Reading 23: Aggregate Supply and Aggregate Demand - LOS b,

class, expected, increase, demand, likely

Q1. An increase in the expected rate of inflation is most likely to cause aggregate demand and short-run aggregate supply to:

Aggregate demand Short-run aggregate supply

A) Increase Decrease

B) Increase Increase

C) Decrease Increase

Q2. When incomes in foreign countries increase, aggregate demand in the U.S. is most likely to:

A) decrease because U.S. interest rates will tend to increase.

B) increase because foreign consumers will tend to buy more U.S. export goods.

C) decrease because foreign consumers will tend to buy fewer U.S. export goods.

Q3. Which of the following choices best describes the effects on consumption, investment, and net exports that would result from an increase in the price level, other factors held constant?

Consumption Investment Net exports

A) Decrease Decrease Decrease

B) Decrease Increase Increase

C) Increase Increase Increase

Q4. Which of the following is most likely to occur in the short run if there is an unanticipated decrease in aggregate demand due to a reduction in business and consumer optimism?

A) A higher rate of inflation.

B) An increase in real GDP.

C) An increase in the rate of unemployment.

Q5. Patch Grove Analytics is evaluating candidates for an economic analyst internship. To demonstrate his grasp of the effects of consumer behavior on aggregate demand, a candidate makes the following statements during his interview:

Statement 1: The wealth effect occurs when consumers feel wealthier at higher price levels because their wages will also increase, and spend more in the current period as a result.

Statement 2: Intertemporal substitution accounts for consumers’ tendency to increase their planned purchases in the current period and decrease planned future purchases when interest rates increase.

Are these two statements CORRECT?

Statement 1 Statement 2

A) Incorrect Correct

B) Correct Incorrect

C) Incorrect Incorrect

Q6. Which of the following factors is most likely to increase aggregate demand?

A) An increase in real wealth.

B) Increasing real interest rates.

C) An expected decrease in future prices.