PART I : TRUE OR FALSE
_____ 1. A reduction in the price level will cause an increase in aggregate demand.
_____ 2. An increase in the price level tends to increase aggregate quantity demanded because it raises interest rates.
_____ 3. The aggregate demand schedule shows the equilibrium level of output corresponding to each price level.
_____ 4. The "real balance effect" refers to the increase in consumption that occurs when there is an increase in the real income of households.
_____ 5. An increase in the price level will reduce real balances and thus reduces aggregate spending and income.
_____ 6. The real money balances are equal to the quantity of nominal money divided by the price level.
_____ 7. The aggregate demand curve shows the relationship between income and employment at a given price level.
_____ 8. An increase in the price level will tend to raise the interest rate by increasing the nominal money supply.
_____ 9. An increase in interest rates will tend to increase aggregate demand by increasing investment spending.
_____ 10. An increase in interest rates due to an increase in the nominal money supply will shift the aggregate demand curve to the right.
_____ 11. An increase in the domestic price level will tend to reduce exports and increase imports and thus increase the equilibrium level of real GDP.
_____ 12. An increase in government purchases or an increase in transfer payments tends to shift the aggregate demand curve to the right.
_____ 13. Monetary policy refers to the central bank's attempt to influence the economy by varying the real money supply.
_____ 14. If the central bank increases interest rates, that will cause households to reduce their consumption spending and increase their investment spending.
_____ 15. A decline in the international value of a country's currency will reduce its exports and will shift its aggregate demand curve to the left.
_____ 16. An increase in foreigners' incomes will reduce a nation's exports and will shift its aggregate demand curve to the left.
_____ 17. An increase in the expected inflation rate will shift a nation's aggregate demand curve to the left, while an increase in expected incomes will shift a nation's aggregate demand curve to the right.
_____ 18. Aggregate supply is a functional relationship between the price level and the output that firms wish to produce.
_____ 19. The macroeconomic short run is the time period during which the prices of inputs (including wages) change in response to changes in demand and supply but the prices of goods and services do not change.
_____ 20. The explanation for the upward-sloping aggregate supply curve is the increase in wage rates as the level of output produced increases.
_____ 21. The equilibrium price level in the economy is determined by the intersection of the aggregate demand and aggregate supply curves.
_____ 22. In the macroeconomic long run, an increase in aggregate demand will result in both an increase in the level of output and an increase in the price level.
_____ 23. In the macroeconomic long-run there is full employment of all factors of production, unemployment is at its natural rate and real GDP is at it's potential level.
_____ 24. The short run aggregate supply curve shows the prices charged by firms at each level of output assuming that wages are constant.
_____ 25. In the intermediate range of the short run aggregate supply curve, firms will sell additional output only if the prices of the products increase.
_____ 26. The long-run aggregate supply curve is vertical and shows that long-run output is not determined by the price level.
_____ 27. A change in the wage rate will shift both the short-run and the long-run aggregate supply curve.
_____ 28. An increase in the capital stock will shift only the short-run aggregate supply curve.
_____ 29. If the price level is below the short run macroeconomic equilibrium level, there will be surpluses of goods and businesses will accumulate unplanned inventories.
_____ 30. At a full employment macroeconomic equilibrium, there will be both a recessionary gap and an inflationary gap.
_____ 31. In the long run, the only effect of a demand shock is an increase in GDP.
_____ 32. An adverse supply shock shifts the short run aggregate supply curve upward and to the left, increases the price level and increases the level of unemployment.
____ 33. The four major components of aggregate expenditure are consumption, saving, investment and net exports.
_____ 34. The most important factor in determining the level of consumption spending is the rate of interest.
_____ 35. When the consumption function is below the 45 degree line, saving is positive.
_____ 36. The average propensity to consume tends to rise as incomes rise.
____ 37. If the marginal propensity to consume is .75, the marginal propensity to save will be .25.
____ 38. Endogenous consumption does not depend on the level of disposable income.
____ 39. The marginal propensity to consume out of real GDP is usually smaller than the marginal propensity to consume out of disposable income.
____ 40. The three most important factors in determining the level of planned investment spending are: the current level of disposable income, profit expectations and the existing capital stock.
_____ 41. The real interest rate is approximately equal to the nominal rate of interest plus the inflation rate.
____ 42. Increases in the real rate of interest tend to result in decreases in the level of planned investment.
____ 43. Both government expenditures and net exports tend to increase when the level of GDP increases.
____ 44. The slope of the Net Export function is equal to the Marginal Propensity to Import.
_____ 45. The four most important influences on the size of a nation's imports are (1) foreign GDP, (2) international specialization, (3) the relative prices of domestic and foreign goods, and (4) exchange rates.
____ 46. The aggregate planned expenditure function normally has a positive intercept and a positive slope.
_____ 47. A decrease in production will generally reduce aggregate planned expenditures by an amount greater than the original decrease in production.
____ 48. If the Aggregate Planned Expenditure curve is above the 45 degree line, firms will find that they are accumulating unplanned inventories.
____ 49. An increase in the price level will shift downwards the aggregate planned expenditure curve and thus shift downward the aggregate demand curve.
_____ 50. The Aggregate Demand curve is constructed in exactly the same way the demand curve for individual products is constructed.
PART II: FILL IN THE BLANKS
1. The ___________________________ function is a relationship between the level of real GDP and the price level.
2. There are three reasons for the negative slope of the Aggregate Demand Curve. They are: (1) the _____________________ effect, (2) the interest rate effect, and (3) the international effect.
3. The four most important causes of shifts in the aggregate demand curve are: (1) fiscal policy, (2) _______________________, (3) international factors and (4) expectations.
4. Fiscal policy is the government's attempt to influence economic activity by altering the level of (1) spending on goods and services (2) transfer payments, and (3) ______________________.
5. The two international factors that are most likely to shift the aggregate demand curve are (1) changes in __________________ , and (2) changes in foreign incomes.
6. The three types of expectations that have the greatest effect on aggregate demand are expectations about: (1) inflation, (2)________________ , and (3) future profits.
7. In the macroeconomic _____________ run, the prices of all inputs and outputs adjust to changes in supply and demand.
8. The short-run aggregate supply curve is assumed to have three ranges. They are: (1) the Depression (or Keynesian) range, (2) the intermediate range, and (3) the_______________________________ range.
9. Shifts in the long-run aggregate supply curves are always accompanied by parallel shifts of the ________________________ __________________________ curves.
10. Short-run macroeconomic equilibrium occurs where the _____________________________ curve crosses the short run aggregate supply curve.
11. Aggregate _____________________ shocks can be caused by increases in the nominal money supply or an increase in government spending.
12. Households can allocate their disposable income to either Consumption or ___________________________ .
13. _________________________ Consumption refers to the consumption spending that would occur even if disposable income were zero.
14. "Investment goods" refer to plant, equipment and
___________________________.
15. Actual aggregate expenditure is equal to
______________________________ plus unplanned inventory accumulation.