In the AD/AS synthesis of the two laws, Say's law is seen as fitting the long run better than a period of a few months or years.
Correct Answer
True
True. In this synthesis, total demand over the long run tends to grow in line with the economy's capacity to produce, so the supply-focused Say's law is seen as fitting well. Over a few months or years, recessions occur in which firms as a group lack demand, which is when Keynes' law is seen as fitting better.
Category: Say's and Keynes' Laws
Question 2
Under the interest rate effect, a higher price level raises interest rates, which reduces business investment and household borrowing for big purchases.
Correct Answer
True
True. At a higher price level, people and firms need more money and credit for the same purchases, which pushes interest rates up. Higher rates discourage business investment and household borrowing for items like homes and cars, so the quantity of aggregate demand falls.
Category: Aggregate Demand
Question 3
The AD curve is drawn fairly flat because the wealth, interest rate, and foreign price effects are believed to be large.
Correct Answer
False
False. The AD curve is drawn fairly steep, because economists debate these three effects and they may be fairly small. A small response of spending to the price level means a steep curve, not a flat one.
Category: Aggregate Demand
Question 4
Potential GDP depends on an economy's existing labor, physical capital, technology, and institutions.
Correct Answer
True
True. Potential GDP is the output an economy can produce when it fully employs its existing labor, physical capital, and technology within its institutional and market structures. Growth in any of these raises potential GDP and shifts LRAS to the right.
Category: Aggregate Supply
Question 5
In the short run, firms can push output above potential GDP, for example through overtime work, but they cannot sustain that level of output.
Correct Answer
True
True. Through extra effort such as overtime and round-the-clock operation, an economy can briefly produce beyond potential GDP, which is why the SRAS curve extends past it. That effort cannot last, so in the long run output returns to potential.
Category: Aggregate Supply
Question 6
Imports are subtracted in the aggregate demand formula because aggregate demand counts only spending on domestically produced goods and services.
Correct Answer
True
True. Aggregate demand is total spending on domestic output, and consumption, investment, and government spending all include some purchases of foreign goods. Subtracting imports removes that spending so only demand for domestically produced output remains.
Category: Aggregate Demand
Question 7
A decrease in the prices of key inputs such as energy shifts the SRAS curve to the left.
Correct Answer
False
False. Lower input prices reduce costs and make production more profitable at each price level, so they shift SRAS to the right. It is an increase in input prices that shifts SRAS to the left.
Category: Shifts in Aggregate Supply
Question 8
Because productivity typically grows only a few percent a year, its effect on aggregate supply over a few months is large.
Correct Answer
False
False. Since productivity usually grows by only a few percentage points a year, its effect on aggregate supply over a few months or even a couple of years is small. Its importance shows up over long periods, when the gains compound.
Category: Shifts in Aggregate Supply
Question 9
The natural rate of unemployment appears as its own separate line on the AD/AS diagram.
Correct Answer
False
False. The natural rate of unemployment is not drawn separately; it is built into the level of potential GDP, since output at potential corresponds to unemployment at the natural rate. Cyclical unemployment shows up as the distance of equilibrium output below potential.
Category: Unemployment and Inflation
Question 10
Cyclical unemployment is high when equilibrium real GDP lies well to the left of potential GDP.
Correct Answer
True
True. Cyclical unemployment comes from the business cycle, so it is high when output is far below potential and low when output is near potential. In the AD/AS diagram, an equilibrium well to the left of the potential GDP line signals a recession.
Category: Unemployment and Inflation
Question 11
A cut in government spending shifts the AD curve to the right.
Correct Answer
False
False. Government spending is a component of aggregate demand, so a cut reduces total spending at every price level and shifts AD to the left. An increase in government spending is what shifts AD to the right.
Category: Shifts in Aggregate Demand
Question 12
In the neoclassical zone, a rightward shift in aggregate demand is the only way to raise real GDP.
Correct Answer
False
False. In the neoclassical zone output is at or near potential GDP, so a rightward AD shift mainly raises the price level. Only a rightward shift in aggregate supply, such as from productivity growth, can raise real GDP there.
Category: SRAS Zones
Question 13
The AD/AS diagram shows a one-time rise in the price level rather than directly showing an ongoing rate of inflation.
Correct Answer
True
True. A shift in AD or SRAS moves the equilibrium price level from one value to another, which is a one-time change. Continuing or expected inflation, where prices rise year after year, is not shown directly in the diagram.
Category: Unemployment and Inflation
Question 14
A rise in key input prices raises the price level and increases real GDP at the same time.
Correct Answer
False
False. Higher input prices shift SRAS to the left, which raises the price level but lowers real GDP and increases unemployment. That combination of higher prices and lower output is the supply-side source of inflationary pressure.
Category: Unemployment and Inflation
Question 15
One explanation for persistent inflation is that people come to expect it, so wages, prices, and interest rates rise each year by the expected amount.
Correct Answer
True
True. When inflation becomes expected, workers, firms, and lenders build it into the wages, prices, and interest rates they set, which keeps it going. Another explanation is that governments may keep stimulating demand even when the economy is near full employment.
Category: Unemployment and Inflation
Question 16
Keynes developed his view that demand drives output in the short run while studying the high inflation of the 1970s.
Correct Answer
False
False. Keynes wrote The General Theory of Employment, Interest, and Money during the Great Depression of the 1930s, a time of mass unemployment. The 1970s were known instead for stagflation, which was linked to leftward shifts in aggregate supply.
Category: Say's and Keynes' Laws
Question 17
A higher price level, with everything else unchanged, is shown as a movement along the AD curve rather than a shift of the curve.
Correct Answer
True
True. The AD curve already shows how total spending responds to the price level, so a change in the price level moves the economy along the curve. The curve shifts only when something else changes, such as confidence, taxes, government spending, or interest rates.
Category: Aggregate Demand
Question 18
According to the chapter, the 2020 U.S. recession was a purely supply-side event with no change in aggregate demand.
Correct Answer
False
False. The 2020 recession most likely combined supply and demand effects: the pandemic reduced labor supply and production, shifting AS left, and people also cut spending on things like restaurants and travel, shifting AD left. Economists debate which effect dominated.
Category: Unemployment and Inflation
Question 19
An unexpected early freeze that destroys crops shifts aggregate supply to the right.
Correct Answer
False
False. A freeze that destroys crops is a negative supply shock, because fewer agricultural products are available at each price level. It shifts aggregate supply to the left, not the right.
Category: Shifts in Aggregate Supply
Question 20
By reducing labor supply through illness and worker caution, the COVID-19 pandemic shifted the SRAS curve to the left.
Correct Answer
True
True. Fewer people available or willing to work reduced what firms could produce at each price level, shifting SRAS to the left. Shortages of goods such as automobile computer chips and meat reflected this supply disruption.
Category: Shifts in Aggregate Supply