Chapter 8: Quiz Answers -- Aggregate Demand and Aggregate Supply


  1. Which of the following is not a component of Aggregate Demand?
    Saving Aggregate Demand is the sum of consumption, Investment, government expenditures, and net exports. Saving does not directly enter into the definition of Aggregate Demand.

  2. An example of a government expenditure is
    employing a public school teacher. A public school teacher's salary is a service (educational service) that the government is purchasing. The other examples are transfer payments, or income transfers.

  3. Which of the following items is an investment?
    purchase of a new farm tractor. The other items are examples of saving. Remember that investment in the economic sense of the term must expand the productive capacity of the economy. A new tractor certainly does this.

  4. The international trade effect argues that an increase in the Price level reduces Aggregate Demand because
    the price level increase makes the dollar stronger, which decreases net exports. The rising price level (given a fixed nominal exchange rate) makes the dollar stronger internationally because a rising U.S. price level, all else equal, lowers the cost of foreign goods relative to domestic goods. The relatively cheaper imports will be demanded at the expense of domestically produced goods, decreasing net exports and hence, Aggregate Demand.

  5. Which factor would shift the Aggregate Demand curve to the right?
    a fall in interest rates which increases investment. The first two multiple choice answers--an increase in real incomes due to a rise in GDP, and an increase in real wages--move the economy along a given Aggregate Demand curve. An appreciation of the dollar shifts the Aggregate Demand curve to the left because net exports fall.

  6. Which of the following statements about the long-run Aggregate Supply curve is true?
    All of the above. By definition, all of the answers are true.

  7. Stagflation results from
    a shift of the AS curve to the left. Stagflation is the combination of rising inflation and output contraction. When the Aggregate Supply curve shifts leftward, the price level rises as output falls.

  8. Which of the following events will shift the Aggregate Supply curve to the left?
    real wages rise. An increase in real wages--other things equal--shifts the Aggregate Supply curve leftward because wages are input costs.

  9. The short-run Aggregate Supply curve is upward sloping only because we assume that resource costs are held constant.
    True. If only the price rises while input costs are constant, the profit motive provides an incentive for firms to increase production.

  10. If Aggregate Demand exceeds Aggregate Supply, unwanted inventories will begin to accumulate, forcing firms to reduce prices to get rid of those inventories.
    False. In fact, unwanted inventories will begin to unexpectedly decline, prompting firms to raise prices to slow the inventory depletion.


 
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