Multiple-Choice Review Questions

1. A business cycle trough is immediately followed by the
(A) nadir.
(B) peak.
(C) inflexion.
(D) expansion.
(E) contraction.

2. Recessions
(A) are a thing of the past.
(B) are very severe depressions.
(C) are typically accompanied by job losses.
(D) occur at regular intervals.
(E) are marked by a sustained increase in output.

3. Which of the following would shift the long-run aggregate supply curve to the right?
(A) Prices are expected to decrease in the near future.
(B) Immigration increases the size of the labor force.
(C) A fire wipes out much of the plant and equipment in the economy.
(D) Prices are expected to increase in the near future.
(E) New government regulations slow factory production.

4. Which of the following would shift the short-run aggregate supply curve to the right?
(A) Prices are expected to increase in the near future.
(B) New government regulations slow factory production.
(C) A fire wipes out much of the plant and equipment in the economy.
(D) Nominal wages decrease.
(E) Nominal wages increase.

5. Which of the following would NOT shift the aggregate supply curve?
(A) An increase in the price level
(B) A decrease in the amount of resources in the economy
(C) An increase in the amount of resources in the economy
(D) An improvement in technology
(E) A decrease in productivity

6. Which of the following would shift the aggregate demand curve to the left?
(A) An increase in consumer confidence
(B) Business firms reduce spending on plant and equipment
(C) Foreigners develop a preference for our products
(D) Government increases its level of spending
(E) An increase in the money supply

7. Which of the following would NOT shift the aggregate demand curve?
(A) A change in consumer confidence
(B) A change in technology
(C) A change in the money supply
(D) A change in spending by state governments
(E) A change in foreign tastes for our products

8. What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate demand curve shifts to the right? Assume an upward-sloping aggregate supply curve.
(A) The equilibrium price level increases while the equilibrium quantity of output decreases.
(B) The equilibrium price level decreases while the equilibrium quantity of output increases.
(C) The equilibrium price level and quantity of output increase.
(D) The equilibrium price level and quantity of output decrease.
(E) The equilibrium price level increases while the equilibrium quantity of output remains unchanged.

9. What will happen to the equilibrium price level and the equilibrium quantity of output if consumer confidence increases? Assume an upward-sloping aggregate supply curve.
(A) The equilibrium price level increases while the equilibrium quantity of output decreases.
(B) The equilibrium price level decreases while the equilibrium quantity of output increases.
(C) The equilibrium price level and quantity of output increase.
(D) The equilibrium price level and quantity of output increase.
(E) The equilibrium price level increases while the equilibrium quantity of output remains unchanged.

10. What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate demand curve shifts to the right? Assume a long-run aggregate supply curve.
(A) The equilibrium price level increases while the equilibrium quantity of output decreases.
(B) The equilibrium price level decreases while the equilibrium quantity of output increases.
(C) The equilibrium price level and quantity of output increase.
(D) The equilibrium price level remains unchanged while the equilibrium quantity of output increases.
(E) The equilibrium price level increases while the equilibrium quantity of output remains unchanged.

11. What will happen to the equilibrium price level and the equilibrium quantity of output if the aggregate supply curve shifts to the left? Assume an upward-sloping aggregate supply curve.
(A) The equilibrium price level increases while the equilibrium quantity of output decreases.
(B) The equilibrium price level decreases while the equilibrium quantity of output increases.
(C) The equilibrium price level and quantity of output increase.
(D) The equilibrium price level and quantity of output decrease.
(E) The equilibrium price level increases while the equilibrium quantity of output remains unchanged.

12. What will happen to the equilibrium price level and the equilibrium quantity of output if a major earthquake destroys much of the plant and equipment on the West Coast? Assume an upward-sloping aggregate supply curve.
(A) The equilibrium price level increases while the equilibrium quantity of output decreases.
(B) The equilibrium price level decreases while the equilibrium quantity of output increases.
(C) The equilibrium price level and quantity of output increase.
(D) The equilibrium price level and quantity of output increase.
(E) The equilibrium price level increases while the equilibrium quantity of output remains unchanged.

13. Stagflation occurs when
(A) aggregate supply shifts left.
(B) aggregate supply shifts right.
(C) aggregate demand shifts left.
(D) aggregate demand shifts right.
(E) inflation slows down.

14. Which of the following will promote economic growth?
(A) Laws limiting immigration
(B) A decrease in the money supply
(C) An increase in the money supply
(D) Price controls that keep prices low
(E) An increase in the supply of capital

15. Stagflation could be caused by
(A) an improvement in consumer confidence.
(B) a decline in consumer confidence.
(C) an increase in resource prices.
(D) a decrease in resource prices.
(E) wages and salaries that are decreasing.

Free-Response Review Questions

1. Draw an aggregate supply/aggregate demand diagram. Label the axes of your diagram. Make the aggregate supply curve upward sloping. Show which curve shifts when foreigners suddenly develop a distaste for our products. What will happen to equilibrium output and the equilibrium price level in the short run?

2. Would you expect the same thing to happen to equilibrium output and the equilibrium price level in the long run? Redraw the aggregate supply/aggregate demand diagram using a long-run aggregate supply curve. Now what happens when foreigners develop a distaste for our products?

3. Explain why the long-run aggregate supply curve is drawn as a vertical line and the short-run aggregate supply curve is drawn upward sloping. Explain why the long-run effects of a change in foreign tastes are different from the short-run effects.