Handout 11-

[Q1] 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.

[Q2] 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

[Q3] Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP and ________ in the inflation in the short run, everything else held constant.

A) an increase; an increase

B) a decrease; a decrease

C) no change; an increase

D) no change; a decrease

[Q4] Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP and ________ in the inflation 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

[Q5] A shift in tastes toward American goods ______ net exports in the US and causes the quantity of aggregate output demanded to ______ in the US, everything else held constant.

A) increase; fall

B) increases; rise

C) decreases; rise

D) decreases; fall

[Q6] Everything else held constant, a change in workers' expectations about the aggregate price level will cause ______ to change.

A) long-run aggregate supply

B) aggregate demand

C) short-run aggregate supply

D) the production function

[Q7] In the Keynesian cross diagram, a decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ______ and the equilibrium level of aggregate output to ______, everything else held constant.

A) down; fall

B) up; rise

C) up; fall

D) down; rise