Week 5 Quiz

On the AD–AS diagram, what does the horizontal axis, Y, measure?

Select one.

• Real output, real GDP valued at base-year prices
• Nominal GDP, valued at each year's own prices
• The price level, an index like the GDP deflator
• The quantity of one typical product sold

On the AD–AS diagram, the vertical axis, P, measures the price level. Which description fits it?

Select one.

• The price of the economy's most popular product
• The yearly inflation rate, written with a percent sign
• An index of prices across the whole economy, like the GDP deflator
• The interest rate that banks charge on loans

Prices across the whole economy fall. A retiree finds that the savings in a bank account now buy more, so the household books a trip it had put off. Which reason for the downward slope of aggregate demand does this show?

Select one.

• The interest-rate effect
• The wealth effect
• The exchange-rate effect
• Switching to a cheaper substitute good

Why does short-run aggregate supply slope up?

Select one.

• Firms switch production toward goods whose prices fell
• A higher price level raises the economy's potential output
• Buyers spend more when the price level rises
• Some prices and wages are sticky, so a higher price level makes extra output pay

Use the illustrative linear AD–AS pair (aggregate demand P = 20 − Y⁄100 and short-run aggregate supply P = 4 + Y⁄100, with Y in billions of dollars of real output). Where is the short-run equilibrium, written as (Y, P)?

Select one.

• (800, 12)
• (1,600, 4)
• (12, 800)
• (800, 8)

Use the illustrative linear AD–AS pair (aggregate demand P = 20 − Y⁄100 and short-run aggregate supply P = 4 + Y⁄100, with Y in billions of dollars of real output). The economy starts at the crossing. Suppose the price level were 13 instead of 12, with nothing else about buyers changed. What happens on the aggregate demand side?

Select one.

• Aggregate demand shifts left, and buyers want 700
• Aggregate demand shifts right, and buyers want 900
• Buyers want 700, a movement along the same demand curve
• Buyers want 900, a movement along the same demand curve

Use the illustrative linear AD–AS pair (aggregate demand P = 20 − Y⁄100 and short-run aggregate supply P = 4 + Y⁄100, with Y in billions of dollars of real output). Government purchases rise, and aggregate demand becomes P = 22 − Y⁄100 while short-run aggregate supply stays the same. What is the new short-run equilibrium?

Select one.

• (1,000, 12): output rises and the price level stays put
• (900, 13): output and the price level both rise
• (900, 11): output rises and the price level falls
• (700, 15): output falls and the price level rises

Oil prices jump, raising costs for shipping, farming, and factories across the economy, while nothing about buyers' spending has changed yet. Which curve shifts, which way, and what happens to the price level and real output?

Select one.

• Aggregate demand shifts left; the price level and real output both fall
• Aggregate demand shifts right; the price level and real output both rise
• Short-run aggregate supply shifts right; the price level falls and real output rises
• Short-run aggregate supply shifts left; the price level rises and real output falls

Which of these events shift the aggregate demand curve? Select all that apply.

Select every option that applies.

• Households grow more confident about their jobs and spend more
• A recession abroad cuts orders for the country's exports
• The price level falls with nothing else changing
• Oil prices jump and raise firms' costs
• Firms cancel orders for new equipment
• A new technology lets each worker produce more

True or false: when aggregate demand shifts to the right along an unchanged short-run aggregate supply curve, the price level rises and real output falls.

True or false.

• True
• False