Businesses cut back spending when the price level rises because the resulting increased Show more Businesses cut back spending when the price level rises because the resulting increased demand for money drives the interest rate upward. true false (2) The short-run aggregate supply (SRAS) curve is based on the premise that because all prices will change at the same rate businesses can alter their production to take advantage of profit opportunities. true false (3) Expected inflation is how much people expect the aggregate price level to change. always greater than the actual inflation rate. always equals to the actual inflation rate. always less than the actual inflation rate. (4) Which of the following is a component of GDP? Consumption Investment Government spending All of the above are components of GDP. (5) There are no profit opportunities in the long run. true false (6) The classical view of economics describes how increases in the wage rate cause unemployment. sticky prices create profit opportunities for firms in the short run. prices and wages adjust immediately to clear markets. changes in technology or resource endowments can shift the economys level of full employment. (7) Which of the following will shift the classical aggregate supply curve outward? An increase in the money supply A depletion of natural resources A decrease in the aggregate price level Improvements in technology (8) Which of the following statements about the relationship between aggregate spending and aggregate income is true? Aggregate income must exceed aggregate spending or the economy will be in debt. Aggregate spending must exceed aggregate income or the economy will be in debt. Aggregate income always equals aggregate spending. The relationship between aggregate spending and aggregate income depends on how high the tax rate is. (9) When prices rise overall consumer spending declines. rises. is unaffected as long as income remains high. remains unchanged because consumer spending is measured in real not nominal terms. (10) When domestic prices rise exports rise because exporters earn more for the goods they sell. fall because exporters earn less for the goods they sell. rise because foreign countries purchase more domestic goods. fall because foreign countries purchase fewer domestic goods. (11) How does an increase in the money supply affect total output? Output increases because interest rates fall. Output increases because interest rates rise. Aggregate demand increases but total output falls. Aggregate demand falls but total output rises. (12) Which policy variables can affect aggregate demand? Government spending taxes and the money supply Consumer spending business spending and net exports Consumer savings business spending and net exports Consumer confidence business confidence and foreign confidence in the domestic economy (13) The short-run aggregate supply curve illustrates how output responds to changes in prices before all prices have adjusted. how output responds to changes in prices after all prices have adjusted. how producers raise prices in response to increases in their costs. how consumers reduce spending in response to increases in prices. (14) When prices rise but wages remain fixed in the short run firms face profit opportunities because real wages fall. firms reduce output because the costs of their inputs increase. firms profits decline because they are unable to attract workers at the old wage. firms profits remain unchanged because in the long run wages will rise to catch up with the increase in prices. (15) What is the relationship between the price level and the level of output in the long run? When the price level rises output increases. When the price level rises output decreases. The relationship depends on how quickly producers respond to changes in prices. There is no relationship between the price level and the level of output. (16) What is the main reason why wages might be fixed in the short run? Workers are afraid they may be fired if they ask for raises. Unions are not constantly renegotiating their wage contracts. Unions are constantly renegotiating their wage contracts. Workers fail to recognize that prices have risen. (17) If inflation is __________ than expected the real wages of workers covered by wage contracts fall. (18) In the short run what happens to the level of output when the government increases its spending? Aggregate demand shifts outward decreasing the equilibrium level of output. Aggregate demand shifts inward decreasing the equilibrium level of output. Aggregate demand shifts outward increasing the equilibrium level of output. Aggregate demand shifts inward increasing the equilibrium level of output. (19) What is the long-run effect of increasing output beyond the full-employment level? Prices and wages rise and the level of output falls. Prices and wages rise and the level of output remains unchanged. Prices wages and the level of output increase. Prices wages and the level of output decrease. (20) What is the effect of a tax increase on the equilibrium level of aggregate output and prices in the economy? Both the level of output and the price level increase. Both the level of output and the price level decrease. The level of output decreases and the price level increases. The level of output increases and the price level decreases. (21) The natural rate of unemployment is fixed at about 3 percent. the rate of unemployment that guarantees that most people who want to work have jobs. the rate of unemployment associated with the highest possible level of output in the economy. the rate of unemployment associated with a stable rate of inflation. (22) Which of the following statements best describes the relationship between unemployment and inflation? The higher the rate of inflation the higher the rate of unemployment. The higher the rate of inflation the lower the rate of unemployment. When inflation rises unemployment first rises and then falls. There is no relationship between unemployment and inflation. (23) If the Federal Reserve increases the money supply too rapidly then prices rise. prices fall. unemployment rises. unemployment falls. (24) ____________ expectations cause the long-run adjustment process to lag. Show less
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