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Department
Administrative Studies
Course
ADMS 2400
Professor
Paul Favaro
Semester
Fall

Description
Economics: Canada in the Global Environment, 7e (Parkin) Chapter 26 Aggregate Supply and Aggregate Demand 26.1 Aggregate Supply Use the figure below to answer the following questions. Figure 26.1.1 1) Refer to Figure 26.1.1. Which graph illustrates what happens when factor prices decrease? A) (a) B) (b) C) (c) D) (d) E) (a) and (b) Answer: A Diff: 2 Topic: Aggregate Supply Source: Study Guide 1 © 2010 Pearson Education Canada 2) Refer to Figure 26.1.1. Which graph illustrates what happens when factor prices rise? A) (a) B) (b) C) (c) D) (d) E) (a) and (b) Answer: B Diff: 2 Topic: Aggregate Supply 3) Which one of the following newspaper quotations describes a movement along an LAS curve? A) "The decrease in consumer spending may lead to a recession." B) "The increase in consumer spending is expected to lead to inflation, without any increase in real GDP." C) "Recent higher wage settlements are expected to cause higher inflation this year." D) "Growth has been unusually high the last few years due to more women entering the labour force." E) "The recent tornadoes destroyed many factories in Calgary and Edmonton." Answer: B Diff: 3 Topic: Aggregate Supply 4) Which one of the following newspaper quotations describes a shift of only the SAS curve? A) "The decrease in consumer spending may lead to a recession." B) "The increase in consumer spending is expected to lead to inflation, without any increase in real GDP." C) "Recent higher wage settlements are expected to cause higher inflation this year." D) "Growth has been unusually high the last few years due to more women entering the work force." E) "The recent tornadoes destroyed many factories in Calgary and Edmonton." Answer: C Diff: 2 Topic: Aggregate Supply 5) Which one of the following newspaper quotations describes a rightward shift of the LAS curve? A) "The decrease in consumer spending may lead to a recession." B) "The increase in consumer spending is expected to lead to inflation, without any increase in real GDP." C) "Recent higher wage settlements are expected to cause higher inflation this year." D) "Growth has been unusually high the last few years due to more women entering the work force." E) "The recent tornadoes destroyed many factories in Calgary and Edmonton." Answer: D Diff: 2 Topic: Aggregate Supply 2 © 2010 Pearson Education Canada 6) Which one of the following newspaper quotations describes a leftward shift of the LAS curve? A) "The decrease in consumer spending may lead to a recession." B) "The increase in consumer spending is expected to lead to inflation, without any increase in real GDP." C) "Recent higher wage settlements are expected to cause higher inflation this year." D) "Growth has been unusually high the last few years due to more women entering the work force." E) "The recent tornadoes destroyed many factories in Calgary and Edmonton." Answer: E Diff: 2 Topic: Aggregate Supply 7) Which of the following does not change short-run aggregate supply? A) A change in the money wage rate. B) Technological change. C) A change in the full-employment quantity of labour. D) An increase in the quantity of capital. E) A change in expected future profits. Answer: E Diff: 2 Topic: Aggregate Supply 8) Complete the following sentence. Potential GDP A) increases as the price level rises. B) is the level of real GDP when unemployment is zero. C) increases as the quantity of money in the economy increases. D) does not vary with the price level. E) never changes. Answer: D Diff: 2 Topic: Aggregate Supply 9) A vertical long-run aggregate supply curve indicates that A) an increase in the price level will not expand an economy's output in the long run. B) output rates greater than the long-run output rate are unattainable. C) an increase in the price level will permit the economy to achieve a higher level of output. D) an increase in the price level will increase technological change and economic growth. E) the long-run aggregate supply curve never shifts. Answer: A Diff: 2 Topic: Aggregate Supply 3 © 2010 Pearson Education Canada 10) The long-run aggregate supply curve is vertical because A) potential GDP is independent of the price level. B) actual output can never exceed, even temporarily, the output rate implied by the economy's long-run aggregate supply curve. C) a vertical long-run aggregate supply curve indicates the maximum output rate that an economy can ever reach. D) a vertical long-run supply curve indicates that an increase in aggregate demand will lead to a larger real GDP, but not a larger nominal GDP. E) potential GDP never changes. Answer: A Diff: 2 Topic: Aggregate Supply 11) The short-run aggregate supply curve indicates A) the relationship between the price level and real GDP demanded by consumers, investors, governments, and net exporters. B) the relationship between the price level and the natural unemployment rate. C) the relationship between the purchasing power of wages and the quantity of labour supplied by households. D) the relationship between the quantity of real GDP supplied and the price level when the money wage rate, the prices of other resources, and potential GDP remain constant. E) the various quantities of real GDP producers supply at different income levels. Answer: D Diff: 1 Topic: Aggregate Supply 12) The long-run aggregate supply curve is A) vertical. B) negatively sloped. C) positively sloped but extremely steep. D) almost flat. E) positively sloped at low levels of real GDP and vertical at high levels of real GDP. Answer: A Diff: 1 Topic: Aggregate Supply 13) The short-run aggregate supply curve is the relationship between the quantity of real GDP supplied and A) the quantity of real GDP demanded. B) real income. C) the inflation rate. D) the real interest rate. E) the price level. Answer: E Diff: 1 Topic: Aggregate Supply 4 © 2010 Pearson Education Canada 14) Everything else remaining the same, the short-run aggregate supply curve shifts rightward if A) the money wage rate increases. B) aggregate demand increases. C) the full-employment quantity of labour increases. D) factor prices increase. E) the quantity of capital decreases. Answer: C Diff: 2 Topic: Aggregate Supply 15) Which one, if any, of the following events shift the short-run aggregate supply curve but not the long-run aggregate supply curve? A) A change in factor prices. B) A change in the quantity of capital. C) An advance in technology. D) An increase in the full-employment quantity of labour. E) None of the above. Answer: A Diff: 2 Topic: Aggregate Supply 16) Suppose there is an increase in the quantity of capital. As a result, the SAS A) and the LAS curves both shift leftward. B) and the LAS curves both shift rightward. C) curve does not shift but the LAS curve shifts rightward. D) curve does not shift but the LAS curve shifts leftward. E) shifts rightward, but the LAS curve does not shift. Answer: B Diff: 2 Topic: Aggregate Supply 17) Potential GDP is the level of real GDP at which A) aggregate demand equals short-run aggregate supply. B) there is full employment. C) there is a recessionary gap. D) there is over-full employment. E) prices are sure to rise. Answer: B Diff: 1 Topic: Aggregate Supply Source: Study Guide 5 © 2010 Pearson Education Canada 18) A technological advance shifts A) both SAS and AD rightward. B) both SAS and LAS leftward. C) SAS rightward but leaves LAS unchanged. D) LAS rightward but leaves SAS unchanged. E) both SAS and LAS rightward. Answer: E Diff: 2 Topic: Aggregate Supply Source: Study Guide 19) An increase in oil prices to a country that is a net importer of oil shifts A) both the short-run aggregate supply and long-run aggregate supply curves rightward. B) both the short-run aggregate supply and long-run aggregate supply curves leftward. C) the short-run aggregate supply curve leftward, but leaves the long-run aggregate supply curve unchanged. D) the long-run aggregate supply curve rightward, but leaves the short-run aggregate supply curve unchanged. E) the short-run aggregate supply curve leftward, but shifts the long-run aggregate supply curve rightward. Answer: C Diff: 2 Topic: Aggregate Supply 20) If the money wage rate falls, then A) the AD curve shifts rightward. B) firms hire less labour. C) the LAS curve shifts rightward. D) the SAS curve shifts rightward. E) C and D. Answer: D Diff: 2 Topic: Aggregate Supply 21) Long-run aggregate supply will increase for all of the following reasons except A) a fall in the money wage rate. B) an increase in human capital. C) the introduction of new technology. D) an increase in the full-employment quantity of labour. E) an increase in the quantity of capital. Answer: A Diff: 2 Topic: Aggregate Supply Source: Study Guide 6 © 2010 Pearson Education Canada 22) An increase in the money wage rate shifts A) both SAS and LAS rightward. B) both SAS and LAS leftward. C) SAS leftward, but leaves LAS unchanged. D) LAS rightward, but leaves SAS unchanged. E) SAS rightward, but leaves LAS unchanged. Answer: C Diff: 2 Topic: Aggregate Supply Source: Study Guide 26.2 Aggregate Demand 1) Aggregate demand A) measures the amount of a nation's goods and services that people are willing to buy. B) measures the amount of a nation's labor, capital and and technology that people are willing to buy. C) is a relationship between the quantity of real GDP demanded and the price level. D) increases when the price level falls. E) both C and D are correct. Answer: C Diff: 1 Topic: Aggregate Demand 2) Which of the following situations illustrates how fiscal policy can influence aggregate demand? A) The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a result, the aggregate demand curve shifts leftward. B) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As a result, aggregate demand decreases. C) The government reduces the goods and services tax. As a result, consumption expenditure increases and aggregate demand increases. D) The exchange rate value of the Canadian dollar rises. As a result, people living near the US- Canada border increase their imports of goods and net exports decrease. E) Both A and C are examples of fiscal policy. Answer: C Diff: 2 Topic: Aggregate Demand 7 © 2010 Pearson Education Canada 3) Which of the following situations illustrates how monetary policy can influence aggregate demand? A) The Bank of Canada raises interest rates so people plan to buy less consumer durables. As a result, the aggregate demand curve shifts leftward. B) Investors, anticipating an erosion of financial wealth due to inflation, decide to save more. As a result, aggregate demand decreases. C) The government reduces the goods and services tax. As a result, consumption expenditure increases and aggregate demand increases. D) The exchange rate value of the Canadian dollar rises. As a result, people living near the US- Canada border increase their imports of goods and net exports decrease. E) Both A and D are examples of monetary policy. Answer: A Diff: 2 Topic: Aggregate Demand 4) Disposable income is aggregate income A) minus taxes and benefits. B) minus taxes plus transfer payments. C) minus fixed expenses such as rent and utilities. D) plus transfer payments. E) minus taxes. Answer: B Diff: 1 Topic: Aggregate Demand 5) The quantity of real GDP demanded is composed of the purchases of A) households and net exporters only. B) firms, bondholders, and net exporters only. C) firms and governments only. D) consumers, firms, governments, and net exporters. E) consumers, firms, and governments only. Answer: D Diff: 2 Topic: Aggregate Demand 6) The quantity of real GDP demanded does not depend on decisions made by A) foreigners. B) households. C) suppliers. D) governments. E) firms. Answer: C Diff: 1 Topic: Aggregate Demand 8 © 2010 Pearson Education Canada 7) The quantity of real GDP demanded is the sum of real consumption expenditure (C), investment (I), A) government expenditure (G), exports (X), and imports (M). B) government expenditure (G), and exports (X) minus imports (M). C) exports (X), and imports (M). D) and exports (X) minus imports (M). E) and government expenditure (G). Answer: B Diff: 2 Topic: Aggregate Demand 8) The aggregate demand curve is a relationship between A) real aggregate expenditure and real GDP. B) real income and real GDP. C) real prices and real GDP. D) the price level and the quantity of real GDP demanded. E) the price level and nominal GDP. Answer: D Diff: 1 Topic: Aggregate Demand 9) Which one of the following variables is not held constant along a given aggregate demand curve? A) fiscal policy B) real income C) tax rates D) expectations about inflation E) the price level Answer: E Diff: 2 Topic: Aggregate Demand 10) Which one of the following variables can change without creating a shift of the aggregate demand curve? A) The interest rate. B) Price level. C) The tax rate. D) Expectations about inflation. E) Monetary policy. Answer: B Diff: 2 Topic: Aggregate Demand 9 © 2010 Pearson Education Canada 11) Your total wealth is $1,000, which you are holding in your savings account. If the price level rises by 10 percent, your wealth A) increases by an unknown amount. B) is unchanged. C) decreases to $990. D) is worth 10 percent less than before the price level change. E) increases to $1,100. Answer: D Diff: 2 Topic: Aggregate Demand 12) If the price level rises, then the wealth effect leads to A) an increase in real wealth, an increase in current consumption expenditure, and an increase in saving. B) an increase in real wealth, an increase in current consumption expenditure, and a decrease in saving. C) a decrease in real wealth, an increase in current consumption expenditure, and an increase in saving. D) a decrease in real wealth, an increase in current consumption expenditure, and a decrease in saving. E) a decrease in real wealth, a decrease in current consumption expenditure, and an increase in saving. Answer: E Diff: 3 Topic: Aggregate Demand 13) Which one of the following factors will not shift the aggregate demand curve? A) An increase in the interest rate. B) An increase in the expected inflation rate. C) An increase in the price level. D) An increase in expected future profits. E) An increase in the quantity of money. Answer: C Diff: 2 Topic: Aggregate Demand 14) If a change in wealth is induced by a change in the price level, then this would be shown as a A) movement along the aggregate demand curve. B) shift of the aggregate demand curve due to the substitution effects. C) movement along the aggregate demand curve due to the substitution effects. D) movement along the aggregate supply curve. E) shift of the aggregate demand curve due to the wealth effect. Answer: A Diff: 2 Topic: Aggregate Demand 10 © 2010 Pearson Education Canada 15) Everything else remaining the same, an increase in the quantity of money A) shifts the aggregate demand curve rightward. B) shifts the aggregate demand curve leftward. C) shifts the aggregate supply curve leftward. D) shifts the aggregate supply curve rightward. E) creates a movement down along the aggregate demand curve. Answer: A Diff: 2 Topic: Aggregate Demand 16) Everything else remaining the same, which one of the following increases aggregate demand? A) An increase in taxes. B) An increase in transfer payments. C) A decrease in government spending. D) A decrease in the price level. E) A decrease in the quantity of money. Answer: B Diff: 2 Topic: Aggregate Demand 17) Everything else remaining the same, an increase in the interest rate increases saving and A) increases aggregate demand through the international substitution effect. B) decreases aggregate demand through the international substitution effect. C) increases aggregate demand through the intertemporal substitution effect. D) decreases aggregate demand through the intertemporal substitution effect. E) increases aggregate demand through the wealth effect. Answer: D Diff: 3 Topic: Aggregate Demand 18) Everything else remaining the same, an increase in foreign income A) increases Canada's aggregate supply. B) increases Canada's aggregate demand. C) decreases Canada's aggregate demand. D) creates a movement downward along Canada's aggregate demand curve. E) decreases Canada's aggregate supply. Answer: B Diff: 2 Topic: Aggregate Demand 11 © 2010 Pearson Education Canada 19) Which one of the following is a reason for the negative slope of the aggregate demand curve? A) the real wage effect B) the substitution effects C) the expected inflation effect D) the nominal balance effect E) the income effect Answer: B Diff: 2 Topic: Aggregate Demand 20) Which one of the following shifts the aggregate demand curve leftward? A) A decrease in the interest rate. B) An increase in expected inflation. C) An increase in taxes. D) An increase in the price level. E) An increase in the money wage rate. Answer: C Diff: 2 Topic: Aggregate Demand 12 © 2010 Pearson Education Canada Use the figure below to answer the following questions. Figure 26.2.1 21) Refer to Figure 26.2.1. Which graph illustrates what happens when government expenditure increases? A) (a) B) (b) C) (c) D) (d) E) None of the above Answer: C Diff: 2 Topic: Aggregate Demand Source: Study Guide 13 © 2010 Pearson Education Canada 22) Refer to Figure 26.2.1. Which graph illustrates what happens when the quantity of money decreases? A) (a) B) (b) C) (c) D) (d) E) None of the above Answer: D Diff: 2 Topic: Aggregate Demand Source: Study Guide 23) Refer to Figure 26.2.1. Which graph illustrates what happens when expected future income increases? A) (a) B) (b) C) (c) D) (d) E) None of the above. Answer: C Diff: 2 Topic: Aggregate Demand Source: Study Guide 24) Refer to Figure 26.2.1. Which graph illustrates what happens when government expenditure decreases? A) (a) B) (b) C) (c) D) (d) E) (a) and (b) Answer: D Diff: 2 Topic: Aggregate Demand 25) Refer to Figure 26.2.1. Which graph illustrates what happens when the quantity of money increases? A) (a) B) (b) C) (c) D) (d) E) (a) and (b) Answer: C Diff: 2 Topic: Aggregate Demand 14 © 2010 Pearson Education Canada 26) Which of the following does not change aggregate demand? A) An increase in expected future income. B) A change in fiscal policy. C) A change in monetary policy. D) An advance in technology. E) A rise in the exchange rate. Answer: D Diff: 2 Topic: Aggregate Demand 27) Everything else remaining the same, an increase in the expected inflation rate A) shifts the aggregate demand curve rightward. B) shifts the aggregate demand curve leftward. C) shifts the short-run aggregate supply curve leftward. D) shifts the long-run aggregate supply curve rightward. E) creates a movement up along the aggregate demand curve. Answer: A Diff: 2 Topic: Aggregate Demand 26.3 Explaining Macroeconomic Fluctuations 1) Which one of the following newspaper quotations describes a movement along an SAS curve? A) "The decrease in consumer spending may lead to a recession." B) "The increase in consumer spending is expected to lead to inflation, without any increase in real GDP." C) "Recent higher wage settlements are expected to cause higher inflation this year." D) "Growth has been unusually high the last few years due to more women entering the labour force." E) "The recent tornadoes destroyed many factories in Calgary and Edmonton." Answer: A Diff: 3 Topic: Explaining Macroeconomic Fluctuations Source: Study Guide 2) Full employment equilibrium occurs when A) aggregate demand equals short-run aggregate supply. B) all who are willing and able to work, are working. C) real GDP equals potential GDP. D) real GDP equals potential GDP and the wage level is set so that the GDP deflator equals 100. E) all who are willing and able to work, are working and the wage level is set so that the GDP deflator equals 100. Answer: C Diff: 1 Topic: Explaining Macroeconomic Fluctuations 15 © 2010 Pearson Education Canada 3) A recessionary gap is the amount by which A) potential GDP exceeds real GDP. B) demand will increase to achieve full employment at a given price level. C) the supply curve must increase to achieve full employment at a given price level. D) the price level must adjust to achieve full employment. E) real GDP exceeds potential GDP. Answer: A Diff: 1 Topic: Explaining Macroeconomic Fluctuations 4) An inflationary gap is the amount by which A) potential GDP exceeds real GDP. B) demand must increase to achieve full employment at a given price level. C) supply must increase to achieve full employment at a given price level. D) the price level must adjust to achieve full employment. E) real GDP exceeds potential GDP. Answer: E Diff: 1 Topic: Explaining Macroeconomic Fluctuations 5) When the actual unemployment rate is equal to the natural unemployment rate, then the A) inflation rate must be zero. B) long-run aggregate supply curve is upward sloping. C) short-run aggregate supply curve is vertical. D) economy is operating at potential GDP. E) the money wage rate will rise. Answer: D Diff: 2 Topic: Explaining Macroeconomic Fluctuations 6) When an economy is operating on its long-run aggregate supply curve, A) the actual inflation rate is greater than the anticipated inflation rate. B) the actual unemployment rate equals the natural unemployment rate. C) unemployment will fall to an unusually low rate that is not likely to last into the future. D) real GDP demanded exceeds real GDP supplied. E) inflation must be positive. Answer: B Diff: 2 Topic: Explaining Macroeconomic Fluctuations 16 © 2010 Pearson Education Canada Use the figure below to answer the following questions. Figure 26.3.1 7) Refer to Figure 26.3.1. Short-run macroeconomic equilibrium real GDP in Econoworld is A) $360 billion. B) $400 billion. C) $440 billion. D) $480 billion. E) $520 billion. Answer: B Diff: 1 Topic: Explaining Macroeconomic Fluctuations 8) Refer to Figure 26.3.1. When the economy of Econoworld is in short-run macroeconomic equilibrium, the price level is A) 100. B) 90. C) 75. D) 70. E) 85. Answer: E Diff: 1 Topic: Explaining Macroeconomic Fluctuations 17 © 2010 Pearson Education Canada 9) Refer to Figure 26.3.1. Econoworld is at its short-run macroeconomic equilibrium. There is a difference between ________ real GDP and potential GDP of $________ billion. A) above full-employment equilibrium; 40 B) above full-employment equilibrium; 20 C) below full-employment equilibrium; 40 D) below full-employment equilibrium; 20 E) full-employment equilibrium; 0 Answer: C Diff: 2 Topic: Explaining Macroeconomic Fluctuations 10) Refer to Figure 26.3.1. As Econoworld automatically adjusts to long-run equilibrium, the A) SAS curve shifts rightward. B) AD curve shifts rightward. C) SAS curve shifts leftward. D) AD curve shifts leftward. E) LAS curve shifts leftward. Answer: A Diff: 2 Topic: Explaining Macroeconomic Fluctuations 11) Refer to Figure 26.3.1. If Econoworld automatically adjusts to a long-run equilibrium, then in the long-run macroeconomic equilibrium A) the price level is 70. B) real GDP is $440 billion. C) actual unemployment exceeds the natural unemployment rate. D) potential GDP is greater than in the short run. E) both A and B. Answer: E Diff: 2 Topic: Explaining Macroeconomic Fluctuations 12) Refer to Figure 26.3.1. Consider statements (1) and (2) and select the correct answer. (1) The economy of Econoworld is experiencing an above full-employment equilibrium. (2) SAS will automatically shift rightward as the economy adjusts to l
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