PRACTICE TEST 23 (Bassam AbuAlFoul)

Chapter 23 Aggregate Demand and Aggregate Supply Part I. Multiple Choice: Choose the best answer for the following questions.
1. If the wage rate increases: a. aggregate demand shifts left, the price level falls, and real output falls. b. aggregate demand shifts right, the price level rises, and real output rises. c. aggregate supply shifts right, the price level falls, and real output rises. d. aggregate supply shifts left, the price level rises, and real output falls. 2. If the price level decreases, then as a result: a. aggregate demand shifts to the left. b. aggregate demand shifts to the right. c. there is a movement up a given aggregate demand curve. d. there is a movement down a given aggregate demand curve. 3. One explanation for the positive slope of the short-run aggregate supply curve is the fact that: a. as prices increase, interest rates increase, making investment more profitable. b. as prices increase, wages do not adjust immediately, making employment and production more profitable. c. as prices increase, net exports increase, so production and employment become more profitable. d. as economic conditions change, all prices adjust immediately, making production and employment more profitable. 4. Other things constant, a reduction in resource prices will: a. increase the cost of producing goods and services leading to a higher price level. b. increase costs and lower profit margins leading to a decrease in short-run aggregate supply. c. cause the natural rate of unemployment to rise. d. decrease costs and increase profit margins leading to an increase in short-run aggregate supply. 5. Suppose the economy is producing at its natural rate of output. Consumers and businesses become more pessimistic about the economic outlook. As a result, in the short run: a. output will fall below its natural rate. b. output will rise above its natural rate. c. output will remain at its natural rate. d. output will first rise above its natural rate and then fall back to its natural rate. 6. Suppose there is a broad increase in the price of stocks which causes an increase in the real wealth of individuals. Consumption spending rises in response to the increase in wealth. This will cause: a. the aggregate demand curve to shift to the left. b. the rate of unemployment to decrease. c. the general price level to fall. d. the aggregate supply curve to shift to the right. 7. The aggregate supply curve shows: a. the relationship between the price level and the various quantities producers will supply. b. the relationship between the price level and the aggregate quantity of goods and services purchased by consumers, investors, governments, and foreigners (net exports). c. the relationship between the price level and the natural rate of unemployment. d. the relationship between the real wage rate and the quantity of labor supplied by households.

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8. Suppose the economy is in a short-run equilibrium producing output below its natural rate. Over the long run, output will return to its natural rate when: a. long-run aggregate supply increases. b. long-run aggregate supply decreases. c. short-run aggregate supply increases. d. short-run aggregate supply increases. 9. Economists use the phrase "business cycle" when referring to: a. the pattern of fluctuations in the general level of prices as measured by the consumer price index. b. the pattern of fluctuations in interest rates as measured by the prime bank-loan rate. c. the pattern of fluctuations in economic activity. d. the pattern of fluctuations in federal budget surpluses or deficits. 10. Which of the following is correct with regard to the short run aggregate supply curve? a. An increase in the price level will increase aggregate quantity supplied. b. An increase in the price level will shift the short-run aggregate supply curve to the right. c. An increase in the price level will have no effect on aggregate quantity supplied. d. The short-run aggregate supply curve will be positively sloped only if the price level is consistent with people's expectations about the price level. 11. Which of the following occur during a recession? a. increases in unemployment b. decreases in real output c. decreases in real income d. all of the above 12. In a recessionary gap, Real GDP is ________ Natural Real GDP, and the unemployment rate is ________ the natural unemployment rate. a. above, above b. above, below c. below, above d. below, below 13. If AD and SRAS intersect to the right of LRAS, the economy is in ________ gap with output ________ the Natural Real GDP. a. a recessionary, below b. a recessionary, above c. an inflationary, below d. an inflationary, above 14. The economy is in long-run equilibrium whenever AD and SRAS a. intersect to the right of Natural Real GDP. b. intersect to the left of Natural Real GDP. c. intersect at Natural Real GDP. d. fail to intersect. 15. When the economy is in long-run equilibrium, the unemployment rate is a. zero. b. the natural unemployment rate. c. the frictional unemployment rate. d. the structural unemployment rate.

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16. In Figure 8.1, at what point or points is the economy in an inflationary gap? a. P b. P, H, and C c. U, B, and H d. B 17. In Figure 8.1, at what point or points is the economy in long-run equilibrium? a. P, H, and B b. U, H, and C c. B d. at none of the points 18. In Figure 8.1, at what point or points does the unemployment rate exceed the sum of the frictional and structural unemployment rates? a. B b. B, U, H, and C c. P and C d. P 19. In a recessionary gap, a ________ in the labor market exists, which forces wages____. a. surplus, up b. surplus, down c. shortage, up d. shortage, down 20. At a given price level, an increase in government purchases causes _________ the aggregate demand curve. a. movement up along b. movement down along c. a rightward shift of d. a leftward shift of 21. Which of the following is a tool of fiscal policy? a. Government spending. b. Taxes. c. Discount rate. d. Parts a and b are correct. 22. On a diagram of the aggregate demand curve, what variable appears on the vertical axis? a. Real GDP b. the price level c. the interest rate d. aggregate quantity demanded 23. A rise in aggregate demand is drawn as a a. movement up along an aggregate demand curve. b. movement down along an aggregate demand curve. c. rightward shift of an aggregate demand curve. d. leftward shift of an aggregate demand curve. 24. An increase in wealth causes a a. movement up along an aggregate demand curve. b. movement down along an aggregate demand curve. c. rightward shift of an aggregate demand curve. d. leftward shift of an aggregate demand curve.

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25. Higher income tax rates cause a a. movement up along an aggregate demand curve. b. movement down along an aggregate demand curve. c. rightward shift of an aggregate demand curve. d. leftward shift of an aggregate demand curve. 26. Suppose the real exchange rate of 1.6 German marks to the dollar falls to 1.5 marks to the dollar. The dollar has _________, which shifts the U.S. aggregate demand curve to the _______ a. appreciated, right b. appreciated, left c. depreciated, right d. depreciated, left 27. A fall in foreign real national income tends to ________ U.S. exports, shifting the U.S. aggregate demand curve to the ____________. a. raise, right b. raise, left c. lower, right d. lower, left 28. A fall in the wage rate shifts the a. aggregate demand curve to the right. c. short-run aggregate supply curve to the right. 29. A decrease in labor productivity shifts the a. aggregate demand curve to the right. c. short-run aggregate supply curve to the right. b. aggregate demand curve to the left. d. short-run aggregate supply curve to the left. b. aggregate demand curve to the left. d. short-run aggregate supply curve to the left.

30. In 1985 and 1986, disagreement among the member nations of OPEC increased the flow of their crude oil to the United States. This shifted the U.S. a. short-run aggregate supply curve to the right. b. aggregate demand curve to the left. c. aggregate demand curve to the right. d. short-run aggregate supply curve to the left. 31. On an AD/SRAS diagram consider a price level at which the horizontal distance to the aggregate demand curve is greater than the horizontal distance to the short-run aggregate supply curve. There is a ________________ of goods, and in moving to short-run equilibrium, the price level will __________. a. surplus, rise b. surplus, fall c. shortage, rise d. shortage, fall 32. On an AD/SRAS diagram, an increase in aggregate demand and a decrease in short-run aggregate supply ___________ the equilibrium price level and ________________ the equilibrium Real GDP. a. raise, lower b. raise, may raise or lower c. may raise or lower, lower d. may raise or lower, may raise or lower 33. When Real GDP rises, the unemployment rate a. must also rise, as a logical necessity. c. must fall, as a logical necessity. b. will rise, ceteris paribus. d. will fall, ceteris paribus.

34. Start with an initial AD/SRAS equilibrium (P1, Q1). Then short-run aggregate supply decreases. At P1 there is a _______of goods, which is eliminated in part by how a ________quantity supplied. a. surplus, falling price level reduces b. surplus, falling price level increases c. shortage, falling price level reduces d. shortage, rising price level increases 35. Depreciation of the dollar shifts the AD/SRAS short-run equilibrium point such that the price level __________________ and Real GDP_____________. a. rises, rises b. rises, falls c. falls, rises d. falls, falls 36. An adverse supply shock shifts the AD/SRAS short-run equilibrium point such that the price level ______________ and Real GDP_______ a. rises, rises b. rises, falls c. falls, rises d. falls, falls

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Part II: Internet:

You are also encouraged to visit the web site for your textbook which is rich in learning resources and materials related to each chapter. In addition, you can test your knowledge with the online quizzes. The internet address was provided in the course syllabus. Here it is again: http://highered.mcgrawhill.com/sites/007712961x/student_view0/index.html

ANSWERS (For Part I):

1. d. aggregate supply shifts left, the price level rises, and real output falls. 2. d. there is a movement down a given aggregate demand curve. 3. b. as prices increase, wages do not adjust immediately, making employment and production more profitable. 4. d. decrease costs and increase profit margins leading to an increase in short-run aggregate supply. 5. a. output will fall below its natural rate. 6. b. the rate of unemployment to decrease. 7. a. the relationship between the price level and the various quantities producers will supply. 8. c. short-run aggregate supply increases. 9. c. the pattern of fluctuations in economic activity. 10 a. An increase in the price level will increase aggregate quantity supplied. 11. d. all of the above 12. c. below, above. (This is the definition of a recessionary gap). 13. d. an inflationary, above 14. c. intersect at Natural Real GDP. (In long-run equilibrium, actual Real GDPwhere AD and SRAS intersect equals Natural Real GDP). 15. b. the natural unemployment rate. 16. d At B, output is above the Natural Real GDP, QN. 17. b Real GDP, where AD and SRAS intersect, equals Natural Real GDP at these points. 18. d The unemployment rate exceeds the natural unemployment rate when Real GDP is below Natural Real GDP, at point P. 19. b In a recessionary gap, high unemployment denotes a labor surplus that leads to falling wages. 20 c. a rightward shift of 21 d. Parts a and b are correct. 22. b See any diagram in Chapter 7 of the textbook with the aggregate demand curve. 23. c The wording indicates a shift of the entire aggregate demand curve. 24. c Consumption expenditure rises at each current price level which causes a rightward shift in aggregate demand curve. 25. d Consumption expenditure falls at each current price level. 26. c U.S. goods become less expensive to the Germans, increasing export expenditures at each U.S. price level. 27. d Foreigners reduce their purchases of U.S. goods at each U.S. price level. 28. c With lower costs, firms are willing to produce more output at each price level. 29. d Firms are able to produce less output at each price level. 30. a This beneficial supply shock, lowering the price of a vital input, made U.S. firms willing to produce more output at each price level. 31. c We are below the short-run equilibrium intersection point, but market forces will drive us up to it. 32. b A little AD/SRAS diagramming should show this to you. 33. d Higher production requires more labor, and this lowers the unemployment rate in the absence of offsetting factors.. 34. d A rising price level encourages production, which helps eliminate the shortage. 35. a This is the result of a rightward shift of the AD curve, due to rising U.S. net exports, set against the SRAS curve. 36. b This is the result of a leftward shift of the SRAS curve, set against the AD curve.

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