes
c. An appreciation of the domestic currency
d. Increased consumer confidence
e. A higher domestic price level
ANS: E DIF: Moderate REF: 2.a OBJ: ch. 08, 1
9. Which of the following is true of the disposable income of the households?

a. An increase in the average price level lowers the disposable income of the households.
b. Disposable income refers to the purchasing power of nominal income.
c. Increase in direct taxes will lower disposable income.
d. Decrease in government transfers will increase disposable income.
e. Disposable income refers to the net private transfers of the household sector.
ANS: C DIF: Moderate OBJ: ch. 08, 1
10. Lower interest rates on business loans usually result in a(n):

a. decrease in aggregate demand.
b. decrease in aggregate supply.
c. decrease in investment spending.
d. increase in government spending.
e. increase in aggregate expenditures.
ANS: E DIF: Moderate REF: 2.b OBJ: ch. 08, 1
11. Other things equal, investment spending will increase when:

a. interest rates are lowered.
b. firms operate under full capacity.
c. corporate taxes are increased.
d. capacity utilization is low.
e. the cost of capital rises.
ANS: A DIF: Moderate REF: 2.b OBJ: ch. 08, 1
12. Identify the correct statement.

a. Investment is positively related to the interest rate.
b. Investment spending in an economy is stimulated by new production technology.
c. Investment is positively related to excess capacity.
d. Investment spending is positively related to the cost of capital goods.
e. Investment is negatively related to the rate of government spending.
ANS: B DIF: Moderate REF: 2.b OBJ: ch. 08, 1
13. Other things equal, a decrease in government spending:

a. increases the slope of the aggregate demand curve.
b. increases the domestic interest rate.
c. decreases aggregate expenditures.
d. shifts the aggregate demand curve to the right.
e. increases the equilibrium level of GDP.
ANS: C DIF: Moderate REF: 2.c OBJ: ch. 08, 1
14. Which of the following will cause net exports to rise?

a. A depreciation of the domestic currency
b. A fall in foreign income
c. Higher foreign tariffs on domestic goods
d. Inflation in domestic economy
e. A depreciation of the foreign currency
ANS: A DIF: Moderate REF: 2.d OBJ: ch. 08, 1
15. If the exchange rate is defined as the price of the foreign currency in terms of the domestic currency,
an increase in the exchange rate:
a. increases domestic demand for foreign goods.
b. makes domestic goods cheaper in the foreign markets.
c. lowers net exports.
d. lowers aggregate expenditure on domestic goods.
e. increases the domestic country's external debt burden.
ANS: B DIF: Moderate OBJ: ch. 08, 1
TOP: Factors that Influence Aggregate Demand MSC: Comprehension

a. As domestic income rises, imports rise and net exports fall.
b. As foreign income rises, net exports fall.
c. As domestic income falls, imports rise and net exports fall.
d. As domestic income rises, imports fall and net exports rise.
e. As foreign income falls, net exports rise.
ANS: A DIF: Easy REF: 2.d OBJ: ch. 08, 1
17. A lower domestic price level tends to:

a. reduce aggregate expenditures and lower the aggregate quantity of goods and services
supplied.
b. reduce aggregate expenditures and lower aggregate demand.
c. reduce aggregate expenditures and raise aggregate demand.
d. increase aggregate expenditures and raise the aggregate quantity of goods and services
demanded.
e. increase aggregate expenditure on foreign goods and lower net exports.
ANS: D DIF: Moderate REF: 2.e OBJ: ch. 08, 1
TOP: Factors that Influence Aggregate Demand MSC: Comprehension
18. Other things held constant, when the general price level changes:
a. we move along the aggregate demand curve.
b. we shift the aggregate demand curve to the right.
c. we shift the aggregate demand curve to the left.
d. we shift the aggregate supply curve to the right.
e. we shift the aggregate demand curve to the left.
ANS: A DIF: Moderate REF: 3.a OBJ: ch. 08, 1
TOP: The Aggregate Demand Curve MSC: Knowledge
19. Which of the following is an impact of an increase in the general price level?
a. An increase in aggregate demand for goods and services
b. A decrease in aggregate supply of goods and services
c. An increase in the price of the financial assets
d. A decrease in supply of bonds and other assets
e. An increase in interest rates
ANS: E DIF: Moderate OBJ: ch. 08, 1
20. The wealth effect and the interest rate effect are changes in the price level that:
a. bring about a movement along the aggregate demand curve.
b. lead to a shift of the demand curve for a particular good.
c. result in a shift of the aggregate supply curve.
d. help explain the vertical shape of the long-run aggregate supply curve.
e. cause a movement along the aggregate supply curve
ANS: A DIF: Moderate REF: 3.a OBJ: ch. 08, 1
21. The _____ is the change in the purchasing power of assets that causes spending to change when the
price level changes.
a. purchasing power effect
b. interest rate effect
c. substitution effect
d. income effect
e. real-balance effect
ANS: E DIF: Easy REF: 3.a.1 OBJ: ch. 08, 1
22. A decrease in the price level will result in:

a. a downward shift of the AD curve.
b. an upward shift of the AD curve.
c. a movement up the AD curve.
d. a steeper slope of the AD curve.
e. a movement down the AD curve
ANS: E DIF: Moderate REF: 3.a.1 OBJ: ch. 08, 1
23. As the general price level in the country of Norweinshire rose, the average interest rate in the economy
increased, thereby lowering aggregate expenditure. This relationship between price level, interest rate,
and aggregate expenditure is referred to as the:
a. total price effect.
b. interest rate effect.
c. wealth effect.
d. real-balance effect.
e. income effect.
ANS: B DIF: Easy REF: 3.a.2 OBJ: ch. 08, 1
TOP: The Aggregate Demand Curve MSC: Application
NARRBEGIN: Table 8.1

The table given below reports the inflation rate in the U.S. and Canada for two years.
Table 8.1
United States Canada
Inflation Rate (year 1) 0% 0%
Inflation Rate (year 2) 0% 3.6 %
NARREND
24. Refer to Table 8.1. Assume the exchange rate is fixed at 1.4 CAD (Canadian dollars) = 1 USD (United
States dollars). Between year 1 and year 2, what happens to the U.S. aggregate demand curve?
a. There is a movement to the right along the AD curve.
b. The AD curve shifts to the right.
c. The AD curve becomes relatively elastic.
d. The AD curve shifts to the left.
e. There is a movement to the left along the AD curve.
ANS: B DIF: Challenging REF: 3.a.3 OBJ: ch. 08, 1
25. Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = 1 USD and that price changes
for lumber are identical to the inflation rate for each country. If Canadian lumber is sold in year 1 for
5,500 CAD, what is the price of that lumber in year 2, given that exchange rates do not change?
a. 5,500 CAD
b. 7,977 CAD
c. 5,698 CAD
d. 7,700 CAD
e. 9,700 CAD
ANS: C DIF: Moderate REF: 3.a.3 OBJ: ch. 08, 1
26. Refer to Table 8.1. Assume that the exchange rate is fixed at 1.4 CAD = $1 and that price changes for
salmon are identical to the inflation rate in each country. If U.S. importers pay 10,000 CAD for a
trailer of Canadian salmon in year 1, what is the approximate price of that salmon in year 2, given that
exchange rates do not change?
a. $10,360
b. $14,504
c. $7,400
d. $7,143
e. $10,000
ANS: C DIF: Challenging REF: 3.a.3 OBJ: ch. 08, 1
27. The change in aggregate expenditures resulting from a movement in the domestic price level, which in
turn changes the price of domestic goods in relation to foreign goods, is known as the:
a. international trade effect.
b. multilateral equilibrium condition.
c. international exchange rate effect.
d. magnified international pricing effect.
e. international deficit effect.
ANS: A DIF: Easy REF: 3.a.3 OBJ: ch. 08, 1
28. Suppose a representative household holds a bond that is expected to pay a real return of $100 one year
from now. However, over the next year, the inflation rate rises 15 percent more than was originally
anticipated. As a consequence:
a. the real value of household wealth will increase.
b. consumption spending will increase, and aggregate demand will rise.
c. the purchasing power of money will rise.
d. savings will fall and aggregate expenditures will rise.
e. the aggregate expenditure in the economy will decrease.
ANS: E DIF: Challenging REF: Ch 8, 3.a OBJ: ch. 08, 1
29. Assuming a fixed exchange rate, a decrease in U.S. prices relative to European prices will:
a. decrease European exports to the United States.
b. increase U.S. imports from Europe.
c. decrease aggregate spending in the U.S.
d. not affect U.S. exports or imports.
e. raise the purchasing power of U.S. consumers.
ANS: A DIF: Moderate REF: Ch 8, 3.a OBJ: ch. 08, 1
30. The wealth effect, the interest rate effect, and the international trade effect account for the:
a. positive slope of the short-run aggregate supply curve.
b. the shape of the long-run aggregate supply curve.
c. positive slope of the aggregate demand curve.
d. negative slope of the aggregate demand curve.
e. negative slope of the short-run aggregate supply curve.
ANS: D DIF: Easy REF: 3.a.4 OBJ: ch. 08, 1
31. The AD curve will shift to the right if:

a. people become pessimistic about the future of the economy.
b. there is a decrease in foreign income.
c. the government decreases spending.
d. domestic price levels decrease.
e. foreign price levels increase.
32. If foreign income falls, we can expect to see all of the following, except:
a. a decrease in foreign spending.
b. a rise in domestic aggregate demand.
c. no change in either domestic net exports or aggregate demand.
d. a decrease in domestic net exports.
e. a decrease in domestic aggregate demand.
ANS: B DIF: Moderate REF: 3.b.2 OBJ: ch. 08, 2
33. Which of the following is most likely to lead to an inward shift of the aggregate demand curve?
a. A decrease in the prices of raw materials
b. A decline in foreign price levels
c. A decline in the domestic price level
d. An optimistic expectation about the economy’s performance in the near future
e. A decrease in foreign income
34. Which of the following does not account for a movement along a given AD curve?
a. The wealth effect
b. The interest rate effect
c. The real-balance effect
d. The international trade effect
e. The government spending effect
ANS: E DIF: Easy REF: 3.b OBJ: ch. 08, 2
35. Which of the following illustrates an optimistic expectation of the people about the economy?
a. A movement to the right along the aggregate demand curve
b. A rightward shift of the aggregate demand curve
c. A leftward shift of the aggregate demand curve
d. A movement to the left along the aggregate demand curve
e. A flatter slope of the aggregate demand curve
36. Which of the following would result in a decrease in aggregate demand?

a. A higher domestic price level
b. Higher raw materials prices
c. Lower aggregate expenditures
d. Technological advances
e. Expansionary government policy
ANS: C DIF: Easy REF: 3.b OBJ: ch. 08, 2
37. An increase in aggregate demand due to higher foreign income will cause:
a. domestic equilibrium GDP to increase.
b. domestic equilibrium GDP to decrease.
c. domestic prices to fall.
d. foreign prices to fall.
e. foreign equilibrium GDP to fall.
ANS: A DIF: Challenging REF: 3.b.2 OBJ: ch. 08, 2
TOP: The Aggregate Demand Curve MSC: Comprehension
38. Pessimistic consumer expectations and decreased government spending are both associated with:
a. a downward movement along the aggregate demand curve.
b. an upward movement along the aggregate demand curve.
c. a leftward shift of the aggregate demand curve.
d. a rightward shift of the aggregate demand curve.
e. a steeper slope of the aggregate demand curve.
ANS: C DIF: Moderate REF: 3.b.3 OBJ: ch. 08, 2
39. Other things remaining unchanged, the flatter the aggregate supply curve:
a. the greater the expansionary effect of an increase in aggregate demand.
b. the smaller the inflationary effect of an increase in aggregate demand.
c. the greater the recessionary effect of a decrease in aggregate demand.
d. the greater the expansionary effect of a decrease in aggregate demand.
e. the smaller the recessionary effect of an increase in aggregate demand.
ANS: B DIF: Challenging REF: 1.c OBJ: ch. 08, 3
MSC: Analysis
40. Identify the correct statement about the aggregate supply curve.
a. The aggregate supply curve is irrelevant for determining macroeconomic equilibrium.
b. The aggregate supply curve shows the various quantities of a particular good that is
produced in the economy.
c. The aggregate supply curve shows an inverse relationship between price level and
employment.
d. The aggregate supply curve shifts inward with an increase in consumer spending,
investment, government spending, and net exports.
e. The aggregate supply curve relates total output in the economy to alternative price levels.
ANS: E DIF: Moderate REF: Ch 8, 1 OBJ: ch. 08, 3
MSC: Knowledge
41. The steepness of the aggregate supply curve depends on the:

a. rate of inflation in the economy.
b. change in relative prices of commodities.
c. substitutability of the inputs used in producing various goods and services.
d. ability of the producers to respond to price-level changes in the short run.
e. the market rate of interest.
ANS: D DIF: Moderate REF: 4 OBJ: ch. 08, 3
NAT: Analytic | Aggregate Demand and Aggregate Supply TOP: Aggregate Supply
MSC: Knowledge
42. Which of the following explains the effect of prices on profits in the short-run?
a. The direct relationship between aggregate quantity demanded and national output.
b. The direct relationship between aggregate quantity supplied and the price level.
c. The inverse relationship between aggregate quantity demanded and national output.
d. The inverse relationship between aggregate quantity supplied and profits.
e. The inverse relationship between aggregate quantity supplied and national output.
ANS: B DIF: Easy REF: Ch 8, 4.a OBJ: ch. 08, 3
MSC: Knowledge
43. Which of the following is true of the aggregate supply curve?

a. It shows the inverse relationship between prices and national output.
b. It shows the positive relationship between the price level and the supply of all goods
produced in the economy.
c. It shows the amount of real GDP consumed at different price levels.
d. It is a negatively sloped curve that shows the relationship between the price level and the
cost of production of firms in the economy.
e. It shows the positive relationship between price and quantity supplied of an individual
good.
ANS: B DIF: Moderate REF: 4 OBJ: ch. 08, 3
MSC: Knowledge
44. Which of the following is not held constant in the short run when determining the aggregate supply
curve?
a. Interest rates
b. Rent
c. Wages
d. Profit
e. Price level
ANS: E DIF: Easy REF: 4.a OBJ: ch. 08, 3
MSC: Knowledge
45. In the short-run, an increase in the average price level will cause:
a. demand for the good to increase but total production to decline.
b. profits to rise and, thus, total production to increase.
c. interest rates to fall and thus total production to decline.
d. input costs to fall and, thus, total production to rise.
e. input costs to fall and, thus, total production to decline.
ANS: B DIF: Moderate REF: 4.a OBJ: ch. 08, 3
MSC: Knowledge
46. The positive slope of the AS curve is a _____ phenomena, when the _____ are held constant.
a. long-run; business profits
b. short-run; government expenditures
c. short-run; costs of production
d. long-run; commodity prices
e. long-run; aggregate expenditures
ANS: C DIF: Easy REF: 4.b OBJ: ch. 08, 3
MSC: Knowledge
47. As the level of real GDP increases, the short-run aggregate supply curve:
a. shifts to the right.
b. shifts to the left.
c. becomes flatter.
d. becomes steeper.
e. becomes horizontal to the real GDP axis.
ANS: D DIF: Easy REF: 4.b.1 OBJ: ch. 08, 4
MSC: Knowledge
48. The degree of responsiveness of aggregate output to a price change declines as the:
a. rate of savings increases.
b. economy approaches its potential output.
c. GDP gap widens over time.
d. the price elasticity of imports declines.
e. the excess capacity of all the firms in the economy increases over time.
ANS: B DIF: Moderate OBJ: ch. 08, 4
TOP: Aggregate Supply MSC: Comprehension
49. If the national output cannot be increased unless the productive capacity or potential GDP increases,
the aggregate supply curve is:
a. downward-sloping.
b. U-shaped.
c. vertical.
d. upward-sloping.
e. horizontal.
ANS: C DIF: Moderate REF: Ch 8, 4.b OBJ: ch. 08, 5
50. Consider the following statement: "If the government attempts to raise employment through increased
fiscal spending, all it will end up doing will be to increase the price level." The statement rests on the
assumption that:
a. the aggregate demand curve is a horizontal line.
b. the aggregate supply curve is a vertical line.
c. the aggregate supply curve is upward-sloping.
d. the aggregate supply curve is downward-sloping.
e. the aggregate supply curve is a horizontal line.
ANS: B DIF: Challenging REF: Ch 8, 4.b OBJ: ch. 08, 5
TOP: Aggregate Supply MSC: Analysis
51. The long-run aggregate supply of an economy at the potential level of real GDP is graphically
represented by:
a. a horizontal line.
b. an upward-sloping curve.
c. a downward-sloping curve.
d. a vertical line.
e. a backward bending curve.
MSC: Knowledge
52. Firms' profits or production do not increase in the long run because:
a. some factors of production are fixed in the long run.
b. all the factors are variable in the long run.
c. changes in factor costs completely offset any change in price level.
d. there exists an excess capacity in the economy in the long run.
e. factor costs remain fixed in the long run.
ANS: C DIF: Moderate OBJ: ch. 08, 5
MSC: Knowledge
53. Which of the following statements is true about the economy in the long run?
a. Equilibrium output must be below potential GDP and the rate of unemployment must
exceed the natural rate.
b. Production costs are close to zero.
c. The rate of unemployment is zero in the long run.
d. The aggregate demand curve plays no role in determining the equilibrium level of real
GDP.
e. The aggregate supply curve is a horizontal line.
ANS: D DIF: Moderate REF: 4.b.2 OBJ: ch. 08, 5
54. What happens to aggregate supply when production costs adjust completely to price increases?
a. Both equilibrium output and prices increase
b. Only prices rise; equilibrium output remains fixed
c. Only equilibrium output rises; equilibrium prices remain fixed
d. Equilibrium output falls while prices rise
e. Both equilibrium output and prices remain fixed
55. In the long-run, if the economy is operating at the full employment level, the equilibrium level of real
GDP is determined solely by the:
a. level of unemployment in the economy.
b. rate of inflation in the economy.
c. real interest rate in the economy.
d. aggregate supply curve of the economy.
e. aggregate demand curve of the economy.
MSC: Knowledge
56. The short-run aggregate supply curve will shift to the left if:
a. there is a significant increase in worker productivity.
b. workers on fixed-wage contracts expect higher inflation.
c. the price of raw materials decreases.
d. the price of capital goods rises.
e. wages fall in anticipation of higher prices.
ANS: D DIF: Easy REF: 4.c OBJ: ch. 08, 6
MSC: Knowledge
57. Given that energy is an input in production, the development of a cheaper source of energy will result
in:
a. a lower price level and a lower amount of production.
b. a higher price level and a higher amount of production.
c. a lower amount of production at every price level.
d. a higher amount of production at every price level.
e. a lower profit at every price level.
ANS: D DIF: Moderate REF: Ch 8, 4.c OBJ: ch. 08, 6
TOP: Aggregate Supply MSC: Application
58. Which of the following could lead to a decline in aggregate supply?

a. The discovery of new mineral deposits in Arizona
b. Higher real wage rates in the U.S.
c. Lower personal income in France
d. Cutbacks in government borrowing
e. Rapid depreciation of the Swiss franc
ANS: B DIF: Moderate REF: 4.c.1 OBJ: ch. 08, 6
MSC: Knowledge
NARRBEGIN: Table 8.2

The table given below reports the average hourly wage received by laborers and the price index for
two years.
Table 8.2
Year 1 Year 2
Average hourly wage $6.00 $7.00
Price index 117 125
NARREND
59. Refer to Table 8.2. The data in the table suggests that in year 2:
a. aggregate supply remains constant.
b. aggregate demand decreases.
c. aggregate supply decreases.
d. aggregate demand increases.
e. aggregate supply increases
ANS: C DIF: Moderate REF: 4.c.1 OBJ: ch. 08, 6
60. Long-run aggregate supply increases as:

a. new production technology is introduced.
b. the quality of labor declines.
c. the average price level increases.
d. natural resources become depleted.
e. corporate wage rates increase.
ANS: A DIF: Easy REF: 4.c.2 OBJ: ch. 08, 6
TOP: Aggregate Supply MSC: Knowledge
61. Suppose in Country X, wages of workers are increased in the beginning of a financial year,
anticipating high inflation in the economy. However prices remain unchanged during the year.
Everything else remaining constant, which of the following will be observed in this economy?
a. The cost of labor, that is the real wage will decline
b. The current profits of the firm will rise
c. Aggregate supply in the economy will increase
d. Annual production in the economy will remain unaffected
e. The aggregate supply curve will move to the left
ANS: E DIF: Moderate REF: 4.c.3 OBJ: ch. 08, 6
62. The movement of the vertical _____ curve to the _____ reflects the increase in potential output on
account of the development of new technologies and increase in the quantity and quality of resources.
a. long-run aggregate supply; right
b. short-run aggregate supply; right
c. short-run aggregate demand; left
d. long-run aggregate demand curve; left
e. long-run aggregate supply; left
ANS: A DIF: Easy REF: 4.c.4 OBJ: ch. 08, 6
MSC: Knowledge
63. In the 1970s the international price of crude oil rocketed because:
a. the demand for crude oil fell short of its supply.
b. a new source of natural gas was discovered.
c. the demand for automobiles increased drastically.
d. the supply of oil was restricted by the oil exporting countries.
e. of the appreciation of dollar in the international market.
ANS: D DIF: Moderate OBJ: ch. 08, 6
TOP: Global Business Insight - Oil and Aggregate Supply MSC: Knowledge
64. To determine short-run equilibrium in the economy, we use an aggregate supply curve that is:
a. downward-sloping.
b. vertical.
c. upward-sloping.
d. horizontal.
e. parabolic.
ANS: C DIF: Easy REF: 5.a OBJ: ch. 08, 7
TOP: Aggregate Demand and Supply Equilibrium MSC: Knowledge
65. The intersection of the aggregate demand and the aggregate supply curve defines the equilibrium level
of _____ and the price level.
a. real interest rate
b. nominal interest rate
c. nominal GDP
d. real GDP
e. unemployment
ANS: D DIF: Easy REF: 1 OBJ: ch. 08, 7
MSC: Knowledge

a. Aggregate demand alone determines equilibrium price and output.
b. Aggregate supply alone determines equilibrium price and output.
c. Aggregate demand and aggregate supply determine equilibrium price and output.
d. Aggregate demand shows the positive relationship between price level and real GDP.
e. Aggregate supply shows the negative relationship between price level and real GDP
ANS: C DIF: Easy REF: 1 OBJ: ch. 08, 7
MSC: Knowledge
67. Other things equal, an increase in aggregate demand will result in:
a. an economic expansion.
b. higher unemployment and a lower equilibrium price level.
c. an economic recession.
d. a decrease in equilibrium real GDP and an increase in the equilibrium level of prices.
e. decreased economic welfare.
ANS: A DIF: Easy REF: 1.a OBJ: ch. 08, 7
MSC: Knowledge
68. Other things equal, an increase in aggregate spending tends to be associated with:
a. cost-push inflation.
b. an economic depression.
c. a lower level of equilibrium real GDP.
d. demand-pull inflation.
e. an increase in the quality of goods and services produced.
ANS: D DIF: Easy REF: 1.a OBJ: ch. 08, 7
MSC: Knowledge
69. Other things equal, an increase in aggregate supply will cause:

a. a decrease in equilibrium real GDP and a decrease in the equilibrium price level.
b. an economic contraction.
c. an increase in equilibrium real GDP and an increase in the equilibrium price level.
d. cost-push inflation.
e. a reduction in unemployment and a decline in inflation.
ANS: E DIF: Easy REF: 1.b OBJ: ch. 08, 7
MSC: Knowledge
70. Which of the following is true of cost-push inflation?

a. Cost-push inflation is associated with an economic expansion.
b. Cost-push inflation is rarely experienced in developed economies.
c. Cost-push inflation is caused by a decrease in aggregate supply.
d. Cost-push inflation is identical to demand-pull inflation.
e. Cost-push inflation is the result of increased consumer spending.
ANS: C DIF: Moderate REF: Ch 8, 1.b OBJ: ch. 08, 7
MSC: Knowledge
71. A simultaneous increase in inflation and decrease in economic growth in a country can be associated
with:
a. a decrease in aggregate demand with no change in aggregate supply.
b. an increase in aggregate demand and aggregate supply.
c. an increase in aggregate supply with no change in aggregate demand.
d. a decrease in aggregate supply and aggregate demand.
e. a decrease in aggregate supply with no change in aggregate demand.
ANS: E DIF: Challenging REF: 1.b OBJ: ch. 08, 7
MSC: Comprehension
72. The degree to which _____ declines during a recession or increases during an expansion depends on
the amount by which the AD and/or AS curves shift.
a. real GDP
b. nominal GDP
c. the money supply
d. real interest rate
e. the consumer price index
ANS: A DIF: Easy REF: 1.c OBJ: ch. 08, 7
MSC: Knowledge
73. Assume that the AD curve is held constant and short-run aggregate supply decreases. The result is
a(n):
a. increase in both equilibrium real GDP and the price level.
b. decrease in equilibrium real GDP and an increase in the price level.
c. decrease in both equilibrium real GDP and the price level.
d. decrease in equilibrium real GDP, while the price level remains fixed.
e. increase in the price level, while equilibrium real GDP remains fixed.
ANS: B DIF: Moderate REF: 5.a OBJ: ch. 08, 7
74. A simultaneous increase in both unemployment and inflation is most likely to be the result of a(n):
a. increase in long-run aggregate supply.
b. increase in short-run aggregate supply.
c. decrease in the aggregate demand curve.
d. a simultaneous outward shift of the aggregate demand and supply curves.
e. a decrease in the short-run aggregate supply.
TOP: Aggregate Demand and Supply Equilibrium MSC: Comprehension
75. Assume that the aggregate demand increases while the short-run aggregate supply decreases. The
result is a(n):
a. increase in both equilibrium real GDP and the price level.
b. decrease in equilibrium real GDP and an increase in the price level.
c. decrease in both equilibrium real GDP and the price level.
d. decrease in equilibrium real GDP, while the price level remains fixed.
e. increase in the price level, while the change in equilibrium real GDP is ambiguous.
TOP: Aggregate Demand and Supply Equilibrium MSC: Application
NARRBEGIN: Figure 8.1

Each of the panels given below represents the short-run equilibrium in the U.S. economy. The
Aggregate Demand and Aggregate Supply curves in each panel responds to various economic changes.
Figure 8.1
NARREND
76. Refer to Figure 8.1. Which of the graphs in the figure best describes the impact of lower real income in
Germany on U.S. equilibrium real GDP and the U.S. equilibrium price level?
a. Panel A
b. Panel B
c. Panel C
d. Panel D
e. Panel E
ANS: C DIF: Challenging REF: 5.a OBJ: ch. 08, 7
77. Refer to Figure 8.1. Which of the graphs in the figure best describes the impact of an effective oil
embargo that raises the price of gasoline?
a. Panel A
b. Panel B
c. Panel C
d. Panel D
e. Panel E
ANS: B DIF: Challenging REF: 5.a OBJ: ch. 08, 7
78. Refer to Figure 8.1. Which of the graphs in the figure best describes the impact of a generalized more
optimistic view of the future by consumers?
a. Panel A
b. Panel B
c. Panel C
d. Panel D
e. Panel E
ANS: A DIF: Challenging REF: 5.a OBJ: ch. 08, 7
79. Aggregate demand–aggregate supply analysis shows that in the long run the effect of increased
aggregate spending on real GDP is:
a. negative.
b. close to infinity.
c. indeterminate.
d. zero.
e. positive.
ANS: D DIF: Moderate REF: 5.b OBJ: ch. 08, 7

The figure given below represents the long-run equilibrium in the aggregate demand and aggregate
supply model.
Figure 8.2
NARREND
80. Refer to Figure 8.2. The combination of rising prices and falling output is known as stagflation. This
phenomenon is represented by which of the following shifts?
a. to
b. to
c. to
d. to
e. The combination of to and to
ANS: D DIF: Challenging REF: 5.b OBJ: ch. 08, 7

81. Refer to Figure 8.2. Suppose major oil-exporting countries restrict oil output, thus increasing the price
of oil. This would be represented by:
a. a movement from A to C.
b. a movement from A to B to C.
c. a movement from B to C.
d. a movement from B to A.
e. a movement from C to A.
ANS: A DIF: Challenging REF: 5.b OBJ: ch. 08, 7
82. Refer to Figure 8.2. A movement from equilibrium point A to equilibrium point B would be the result
of a(n):
a. increase in consumer confidence and a decrease in productivity.
b. technological advances and domestic price decreases.
c. decrease in productivity and a decrease in government spending.
d. increase in production costs and greater consumer confidence.
e. decrease in domestic prices and decrease in direct taxes.
ANS: C DIF: Challenging REF: 5.b OBJ: ch. 08, 7
The figure given below represents the equilibrium real GDP and price level in the aggregate demand
and aggregate supply model.
Figure 8.3
NARREND
83. Refer to Figure 8.3. If AS1 and AD1 represent the initial aggregate demand and supply in the economy,
the long-run equilibrium real GDP will be _____ billion.
a. $100
b. $200
c. $300
d. $400
e. $500
ANS: C DIF: Moderate REF: 5.b OBJ: ch. 08, 7
84. Refer to Figure 8.3. Potential GDP is greater than real GDP at all output levels:
a. above $300 billion.
b. between $300 billion and $400 billion.
c. above $400 billion.
d. below $300 billion.
e. above $500 billion.
ANS: D DIF: Challenging REF: 5.b OBJ: ch. 08, 7
85. Refer to Figure 8.3. Movement from point B to point D could be initiated by:
a. a stock market crash that undermines consumer confidence.
b. a tax code changes that improve investor expectations.
c. a national emergency that increases government spending.
d. a higher net exports because of economic expansion in European countries.
e. a technological advancement.
ANS: A DIF: Moderate REF: 5.b OBJ: ch. 08, 7
86. Consider Figure 8.3. Which of the following is most likely to have led to the movement from point B
to point E?
a. Declining net exports
b. Increased investment spending.
c. A decline in the domestic price level.
d. An improvement in the quality of labor.
e. An increase in the real wage rates.
87. In Figure 8.3, which of the following shifts would result in stagflation (economic stagnation and
inflation)?
a. AS1 to AS2
b. AD1 to AD2
c. AD2 to AD1
d. AD2 toAD3
e. AS1 to AS3
ANS: E DIF: Challenging REF: 5.b OBJ: ch. 08, 7
TRUE/FALSE
1. An increase in aggregate demand normally does not cause inflation.
ANS: F DIF: Easy REF: 1.a OBJ: ch. 08, 1

MSC: Knowledge
2. A demand-pull inflation is caused by an increase in the demand for output. Therefore, economists say
that this type of inflation is actually good for the economy.

MSC: Knowledge
3. A rightward shift in the aggregate supply curve with no change in the aggregate demand curve signals
an economic expansion.
ANS: T DIF: Easy REF: 1.b OBJ: ch. 08, 1

MSC: Knowledge
4. The economic reasons that underlie the shape of the aggregate supply curve are different from those
that underlie the shape of the supply curve for a particular good.
ANS: T DIF: Easy REF: 1.c OBJ: ch. 08, 3
MSC: Knowledge
5. A change in foreign demand does not affect aggregate demand.
ANS: F DIF: Easy REF: 2 OBJ: ch. 08, 1

6. Increased household spending reduces aggregate expenditures.

7. The purchase of fifty new food-processing machines by the Campbell Soup Corporation would be
classified as investment spending.
ANS: T DIF: Moderate REF: 2.b OBJ: ch. 08, 1

TOP: Factors that Influence Aggregate Demand MSC: Application
8. Government spending is set by the federal authorities in such a way that aggregate supply just equals
aggregate spending.
ANS: F DIF: Easy REF: 2.c OBJ: ch. 08, 1

9. In 2009, a nation reported total imports worth $250,000 and total exports worth $225,000. This implies
the nation had net exports worth $25,000 during this year.
ANS: F DIF: Moderate REF: 2.d OBJ: ch. 08, 1

TOP: Factors that Influence Aggregate Demand MSC: Application
10. A lower domestic price level raises aggregate expenditures and, therefore, shifts the aggregate demand
curve to the right.
ANS: F DIF: Moderate REF: 2.e OBJ: ch. 08, 1

11. If there is a sudden jump in the inflation rate, the purchasing power of financial assets will
immediately fall.
ANS: T DIF: Moderate REF: 3.a.1 OBJ: ch. 08, 1

12. An increase in the real value of assets is associated with a reduction in planned aggregate expenditures.
ANS: F DIF: Moderate REF: 3.a.1 OBJ: ch. 08, 1
13. The interest rate effect suggests that investment spending and planned aggregate expenditures fall
when the general price level rises.
ANS: T DIF: Easy REF: 3.a.2 OBJ: ch. 08, 1

14. A decrease in the relative price of economics textbooks will raise the aggregate quantity of an
economy’s goods and services demanded.
ANS: F DIF: Challenging REF: 3.a.4 OBJ: ch. 08, 1

15. If people expect the economy to do well in the future, they will increase their consumption today at
every price level.
ANS: T DIF: Easy REF: Ch 8, 3.b OBJ: ch. 08, 1

16. The fact that the aggregate demand curve slopes downward means that aggregate expenditures
increase when the price level decreases.
ANS: T DIF: Easy REF: 3.a.4 OBJ: ch. 08, 1

17. When the foreign price level falls, domestic goods become more expensive relative to foreign goods,
causing domestic net exports and aggregate demand to fall.
ANS: T DIF: Moderate REF: 3.b OBJ: ch. 08, 2

18. The wealth effect of a change in the price level refers to the fact that wealthier individuals tend to
spend more on foreign goods.
ANS: F DIF: Easy REF: Ch 8, 3.a OBJ: ch. 08, 2

19. If the level of prices falls, the real value of wealth also falls.
ANS: F DIF: Easy REF: Ch 8, 3.a OBJ: ch. 08, 2

20. A higher domestic price level lowers aggregate expenditures and, therefore, shifts the aggregate
demand curve to the left.
ANS: F DIF: Moderate REF: Ch 8, 2.e OBJ: ch. 08, 2

21. The aggregate supply curve shows the negative relationship between general price level and real GDP.
ANS: F DIF: Easy REF: 4 OBJ: ch. 08, 3

MSC: Knowledge
22. The main reason why the short-run aggregate supply curve slopes upward is that as the average price
level increases, larger scales of production become more profitable.
ANS: F DIF: Moderate REF: 4.a OBJ: ch. 08, 3

MSC: Comprehension
23. In the short run, a decrease in the general price level will cause business profits to rise and, hence, the
total quantity of output to increase.

24. The slope of the aggregate supply curve becomes steeper, the faster the costs of production adjust to
prices and the smaller the amount of excess capacity in the economy.
ANS: T DIF: Moderate REF: Ch 8, 4.b OBJ: ch. 08, 4

MSC: Knowledge
25. In the long-run, the aggregate supply curve normally is downward-sloping.
ANS: F DIF: Easy REF: 4.b.2 OBJ: ch. 08, 5

MSC: Knowledge
26. If a large number of laborers shift from fixed-wage contracts to wages that depend on the cost of living
adjustments, the long-run aggregate supply curve for the economy will become relatively steeper.
ANS: T DIF: Challenging REF: 4.b.2 OBJ: ch. 08, 5

27. The aggregate quantity of goods and services produced will decrease at every price level when
resource price rises.
ANS: T DIF: Moderate REF: 4.c.1 OBJ: ch. 08, 6

MSC: Knowledge
28. A rightward shift in the aggregate supply curve is generally associated with a reduction in resource
prices.
ANS: T DIF: Easy REF: Ch 8, 1.b OBJ: ch. 08, 6

MSC: Knowledge
29. When the actual inflation rate rises more rapidly than nominal wage rates, we would expect the
short-run aggregate supply curve to shift to the right.
ANS: T DIF: Moderate REF: 4.c.3 OBJ: ch. 08, 6

MSC: Knowledge
30. In the Keynesian case, an increase in aggregate demand results in an increase in both the price level
and equilibrium real GDP.

31. Suppose an increase in investment spending results in an increase in equilibrium real GDP and a rise in
the equilibrium price level. This implies that the aggregate supply curve for this economy is vertical.
ANS: F DIF: Challenging REF: 5.a OBJ: ch. 08, 7

32. In the long run, increased consumption spending raises only the price level.
ANS: T DIF: Easy REF: 5.b OBJ: ch. 08, 7

33. If the aggregate supply curve is vertical, then shifts in aggregate demand will not change aggregate
output.
ANS: T DIF: Challenging REF: Ch 8, 1.c OBJ: ch. 08, 7

34. The steeper slope of the aggregate supply curve in the long run indicates that an increase in aggregate
demand will cause an increase in the price level and an even greater increase in output in the long run.
ANS: F DIF: Moderate REF: Ch 8, 5.a OBJ: ch. 08, 7

35. In the long run, increased government spending is ineffective in raising equilibrium real GDP.
ANS: T DIF: Moderate REF: Ch 8, 5.b OBJ: ch. 08, 7

36. Suppose the long-run aggregate supply curve shifts to the right as a consequence of the discovery of
more efficient production technologies. Given unchanged aggregate expenditure, this implies a rise in
long-run equilibrium output and a decline in the equilibrium price level.
ANS: T DIF: Challenging REF: Ch 8, 5.b OBJ: ch. 08, 7

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Microeconomics 10th Edition Boyes Test Bank

1. Business cycles are linked to the interaction between:

2. Aggregate demand represents the _____ at alternative price levels.

3. Which of the following is an incorrect statement?

4. Which of the following is most likely to lead to an economic contraction?

5. Which of the following is true of the aggregate demand curve?

7. Which of the following is not a component of the aggregate expenditures of a country?

8. Which of the following economic changes will decrease household expenditures?

9. Which of the following is true of the disposable income of the households?

10. Lower interest rates on business loans usually result in a(n):

11. Other things equal, investment spending will increase when:

12. Identify the correct statement.

13. Other things equal, a decrease in government spending:

14. Which of the following will cause net exports to rise?

16. Identify the correct statement.

17. A lower domestic price level tends to:

22. A decrease in the price level will result in:

NARRBEGIN: Table 8.1

31. The AD curve will shift to the right if:

36. Which of the following would result in a decrease in aggregate demand?

41. The steepness of the aggregate supply curve depends on the:

43. Which of the following is true of the aggregate supply curve?

58. Which of the following could lead to a decline in aggregate supply?

NARRBEGIN: Table 8.2

60. Long-run aggregate supply increases as:

66. Identify the correct statement.

69. Other things equal, an increase in aggregate supply will cause:

70. Which of the following is true of cost-push inflation?

NARRBEGIN: Figure 8.1

NARRBEGIN: Figure 8.2

ANS: D DIF: Challenging REF: 5.b OBJ: ch. 08, 7

1. An increase in aggregate demand normally does not cause inflation.

ANS: F DIF: Easy REF: 1.a OBJ: ch. 08, 1

ANS: F DIF: Easy REF: 1.a OBJ: ch. 08, 1

ANS: T DIF: Easy REF: 1.b OBJ: ch. 08, 1

5. A change in foreign demand does not affect aggregate demand.

ANS: F DIF: Easy REF: 2 OBJ: ch. 08, 1

6. Increased household spending reduces aggregate expenditures.

ANS: F DIF: Easy REF: 2.a OBJ: ch. 08, 1

ANS: T DIF: Moderate REF: 2.b OBJ: ch. 08, 1

ANS: F DIF: Easy REF: 2.c OBJ: ch. 08, 1

ANS: F DIF: Moderate REF: 2.d OBJ: ch. 08, 1

ANS: F DIF: Moderate REF: 2.e OBJ: ch. 08, 1

ANS: T DIF: Moderate REF: 3.a.1 OBJ: ch. 08, 1

ANS: T DIF: Easy REF: 3.a.2 OBJ: ch. 08, 1

ANS: F DIF: Challenging REF: 3.a.4 OBJ: ch. 08, 1

ANS: T DIF: Easy REF: Ch 8, 3.b OBJ: ch. 08, 1

ANS: T DIF: Easy REF: 3.a.4 OBJ: ch. 08, 1

ANS: T DIF: Moderate REF: 3.b OBJ: ch. 08, 2

ANS: F DIF: Easy REF: Ch 8, 3.a OBJ: ch. 08, 2

ANS: F DIF: Easy REF: Ch 8, 3.a OBJ: ch. 08, 2

ANS: F DIF: Moderate REF: Ch 8, 2.e OBJ: ch. 08, 2

ANS: F DIF: Easy REF: 4 OBJ: ch. 08, 3

ANS: F DIF: Moderate REF: 4.a OBJ: ch. 08, 3

ANS: F DIF: Moderate REF: 4.a OBJ: ch. 08, 3

ANS: T DIF: Moderate REF: Ch 8, 4.b OBJ: ch. 08, 4