Mishkin 6ce TB Ch23

Economics of Money, Banking, and Financial Markets 6e (Mishkin)
Chapter 23 Aggregate Demand and Supply Analysis
23.1 Aggregate Demand
1) The aggregate demand curve is the total quantity of an economy's ________.

A) intermediate goods demanded at different inflation rates
B) intermediate goods demanded at a particular inflation rate
C) final goods and services demanded at a particular inflation rate
D) final goods and services demanded at different inflation rates
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 23.1 Summarize and illustrate the aggregate demand curve and the factors that shift it
2) Demand shocks are based on the ________ based factors that can shift the aggregate demand
curve.
A) seven
B) six
C) five
D) eight
Answer: A
Diff: 2 Type: MC
Skill: Recall
3) The downward slope of the aggregate demand curve is due to ________ and ________.
A) planned investment spending; net exports
B) planned investment spending; financial frictions
C) net exports; financial frictions
D) financial frictions; net transfers
Answer: A
Diff: 2 Type: MC
Skill: Recall
4) The total quantity of an economy's final goods and services demanded at different inflation
rates is ________.
A) the aggregate supply curve
B) the aggregate demand curve
C) the Phillips curve
D) the aggregate expenditure function
Answer: B
Diff: 2 Type: MC
Skill: Recall
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Copyright 2017 Pearson Canada, Inc.
5) One way to derive aggregate demand is by looking at its four component parts, which are
________.
A) consumer expenditures, planned investment spending, government spending, and net
exports
B) consumer expenditures, actual investment spending, government spending, and net exports
C) consumer expenditures, planned investment spending, government spending, and gross
exports
D) consumer expenditures, planned investment spending, government spending, and taxes
Answer: A
Diff: 2 Type: MC
Skill: Recall
6) By analyzing aggregate demand through its component parts, we can conclude that,
everything else held constant, a decline in the inflation rate causes ________.
A) an increase in real interest rates, an increase in investment spending, and a decline in
aggregate output demand
B) a decline in real interest rates, a decrease in investment spending, and an increase in
C) a decline in real interest rates, an increase in investment spending, and an increase in
D) an increase in real interest rates, a decline in investment spending, and a decline in
Answer: C
Diff: 2 Type: MC
Skill: Recall
7) By looking at aggregate demand via its component parts, we can conclude that the aggregate
demand curve is downward sloping because ________.
A) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment
spending
B) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment
spending
C) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment
spending
D) a higher inflation rate causes the real interest rate to rise, and stimulates planned investment
spending
Answer: A
Diff: 2 Type: MC
Skill: Recall
2
8) Everything else held constant, an autonomous monetary policy easing ________ aggregate
________.
A) increases; demand
B) decreases; demand
C) decreases; supply
D) increases; supply
Answer: A
Diff: 2 Type: MC
Skill: Recall
9) Everything else held constant, an autonomous monetary policy tightening ________

aggregate ________.
Answer: B
Diff: 2 Type: MC
Skill: Recall
10) Everything else held constant, when financial frictions increase, the real cost of borrowing
________ so that planned investment spending ________ at any given inflation rate.
A) increases; falls
B) decreases; falls
C) decreases; rises
D) increases; rises
Answer: A
Diff: 2 Type: MC
Skill: Recall
11) Everything else held constant, an increase in financial frictions ________ aggregate
________.
Answer: B
Diff: 2 Type: MC
Skill: Recall
3
12) Everything else held constant, an increase in government spending ________ aggregate
________.
Answer: A
Diff: 2 Type: MC
Skill: Recall
13) Everything else held constant, a decrease in government spending ________ aggregate
________.
Answer: B
Diff: 2 Type: MC
Skill: Recall
14) Everything else held constant, a decrease in net taxes ________ aggregate ________.
Answer: A
Diff: 2 Type: MC
Skill: Recall
15) Everything else held constant, an increase in net taxes ________ aggregate ________.
Answer: B
Diff: 2 Type: MC
Skill: Recall
4
16) Everything else held constant, a balanced budget increase in government spending (that is,
an increase in government spending that is matched by an identical increase in net taxes) will
________.
A) increase aggregate demand, but not by as much as if just government spending increases
B) increase aggregate demand by more than if just government spending increases
C) not affect aggregate demand
D) decrease aggregate demand
Answer: A
Diff: 2 Type: MC
Skill: Recall
17) Everything else held constant, an increase in net exports ________ aggregate ________.
Answer: A
Diff: 2 Type: MC
Skill: Recall
18) Everything else held constant, a decrease in net exports ________ aggregate ________.
Answer: B
Diff: 2 Type: MC
Skill: Recall
19) Everything else held constant, an increase in planned investment expenditure ________
aggregate ________.
Answer: A
Diff: 2 Type: MC
Skill: Recall
5
20) Everything else held constant, a decrease in planned investment expenditure ________
aggregate ________.
Answer: B
Diff: 2 Type: MC
Skill: Recall
21) Everything else held constant, aggregate demand increases when ________.
A) taxes are cut
B) government spending is reduced
C) animal spirits decrease
D) the money supply is reduced
Answer: A
Diff: 2 Type: MC
Skill: Recall
22) Everything else held constant, aggregate demand increases when ________.
A) net exports decrease
B) taxes increase
C) planned investment spending increases
D) the money supply decreases
Answer: C
Diff: 2 Type: MC
Skill: Recall
23) Everything else held constant, which of the following does not cause aggregate demand to
increase?
A) An increase in net exports
B) An increase in government spending
C) An increase in taxes
D) An increase in consumer optimism
Answer: C
Diff: 2 Type: MC
Skill: Recall
6
24) Explain through the component parts of aggregate demand why the aggregate demand
curve slopes down with respect to the inflation rate. Be sure to discuss two channels through
which changes in inflation rates affect demand.
Answer: A fall in the inflation rate lowers real interest rates. Lower rates increase investment,
thereby increasing aggregate demand. Lower interest rates also cause depreciation of the
domestic currency, increasing net exports and aggregate demand.
Diff: 2 Type: ES
Skill: Recall
25) What are the factors that can shift the aggregate demand curve to the right?
Answer: These factors are:
a. An increase in the money supply
b. An increase in government spending
c. A decrease in taxes
d. An increase in net exports
e. An increase in consumer optimism
f. An increase in business optimism
Diff: 2 Type: ES
Skill: Recall
26) Why is the aggregate demand curve downward sloping?

Answer: The aggregate demand function AD is downward sloping as a decrease in the price
level will make the real money supply M/P to increase, which in turn will reduce the nominal
interest rate. The fall in the interest rate will make more investment plans profitable, thus
increasing spending in planned investment, which will increase aggregate demand.
Diff: 2 Type: ES
Skill: Recall
27) Explain through the component parts of aggregate demand why the aggregate demand
curve slopes down with respect to the price level. Be sure to discuss two channels through
which changes in prices affect demand.
Answer: A fall in the price level increases the real value of a fixed nominal money supply.
This increase in the real money supply lowers interest rates. Lower rates increase investment,
thereby increasing aggregate demand. Lower interest rates also cause depreciation of the
domestic currency, increasing net exports and aggregate demand.
Diff: 2 Type: ES
Skill: Recall
7
23.2 Aggregate Supply
1) The aggregate supply curve shows the relationship between ________.

A) the level of inputs and aggregate output
B) the price level and the level of inputs
C) the wage rate and the level of employment
D) the price level and the level of aggregate output supplied
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 23.2 Illustrate and interpret the short-run and long-run aggregate supply curves
2) The aggregate supply curve is ________.

A) the total quantity of raw materials offered for sale at different prices
B) the total quantity of final goods and services offered for sale at the current price level
C) the total quantity of final goods and services offered for sale at different price levels
D) the total quantity of intermediate and final goods and service offered for sale at different
price levels
Answer: C
Diff: 1 Type: MC
Skill: Recall
3) Economists believe the natural rate of unemployment is approximately ________ percent.

A) seven
B) six
C) five
D) four
Answer: A
Diff: 1 Type: MC
Skill: Recall
4) Some unemployment is always present due to the ________ and ________ components,
which are greater than zero.
A) frictional; structural
B) frictional; cyclical
C) structural; cyclical
D) involuntary; frictional
Answer: A
Diff: 1 Type: MC
Skill: Recall
8
5) The total quantity of final goods and services offered for sale at different price levels is
________.
A) the aggregate supply curve
B) the aggregate demand curve
C) the 45 line
D) A and D only.
Answer: A
Diff: 1 Type: MC
Skill: Recall
6) The long-run rate of unemployment to which an economy always gravitates is the ________.
A) normal rate of unemployment
B) natural rate of unemployment
C) neutral rate of unemployment
D) inflationary rate of unemployment
Answer: B
Diff: 2 Type: MC
Skill: Recall
7) The long-run aggregate supply curve is ________.

A) a vertical line through the non-inflationary rate of output
B) a vertical line through the current level of output
C) a vertical line through the natural rate level of output
D) a horizontal line through the current level of output
Answer: C
Diff: 2 Type: MC
Skill: Recall
8) The long-run aggregate supply curve is a vertical line passing through ________.
A) the natural rate of output
B) the natural-rate price level
C) the actual rate of unemployment
D) the expected rate of inflation
Answer: A
Diff: 2 Type: MC
Skill: Recall
9
9) The short-run aggregate supply curve is upward sloping because in the short run, costs of
many factors that go into producing goods and services are ________, meaning that the price
for a unit of output will ________ relative to input prices and the profit per unit will rise.
A) fixed; rise
B) fixed; fall
C) flexible; rise
D) flexible; fall
Answer: A
Diff: 2 Type: MC
Skill: Recall
10) The positively sloped short-run aggregate supply curve reflects the assumption that labour
prices are ________.
A) more flexible than output prices
B) less flexible than output prices
C) fixed in the long run
D) perfectly flexible in both the short run and the long run
Answer: B
Diff: 2 Type: MC
Skill: Recall
11) Everything else held constant, an increase in the cost of production ________ aggregate
________.
C) increases; supply
D) decreases; supply
Answer: D
Diff: 2 Type: MC
Skill: Recall
12) Everything else held constant, a decrease in the cost of production ________ aggregate
________.
C) increases; supply
D) decreases; supply
Answer: C
Diff: 2 Type: MC
Skill: Recall
10
13) Everything else held constant, when output is ________ the natural rate level, wages will
begin to ________, increasing short-run aggregate supply.
A) above; fall
B) above; rise
C) below; fall
D) below; rise
Answer: C
Diff: 2 Type: MC
Skill: Recall
14) Everything else held constant, when output is ________ the natural rate level, wages will
begin to ________, decreasing short-run aggregate supply.
A) above; fall
B) above; rise
C) below; fall
D) below; rise
Answer: B
Diff: 2 Type: MC
Skill: Recall
15) Everything else held constant, when actual output exceeds the natural rate of output
________ aggregate supply ________.
A) short-run; decreases
B) short-run; increases
C) long-run; increases
D) long-run; decreases
Answer: A
Diff: 2 Type: MC
Skill: Recall
16) If workers demand and receive higher real wages, the cost of production ________ and the
short-run aggregate supply curve shifts ________.
A) rises; leftward
B) rises; rightward
C) falls; leftward
D) falls; rightward
Answer: A
Diff: 2 Type: MC
Skill: Applied
11
17) Everything else held constant, if workers expect an increase in the price level, ________
aggregate supply ________.
A) long-run; increases
B) long-run; decreases
C) short-run; decreases
D) short-run; increases
Answer: C
Diff: 2 Type: MC
Skill: Recall
18) Everything else held constant, a change in workers' expectations about the inflation rate
will cause ________ to change.
A) aggregate demand
B) short-run aggregate supply
C) the production function
D) long-run aggregate supply
Answer: B
Diff: 2 Type: MC
Skill: Recall
19) A decrease in the availability of raw materials that increases the price level is called a
________ shock.
A) unfavourable demand
B) favourable demand
C) unfavourable supply
D) favourable supply
Answer: C
Diff: 2 Type: MC
Skill: Recall
20) An unfavourable supply shock causes ________ to ________.

A) aggregate demand; increase
B) aggregate demand; decrease
C) short-run aggregate supply; decrease
D) short-run aggregate supply; increase
Answer: C
Diff: 2 Type: MC
Skill: Recall
12
21) A favourable supply shock causes ________ to ________.
A) aggregate demand; increase
B) aggregate demand; decrease
C) short-run aggregate supply; decrease
D) short-run aggregate supply; increase
Answer: D
Diff: 2 Type: MC
Skill: Recall
22) Which of the following increases aggregate supply in the short-run, everything else held
constant?
A) An increase in the price of crude oil
B) A successful wage increase led by workers
C) Expectations of a higher inflation rate
D) A technological improvement that increases worker productivity
Answer: D
Diff: 2 Type: MC
Skill: Recall
23) What is the shape of the long-run aggregate supply curve? Why?
Answer: The long-run aggregate supply curve is vertical. The amount of output that can be
produced by the economy in the long-run is determined by the amount of capital, the amount of
labour supplied at full employment and the available technology. Some unemployment cannot
be eliminated as it is frictional or structural. Thus, full employment is not at zero
unemployment but is rather at a level above zero, at which the demand for labor equals the
supply of labour. This natural rate of unemployment is where the economy gravitates in the
long-run. The level of output produced at the natural rate of unemployment is called the natural
rate of output; it is where the economy settles in the long-run for any price level. Hence the
long-run aggregate supply curve (LRAS) is vertical at the natural rate of output.
Diff: 3 Type: ES
Skill: Recall
13
24) Explain why the short-run aggregate supply curve has a positive slope.
Answer: Because wages and prices take time to adjust to economic conditions, we say that
they are sticky. The goal of businesses is to maximize profits made on each unit of output. If
profit rises, more output will be produced, and the quantity of output supplied will increase. In
the short-run, costs of many factors that go into producing goods and services are fixed. Wages
for example, are often fixed for periods of time due to labor contracts, and raw materials are
often bought by firms using long-term contracts that fix the price. Since the costs of production
are fixed in the short-run, when the price level rises, the price of a unit of output will rise while
the costs associated with it remain the same, thus increasing profit per unit produced. Firms will
increase production, and the quantity of aggregate output rises as the price level rises in the
short-run, resulting in an upward-sloping aggregate supply curve
Diff: 2 Type: ES
Skill: Recall
23.3 Shifts in Aggregate Supply Curves
1) The long-run aggregate supply curve shifts to the right when there is ________.
A) a decrease in the total amount of capital in the economy
B) a decrease in the total amount of labor supplied in the economy
C) a decrease in the available technology
D) a decline in the natural rate of unemployment
Answer: D
Diff: 2 Type: MC
Skill: Recall
Objective: 23.3 Illustrate and interpret shifts in the short-run and long-run aggregate supply
curves
2) The long-run aggregate supply curve shifts to the right when there is ________.
A) an increase in the total amount of capital in the economy
B) an increase in the available technology
C) a decrease in the natural rate of unemployment
D) all of the above
Answer: D
Diff: 2 Type: MC
Skill: Recall
curves
14
3) The short-run aggregate supply curve shifts to the right when ________.
A) output gap is higher
B) output gap is lower
C) expected inflation is higher
D) expected inflation is lower
Answer: D
Diff: 2 Type: MC
Skill: Recall
curves
4) Which of the followings does not shift the short-run aggregate supply curve?
A) Supply shocks
B) Persistent positive output gap
C) Changes in expected inflation
D) An increase in output gap
Answer: D
Diff: 2 Type: MC
Skill: Recall
curves
15
23.4 Equilibrium in Aggregate Supply and Demand Analysis
1) The fact that an economy always returns to the natural rate level of output is known as
________.
A) the excess demand hypothesis
B) the price-adjustment mechanism
C) the self-correcting mechanism
D) the natural rate of unemployment
Answer: C
Diff: 2 Type: MC
Skill: Recall
Objective: 23.4 Illustrate and interpret the short-run and long-run equilibriums, and the role of
the self-correcting mechanism
2) Assuming the economy is starting at the natural rate of output and everything else held
constant, the effect of ________ in aggregate ________ is a rise in both the inflation rate and
output in the short-run, but in the long-run the only effect is a rise in the inflation rate.
A) a decrease; supply
B) a decrease; demand
C) an increase; supply
D) an increase; demand
Answer: D
Diff: 2 Type: MC
Skill: Recall
3) The aggregate demand-aggregate supply framework indicates that the long-run effect of a
________ in the money supply is an increase in ________, everything else held constant.
A) fall; aggregate output
B) fall; the inflation rate
C) rise; aggregate output
D) rise; the inflation rate
Answer: D
Diff: 2 Type: MC
Skill: Recall
16
4) Suppose the economy is producing at the natural rate of output. Assuming a fixed natural
rate of output and everything else held constant, the development of a new, more productive
technology will cause ________ in the unemployment rate in the short run and ________ in the
inflation rate in the short run.
A) an increase; an increase
B) a decrease; a decrease
C) a decrease; an increase
D) no change; no change
Answer: B
Diff: 2 Type: MC
Skill: Applied
technology will cause ________ in the unemployment rate in the long run and ________ in the
inflation rate in the short run.
C) no change; a decrease
Answer: C
Diff: 2 Type: MC
Skill: Applied
technology will cause ________ in the unemployment rate and ________ in the aggregate price
level in the long run.
Answer: D
Diff: 2 Type: MC
Skill: Applied
17
7) In deriving the aggregate demand curve a ________ in the price level leads to ________ in
the real money supply because the nominal quantity of dollars can purchase ________ goods
and services.
A) decline; an increase; more
B) decline; a decrease; more
C) rise; an increase; fewer
D) rise; a decrease; more
Answer: A
Diff: 2 Type: MC
Skill: Recall
8) In deriving the aggregate demand curve a ________ price level ________ the money supply
in real terms, raises interest rates, and ________ the equilibrium level of aggregate output.
A) higher; reduces; raises
B) higher; reduces; lowers
C) lower; increases; raises
D) lower; increases; lowers
Answer: B
Diff: 2 Type: MC
Skill: Applied
9) The aggregate demand curve is downward sloping because a decrease in the price level
increases the ________ money supply which ________ interest rates and increases the
equilibrium level of aggregate output, everything else held constant.
A) real; lowers
B) real; raises
C) nominal; lowers
D) nominal; raises
Answer: A
Diff: 2 Type: MC
Skill: Recall
18
10) The aggregate demand curve has the usual downward slope, since a ________ price level
________ the real money supply, raises interest rates, and lowers the equilibrium level of
aggregate output, everything else held constant.
A) lower; reduces
B) lower; increases
C) higher; reduces
D) higher; increases
Answer: C
Diff: 2 Type: MC
Skill: Recall
11) The aggregate demand curve has the usual downward slope, since a higher price level
reduces the real money supply, ________ interest rates, and ________ the equilibrium level of
aggregate output, everything else held constant.
A) raises; lowers
B) raises; raises
C) lowers; lowers
D) lowers; raises
Answer: A
Diff: 2 Type: MC
Skill: Recall
12) Everything else held constant, an increase in government spending will cause ________.
A) aggregate demand to increase
B) aggregate demand to decrease
C) the quantity of aggregate demand to increase
D) the quantity of aggregate demand to decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
13) Everything else held constant, expansionary monetary policies will cause ________.
A) the quantity of aggregate demand to increase
B) the quantity of aggregate demand to decrease
C) aggregate demand to decrease
D) aggregate demand to increase
Answer: D
Diff: 2 Type: MC
Skill: Recall
19
14) Everything else held constant, contractionary monetary policies will cause ________.
A) the quantity of aggregate demand to increase
B) the quantity of aggregate demand to decrease
C) aggregate demand to increase
D) aggregate demand to decrease
Answer: D
Diff: 2 Type: MC
Skill: Recall
15) Everything else held constant, a purchase of government securities by the Bank of Canada
will cause ________.
A) aggregate demand to increase
B) aggregate demand to decrease
C) the quantity of aggregate demand to increase
D) the quantity of aggregate demand to decrease
Answer: A
Diff: 2 Type: MC
Skill: Recall
16) Using the aggregate demand-aggregate supply model, explain and demonstrate graphically
the short-run and long-run effects of an increase in the money supply.
Answer: An increase in the money supply increases aggregate demand. In the short run both
the price level and real output increase. In the long run, wages adjust, decreasing short-run
aggregate supply, raising inflation further and reducing real output until the economy returns to
the natural level of output. The long-run result is to only increase the inflation rate.
Diff: 3 Type: ES
Skill: Recall
20
23.5 Changes in Equilibrium: Aggregate Demand Shocks
1) Suppose the economy is producing at the natural rate of output. An open market sale of
bonds by the Bank of Canada will cause ________ in real GDP in the long run and ________
in the inflation rate in the long run, everything else held constant.
C) no change; an increase
D) no change; a decrease
Answer: D
Diff: 2 Type: MC
Skill: Applied
Objective: 23.5 Illustrate and interpret the short-run and long-run effects of a shock to aggregate
demand
2) Suppose the economy is producing at the natural rate of output. An increase in consumer and
business confidence will cause ________ in real GDP in the short run and ________ in the
inflation rate in the short run, everything else held constant.
Answer: A
Diff: 2 Type: MC
Skill: Recall
demand
3) Suppose the economy is producing at the natural rate of output. An increase in consumer and
business confidence will cause ________ in real GDP in the long run and ________ in the
inflation rate in the long run, everything else held constant.
Answer: C
Diff: 2 Type: MC
Skill: Applied
demand
21
4) Suppose the economy is producing at the natural rate of output. A decrease in consumer and
business confidence will cause ________ in real GDP in the short run and ________ in the
inflation rate in the short run, everything else held constant.
Answer: B
Diff: 2 Type: MC
Skill: Applied
demand
5) Suppose the economy is producing at the natural rate of output. A decrease in consumer and
business confidence will cause ________ in real GDP in the long run and ________ in the
inflation rate in the long run, everything else held constant.
Answer: D
Diff: 2 Type: MC
Skill: Applied
demand
6) Suppose the economy is producing at the natural rate of output. An open market purchase of
bonds by the Bank of Canada will cause ________ in real GDP the short run and ________ in
the inflation rate in the short run, everything else held constant.
Answer: A
Diff: 2 Type: MC
Skill: Applied
demand
22
7) Suppose the economy is producing at the natural rate of output. An open market purchase of
bonds by the Bank of Canada will cause ________ in real GDP in the long run and ________
in the inflation rate in the long run, everything else held constant.
Answer: C
Diff: 2 Type: MC
Skill: Applied
demand
8) Suppose the economy is producing at the natural rate of output. An open market sale of
bonds by the Bank of Canada will cause ________ in real GDP in the short run and ________
in the inflation rate in the short run, everything else held constant.
Answer: B
Diff: 2 Type: MC
Skill: Applied
demand
9) Suppose the Canadian economy is producing at the natural rate of output. A depreciation of
the Canadian dollar will cause ________ in real GDP in the short run and ________ in the
inflation rate in the short run, everything else held constant. (Assume the depreciation causes
no effects in the supply side of the economy.)
Answer: A
Diff: 2 Type: MC
Skill: Applied
demand
23
10) Suppose the Canadian economy is producing at the natural rate of output. A depreciation of
the Canadian dollar will cause ________ in real GDP in the short run and ________ in the
inflation rate in the long run, everything else held constant. (Assume the depreciation causes no
effects in the supply side of the economy.)
Answer: C
Diff: 2 Type: MC
Skill: Applied
demand
11) Suppose the Canadian economy is producing at the natural rate of output. An appreciation
of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the
aggregate price level in the short run, everything else held constant. (Assume the appreciation
causes no effects in the supply side of the economy.)
Answer: B
Diff: 2 Type: MC
Skill: Applied
demand
12) Suppose the Canadian economy is producing at the natural rate of output. An appreciation
of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the
aggregate price level in the long run, everything else held constant. (Assume the appreciation
causes no effects in the supply side of the economy.)
Answer: D
Diff: 2 Type: MC
Skill: Applied
demand
24
13) Suppose the economy is producing below the natural rate of output and the government is
suffering from large budget deficits. To deal with the deficit problem, suppose the government
takes a policy action to reduce the size of the deficits. This policy action will cause ________
in the unemployment rate in the short run and ________ in the aggregate price level in the short
run, everything else held constant.
D) an increase; a decrease
Answer: D
Diff: 2 Type: MC
Skill: Applied
demand
14) According to aggregate demand and supply analysis, the U.S. involvement in the Vietnam
War had the effect of ________.
A) increasing aggregate output, lowering unemployment, and raising the price level
B) decreasing aggregate output, lowering unemployment, and lowering the price level
C) increasing aggregate output, raising unemployment, and raising the price level
D) decreasing aggregate output, raising unemployment, and lowering the price level
Answer: A
Diff: 2 Type: MC
Skill: Applied
demand
25
23.6 Changes in Equilibrium: Aggregate Supply (Inflation) Shocks
1) Suppose the economy is producing at the natural rate of output and the government passes
legislation that severely restricts a company's ability to reduce production costs via outsourcing.
Everything else held constant, this policy action will cause ________ in the unemployment rate
in the short run and ________ in the aggregate price level in the short run.
Answer: A
Diff: 2 Type: MC
Skill: Applied
Objective: 23.6 Illustrate and interpret the short-run and long-run effects of temporary and
permanent supply shocks
2) Suppose the Canadian economy is operating at potential output. A negative supply shock
that is accommodated by an open market purchase by the Bank of Canada will cause ________
in real GDP in the long run and ________ in the aggregate price level in the long run,
everything else held constant.
A) no change; an increase
B) no change; a decrease
C) an increase; an increase
D) a decrease; a decrease
Answer: A
Diff: 2 Type: MC
Skill: Applied
26
Figure 24-1
3) In Figure 24.1 above, a ________ supply shock will shift the aggregate supply curve to AS2
and the economy will return to the long run equilibrium at point ________.
A) negative; 1
B) negative; 3
C) positive; 1
D) positive; 3
Answer: A
Diff: 3 Type: MC
Skill: Applied
4) In Figure 24.1 the shift of the aggregate supply curve from AS1 to AS2 and the following
shift back to AS1 is called ________.
A) a self-correcting mechanism
B) a self-fulfilling prophecy
C) a self-adjusting mechanism
D) a long-run correcting mechanism
Answer: A
Diff: 2 Type: MC
Skill: Recall
27
5) In Figure 24.1 above, at point 2, the shift of the aggregate supply curve from AS1 to AS2 is a
result of ________ wages that ________ production cost.
A) increasing; increase
B) increasing; reduce
C) decreasing; decrease
D) decreasing; increase
Answer: A
Diff: 2 Type: MC
Skill: Applied
6) In Figure 24.1 above, an equilibrium output greater than Yn is ________ attainable in the
________-run.
A) only; short
B) only; long
C) not; short
D) always; long
Answer: A
Diff: 2 Type: MC
Skill: Applied
7) In Figure 24.1, output levels below Yn will cause the aggregate ________ function to shift to
the ________.
A) supply; right
B) supply; left
C) demand; left
D) A and C only
Answer: A
Diff: 2 Type: MC
Skill: Applied
28
8) A theory of aggregate economic fluctuations called real business cycle theory holds that
________.
A) changes in the real money supply are the only demand shocks that affect the natural rate of
output
B) aggregate demand shocks do affect the natural rate of output
C) aggregate supply shocks do affect the natural rate of output
D) changes in net exports are the only demand shocks that affect the natural rate of output
Answer: C
Diff: 2 Type: MC
Skill: Recall
9) Because shifts in aggregate demand are not viewed as being particularly important to
aggregate output fluctuations, they do not see much need for activist policy to eliminate high
unemployment. "They" refers to proponents of ________.
A) the natural rate hypothesis
B) monetarism
C) the Phillips curve model
D) real business cycle theory
Answer: D
Diff: 2 Type: MC
Skill: Recall
10) This theory views shocks to tastes (workers' willingness to work, for example) and
technology (productivity) as the major driving forces behind short-run fluctuations in the
business cycle because these shocks lead to substantial short-run fluctuations in the natural rate
of output.
A) The natural rate hypothesis
B) Hysteresis
C) Real business cycle theory
D) The Phillips curve model
Answer: C
Diff: 2 Type: MC
Skill: Recall
29
11) According to aggregate demand and supply analysis, the negative supply shocks of 1973-
1975 and 1978-1980 had the effect of ________.
A) increasing aggregate output, lowering unemployment, and raising the price level
B) decreasing aggregate output, raising unemployment, and raising the price level
C) increasing aggregate output, raising unemployment, and raising the price level
D) decreasing aggregate output, raising unemployment, and lowering the price level
Answer: B
Diff: 2 Type: MC
Skill: Applied
12) According to aggregate demand and supply analysis, the favorable supply shock of 1995-
1999 had the effect of ________.
A) increasing aggregate output, lowering unemployment, and raising inflation
B) decreasing aggregate output, raising unemployment, and raising inflation
C) increasing aggregate output, lowering unemployment, and lowering inflation
D) decreasing aggregate output, raising unemployment, and lowering inflation
Answer: C
Diff: 2 Type: MC
Skill: Applied
13) According to aggregate demand and supply analysis, the negative demand shock of 2000-
2004 had the effect of ________.
A) increasing aggregate output, lowering unemployment, and raising inflation
B) decreasing aggregate output, raising unemployment, and raising inflation
C) increasing aggregate output, lowering unemployment, and lowering inflation
D) decreasing aggregate output, raising unemployment, and lowering inflation
Answer: D
Diff: 2 Type: MC
Skill: Recall
30
14) Explain and demonstrate graphically the effects of a negative supply shock. What happens
to the economy if no action is taken? What happens if monetary and or fiscal policy is used to
reduce unemployment?
Answer: The supply shock shifts the aggregate supply curve back to AS', reducing real output
and raising the price level. If no action is taken, the supply curve eventually adjusts back to the
original position. The economy adjusts from 1 to 4 back to 1. If policy actions are implemented,
aggregate demand increases to AD', and the economy returns to full employment at a higher
price level. The path is from 1 to 4 to 3.
Diff: 2 Type: ES
Skill: Applied
31
23.7 AD/AS Analysis of Foreign Business Cycle Episodes
1) According to aggregate demand and supply analysis, the rising oil prices coupled with the
subprime financial crisis in 2007-2008 caused the unemployment rate to ________ and the
level of real aggregate output to ________.
A) increase; increase
B) increase; decrease
C) decrease; increase
D) decrease; decrease
Answer: B
Diff: 2 Type: MC
Skill: Recall
Objective: 23.7 Explain the business cycle fluctuations in major economies during the 2007-
2009 financial crisis
2) The run-up of oil prices in 2007 led to ________.

A) a negative supply shock
B) a negative demand shock
C) a positive supply shock
D) a positive negative shock
Answer: A
Diff: 2 Type: MC
Skill: Recall
3) Aggregate demand and supply analysis can be used ________.

A) to examine the effects of macroeconomic shocks on prices
B) to build the LM curve
C) as an alternative to IS LM model
D) to value real assets in the long run
Answer: A
Diff: 3 Type: MC
Skill: Recall
32
4) The financial crisis that began in August 2007 initially had ________ effect on China but
caused exports to fall by ________ percent.
A) no; 20
B) a moderate; 20
C) large; 20
D) no; 1
Answer: A
Diff: 2 Type: MC
Skill: Recall
5) The Chinese central bank is ________.

A) Hong Kong Shanghai Bank of China
B) People's Bank of Canada
C) the People's Republic Bank
D) Republic of China Central Bank
Answer: B
Diff: 2 Type: MC
Skill: Recall
6) To manage the large export losses resulting from the U.S financial crisis, China implemented
________ policy, amounting to ________ percent of Chinese GDP.
A) fiscal; 12.5
B) fiscal; 25
C) monetary; 12.5
D) monetary; 25
Answer: A
Diff: 2 Type: MC
Skill: Recall
7) During the 2007-2008 financial crisis, China's economic growth slowed from over ________
percent in the first half of 2008 to under ________ percent in the second half.
A) 11; 5
B) 10; 6
C) 11; 2
D) 11;10
Answer: A
Diff: 2 Type: MC
Skill: Recall
33
8) The increase in energy prices that occurred in 2007-2008 led to a ________ in the ________
aggregate supply curve.
A) fall; short run
B) fall; long run
C) rise; short run
D) rise; long run
Answer: A
Diff: 2 Type: MC
Skill: Recall
9) The Lehman Brothers bankruptcy caused a ________ ________ shock.

A) negative; demand
B) negative; supply
C) positive; demand
D) positive; supply
Answer: A
Diff: 2 Type: MC
Skill: Recall
10) Prior to the financial crisis in 2007-2008, the Chinese economy was growing at ________
per year.
A) 10 percent
B) 15 percent
C) 20 percent
D) 25 percent
Answer: C
Diff: 2 Type: MC
Skill: Recall
34
11) The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters
worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the
following is an appropriate description of the mechanism that would have ensued?
A) The increase in the price of oil would have immediately shifted the AS curve to the right.
B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve
to the right.
C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as
neither shock had an impact on potential output, ultimately unemployment will have been
unaffected in the long run.
D) All of the above.
E) None of the above.
Answer: C
Diff: 2 Type: MC
Skill: Recall
following is true of the United Kingdom's experience?
A) The increase in the price of oil immediately shifted the AS curve to the left.
B) The financial crisis did not take hold right away so the AD curve did not immediately shift.
C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a
further fall in output and an increase in the unemployment rate.
Answer: D
Diff: 2 Type: MC
Skill: Recall
35
following is true of the Chinese experience?
A) The worldwide decline in demand led to a collapse of Chinese exports.
B) Instead of relying solely on the economy's self-correcting mechanism, much more
aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary
easing) served to shift the AD curve back to general equilibrium relatively quickly.
C) The Chinese economy was better able than the U.S. economy to weather the financial crisis
with output growth starting to grow earlier and more quickly than that of the U.S.
Answer: D
Diff: 2 Type: MC
Skill: Recall
14) In the long run, following a combination of a negative demand shock and a temporary
negative supply shock, ________.
A) both inflation and output return to the original long-run equilibrium values
B) inflation is permanently increased, while output returns to potential output
C) output returns to potential output, while inflation may be higher or lower than its initial
value
D) inflation is permanently reduced, while output returns to potential output
Answer: D
Diff: 2 Type: MC
Skill: Recall
15) As of 2009, China's economy had recovered from the global recession that began in 2008.
Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely
consequences for China of an increase in the growth rate of the global economy.
Answer: Policy in China reversed the decline in aggregate demand, substituting fiscal and
monetary stimulus for the reduced demand for China's exports. The result was a rapid recovery
of output and avoidance of downward shifts of the short-run aggregate supply curve that would
have meant declining inflation. With output at or near potential in China, the rise in exports that
will accompany faster growth of the global economy will cause a positive output gap and
accelerating inflation, unless policy makers in China can again intervene with policies to
counteract the positive output gap.
Diff: 2 Type: ES
Skill: Recall
36
23.8 Appendix The Phillips Curve and the Short-Run Aggregate Supply Curve
1) The empirical Phillips curve describes a ________ correlation between ________ and
inflation.
A) negative; unemployment
B) negative; aggregate output
C) positive; unemployment
D) positive; aggregate output
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: Appendix: The Phillips curve and short-run aggregate supply curve
2) The Phillips curve from the 1960s suggested to the policy makers of the time that they could
lower ________ by using policies that would ________ inflation.
A) aggregate output; lower
B) aggregate output; higher
C) unemployment; lower
D) unemployment; higher
Answer: D
Diff: 2 Type: MC
Skill: Recall
3) The Friedman-Phelps critique of the Phillips curve focused on the observation that
________.
A) workers care primarily about nominal wages and therefore higher inflation would induce
them to supply more labour
B) workers care primarily about nominal wages and therefore higher inflation would induce
them to supply less labour
C) workers care primarily about real wages and therefore higher inflation would induce them to
demand higher nominal wages which would result in higher aggregate output
D) workers care primarily about real wages and therefore higher inflation would induce them to
demand higher nominal wages which would result in no increase in aggregate output
Answer: D
Diff: 2 Type: MC
Skill: Recall
37
4) The Friedman-Phelps inflation-augmented Phillips curve suggested that inflation would be
________ related to the expected inflation rate and ________ related to the unemployment rate.
A) positively; positively
B) positively; negatively
C) negatively; positively
D) negatively; negatively
Answer: B
Diff: 2 Type: MC
Skill: Recall
5) The expectations-augmented Phillips curve concludes that ________.

A) unemployment will be lower in the short-run than in the long-run
B) unemployment will be lower in the long-run than in the short-run
C) there will be no unemployment gap in the long-run
D) there will be no unemployment in the long-run
Answer: C
Diff: 2 Type: MC
Skill: Applied
6) The expectations-augmented Phillips curve concludes that ________.

A) there is a long-run but not a short-run tradeoff between unemployment and inflation
B) there is a short-run but not a long-run tradeoff between unemployment and inflation
C) there is both a short-run and not a long-run tradeoff between unemployment and inflation
D) there is neither a short-run nor a long-run tradeoff between unemployment and inflation
Answer: B
Diff: 2 Type: MC
Skill: Applied
7) The modern Phillips curve incorporates ________ into the expectations-augmented Phillips
curve.
A) output gaps
B) unemployment gaps
C) supply shocks
D) inflation
Answer: C
Diff: 2 Type: MC
Skill: Recall
38
8) Which of the following statements best describes Okun's law?
A) For each 1% that output is greater than potential output, the unemployment rate is 0.5%
below the natural rate of unemployment.
B) For each 1% that output is greater than potential output, the unemployment rate is 0.5%
above the natural rate of unemployment.
C) For each 0.5% that output is lower than potential output, the unemployment rate is 1%
below the natural rate of unemployment.
D) For each 0.5% that output is lower than potential output, the unemployment rate is 1%
above the natural rate of unemployment.
Answer: A
Diff: 2 Type: MC
Skill: Applied
9) What was the theoretical flaw in the original Phillips curve observes by Friedman and
Phelps?
Answer: Friedmand and Phelps pointed out that workers care about real, not nominal wages
and that rising inflation would lower their real wages causing them to demand nominal wage
increases. While lower real wages in the short-run would encourage more output, this effect
would be lost as nominal wages adjusted to reflect higher inflation.
Diff: 2 Type: ES
Skill: Applied
10) What is the unemployment gap?

Answer: The unemployment gap is the actual unemployment rate minus the natural rate of
unemployment.
Diff: 2 Type: ES
Skill: Recall
11) Explain how the modern Phillips curve and the short-run aggregate supply curve are related
to each other.
Answer: The Phillips curve holds that the inflation rate is negatively related to the
unemployment gap whereas the short-run aggregate supply holds that the inflation rate is
positively related to the output gap.
Diff: 2 Type: ES
Skill: Applied
39
23.9 Web Appendix 24.1 The Effects of Macroeconomic Shocks on Asset Prices
1) Autonomous monetary policy ________ real interest rates and ________ aggregate output
temporarily.
A) raises; raises
B) raises; lowers
C) lowers; raises
D) lowers; lowers
Answer: A
Diff: 2 Type: MC
Skill: Recall
Objective: Appendix: The Effects of Macroeconomic Shocks on Asset Prices
2) An anonymous monetary policy that reduces real interest rates will ________ the inflation
rate ________.
A) raise; temporarily
B) raise; permanently
C) lower; permanently
D) lower; temporarily
Answer: A
Diff: 2 Type: MC
Skill: Recall
3) A ________supply shock ________ prices will cause the real interest rate to ________ in the
short run.
A) temporary; raises; rise
B) temporary; lowers; fall
C) permanent; raises; fall
D) permanent; lowers; rise
Answer: A
Diff: 2 Type: MC
Skill: Recall
40
23.10 Web Appendix 24.2 Aggregate Demand and Supply: A Numerical Example
1) Consider the following aggregate demand curve Y = 22-1p and a short-run aggregate supply
curve given by: p = 4 + 3(Y - 10). Find the equilibrium output and inflation rate.
Answer: Y = 22 - pi. Substitute in pi from the short run aggregate supply curve.
Y = 22 - (4 + 3(Y - 10))
Y = 22 - 4 - 3Y + 30
Y + 3Y = 48
4Y = 48
Y = 12
Plug this into the aggregate supply curve

p = 4 + 3(Y - 10)
p = 4 + 3(12 - 10)
p = 4 + 3(2)
p = 10
Diff: 2 Type: ES
Skill: Applied
Objective: Appendix: Aggregate demand and supply: a numerical analysis
23.11 Web Appendix 24.3 The Algebra of the Aggregate Demand and Supply Model
1) Enumerate the four implications for aggregate output from algebraic expression of the
aggregate demand curve.
Answer: 1. The aggregate demand curve slopes downward.
2. The more willing monetary policymakers are to raise interest rates when faced with inflation,
the steeper the AD curve is.
3. C, -mpc T, -df, G and NX shift the aggregate demand curve by exactly the same amount
and in the same direction as they shift the IS curve.
4. An autonomous easing of monetary policy results in a higher level of equilibrium output,
shifting the aggregate demand curve to the right.
Diff: 2 Type: ES
Skill: Recall
Objective: Appendix: The Algebra of the Aggregate Demand and Supply Model
41
23.12 Web Appendix 24.4 The Taylor Principle and Inflation Stability
1) Explain how not following the Taylor principle leads to unstable inflation
Answer: A central bank that does not follow the Taylor principle will fail to raise nominal
interest rates more than the increase in expected inflation. As a result higher inflation will lead
to a decline in real interest rates. As the real interest rate falls and equilibrium output rises and
so does inflation Expected inflation rises and the SRAS shifts up and aggregate output is further
above potential output. This cases the SRAS to rise further with an even larger increase in
output and inflation. The result is an ever-accelerating inflation rate which keeps rising faster
and faster.
Diff: 2 Type: ES
Skill: Recall
Objective: Appendix: The Taylor Principle and Inflation Stability
42

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Economics of Money, Banking, and Financial Markets 6e (Mishkin)

Chapter 23 Aggregate Demand and Supply Analysis

23.1 Aggregate Demand

1) The aggregate demand curve is the total quantity of an economy's ________.

9) Everything else held constant, an autonomous monetary policy tightening ________

26) Why is the aggregate demand curve downward sloping?

1) The aggregate supply curve shows the relationship between ________.

2) The aggregate supply curve is ________.

3) Economists believe the natural rate of unemployment is approximately ________ percent.

7) The long-run aggregate supply curve is ________.

20) An unfavourable supply shock causes to .

23.3 Shifts in Aggregate Supply Curves

2) The run-up of oil prices in 2007 led to ________.

3) Aggregate demand and supply analysis can be used ________.

5) The Chinese central bank is ________.

9) The Lehman Brothers bankruptcy caused a shock.

5) The expectations-augmented Phillips curve concludes that ________.

6) The expectations-augmented Phillips curve concludes that ________.

10) What is the unemployment gap?

Plug this into the aggregate supply curve

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