Economics of Money, Banking, and Financial Markets, 8ecourse.sdu.edu.cn/G2S/eWebEditor/uploadfile/20120330220300... · Aggregate Demand and Supply Analysis ... raw materials offered

Chapter 22Aggregate Demand and Supply Analysis

22.1 Aggregate Demand

1) The aggregate demand curve is the total quantity of an economyʹs

A) intermediate goods demanded at all price levels.

B) intermediate goods demanded at a particular price level.

C) final goods and services demanded at a particular price level.

D) final goods and services demanded at different price levels.

Answer: DQues Status: Revised

2) The total quantity of an economyʹs final goods and services demanded at different price levelsis

A) the aggregate supply curve.

B) the aggregate demand curve.

C) the Phillips curve.

D) the aggregate expenditure function.

Answer: BQues Status: Revised

3) According to the quantity theory of money, changes in the money supply are

A) unrelated to changes in the price level.

B) unrelated to changes in inflation.

C) unrelated to shifts in the aggregate demand curve.

D) the primary source of changes in aggregate spending.


4) The quantity theory of money concludes that changes in aggregate spending are primarilydetermined by changes in

A) government spending and taxes.

B) the velocity of money.

C) interest rates.

D) the money supply.


Chapter 22 Aggregate Demand and Supply Analysis 595

5) The average number of times per year that a dollar is spent on final goods and services iscalled

A) velocity.

B) acceleration.

C) the equation of exchange.

D) nominal output.

Answer: AQues Status: Revised

6) Suppose nominal GDP is equal to $200 trillion and the money supply equals $50 trillion. Inthis case, the velocity of money is equal to ________.

A) 1

B) 2

C) 4

D) 5

Answer: CQues Status: New

7) Suppose real GDP is equal to $100 trillion, the money supply is equal to $50 trillion and theprice level is equal to 2. In this case, the velocity of money is equal to ________.

A) 1

B) 2

C) 4

D) 5


8) The quantity theory of money is derived from

A) the concept of velocity.

B) the Keynesian monetary transmission mechanism.

C) the equation of exchange.

D) the money supply.

Answer: CQues Status: Revised

596 Mishkin · Economics of Money, Banking, and Financial Markets, Eighth Edition

9) As approached through the quantity theory of money, aggregate demand is derived from

A) the equation of exchange.

B) its three component parts: consumer expenditure, investment spending, and governmentspending.

C) its four component parts: consumer expenditure, investment spending, governmentspending, and net exports.

D) the spending multiplier.


10) The aggregate demand curve slopes downward because a decrease in the price level means________ in the real money supply and therefore a ________ level of real spending.

A) an increase; higher

B) an increase; lower

C) a decrease; lower

D) a decrease; higher


11) According to the quantity theory of money approach to aggregate demand, an increase in themoney supply, other things equal, ________ aggregate ________.

A) increases; demand

B) decreases; demand

C) decreases; supply

D) increases; supply


12) According to the quantity theory of money approach to aggregate demand, a decrease in themoney supply, other things equal, ________ aggregate ________.







13) One way to derive aggregate demand is by looking at its four component parts, which are:

A) consumer expenditures, planned investment spending, government spending, and netexports.

B) consumer expenditures, actual investment spending, government spending, and netexports.

C) consumer expenditures, planned investment spending, government spending, and grossexports.

D) consumer expenditures, planned investment spending, government spending, and taxes.


14) By analyzing aggregate demand through its component parts, we can conclude that,everything else held constant, a decline in the price level causes

A) a decline in the real money supply, an increase in interest rates, a decline in investmentspending, and a decline in aggregate output demand.

B) a decline in the real money supply, a decline in interest rates, an increase in investmentspending, and an increase in aggregate output demand.

C) an increase in the real money supply, a decline in interest rates, an increase in investmentspending, and an increase in aggregate output demand.

D) an increase in the real money supply, an increase in interest rates, a decline in investmentspending, and a decline in aggregate output demand.


15) By looking at aggregate demand via its component parts, we can conclude that the aggregatedemand curve is downward sloping because

A) a lower price level, holding the nominal quantity of money constant, leads to a largerquantity of money in real terms, causes the interest rate to fall, and stimulates plannedinvestment spending.

B) a lower price level, holding the nominal quantity of money constant, leads to a largerquantity of money in nominal terms, causes the interest rate to rise, and stimulatesplanned investment spending.

C) a higher price level, holding the nominal quantity of money constant, leads to a largerquantity of money in real terms, causes the interest rate to fall, and stimulates plannedinvestment spending.

D) a higher price level, holding the nominal quantity of money constant, leads to a smallerquantity of money in real terms, causes the interest rate to fall, and stimulates plannedinvestment spending.



16) By looking at aggregate demand through its component parts, we can conclude that a_________ price level _________ the real quantity of money, ________ higher spending.

A) lower; expands; encouraging

B) higher; contracts; encouraging

C) lower; contracts; discouraging

D) higher; expands; encouraging


17) By analyzing aggregate demand via its component parts, we can conclude that changes in themoney supply

A) have no effect on aggregate demand.

B) affect aggregate demand in the opposite direction of the change in governmentspending.

C) affect aggregate demand in the same direction as the change in government spending.

D) affect the quantity of aggregate output demand.


18) An increase in government spending, other things equal, ________ aggregate ________.






19) A decrease in government spending, other things equal, ________ aggregate ________.







20) A decrease in net taxes, other things equal, ________ aggregate ________.






21) An increase in net taxes, other things equal, ________ aggregate ________.






22) Everything else held constant, a balanced budget increase in government spending (that is, anincrease in government spending that is matched by an identical increase in net taxes) will

A) increase aggregate demand, but not by as much if just government spending increases.

B) increase aggregate demand by more than if just government spending increases.

C) will not affect aggregate demand.

D) decrease aggregate demand.

Answer: AQues Status: New

23) An increase in net exports, other things equal, ________ aggregate ________.







24) A decrease in net exports, other things equal, ________ aggregate ________.






25) Everything else held constant, an increase in planned investment expenditure ________aggregate ________.






26) Everything else held constant, a decrease in planned investment expenditure ________aggregate ________.





Answer: BQues Status: New

27) Everything else held constant, aggregate demand increases when

A) taxes are cut.

B) government spending is reduced.

C) animal spirits decrease.

D) the money supply is reduced.



28) Everything else held constant, aggregate demand increases when

A) net exports decrease.

B) taxes increase.

C) planned investment spending increases.

D) the money supply decreases.


29) Everything else held constant, which of the following does not cause aggregate demand toincrease?

A) An increase in net exports.

B) An increase in government spending.

C) An increase in taxes.

D) An increase in consumer optimism.


30) Explain through the component parts of aggregate demand why the aggregate demand curveslopes down with respect to the price level. Be sure to discuss two channels through whichchanges in prices affect demand.

Answer: A fall in the price level increases the real value of a fixed nominal money supply. Thisincrease in the real money supply lowers interest rates. Lower rates increase investment,thereby increasing aggregate demand. Lower interest rates also cause depreciation ofthe domestic currency, increasing net exports and aggregate demand.

Ques Status: Revised

22.2 Aggregate Supply

1) The aggregate supply curve is the total quantity of

A) raw materials offered for sale at different prices.

B) final goods and services offered for sale at the current price level.

C) final goods and services offered for sale at different price levels.

D) intermediate and final goods and service offered for sale at different price levels.



2) The aggregate supply curve shows the relationship between

A) the level of inputs and aggregate output.

B) the price level and the level of inputs.

C) the wage rate and the level of employment.

D) the price level and the level of aggregate output supplied.

Answer: DQues Status: Previous Edition

3) The long-run rate of unemployment to which an economy always gravitates is the

A) normal rate of unemployment.

B) natural rate of unemployment.

C) neutral rate of unemployment.

D) inflationary rate of unemployment.


4) The long-run aggregate supply curve is

A) a vertical line through the non-inflationary rate of output.

B) a vertical line through the current level of output.

C) a vertical line through the natural rate level of output.

D) a horizontal line through the current level of output.

Answer: CQues Status: Previous Edition

5) The long-run aggregate supply curve is a vertical line passing through

A) the natural rate of output.

B) the natural-rate price level.

C) the actual rate of unemployment.

D) the expected rate of inflation.



6) The short-run aggregate supply curve is upward sloping because in the short run, costs ofmany factors that go into producing goods and services are ________, meaning that the pricefor a unit of output will ________ relative to input prices and the profit per unit will rise.

A) fixed; rise

B) fixed; fall

C) flexible; rise

D) flexible; fall


7) The positively sloped short-run aggregate supply curve reflects the assumption that factorprices are

A) more flexible than output prices.

B) less flexible than output prices.

C) fixed in the long run.

D) perfectly flexible in both the short run and the long run.


8) Everything else held constant, an increase in the cost of production ________ aggregate________.



C) increases; supply

D) decreases; supply


9) Everything else held constant, a decrease in the cost of production ________ aggregate________.



C) increases; supply

D) decreases; supply



10) Everything else held constant, when output is ________ the natural rate level, wages will beginto ________, increasing short-run aggregate supply.

A) above; fall

B) above; rise

C) below; fall

D) below; rise


11) Everything else held constant, when output is ________ the natural rate level, wages will beginto ________, decreasing short-run aggregate supply.

A) above; fall

B) above; rise

C) below; fall

D) below; rise


12) Everything else held constant, when actual output exceeds the natural rate of output ________aggregate supply ________.

A) short-run; decreases

B) short-run; increases

C) long-run; increases

D) long-run; decreases


13) If workers demand and receive higher real wages (a successful wage push), the cost ofproduction ________ and the short-run aggregate supply curve shifts ________.

A) rises; leftward

B) rises; rightward

C) falls; leftward

D) falls; rightward



14) Everything else held constant, if workers expect an increase in the price level, ________aggregate supply ________.

A) long-run; increases

B) long-run; decreases

C) short-run; decreases

D) short-run; increases


15) Everything else held constant, a change in workersʹ expectations about the aggregate pricelevel will cause ________ to change.

A) aggregate demand

B) short-run aggregate supply

C) the production function

D) long-run aggregate supply


16) A decrease in the availability of raw materials that increases the price level is called a ________shock

A) negative demand

B) positive demand

C) negative supply

D) positive supply


17) A negative supply shock causes ________ to ________.

A) aggregate demand; increase

B) aggregate demand; decrease

C) short-run aggregate supply; decrease

D) short-run aggregate supply; increase



18) A positive supply shock causes ________ to ________.

A) aggregate demand; increase

B) aggregate demand; decrease

C) short-run aggregate supply; decrease

D) short-run aggregate supply; increase


19) Which of the following increases aggregate supply in the short-run, everything else heldconstant?

A) An increase in the price of crude oil.

B) A successful wage push by workers.

C) Expectations of a higher aggregate price level.

D) A technological improvement that increases worker productivity.


22.3 Equilibrium in Aggregate Supply and Demand Analysis

1) The fact that an economy always returns to the natural rate level of output is known as

A) the excess demand hypothesis.

B) the price-adjustment mechanism.

C) the self-correcting mechanism.

D) the natural rate of unemployment.


2) Assuming the economy is starting at the natural rate of output and everything else heldconstant, the effect of ________ in aggregate ________ is a rise in both the price level andoutput in the short-run, but in the long-run the only effect is a rise in the price level.

A) a decrease; supply

B) a decrease; demand

C) an increase; supply

D) an increase; demand



3) The aggregate demand-aggregate supply framework indicates that the long-run effect of a_________ in the money supply is an increase in _________, everything else held constant.

A) fall; aggregate output

B) fall; the price level

C) rise; aggregate output

D) rise; the price level


4) Suppose the economy is producing at the natural rate of output. Everything else heldconstant, the development of a new, more productive technology will cause ________ in theunemployment rate and ________ in the aggregate price level in the short run.

A) an increase; an increase

B) a decrease; a decrease

C) a decrease; an increase

D) no change; no change


5) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rateof output and everything else held constant, the development of a new, more productivetechnology will cause ________ in the unemployment rate and ________ the aggregate pricelevel in the long run.





Answer: DQues Status: New

6) Suppose the economy is producing at the natural rate of output. An increase in consumer andbusiness confidence will cause ________ in real GDP and ________ in the aggregate price levelin the short run, everything else held constant.



C) no change; an increase

D) no change; a decrease



7) Suppose the economy is producing at the natural rate of output. An increase in consumer andbusiness confidence will cause ________ in real GDP and ________ in the aggregate price levelin the long run, everything else held constant.






8) Suppose the economy is producing at the natural rate of output. A decrease in consumer andbusiness confidence will cause ________ in real GDP and ________ in the aggregate price levelin the short run, everything else held constant.






9) Suppose the economy is producing at the natural rate of output. A decrease in consumer andbusiness confidence will cause ________ in real GDP and ________ in the aggregate price levelin the long run, everything else held constant.






10) Suppose the economy is producing at the natural rate of output. An open market purchase ofbonds by the Fed will cause ________ in real GDP and ________ in the aggregate price level inthe short run, everything else held constant.







11) Suppose the economy is producing at the natural rate of output. An open market purchase ofbonds by the Fed will cause ________ in real GDP and ________ in the aggregate price level inthe long run, everything else held constant.






12) Suppose the economy is producing at the natural rate of output. An open market sale ofbonds by the Fed will cause ________ in real GDP and ________ in the aggregate price level inthe short run, everything else held constant.






13) Suppose the economy is producing at the natural rate of output. An open market sale ofbonds by the Fed will cause ________ in real GDP and ________ in the aggregate price level inthe long run, everything else held constant.






14) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of theU.S. dollar will cause ________ in real GDP and ________ in the aggregate price level in theshort run, everything else held constant. (Assume the depreciation causes no effects in thesupply side of the economy.)







15) Suppose the U.S. economy is producing at the natural rate of output. A depreciation of theU.S. dollar will cause ________ in real GDP and ________ in the aggregate price level in thelong run, everything else held constant. (Assume the depreciation causes no effects in thesupply side of the economy.)






16) Suppose the U.S. economy is producing at the natural rate of output. An appreciation of theU.S. dollar will cause ________ in real GDP and ________ in the aggregate price level in theshort run, everything else held constant. (Assume the appreciation causes no effects in thesupply side of the economy.)






17) Suppose the U.S. economy is producing at the natural rate of output. An appreciation of theU.S. dollar will cause ________ in real GDP and ________ in the aggregate price level in thelong run, everything else held constant. (Assume the appreciation causes no effects in thesupply side of the economy.)







18) Suppose the economy is producing below the natural rate of output and the government issuffering from large budget deficits. To deal with the deficit problem, suppose thegovernment takes a policy action to reduce the size of the deficits. This policy action willcause ________ in the unemployment rate and ________ in the aggregate price level in theshort run, everything else held constant.




D) an increase; a decrease


19) Suppose the economy is producing at the natural rate of output and the government passeslegislation that severely restricts a companyʹs ability to reduce production costs viaoutsourcing. Everything else held constant, this policy action will cause ________ in theunemployment rate and ________ in the aggregate price level in the short run.






20) Suppose the U.S. economy is operating at potential output. A negative supply shock that isaccommodated by an open market purchase by the Federal Reserve will cause ________ in realGDP and ________ in the aggregate price level in the long run, everything else held constant.

A) no change; an increase

B) no change; a decrease

C) an increase; an increase

D) a decrease; a decrease


21) A theory of aggregate economic fluctuations called real business cycle theory holds that

A) changes in the real money supply are the only demand shocks that affect the natural rateof output.

B) aggregate demand shocks do affect the natural rate of output.

C) aggregate supply shocks do affect the natural rate of output.

D) changes in net exports are the only demand shocks that affect the natural rate of output.



22) This theory views shocks to tastes (workersʹ willingness to work, for example) and technology(productivity) as the major driving forces behind short-run fluctuations in the business cyclebecause these shocks lead to substantial short-run fluctuations in the natural rate of output.

A) The natural rate hypothesis

B) Hysteresis

C) Real business cycle theory

D) The Phillips curve model


23) Because shifts in aggregate demand are not viewed as being particularly important toaggregate output fluctuations, they do not see much need for activist policy to eliminate highunemployment. ʺTheyʺ refers to proponents of

A) the natural rate hypothesis.

B) monetarism.

C) the Phillips curve model.

D) real business cycle theory.

Answer: DQues Status: Previous Edition

24) A group of economists believe that the natural rate of output is affected by aggregate ________shocks. They contend that the natural rate level of unemployment and output are subject to________, a departure from full employment levels as a result of past high unemployment.

A) supply; hysterisis

B) supply; systerisis

C) demand; hysterisis

D) demand; systerisis


25) A reduction of aggregate demand may raise the natural rate of unemployment above the fullemployment level, meaning that the self-correcting mechanism will only be able to return theeconomy to the natural rate level of output and unemploymentnot to the full employmentlevels. Such a view is consistent with

A) monetarism.

B) hysterisis.

C) Keynesianism.

D) real business cycle theory.

Answer: BQues Status: Previous Edition


26) According to aggregate demand and supply analysis, Americaʹs involvement in the VietnamWar had the effect of

A) increasing aggregate output, lowering unemployment, and raising the price level.

B) decreasing aggregate output, lowering unemployment, and lowering the price level.

C) increasing aggregate output, raising unemployment, and raising the price level.

D) decreasing aggregate output, raising unemployment, and lowering the price level.


27) According to aggregate demand and supply analysis, the negative supply shocks of 1973 -1975and 1978-1980 had the effect of

A) increasing aggregate output, lowering unemployment, and raising the price level.

B) decreasing aggregate output, raising unemployment, and raising the price level.

C) increasing aggregate output, raising unemployment, and raising the price level.

D) decreasing aggregate output, raising unemployment, and lowering the price level.


28) According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999had the effect of

A) increasing aggregate output, lowering unemployment, and raising inflation.

B) decreasing aggregate output, raising unemployment, and raising inflation.

C) increasing aggregate output, lowering unemployment, and lowering inflation.

D) decreasing aggregate output, raising unemployment, and lowering inflation.


29) According to aggregate demand and supply analysis, the negative demand shock of 2000 -2004had the effect of

A) increasing aggregate output, lowering unemployment, and raising inflation.

B) decreasing aggregate output, raising unemployment, and raising inflation.

C) increasing aggregate output, lowering unemployment, and lowering inflation.

D) decreasing aggregate output, raising unemployment, and lowering inflation.



30) Using the aggregate demand-aggregate supply model, explain and demonstrate graphicallythe short-run and log-run effects of an increase in the money supply.

Answer: See figure below.

An increase in the money supply increases aggregate demand, from AD1 to AD2. Theeconomy moves from point 1 to point 1ʹ. In the short run both the price level and realoutput increase. In the long run, wages adjust, decreasing short-run aggregate supply,to AS2, raising prices further and reducing real output until the economy returns to thenatural level of output. The long-run result is to only increase the price level. The pathis from 1 to 1ʹ to 2.


31) Explain and demonstrate graphically the effects of a negative supply shock in both theshort-run and long-run.

Answer: See figure below.

The supply shock decreases short-run aggregate supply from AS1 to AS2, reducingreal output and raising the price level, or from points 1 to 2 in the graph. In the longrun, the supply curve eventually adjusts back to the original position as wages fall. Theeconomy adjusts from 2 back to 1.



22.4 Web Appendix: Aggregate Supply and the Phillips Curve

1) The Phillips curve indicates that when the labor market is ________, production costs will________ and aggregate supply increases.

A) easy; rise

B) easy; fall

C) tight; fall

D) tight; rise


2) The Phillips curve indicates that when the labor market is ________, production costs will________ and aggregate supply decreases.

A) easy; rise

B) easy; fall

C) tight; fall

D) tight; rise


3) The expectations-augmented Phillips curve implies that as expected inflation increases,nominal wages ________ to prevent real wages from ________.

A) fall; rising

B) fall; falling

C) rise; falling

D) rise; rising


4) The Lucas supply function indicates that deviations of unemployment from the natural ratelevel respond to

A) any increase in aggregate demand.

B) unanticipated inflation.

C) a supply shock.

D) expected changes in inflation.


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Economics of Money, Banking, and Financial Markets, 8ecourse.sdu.edu.cn/G2S/eWebEditor/uploadfile/20120330220300... · Aggregate Demand and Supply Analysis ... raw materials offered