Aggregate Demand and Supply Concepts
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Questions and Answers

What happens to the quantity of real GDP demanded when the price level increases?

  • It increases
  • It decreases (correct)
  • It remains unchanged
  • It fluctuates wildly

    • The aggregate demand curve and a specific market demand curve are the same concept.

    False

    What is the real balances effect?

    It is the impact on total spending caused by the inverse relationship between the price level and the real value of financial assets.

    The aggregate demand curve slopes _____ due to the real balances effect, interest-rate effect, and net exports effect.

    <p>downward</p> Signup and view all the answers

    Match the following effects with their descriptions:

    <p>Real Balances Effect = Increases in real wealth lead to higher spending Interest Rate Effect = Higher price levels lead to higher interest rates Net Exports Effect = Increased domestic prices reduce export attractiveness Aggregate Demand Curve = Shows the total demand in an economy at different price levels</p> Signup and view all the answers

    Which effect describes the impact of price levels on net exports?

    <p>Net Exports Effect</p> Signup and view all the answers

    An increase in the overall price level leads to a rightward shift of the Aggregate Demand curve.

    <p>False</p> Signup and view all the answers

    How does a decrease in the price level affect the real value of money?

    <p>It increases the real value of money.</p> Signup and view all the answers

    What do classical economists believe about prices and wages?

    <p>Prices and wages are completely flexible.</p> Signup and view all the answers

    The classical view states that changes in aggregate demand cannot affect the price level.

    <p>False</p> Signup and view all the answers

    What is the Keynesian range of the aggregate supply curve?

    <p>The horizontal segment representing an economy in a severe recession.</p> Signup and view all the answers

    The ________ segment of the aggregate supply curve represents full-employment output.

    <p>classical</p> Signup and view all the answers

    Match the following ranges of the aggregate supply curve with their characteristics:

    <p>Keynesian range = Horizontal segment indicating severe recession Intermediate range = Rising segment approaching full-employment output Classical range = Vertical segment at full-employment output</p> Signup and view all the answers

    Keynesians agree with classical economists that prices and wages adjust swiftly during a recession.

    <p>False</p> Signup and view all the answers

    Where does macroeconomic equilibrium occur?

    <p>Where the aggregate demand curve intersects the aggregate supply curve.</p> Signup and view all the answers

    What do we conclude about the effect of an increase in aggregate demand in the Keynesian range?

    <p>It results in higher output without affecting the price level initially.</p> Signup and view all the answers

    What effect does a rightward shift in the aggregate demand curve have on the economy?

    <p>Increases real GDP and employment</p> Signup and view all the answers

    A leftward shift in the aggregate demand curve can lead to an upswing in the economy.

    <p>False</p> Signup and view all the answers

    What is the term used to describe inflation caused by an increase in aggregate demand?

    <p>demand-pull inflation</p> Signup and view all the answers

    A significant increase in government spending will cause a __________ shift of the aggregate demand curve.

    <p>rightward</p> Signup and view all the answers

    Match the following terms with their definitions:

    <p>Demand-Pull Inflation = Inflation caused by an increase in aggregate demand Cost-Push Inflation = Inflation caused by a decrease in aggregate supply Recession = A period of economic decline Upswing = A period of economic recovery</p> Signup and view all the answers

    Which of the following can cause a leftward shift in the aggregate supply curve?

    <p>Increase in production costs</p> Signup and view all the answers

    The business cycle is solely influenced by changes in the aggregate supply curve.

    <p>False</p> Signup and view all the answers

    Explain one potential outcome of a leftward shift in the aggregate supply curve.

    <p>It can lead to inflation and a decrease in real GDP.</p> Signup and view all the answers

    Which condition would cause a rightward shift of the aggregate supply curve?

    <p>Lower costs of raw materials</p> Signup and view all the answers

    Stagflation is characterized by low unemployment and low inflation.

    <p>False</p> Signup and view all the answers

    What are the two types of inflation?

    <p>Cost-push inflation and demand-pull inflation</p> Signup and view all the answers

    A rightward shift in the aggregate supply curve can result from _________ government regulation.

    <p>reduced</p> Signup and view all the answers

    Match the following conditions with their effect on the aggregate supply curve:

    <p>Larger-than-expected wage increases = Leftward shift Lower taxes = Rightward shift Greater government regulation = Leftward shift Greater entrepreneurship = Rightward shift</p> Signup and view all the answers

    Which of the following is NOT a nonprice-level determinant of aggregate supply?

    <p>Consumer confidence</p> Signup and view all the answers

    Demand-pull inflation occurs due to increased production costs.

    <p>False</p> Signup and view all the answers

    What is cost-push inflation?

    <p>An increase in the general price level resulting from an increase in the cost of production.</p> Signup and view all the answers

    What does the aggregate demand curve (AD) represent?

    <p>The level of real GDP purchased by households, businesses, government, and foreigners</p> Signup and view all the answers

    The horizontal axis in the aggregate demand and supply model measures physical units.

    <p>False</p> Signup and view all the answers

    What factors can cause the aggregate demand curve to shift?

    <p>Changes in consumer spending, investment, government spending, and net exports</p> Signup and view all the answers

    The vertical axis in the aggregate demand and supply model is an index of the overall price level measured by the __________.

    <p>consumer price index (CPI)</p> Signup and view all the answers

    Match the following curves with their characteristics:

    <p>Aggregate Demand Curve = Shows the level of real GDP at different price levels Short-run Aggregate Supply Curve = Reflects production based on current prices and wages Long-run Aggregate Supply Curve = Indicates the economy's maximum sustainable output Market Demand Curve = Relates to quantity demanded for a specific good at various prices</p> Signup and view all the answers

    What is the primary reason for the downward slope of the aggregate demand curve?

    <p>Higher price levels reduce the quantity of GDP demanded</p> Signup and view all the answers

    Demand-pull inflation occurs when aggregate supply increases.

    <p>False</p> Signup and view all the answers

    Name one of the three ranges of the aggregate supply curve.

    <p>Keynesian range, classical range, or intermediate range</p> Signup and view all the answers

    When consumers spend more on goods and services because the purchasing power of their money increases, this is known as the:

    <p>Real balances effect</p> Signup and view all the answers

    An increase in interest rates typically leads to an increase in the quantity of real GDP demanded.

    <p>False</p> Signup and view all the answers

    Name one nonprice-level determinant of aggregate demand.

    <p>Consumption (C), Investment (I), Government spending (G), or Net exports (X – M)</p> Signup and view all the answers

    A decrease in the price level results in a(n) __________ in the quantity of real GDP demanded due to lower purchasing power.

    <p>increase</p> Signup and view all the answers

    Match the following effects to their causal relations:

    <p>Real balances effect = Consumers buy more goods due to increased wealth Interest-rate effect = Businesses borrow more due to lower interest rates Net exports effect = U.S. goods become more attractive to foreign buyers Overall demand shift = Change in expenditures shifts AD curve</p> Signup and view all the answers

    What happens to the aggregate demand curve when there is an increase in government spending?

    <p>It shifts to the right.</p> Signup and view all the answers

    A rise in imports can lead to an increase in aggregate demand.

    <p>False</p> Signup and view all the answers

    What can cause the aggregate demand curve to shift to the left?

    <p>A decrease in any of the components of aggregate expenditures (C, I, G, or (X - M)).</p> Signup and view all the answers

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