Chapter 8 Aggregate Demand, Aggregate Supply, and the Great Depression

1) A rise in the nominal money supply will

A) shift the IS curve and shift the AD curve.
B) shift the AD curve and raise the equilibrium price level.
C) shift the AD curve and raise the equilibrium level of nominal GDP.
D) All of the above are correct.
Answer: D

2) The fixed price level that was assumed in Chapters 3 through 7 implied that
A) there is always full employment.
B) there is always less than full employment.
C) the aggregate supply curve is upward sloping to the left.
D) the aggregate supply curve is horizontal.
Answer: D
3) A fall in the price level causes changes in the IS-LM diagram that can also be recorded as a
A) rightward shift of the AD curve.
B) leftward shift of the AD curve.
C) movement downward along an AD curve.
D) movement upward along an AD curve.
Answer: C
4) A flatter IS curve implies that the aggregate demand curve will be
A) steeper and the k1 multiplier becomes larger.
B) flatter and the k1 multiplier becomes smaller.
C) unaffected and the k1 multiplier becomes smaller.
D) vertical and the k1 multiplier becomes smaller.
Answer: B

5) Suppose that the administration proposes to follow a contractionary fiscal policy. This would
cause the
A) AD to shift rightward and raise the price level.
B) SAS to shift rightward and lower the price level.
C) AD to shift leftward and lower the price level.
D) SAS to shift leftward and raise the price level.
Answer: C
6) If firms are willing to produce and sell more output when prices rise, this implies
A) an upward-sloping short-run aggregate supply curve.
B) a vertical short-run aggregate supply curve.
C) an upward-sloping aggregate demand curve.
D) a horizontal aggregate supply curve.
Answer: A
7) The short-run aggregate supply curve slopes upward because, with a given equilibrium wage
rate, a higher actual price level will
A) reduce the actual real wage and induce firms to hire more labor.
B) shift the labor supply curve.
C) increase the aggregate demand for goods, so that output will rise.
D) All of these.
Answer: A
8) The SAS curve will be steeper the
A) greater is the marginal product of each additional worker.
B) greater is MC.
C) greater is the nominal wage.
D) the faster the MPN falls for each additional worker.
Answer: D
9) With the nominal wage rate given, an increase in the price level leads to
A) movement downward along a short-run aggregate supply curve (SAS).
B) movement upward along a short-run aggregate supply curve(SAS).
C) a rightward shift of the short-run aggregate supply curve(SAS).
D) a leftward shift of the short-run aggregate supply curve(SAS).
Answer: B

10) Which of the following factors will NOT cause the AD curve to shift?
A) tax rates
B) autonomous exports
C) changes in the marginal product of labor
D) consumer confidence
Answer: C
11) That the LAS curve is vertical means that
A) firms are willing to produce any amount of output demanded at the fixed price level.
B) actual real GDP does not depend on the value of natural real GDP.
C) natural real GDP does not depend on the price level.
D) output never deviates from the natural real GDP.
Answer: C
12) Classical economists believed that
A) government intervention was necessary to stabilize the economy.
B) movements away from the natural rate of output were only temporary.
C) monetary policy was ineffective.
D) monetary impotence would make fiscal policy necessary to bring the economy out of a
depression.
Answer: B
13) Classical macroeconomists believed that a market-based economy has ________ selfcorrecting forces and thus ________ business cycles.
A) strong, mild and fleeting
B) strong, violent and prolonged
C) weak, mild and fleeting
D) weak, violent and prolonged
Answer: A
14) If the Pigou effect characterizes the economy then the slope
A) of the aggregate demand curve is zero; the aggregate supply curve is vertical.
B) of the aggregate supply curve is zero; the aggregate demand curve is vertical.
C) of both the AD and SAS curves are vertical.
D) of the AD cannot be vertical; the aggregate supply curve is unaffected.
Answer: D

15) Keynes argued that monetary policy would be impotent during the Great Depression because
a
A) fall in interest rates would stimulate investment.
B) fall in interest rates would not stimulate investment.
C) rise in interest rates should not stimulate investment.
D) rise in interest rates would stimulate investment.
Answer: B
16) A single aggregate demand curve records how IS-LM equilibrium output changes as
________ changes.
A) the IS curve
B) the nominal money supply
C) government expenditure
D) the price level
Answer: D
17) Suppose that from an initial labor market equilibrium the price level suddenly falls. The
resulting movement ________ the labor demand curve results in an excess ________ labor,
which then puts ________ pressure on the nominal wage to restore labor market equilibrium.
A) up, demand for, upward
B) down, supply of, upward
C) up, supply of, downward
D) down, demand for, upward
E) up, demand for, downward
Answer: C
18) Keynes held out the possibility of "monetary impotence" causing the aggregate demand
curve to be ________ below the natural real GDP, which results in an economy with ________
self-correction.
A) vertical, instant
B) vertical, no
C) horizontal, instant
D) horizontal, no
Answer: B

19) Keynes said that even should monetary impotence not occur, full self-correction could be
short-circuited by
A) the price level failing to fall sufficiently due to downwardly-rigid wages.
B) the price level failing to fall sufficiently due to continuously falling wages.
C) the price level falling too much due to downwardly-rigid wages.
D) the price level falling too much due to continuously falling wages.
Answer: A
20) The possibility that an economy in recession may be afflicted by monetary impotence led
Keynes and his followers to recommend
A) raising real balances by letting the price level fall rather than increasing the nominal money
supply.
B) raising real balances by increasing the nominal money supply rather than waiting for the price
level to fall.
C) an active fiscal policy to shift the IS and AD curves.
D) waiting for a falling price level to activate the real balance effect on the IS and AD curves.
Answer: C