hinsafdar

Which of the following statements concerning aggregate demand is most accurate?

A) When price levels rise, real wealth increases, and individuals will spend more.

B) When price levels rise, real wealth decreases, and individuals will spend less.

C) When price levels fall, real wealth increases, and individuals will spend less.

---

When price levels rise, real wealth decreases, and we would expect individuals to spend less. If the converse were also true—if price levels were to fall—real wealth should increase, and we would expect individuals to spend more, all else being equal.

hinsafdar

The long-run aggregate supply curve is best described as:

A) elastic because most input prices are variable in the long run.

B) perfectly elastic because input prices are sticky in the long run.

C) perfectly inelastic because input prices change proportionately with the price level in the long run.

---

The long-run aggregate supply curve is perfectly inelastic because in the long run, wages and other input prices adjust to changes in the overall price level. Long-run aggregate supply equals potential GDP.

hinsafdar

Which of the following events is least likely to cause a decrease in short-run aggregate supply?

A) Inflation increases from 4% to 7%.

B) A labor stoppage causes the price of steel to rise.

C) Oil exporting countries reduce their production levels.

---

Changes in the price level represent movement along the short-run aggregate supply curve. The other items listed are events that are likely to shift the short-run aggregate supply curve to the left (decrease SRAS).

hinsafdar

Which of the following factors is most likely to increase long-run aggregate supply?

A) The average rate of labor productivity increases.

B) Wage rates increase.

C) Aggregate demand decreases.

---

Factors that shift the long-run aggregate supply curve (LAS) to the right include improvements in technology and productivity, increases in the supply of resources, and institutional changes that increase the efficiency of resource use. An increase in the productivity of the average worker is likely to shift the LAS curve to the right. Wage rate changes shift the short-run aggregate supply curve (SAS) but not the LAS curve. A decline in consumer demand would represent a move down the LAS curve but not a shift in LAS.

hinsafdar

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

A) Increasing real interest rates.

B) An increase in real wealth.

C) An expected decrease in future prices.

---

While an increase in real wealth will shift the AD curve to the right, an increase in the real rate of interest will shift the AD curve to the left as consumers and businesses reduce their borrowing and spending. An expected decrease in prices will shift the AD curve to the left as households and businesses postpone their consumption in anticipation of lower prices in the future.

hinsafdar

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

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

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

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

---

When incomes in foreign countries increase, it is unlikely to have a direct effect on interest rates in the U.S. However, increased foreign income is likely to result in greater foreign purchases of U.S. exports. Thus, aggregate demand in the U.S. is likely to increase.

hinsafdar

The sustainable growth rate of real GDP is most likely to be increased by:

A) an increase in government spending.

B) an increase in the propensity to consume by households.

C) the discovery of untapped oil fields.

---

Sustainable growth in real GDP is defined as the growth rate in real GDP that is sustainable over the long term. The sustainable growth rate is positively affected by increases in the supply of natural resources, the supply of physical capital, or the supply or productivity of labor. An increase in government spending does not increase an economy’s sustainable growth rate.

hinsafdar

Which of the following is most likely to occur in the short run aggregate demand decreases 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.

---

If business and consumer optimism wanes, consumers will spend less and defer current consumption and save more of their disposable income. With reduced product demand, businesses will reduce their capital expenditures and investments. These actions will lead businesses to reduce their number of employees, thereby increasing the rate of unemployment. Moreover, current output will decrease and the price level will fall.

hinsafdar

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

---

At higher price levels, consumption, investment, and net exports all decrease. A rising price level decreases consumers’ real wealth, so they consume less. The higher price level will increase interest rates, which causes business investment to decrease. Rising domestic prices will also reduce foreign purchases of the country’s goods, decreasing net exports.

hinsafdar

If the economy is in short-run disequilibrium below full employment, the most likely explanation is that:

A) money wage rates have decreased.

B) long-run aggregate supply has decreased.

C) aggregate demand has decreased.

---

A decrease in aggregate demand can reduce output below its full-employment level. A decline in long-run aggregate supply would mean the full-employment output level itself has decreased. Wage rates are assumed to be fixed in the short run, but the long-run effect of decreases in wage rates would be to increase (shift) short-run aggregate supply, leading to an increase in output.