Economics Quiz on Aggregate Demand and Supply
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Questions and Answers

What is the primary factor that determines the demand for goods in an economy?

  • Desired spending by households and business firms (correct)
  • Bank interest rates
  • Government regulations on production
  • Changes in consumer habits

How do shifts in aggregate demand typically affect economic output in the short run?

  • They always lead to an increase in prices
  • They create a long-term economic equilibrium
  • They cause fluctuations in output and employment (correct)
  • They have no effect on employment

Which of the following is NOT a method by which policymakers can stabilize the economy?

  • Monetary policy
  • Regulatory policy (correct)
  • Fiscal policy
  • Offsetting shifts in aggregate demand

When desired spending changes, what is the subsequent effect on aggregate demand?

<p>Aggregate demand shifts (C)</p> Signup and view all the answers

What is the usual consequence of shifts in aggregate demand for employment levels?

<p>Employment fluctuates as aggregate demand changes (A)</p> Signup and view all the answers

What is the effect of an increase in the money supply on interest rates?

<p>Interest rates decrease, increasing quantity demanded (C)</p> Signup and view all the answers

How do changes in government purchases directly impact the aggregate demand curve?

<p>They shift the aggregate demand curve to the right (D)</p> Signup and view all the answers

What does the crowding-out effect refer to in the context of fiscal policy?

<p>Decrease in investment spending from rising interest rates (C)</p> Signup and view all the answers

Which statement best describes the impact of the multiplier effect?

<p>It leads to a greater than one-to-one increase in aggregate demand from government spending (D)</p> Signup and view all the answers

What is a potential outcome when the central bank lowers interest rates?

<p>Higher quantity of goods and services produced (B)</p> Signup and view all the answers

In a scenario of increased government spending, what is the likely direct impact on aggregate demand?

<p>Aggregate demand experiences a rightward shift (D)</p> Signup and view all the answers

What primarily determines the quantity of money demanded at a given price level?

<p>The prevailing interest rates (B)</p> Signup and view all the answers

Which of the following accurately describes fiscal policy?

<p>It encompasses the government's decisions on spending and taxation (D)</p> Signup and view all the answers

Which term describes the difficulty of exchanging goods directly without a common medium?

<p>Double coincidence of wants (D)</p> Signup and view all the answers

What is the primary purpose of a central bank in a monetary system?

<p>To oversee the banking system and regulate the money supply (B)</p> Signup and view all the answers

Which of the following best represents an example of fiat money?

<p>A government-issued paper note with no intrinsic value (B)</p> Signup and view all the answers

What does the term 'liquidity' refer to in an economic context?

<p>The ease of converting an asset into the economy's medium of exchange (C)</p> Signup and view all the answers

Which monetary policy tool involves the central bank buying and selling non-monetary assets?

<p>Open market operations (C)</p> Signup and view all the answers

What is meant by 'money stock' in an economic context?

<p>The quantity of money circulating in the economy (D)</p> Signup and view all the answers

Which of the following is NOT a function of money?

<p>Bartering (C)</p> Signup and view all the answers

In which system does currency value fluctuate based on gold reserves?

<p>Gold standard (A)</p> Signup and view all the answers

What is a demand deposit?

<p>Balances in bank accounts accessible on demand (A)</p> Signup and view all the answers

What distinguishes commodity money from fiat money?

<p>Commodity money has intrinsic value; fiat money does not (A)</p> Signup and view all the answers

What does the natural rate of unemployment represent?

<p>The average rate at which unemployment fluctuates over time (B)</p> Signup and view all the answers

According to Friedman and Phelps, what is the relationship between inflation and unemployment in the long run?

<p>Inflation and unemployment are not related (C)</p> Signup and view all the answers

What is the primary implication of the natural rate hypothesis?

<p>Unemployment eventually returns to its natural rate regardless of inflation (B)</p> Signup and view all the answers

What does a deflationary gap represent?

<p>The situation where actual spending is less than the full employment level (C)</p> Signup and view all the answers

What is meant by 'autonomous expenditure'?

<p>Expenditure that is independent of current income levels (A)</p> Signup and view all the answers

At what point does short run equilibrium occur in an economy?

<p>When actual spending equals planned spending on the 45-degree line (C)</p> Signup and view all the answers

What is the primary criticism of classical economic theory as noted in the content?

<p>It fails to provide insights into short-run dynamics (C)</p> Signup and view all the answers

What is the significance of the 45-degree line in economic graphs?

<p>It signifies where consumption equals national income (A)</p> Signup and view all the answers

Which of the following describes the Keynesian outlook on recessions?

<p>They can occur due to inadequate aggregate demand (B)</p> Signup and view all the answers

What occurs when planned and actual outcomes differ greatly?

<p>The equilibrium level of national income might fall below full employment (C)</p> Signup and view all the answers

What is a primary requirement of bartering?

<p>Simultaneous desire for each other's goods (D)</p> Signup and view all the answers

Which of the following best defines fiat money?

<p>Money based on government decree without intrinsic value (A)</p> Signup and view all the answers

Which component of the money stock includes currency and demand deposits?

<p>M1 (C)</p> Signup and view all the answers

What role does a central bank play in the economy?

<p>To oversee the banking system and regulate money supply (B)</p> Signup and view all the answers

How is the gold standard characterized?

<p>Currency can be exchanged for a fixed amount of gold (B)</p> Signup and view all the answers

What does liquidity refer to in terms of money?

<p>The speed at which an asset can be turned into cash (B)</p> Signup and view all the answers

What is one key goal of monetary policy executed by a central bank?

<p>Maintaining macroeconomic stability (B)</p> Signup and view all the answers

Which kind of money has intrinsic value and is often used in its physical form?

<p>Commodity money (D)</p> Signup and view all the answers

What constitutes M3 in the measures of money stock?

<p>M2 plus money market funds and short-term debt securities (D)</p> Signup and view all the answers

Flashcards

Desired Spending

How much households and businesses want to spend on goods.

Bartering

The exchange of one good for another, requiring both parties to have what the other wants at that moment.

Money

A set of assets regularly used to buy goods and services in an economy.

Aggregate Demand

The total demand for all goods and services in an economy.

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Aggregate Demand Shifts

Changes in desired spending by households and businesses lead to shifts in the aggregate demand curve.

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Medium of Exchange

An item used by buyers to pay sellers for goods and services.

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Unit of Account

A yardstick used to measure prices and record debts.

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Short-Run Fluctuations

Short-term fluctuations in the overall production of goods and services, and the number of people employed.

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Store of Value

An asset that allows people to transfer purchasing power from the present to the future.

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Monetary and Fiscal Policy

Government policies designed to stabilize the economy by influencing aggregate demand.

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Liquidity

The ease with which an asset can be converted into the economy's medium of exchange.

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Commodity Money

A form of money with intrinsic value, such as gold or cigarettes.

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Gold Standard

A system where the currency is based on the value of gold and convertible to it on demand.

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Fiat Money

Money used by government decree, with no intrinsic value but accepted as legal tender.

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Money Stock

The quantity of money circulating in an economy, often measured as M1, M2, or M3.

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Aggregate Demand and Output

The level of output (quantity of goods and services produced) is directly influenced by the aggregate demand for those goods and services.

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Price Level and Money Demand

A higher price level means people need more money to buy the same amount of goods and services. This increases the demand for money, which in turn leads to higher interest rates.

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Monetary Policy

A central bank's actions to change the money supply in an economy. It can expand the money supply by buying bonds, causing interest rates to fall and stimulate economic growth.

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Money Supply and Aggregate Demand

An increase in the money supply lowers interest rates, which encourages businesses and individuals to borrow and spend more, ultimately increasing the quantity of goods and services demanded.

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Refinancing Rate (ECB) or Repo Rate (Bank of England)

The rate at which central banks lend money to commercial banks. It influences the overall interest rate environment in an economy.

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Fiscal Policy

Government decisions regarding spending and taxation, which can significantly affect the aggregate demand and overall economic activity.

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Multiplier Effect

The additional increase in aggregate demand that occurs when government spending stimulates income, leading to further increases in consumer spending.

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Crowding-Out Effect

Occurs when government spending increases interest rates, leading to a reduction in private investment spending and potentially dampening the impact of fiscal expansion on aggregate demand.

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Double coincidence of wants

A situation where two individuals have goods or services that each other wants, making an exchange possible.

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Higher Output, Lower Unemployment

The theory that a greater level of output/production (GDP) leads to a lower level of unemployment.

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Long-Run Phillips Curve

The belief that in the long run, there is no relationship between inflation and unemployment, and that the economy will naturally gravitate towards a specific level of unemployment.

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Natural Rate of Unemployment

The normal rate of unemployment around which the unemployment rate fluctuates in the long run. It represents the underlying structural factors influencing unemployment, such as job search, skill mismatch, and labor market frictions.

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Increase in Aggregate Demand (AD) in Long Run

An increase in overall spending in the economy, leading to higher prices without any sustained increase in real output.

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Natural Rate Hypothesis

The hypothesis that, despite changes in inflation, the unemployment rate will eventually return to its natural level.

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Full Employment

A situation where the economy is operating at its maximum sustainable output level without excessive inflationary pressures, meaning all who want to work at the prevailing wage rate can find employment.

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Planned Spending

The intended or planned spending by households and firms on consumption, investment, and saving.

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Actual Spending

The actual spending that occurs in an economy, based on realized decisions of households and firms.

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Deflationary Gap

A situation where planned spending is less than the level of spending needed to achieve full employment, leading to a shortfall in aggregate demand.

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Inflationary Gap

A situation where planned spending exceeds the level of spending needed to achieve full employment, leading to inflationary pressures.

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Study Notes

Economics Study Notes

  • Economics studies interactions between households and firms.
  • It studies how society manages its scarce resources.
  • Economic agents are individuals, firms or organisations.
  • Economy includes all production and exchange activities.
  • Economic activity measures purchasing and selling over time
  • Economic systems organize and allocate resources to meet citizen needs.
  • Economic growth is the increase in the amount of goods and services over time.
  • Capitalist economic systems rely on private ownership and profit-driven production.
  • Market economies rely on households and firms but without government intervention
  • Planned economic systems are organized by central planners (governments).
  • Market failure occurs when scarce resources are not allocated efficiently.
  • Externality is a cost or benefit of an agent's decision on a third party, such as pollution.
  • Market power is the ability of an agent to substantially influence market price.
  • Microeconomics studies individual decision-making and interactions.
  • Macroeconomics studies the economy as a whole, like GDP.
  • GDP is the market value of all goods & services produced in a country over a period.
  • Standard of living refers to the amount of goods that can be purchased by the population of a country.
  • Productivity is the amount of goods/services produced from each hour of work.
  • Inflation is a rise in overall prices.
  • Market is a group of buyers and sellers for a particular good or service.
  • Competitive Market has many buyers and sellers, none individually impacting price.
  • Price takers must accept the current market price.
  • Quantity demanded is the amount buyers purchase at a given price (falls with price increase).
  • Demand schedule shows the relationship between price and quantity demanded.
  • Ceteris paribus holds other demand factors constant when analyzing price effects.
  • Market demand is the sum of all individual demands for a particular good or service.
  • Income effect is the change in consumption due to price changes affecting real income.
  • Substitution effect is the change in consumption from price change prompting use of substitutes.
  • Substitutes are two goods where a price increase of one increases demand for the other.
  • Complements are two goods where a price increase of one decreases demand for the other.
  • Normal good, demand rises with income.
  • Inferior good, demand falls with income.
  • Quantity supplied is the amount sellers are willing to sell at a particular price (rises with price increase).
  • Supply schedule shows the relationship between price and quantity supplied.
  • Supply curve is the graphic representation of supply.
  • Market Supply is the sum of supply by all sellers.
  • Equilibrium/market price is where the quantity demanded equals the quantity supplied.
  • Equilibrium quantity refers to the quantity bought and sold at the equilibrium price.
  • Surplus is when supplied is greater than demanded (price usually falls to reach equilibrium).
  • Shortage is when demanded is greater than supplied (price usually rises to reach equilibrium).
  • Comparative statics compare static equilibrium points.
  • Elasticity measures how much economic agents respond to market changes.
  • Price elasticity of demand measures how much quantity demanded changes with price change.
  • Inelastic demand - demanded quantity doesn't change significantly with price changes.
  • Price elastic demand - demanded quantity changes significantly with price changes.
  • Perfectly price inelastic - demanded quantity doesn't respond to price.
  • Perfectly price elastic - demanded quantity infinitely responds to any price change.
  • Unit price elastic - demanded quantity changes by the same percentage as price.
  • Total expenditure is the amount paid by buyers.
  • Income elasticity of demand measures how quantity demanded responds to change in income.
  • Price elasticity of supply measures how quantity supplied responds to price changes.
  • Total revenue is the total amount generated by supply.

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Description

Test your understanding of key concepts related to aggregate demand and supply in economics. This quiz covers the factors affecting demand, the impact of fiscal policy, and the relationship between money supply and interest rates. Challenge your knowledge with a series of thought-provoking questions.

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