The Aggregate Demand Aggregate Supply Model

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1.In the long-run aggregate supply and demand framework, what is the expected effect of an increase in the money supply?

Both the price level and output will increasePrice levels will decrease while output stays constantBoth prices and output will declinePrice levels will increase but output will stay the sameOutput will increase but prices will remain stable

2.Refer to Exhibit 4. If the economy is currently in a recession, represented by point B in Exhibit 4, what action should policymakers take to restore output to its natural long-run level?

Reduce aggregate demand by shifting it leftwardDecrease short-run aggregate supply by shifting it leftwardIncrease aggregate demand by shifting it rightwardIncrease short-run aggregate supply by shifting it rightwardMaintain current policy without changes

3.What economic condition is characterized by increasing inflation alongside a decline in production?

Prices increase while economic output growsInflation rises as economic output decreasesBoth prices and output declinePrices drop while output expands

4.If the economy starts at a long-run equilibrium and then experiences a drought that severely damages the wheat harvest, what is the short-run effect on prices and output according to the aggregate demand and aggregate supply model?

Prices increase; output decreasesPrices decrease; output increasesPrices increase; output increasesPrices decrease; output decreasesNo change in prices or output

5.If the economy starts at long-run equilibrium and military expenditures increase due to escalating international conflicts, what is the short-term impact on price levels and output according to the aggregate demand and aggregate supply framework?

Prices decrease; output increasesPrices decrease; output decreasesPrices increase; output decreasesPrices increase; output increaseNo change in prices or output

6.If the overall price level decreases but fixed nominal wage agreements cause the real wage to increase, leading firms to reduce their output, which theory does this illustrate?

sticky-wage theory explaining the short-run aggregate supply curveclassical dichotomy theory related to the short-run aggregate supply curvemisperceptions theory of the short-run aggregate supply curvesticky-price theory concerning the short-run aggregate supply curve

7.Why does aggregate demand curve slope downward according to the wealth effect?

A drop in price levels raises the real value of money holdings, leading to higher consumer expenditure.A decline in prices lowers the real worth of money holdings, causing consumers to spend less.Falling prices reduce money holdings, boost lending, lower interest rates, and increase investment spending.Decreasing prices increase money holdings but reduce lending, causing interest rates to rise and investment to decline.

8.Which of the following does not explain why the aggregate demand curve has a downward slope?

The effect of exchange ratesThe impact of changes in wealthThe concept of classical dichotomy or monetary neutralityThe influence of interest rates

9.Why does the aggregate demand curve slope downward due to the interest rate effect?

A decline in prices raises money holdings, causing lending rates to climb and investment to drop.A drop in prices enhances the real value of money, leading to higher consumer expenditures.Lower prices reduce the real value of money, resulting in decreased consumer spending.Falling prices reduce money demand, causing interest rates to fall and investment spending to rise.

10.When policymakers "accommodate" a negative supply shock, what action do they take?

Ignore the negative supply shock and let the market self-correct without intervention.Counteract the shock by reducing aggregate demand to bring down price levels.Address the shock by lowering short-run aggregate supply.Counter the shock by boosting aggregate demand, causing prices to rise even more.