Macroeconomics 9

The aggregate demand curve (AD) shows which of the following relationships?

• Higher rates of inflation are associated with lower levels of output.
• Lower rates of inflation are associated with lower levels of output.
• Higher rates of inflation are associated with higher interest rates.
• Lower rates of inflation are associated with higher interest rates.
• Higher rates of interest are associated with lower levels of output.

Which one of the following statements describes why the aggregate demand (AD) curve slopes downward?

• As inflation rises, real wealth declines, so people tend to demand less goods and services.
• As inflation rises, the real money supply declines, raising interest rates and discouraging investment.
• As inflation rises the Fed will tend to raise interest rates, which reduces investment and aggregate demand.
• As inflation rises, exports become more expensive and imports become more attractive to domestic consumers, lowering aggregate demand.
• All of the above.

Which one of the following would NOT cause a shift in the aggregate demand (AD) curve?

• An increase in government spending
• An increase in autonomous consumption
• An increase in net exports
• An increase in inflation
• An increase in autonomous investment

Which one of the following statements best describe why the aggregate supply (AS) curve slopes upward?

• As inflation rises, consumers will want to spend more.
• As firms run into “bottlenecks” in the supply of some resources, they will bid prices up more quickly, causing inflation to rise.
• As inflation rises, firms will be less likely to undertake new investments.
• As output rises, the Fed will allow inflation to rise.
• As inflation rises, the government responds with tax cuts.

Suppose people’s expectation of inflation goes down over time. Holding everything else constant, how would this change the position of the aggregate supply (AS) curve?

• The entire curve will shift to the right.
• The entire curve will shift to the left.
• The curve will shift down, but not to the right or left.
• The curve will shift up, but not to the right or left.
• The AS curve would not shift.

Suppose the government institutes a major tax cut. Holding everything else constant, how would this change the position of the aggregate supply (AS) curve?

• The entire curve will shift to the right.
• The entire curve will shift to the left
• The curve will shift down, but not to the right or left
• The curve will shift up, but not to the right or left
• The AS curve would not shift.

Which one of the following statements is TRUE?

• The maximum capacity output in an economy is determined by expectations about inflation.
• A supply shock will directly shift the position of the AD curve.
• Within the full employment range the AS curve is flat.
• The maximum capacity output in an economy is determined by interest rates.
• A change in inflationary expectations will shift the position of the AS curve.

Suppose a significant hurricane damages a coastal region with a large oil refining industry. What would be the most likely effect of this damage in the AD/AS model?

• The AD curve would shift to the right.
• The AD curve would shift to the left.
• The AS curve would shift to the right.
• The AS curve would shift to the left.
• Both the AD and AS curves would shift.

Under what conditions is a wage-price spiral most likely to occur?

• When the AD curve shifts upwards.
• When the AD curve shifts downwards.
• When the economy is in a recession.
• When the economy is at full employment.
• When the economy is near the maximum capacity output.

Suppose that in the medium run most people decrease their expectations about inflation. What change would we expect to occur in the AD/AS model?

• The AS curve would shift upwards
• The AS curve would shift downwards
• The AD curve would shift upwards
• The AD curve would shift downwards
• No change would occur