1.

2.
3.
4.

GROUP ASSIGNMENT
(Week 10 : Aggregate Demand & Aggregate Supply – Part 1)

Multiple Choices: Choose the correct answer!

1. Which of the following explains why production rises in most years?
a. increases in the labor force c. advances in technological knowledge b. increases in the
capital stock d. All of the above are correct.

2. A short period of falling incomes and rising unemployment is called a

a. depression. c. expansion.
b. recession. d. business cycle.

3. During a recession the economy experiences

a. rising employment and income. c. rising income and falling employment. b. rising
employment and falling income. d. falling employment and income.

4. During recessions,
a. sales and profits fall. c. sales rise, profits fall.
b. sales and profits rise. d. profits fall, sales rise.
5. The classical dichotomy refers to the separation of
a. variables that move with the business cycle and variables that do not.
b. changes in money and changes in government expenditures.
c. decisions made by the public and decisions made by the government.
d. real and nominal variables.

6. The model of short-run economic fluctuations focuses on the price level and
a. real GDP. c. the neutrality of money.
b. economic growth. d. None of the above is correct.

7. The model of aggregate demand and aggregate supply explains the relationship between
a. the price and quantity of a particular good. c. wages and employment.
b. unemployment and output. d. real GDP and the price level.

8. The variables on the vertical and horizontal axes of the aggregate demand and supply graph are
a. the price level, real output. c. employment, the inflation rate. b. real output, employment. d. the
value of money, the price level.

9. The aggregate demand curve

a. has a slope that is explained in the same way as the slope of the demand curve for a
particular product.
b. is vertical in the long run.
c. shows an inverse relation between the price level and the quantity of all goods and
services demanded.
 d. All of the above are correct.

10. Which of the following is included in the aggregate demand for goods and
services? a. consumption demand c. net exports
b. investment demand d. All of the above are correct.

1
11. Which of the following is not included in aggregate demand?
a. purchases of stock and bonds
b. purchases of services such as visits to the doctor
c. purchases of capital goods such as equipment in a factory
d. purchases by foreigners of consumer goods produced in the United States

12. The effect of an increase in the price level on aggregate demand is represented by a
a. shift to the right of the aggregate demand curve.
b. shift to the left of the aggregate demand curve.
c. movement to the left along a given aggregate demand curve.
d. movement to the right along a given aggregate demand curve.

13. Other things the same, an increase in the price level makes consumers
feel
a. less wealthy, so the quantity of goods and services demanded falls.
b. less wealthy, so the quantity of goods and services demanded rises.
c. more wealthy, so the quantity of goods and services demanded rises.
d. more wealthy, so the quantity of goods and services demanded falls.

14. Other things the same, a decrease in the price level makes the amount of money people hold
worth a. more, so they are willing to spend more. c. less, so they are willing to spend more. b. more,
so they are willing to spend less. d. less, so they are willing to spend less.

15. Other things the same, as the price level rises, exchange rates
a. and interest rates rise. c. fall and interest rates rise. b. and interest rates
fall. d. rise and interest rates fall.

16. An increase in the price level causes the interest rate to

a. increase, the home currency to depreciate, and net exports to increase.
b. increase, the home currency to appreciate, and net exports to decrease.
c. decrease, the home currency to depreciate, and net exports to increase.
d. decrease, the home currency to appreciate, and net exports to decrease.

17. Suppose a stock market boom makes people feel wealthier. The increase in wealth would cause
people to desire
a. increased consumption, which shifts the aggregate demand curve to the
right. b. increased consumption, which shifts the aggregate demand curve to the
left. c. decreased consumption, which shifts the aggregate demand curve to the
right. d. decreased consumption, which shifts the aggregate demand curve to the
 left.

18. Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce
people to
a. decrease consumption, which shifts aggregate supply to the left.
b. decrease consumption, which shifts aggregate demand to the left.
c. increase consumption, which shifts aggregate supply to the right.
d. increase consumption, which shifts aggregate demand to the right.

2
19. Imagine that businesses in general believe that the economy is likely to head into recession and so
they reduce capital purchases. Their reaction would initially shift
a. aggregate demand to the right. c. aggregate supply to the right. b. aggregate
demand to the left. d. aggregate supply to the left.

20. When taxes increase, consumption

a. decreases as shown by a movement to the left along a given aggregate demand curve.
b. decreases as shown by shifting aggregate demand to the left.
c. increases as shown by shifting aggregate supply the left.
d. None of the above is correct.

21. When the money supply increases

a. interest rates fall and so aggregate demand shifts to the right.
b. interest rates fall and so aggregate demand shifts to the left.
c. interest rates rise and so aggregate demand shifts to the right.
d. interest rates rise and so aggregate demand shifts to the left.

22. Which of the following shifts aggregate demand to the left?

a. An increase in the price level.
b. A decrease in the money supply.
c. An increase in net exports.
d. The government passes a new investment tax credit.

23. Which of the following shifts aggregate demand to the right?

a. The government reduces purchases of new weapon systems.
b. The country’s monetary authority buys bonds in the open market.
c. The price level falls.
d. Net exports fall.

24. The initial impact of an increase in an investment tax credit is to shift

a. aggregate demand to the right. c. aggregate supply to the right. b. aggregate
demand to the left. d. aggregate supply to the left.
25. Other things the same, an increase in the amount of capital that firms wish to purchase would
initially shift
a. aggregate demand to the right. c. aggregate supply to the right. b. aggregate
demand to the left. d. aggregate supply to the left.
26. Imagine that businesses in general believe that the economy is likely to head into recession and so
they reduce capital purchases. Their reaction would initially shift
a. aggregate demand to the right. c. aggregate supply to the right. b. aggregate
demand to the left. d. aggregate supply to the left.
27. When taxes increase, consumption
a. decreases as shown by a movement to the left along a given aggregate demand curve.
b. decreases as shown by shifting aggregate demand to the left.
c. increases as shown by shifting aggregate supply the left.
d. None of the above is correct.
28. Aggregate demand shifts to the left when the government
a. decreases taxes. c. creates a new investment tax credit. b. cuts military
expenditures. d. None of the above is correct.

3
Political Instability Abroad
29. Suppose that political instability in other countries makes people fear for the value of their assets in
these countries so that they desire to purchase more domestic assets.
29. Refer to Political Instability Abroad. How would the change in the exchange rate affect Japan’s
net exports and Japan’s aggregate demand?
a. Net exports would rise and so Japan’s aggregate demand would fall.
b. Net exports would rise and so Japan’s aggregate demand would rise.
c. Net exports would fall and so Japan’s aggregate demand would fall.
d. Net exports would fall and so Japan’s aggregate demand would rise.
30. Refer to Political Instability Abroad. What would happen to the Japanese yen? a. It would
appreciate in foreign exchange markets making Japanese goods more expensive as
compared to foreign goods.
b. It would appreciate in foreign exchange markets making Japanese goods less expensive as
compared to foreign goods.
c. It would depreciate in foreign exchange markets making Japanese goods more expensive
as compared to foreign goods.
d. It would depreciate in foreign exchange markets making Japanese goods less expensive as
compared to foreign goods.

31. The aggregate supply curve is upward sloping rather than vertical in
a. the short and long run. c. the long run but not the short run. b. neither the short nor
the long run. d. the short run but not the long run.

32. The aggregate supply curve is upward sloping in

a. the short and long run. c. the long run but not the short run. b. neither the short nor
the long run. d. the short run but not the long run.

33. Which of the following is not a determinant of the long-run level of real GDP?
a. the price level c. available natural resources b. the supply of labor d. available
technology

34. The long-run aggregate supply curve shifts to the right if

a. immigration from abroad increases. c. technology advances.
 b. the capital stock increases. d. All of the above are correct.

35. The long-run aggregate supply curve shifts to the right if

a. technology improves. c. the money supply increases. b. the price level decreases.
d. All of the above are correct.

36. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises
more than expected,
a. production is more profitable and employment rises.
b. production is more profitable and employment falls.
c. production is less profitable and employment rises.
d. production is less profitable and employment falls.

37. Other things the same, if workers and firms expected prices to rise by 2 percent but instead if they
rise by 3 percent, then
a. employment and production rise. c. employment falls and production rises. b.
employment rises and production falls. d. employment and production fall.

38. The sticky-price theory of the short-run aggregate supply curve says that if the price level rises by
5% and if people were expecting it to rise by 2%, then firms have
a. Highe than desired prices, which increases their sales.
b. higher than desired prices, which depresses their sales.
c. lower than desired prices, which increases their sales.
d. lower than desired prices, which depresses their sales.

39. Other things the same, if the price level is lower than expected, then some firms believe that the
relative price of what they produce has
a. decreased, so they increase production. c. increased, so they increase production. b.
decreased, so they decrease production. d. increased, so they decrease production.

40. If the actual price level is 165, but people had been expecting it to be 160, then
a. the quantity of output supplied rises, but only in the short run.
b. the quantity of output supplied rises in the short run and the long run.
c. the quantity of output supplied falls but only in the short run.
d. the quantity of output supplied falls in the short run and the long run.

41.

*******
5