Practice Questions 8-

1. The demand for money

a. is the same as the demand for bonds.

b. is the same as the supply for bonds.

c. increases whenever the price level falls.

d. Increases whenever aggregate income increases.

e. shows that people always demand as much money as possible

2. Which of the following would be most likely to increase the quantity of money demanded (i.e., to cause a movement along a money demand curve)?

a. a decrease in real income

b. an increase in real income

c. a decrease in the interest rate

d. an increase in the cost of converting other assets into money

e. an increase in the price level

3. In the short-run macro model, an open market purchase of bonds by the Fed will

a. raise the interest rate, reduce spending, and increase output.

b. raise the interest rate, reduce spending, and decrease output.

c. lower the interest rate, reduce spending, and decrease output.

d. lower the interest rate, increase spending, and decrease output.

e. lower the interest rate, increase spending, and increase output.

4. Which of the following would lead to a rightward movement along a stationary demand for money curve?

a. a decrease in the interest rate

b. a decrease in the price level

c. an increase in the interest rate

d. an increase in the price level

e. an increase in real income

5. The aggregate demand curve is derived using

a. the sum of market demand curves from all industries.

b. product market demand curves and money market equilibrium.

c. product market demand curves and the short-run Keynesian aggregate expenditure model.

d. the short-run Keynesian aggregate expenditure model only.

e. the short-run Keynesian aggregate model and money market equilibrium.

6. A decrease in the price level leads to which of the following sequences?

a. the money demand curve shifts leftward, the interest rate drops, the aggregate expenditure line shifts upward, and there is movement downward along the aggregate demand curve.

b. the money demand curve shifts rightward, the interest rate increases, the aggregate expenditure line shifts downward, and there is movement upward along the aggregate demand curve.

c. the money demand curve shifts leftward, the interest rate drops, the aggregate expenditure line shifts downward, and there is movement upward along the aggregate demand curve.

d. the money demand curve shifts rightward, the interest rate increases, the aggregate expenditure line shifts upward, and there is movement downward along the aggregate demand curve.

e. the money demand curve shifts leftward, the interest rate drops, the aggregate expenditure line shifts upward, and there is movement upward along the aggregate demand curve.

7. Which of the following would shift the aggregate demand curve to the right?

a. increases in government purchases, investment spending, autonomous consumption, taxes, or the money supply

b. increases in government purchases, investment spending, autonomous consumption, or the money supply

c. decreases in government purchases, investment spending, autonomous consumption, taxes, or the money supply

d. increases in government purchases, investment spending, autonomous consumption or taxes

e. decreases in government purchases or investment spending, and increases in autonomous consumption, taxes, or the money supply

8. If the Fed conducts an open market purchase of bonds, which of the following will happen?

a. the interest rate will decrease, the aggregate expenditure line will shift upward, and the aggregate demand curve will shift leftward

b. the interest rate will increase, the aggregate expenditure line will shift upward, and the aggregate demand curve will shift rightward

c. the interest rate will decrease, the aggregate expenditure line will shift upward, and the aggregate demand curve will shift rightward

d. the interest rate will decrease, the aggregate expenditure line will shift downward, and the aggregate demand curve will shift rightward

e. the interest rate will increase, the aggregate expenditure line will shift downward, and the aggregate demand curve will shift leftward

9. The AS curve

a. indicates the markup at which firms are willing to supply a given level of output.

b. is derived from equilibrium conditions in the money market.

c. has a positive slope because an increase in real GDP causes an increase in the cost of resources.

d. is found by summing up the supply curves of all the firms in an economy.

e. illustrates how a change in the price level affects total output.

10. If output increases, which of the following would occur?

a. prices of non-labor inputs, input requirements per unit of output, and unit costs would all increase, and the economy would move downward along the aggregate supply curve

b. prices of non-labor inputs, input requirements per unit of output, and unit costs would all decrease, and the economy would move downward along the aggregate supply curve

c. prices of non-labor inputs, input requirements per unit of output, and unit costs would all decrease, and the economy would move upward along the aggregate supply curve

d. prices of non-labor inputs, input requirements per unit of output, and unit costs would all increase, and the economy would move upward along the aggregate supply curve

e. prices of non-labor inputs and input requirements per unit of output would increase, unit costs would decrease, and the economy would move downward along the aggregate supply curve

11. Which of the following will shift the aggregate supply curve upward?

a. a decrease in world oil prices

b. bad weather, which increases farmers' costs per unit of output

c. increases in consumer spending

d. an increase in the price level

e. technological changes that improve worker productivity

12. The intersection of the AD and AS curves

a. gives the price at which the quantity of goods demanded equals the quantity supplied

b. represents sustainable levels of nominal GDP and prices

c. represents the optimal output and employment levels for the economy

d. is the short-run macroeconomic equilibrium point

e. represents one of many possible equilibria, given the two curves

13. If a demand shock causes an economy to operate at a point above potential GDP, then

a. the AS curve will shift to return the economy to the original point of equilibrium.

b. the economy will correct itself through rising wages and prices.

c. this short-run equilibrium point will become the new long-run equilibrium GDP.

d. the economy will correct itself through falling wage rates and prices.

e. the shock is said to be a negative demand shock.

14. According to the self-correcting mechanism, if a negative demand shock occurs,

a. a decrease in wage rates will lead to a decrease in the price level so that the economy returns to full employment.

b. the price level will increase, causing equilibrium GDP to return to its original level.

c. the wage rate will eventually increase, restoring GDP to its full-employment level.

d. the price level will remain constant.

e. there will be no effect in the long run.

15. After a negative demand shock, what are the expected long-run adjustments?

a. wages rise, price level rises, and output falls back to potential

b. wages fall, price level rises, and output falls back to potential

c. wages fall, price level falls, and output increases back to potential

d. wages fall, price level rises, and output increases backto potential

e. wages rise, price level falls, and output increases back to potential