Chapter 12 Practice Questions 1. Deflation will A. B. C. D. cause the aggregate demand curve to shift right (i.e.

, increase aggregate demand). cause the aggregate demand curve to shift left (i.e., decrease aggregate demand). cause a movement up and to the left along a stationary aggregate demand curve (i.e., decrease the quantity of real GDP demanded). cause a movement down and to the right along a stationary aggregate demand curve (i.e., increase the quantity of real GDP demanded).

2.

TRUE/FALSE. An increase in the price level causes a decrease in consumption, investment, government purchases, and net exports. A(n) _____ in the price level or a(n) _____ in the money supply decreases the interest rate, which encourages households and firms to borrow _____. A. B. C. D. E. F. G. H. increase; increase; more increase; increase; less increase; decrease; more increase; decrease; less decrease; increase; more decrease; increase; less decrease; decrease; more decrease; decrease; less

3.

4. 5.

TRUE/FALSE. If the interest rate changes for any reason, then the aggregate demand curve will shift. The federal government can shift the aggregate demand curve right by _____ government purchases and/or _____ personal income taxes and business taxes. A. B. C. D. increasing; increasing increasing; decreasing decreasing; increasing decreasing; decreasing

6.

If U.S. real GDP begins to grow more slowly than foreign real GDPs, then U.S. _____ will grow more slowly than U.S. _____, which will _____ U.S. net exports and shift the aggregate demand curve ____. A. B. C. D. imports; exports; increase; right imports; exports; decrease; left exports; imports; increase; right exports; imports; decrease; left

Page 1 of 4

7.

Last month, ten British pounds could purchase one U.S. dollar. This month, it takes twelve British pounds to purchase one U.S. dollar. This change in the value of the U.S. dollar will _____ U.S. exports to Great Britain, _____ U.S. imports from Great Britain, and _____ U.S. aggregate demand. A. B. C. D. increase; decrease; increase increase; decrease; decrease decrease; increase; increase decrease; increase; decrease

8.

When real GDP is equal to potential GDP, the unemployment rate is A. B. C. D. E. equal to zero. equal to the natural rate of unemployment. less than the natural rate of unemployment. greater than the natural rate of unemployment. More than one of the above could be correct.

9.

TRUE/FALSE. Potential GDP is determined by the number of workers, the capital stock, and the available technology in the economy. Assume that wages and input prices are fixed by contract when the economy begins to experience inflation. In the short run, firms profits will _____, so firms will _____ the quantity of goods and services supplied. A. B. C. D. increase; increase increase; decrease decrease; increase decrease; decrease

10.

11.

If, as the economy experience deflation, some firms do not adjust the prices of their final goods and services because of menu costs, then these firms profits will _____ and they will _____ the quantity of goods and services they supply. A. B. C. D. increase; increase increase; decrease decrease; increase decrease; decrease

12.

Wages and input prices often A. B. C. D. move in the opposite direction as the prices of final goods and services. rise at the same rate as the prices of final goods and services. rise faster than the prices of final goods and services. rise more slowly than the prices of final goods and services.

Page 2 of 4

13.

All of the following will shift both long-run aggregate supply and short-run aggregate supply right except A. B. C. D. an increase in the number of workers in the economy. an increase in the capital stock in the economy. an improvement in production technology. an unexpected decrease in the price of an important natural resource.

14.

An increase in the expected future price level will A. B. C. D. cause the short-run aggregate supply curve to shift right (i.e., increase short-run aggregate supply). cause the short-run aggregate supply curve to shift left (i.e., decrease short-run aggregate supply). cause a movement up and to the right along a stationary short-run aggregate supply curve (i.e., increase the quantity of goods and services firms are willing and able to supply). cause a movement down and to the left along a stationary short-run aggregate supply curve (i.e., decrease the quantity of goods and services firms are willing and able to supply).

15.

Workers and firms producing inputs adjusting to the price level being lower than expected will A. B. C. D. cause the short-run aggregate supply curve to shift right (i.e., increase short-run aggregate supply). cause the short-run aggregate supply curve to shift left (i.e., decrease short-run aggregate supply). cause a movement up and to the right along a stationary short-run aggregate supply curve (i.e., increase the quantity of goods and services firms are willing and able to supply). cause a movement down and to the left along a stationary short-run aggregate supply curve (i.e., decrease the quantity of goods and services firms are willing and able to supply).

16. 17.

TRUE/FALSE. Business cycle fluctuations are most often caused by shifts in aggregate demand. The automatic mechanism refers to a shift in ____ that returns the economy to long-run macroeconomic equilibrium. A. B. C. D. aggregate demand short-run aggregate supply long-run aggregate supply both short-run and long-run aggregate supply

18.

TRUE/FALSE. After an increase in aggregate demand moves the economy to a short-run macroeconomic equilibrium, workers' willingness to accept lower wages and firms' willingness to accept lower input prices moves the economy back to long-run macroeconomic equilibrium.

Page 3 of 4

19.

A decrease in aggregate demand causes a decrease in _____ only in the short run, but causes a decrease in _____ in both the short run and the long run. A. B. C. D. the price level; real GDP real GDP; the price level the price level; unemployment unemployment; the price level

20.

If the economy adjusts through the automatic mechanism, then household and firm optimism causes A. B. C. D. an expansion in the short run and inflation in the long run. an expansion in the short run and deflation in the long run. a recession in the short run and inflation in the long run. a recession in the short run and deflation in the long run.

21.

In the short run, households expecting future income to decrease causes _____, _____ cyclical unemployment, and _____. A. B. C. D. E. F. G. H. expansion; positive; deflation expansion; positive; inflation expansion; negative; deflation expansion; negative; inflation recession; positive; deflation recession; positive; inflation recession; negative; deflation recession; negative; inflation

22.

In the short run, an adverse supply shock causes _____, _____ cyclical unemployment, and _____. A. B. C. D. E. F. G. H. expansion; positive; deflation expansion; positive; inflation expansion; negative; deflation expansion; negative; inflation recession; positive; deflation recession; positive; inflation recession; negative; deflation recession; negative; inflation

23.

TRUE/FALSE. In the long run, if the government takes no action, then an increase in the price of an important input does not affect real GDP, the unemployment rate, or the price level. TRUE/FALSE. The government can successfully fight both components of stagflation simultaneously.

24.

Page 4 of 4