Aggregate Demand and Aggregate Supply
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1. If the Minister of the Economy of Freedonia declares that "We are in a recession," he is saying that
a. Freedonia will be in a depression within six months.
b. Freedonia's GDP is growing at a lower rate than in the previous year.
c. Freedonia's GDP has declined over a period of at least six months.
d. Freedonia's price level is higher than in the previous year.

2. The "business cycle" refers to
a. the economic model in which businesses pay wages for the resources they purchase from households.
b. the tendency of all economies to grow over time.
c. the tendency of all economies to experience alternating periods of growth and decline.
d. the fact that we must adjust any year's GDP by the price level to measure real growth.

3. The U.S. gross domestic product includes
a. cars manufactured by Ford's plants in Brazil.
b. intermediate goods and services.
c. production by the Honda plant in Kentucky.
d. wine imported from France.

4. The consumer price index is a way of measuring
a. the level of aggregate demand by adding up all expenditure by consumers.
b. the price level by tracking the price of all goods in the economy.
c. the price level tracking only a select group of goods that are commonly purchased by households.
d. the price level by comparing the price of goods bought and sold.

5. In the horizontal segment of an aggregate supply curve
a. it is easy for firms to hire more people.
b. it is easy for people to find new jobs.
c. firms can hire more people without an increase in the price level.
d. all of the above.
e. none of the above

6. The CPI is an imperfect measure of the price level because
a. new goods and services are constantly created but are not included in the index.
b. the changes in the quality of goods in the market basket are not included in the index.
c. it does not account for changes in the relative importance of goods and services in the market basket.
d. all of the above.
e. none of the above.

7. On the vertical segment of an aggregate supply curve
a. it is easy for firms to hire more people.
b. it is easy for people to find new jobs.
c. firms can hire more people without an increase in the price level.
d. output can be increased only with an increase in the price level.

8. The aggregate demand curve is downward sloping because
a. as the price level increases, the purchasing power of people's wealth increases.
b. as the price level increases, people need to borrow to buy more goods and services and interest rates decrease.
c. as the price level increases, consumers in other countries find our goods MORE expensive.
d. as the price level increases, consumers in other countries find our goods LESS expensive.

9. Aggregate demand will increase (shift to the right) if
a. the supply of resources increases.
b. the income level of people in other countries increases.
c. the price level increases.
d. government spending decreases.

10. The aggregate supply will decrease (shift to the left) if
a. there is a technological improvement.
b. there is an increase in the supply of oil.
c. there is an increase in the price of oil.
d. there is an increase in government spending.

11. In Figure 1, if the price level is 110,
a. aggregate supply will shift to bring the economy into equilibrium.
b. aggregate demand will shift to bring the economy into equilibrium.
c. the price level will increase to bring the economy into equilibrium.
d. the price level will decrease to bring the economy into equilibrium.

       

       

12. In the 1970s, OPEC increased oil prices,
a. which caused demand pull inflation.
b. which caused a period of deflation.
c. which led to a period of high unemployment.
d. which shifted aggregate supply to the right.
e. which led to a period of high economic growth.

13. During the great depression,
a. aggregate supply increased.
b. aggregate demand increased.
c. inflation was high.
d. unemployment was high.

14. Real GDP
a. is always higher than nominal GDP.
b. is always lower than GDP.
c. can be found by subtracting the price level from nominal GDP and multiplying by 100.
d. can be found by dividing nominal GDP by the price level and multiplying by 100.



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