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Chapter 29AS-AD and the Business Cycle

29.1 Business-Cycle Definitions and Facts

1) The business cycle is defined as

A) changes in the stock market.

B) changes in financial markets.

C) persistent growth in potential GDP.

D) irregular ups and downs in production and jobs.

E) the period of time during which the unemployment rate is rising.

Answer: DTopic: Business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU

2) The task of identifying and dating business cycle phases and turning points is performed by

A) a private organization, the National Bureau of Economic Research.

B) a public organization, the Bureau of Labor Statistics.

C) a private organization, the Conference Board.

D) a public institution, the Commerce Department.

E) the Federal Reserve.

Answer: ATopic: Business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: DMC

1142 Bade/Parkin œ Foundations of Economics, Third Edition

3) A business cycle has two phases, called

A) expansion and recession.

B) boom and depression.

C) concave and convex.

D) elongation and contraction.

E) peak and depression.

Answer: ATopic: Business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: DMC

4) A business cycle has two turning points, called a

A) low and a high.

B) peak and a trough.

C) top and a bottom.

D) ceiling and a floor.

E) max and a min.

Answer: BTopic: Business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: DMC

Chapter 29 AS-AD and the Business Cycle 1143

5) Based on the figure above, in which quarter or quarters did a recession occur?

A) between 2000, 2nd quarter to 2001, 2nd quarter and also between 2002, 2nd quarter tothe end of the figure

B) in 2001, 2nd quarter

C) between 2001, 2nd quarter to 2002, 2nd quarter

D) in 2002, 2nd quarter

E) after 2002, 2nd quarter

Answer: CTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: NAU

6) Based on the figure above, in which quarter or quarters did an expansion occur?





E) there are no expansions illustrated in the figure

Answer: ATopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: NAU


7) Based on the figure above, in which quarter or quarters did a trough occur?





E) there are no troughs illustrated in the figure

Answer: DTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: NAU

8) Based on the figure above, in which quarter or quarters did a peak occur?





E) there are no peaks illustrated in the figure

Answer: BTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: NAU

9) During the business cycle, real GDP fluctuates around a

A) peak.

B) parabola.

C) trend.

D) trough.

E) recession.

Answer: CTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: DMC


10) In a recession

A) real GDP is equal to potential GDP.

B) potential GDP decreases.

C) there is no relationship between real GDP and potential GDP.

D) real GDP moves from above to below potential GDP.

E) potential GDP moves from above to below real GDP.

Answer: DTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: TPS

11) During the business cycle,

A) real GDP fluctuates around nominal GDP.

B) nominal GDP fluctuates around real GDP.

C) real GDP fluctuates around its trend.

D) trend GDP fluctuates around real GDP.

E) real GDP falls after the trough.

Answer: CTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: NAU

12) When real GDP is above its trend, resources are ____ and when real GDP is below trend,resources are ____.

A) underused; overused

B) unemployed; fully employed

C) contracted; expanded

D) overused; underused

E) fully employed; underused

Answer: DTopic: Business cycleSkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: DMC


13) In order to be classified as a recession, a contraction of general economic activity must lastat least

A) one year.

B) six months.

C) one period.

D) one quarter.

E) None of the above because recessions do not have a minimum length.

Answer: BTopic: Business cycle, recessionSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: DMC

14) How long must a downturn in real GDP last before it is considered a recession?

A) one month

B) 3 months

C) six months

D) one year

E) two years

Answer: CTopic: Business cycle, recessionSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: TPS

15) A recession conventionally is defined as a decrease in

A) real GDP that lasts for at least six months.

B) the growth rate of real GDP that lasts for at least six months.

C) potential GDP that lasts for at least six months.

D) real GDP that lasts for at least three months.

E) the inflation rate that lasts for at least six months.

Answer: ATopic: Business cycle, recessionSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU


16) A recession is a decrease in real GDP that lasts for at least

A) three months.

B) six months.

C) two years.

D) one decade.

E) one year.

Answer: BTopic: Business cycle, recessionSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU

17) A recession runs from the

A) peak of the business cycle to its trough.

B) peak of the business cycle to a recovery.

C) expansion of a business cycle to its peak.

D) trough of a business cycle to its peak.

E) trough of a business cycle to its expansion.

Answer: ATopic: Business cycle, recessionSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU

18) The NBER has dated business cycles in the United States back to about

A) 1930.

B) 1850.

C) 1800.

D) 1700.

E) 1965.

Answer: BTopic: Business cycle, historySkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU


19) Since 1854, the average length of a recession in the United States is

A) 3 to 4 years.

B) 56 months.

C) 146 days.

D) 18 months.

E) 6 months.

Answer: DTopic: Business cycle, historySkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: DMC

20) In the United States since 1854, the average length of a recession is about

A) 2 months.

B) 18 months.

C) 48 months.

D) 90 months.

E) 6 months.


21) In the United States since 1854, the average length of an expansion is about

A) 6 months.

B) 3 years.

C) 6 years.

D) 12 years.

E) 1 year.



22) Since 1854, the average length of an expansion in the United States is

A) 35 months.

B) 5 months.

C) 146 days.

D) 8 years.

E) 14 months.

Answer: ATopic: Business cycle, historySkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: DMC

23) In the United States, the ____ part of the business cycle has lasted the longest on theaverage.

A) recession

B) trough

C) expansion

D) peak

E) high-trend

Answer: CTopic: Business cycle, historySkill: Level 2: Using definitionsObjective: Checkpoint 29.1Author: TPS

24) The last recession in the United States was in

A) 2001.

B) 1991.

C) 1981.

D) 1975.

E) 2004

Answer: ATopic: U.S. recent business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU


25) The longest expansion in U.S. history took place throughout most of the

A) 1880s.

B) 1930s.

C) 1970s.

D) 1990s.

E) 2000s.

Answer: DTopic: U.S. recent business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: NAU

26) The business cycle is

A) a regular up and down movement in production and jobs.

B) an irregular up and down movement in production and jobs.

C) a regular movement in price changes.

D) an irregular movement in price changes.

E) an irregular up and down movement in the interest rate.

Answer: BTopic: Business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: STUDY GUIDE

27) The turning point that reflects the end of an expansion is a

A) peak.

B) recession.

C) trough.

D) trend.

E) stoppage.

Answer: ATopic: Business cycleSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: STUDY GUIDE


28) A standard definition of recession is a decrease in real GDP that lasts for at least two

A) years.

B) quarters.

C) months.

D) weeks.

E) reference periods.

Answer: BTopic: Business cycle, recessionSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: STUDY GUIDE

29) Which organization or agency identifies and dates business cycle phases in the UnitedStates?

A) Bureau of Economic Analysis

B) Department of Commerce

C) National Bureau of Economic Research

D) Federal Reserve System

E) Bureau of the Treasury

Answer: CTopic: Business cycle, NBERSkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: STUDY GUIDE

30) Since 1854, the NBER has identified approximately

A) 82 complete business cycles.

B) 33 expansions and 25 recessions.

C) 33 complete business cycles.

D) 25 expansions and 33 recessions.

E) 17 complete business cycles.

Answer: CTopic: Business cycle, historySkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: STUDY GUIDE


31) During the twentieth century, recessions

A) have shortened and expansions have lengthened.

B) were as long as expansions.

C) have lengthened and expansions have shortened.

D) and expansions have shortened.

E) and expansions have not changed in length.

Answer: ATopic: Business cycle, historySkill: Level 1: DefinitionObjective: Checkpoint 29.1Author: STUDY GUIDE

29.2 Aggregate Supply

1) Over a business cycle, the quantities of capital, human capital, and entrepreneurial talent

A) change gradually and do not fluctuate much.

B) cycle alongside real GDP.

C) are completely unpredictable and cannot be forecast.

D) cycle more than real GDP.

E) are constant and do not change.

Answer: ATopic: Aggregate supply basicsSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: TPS

2) Potential GDP

A) increases as the price level increases because firms supply more goods and services.

B) decreases as the price level increases because people demand fewer goods andservices.

C) might either increase or decrease as the price level increases, depending on whetheraggregate demand increases or decreases.

D) is independent of the price level.

E) never changes.

Answer: DTopic: Potential GDPSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU


3) The line showing potential GDP is a vertical straight line because

A) there is only one level of full employment at any point in time.

B) economists are unsure about how to determine potential GDP

C) it represents the minimum level of real GDP in a recession.

D) when nothing else changes, a higher price level has no effect on real GDP.

E) the aggregate supply curve is upward sloping.

Answer: ATopic: Potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS

4) A rise in the price level produces a ____ the potential GDP line.

A) rightward shift of

B) movement downward along

C) leftward shift of

D) movement upward along

E) neither a shift of the potential GDP line nor a movement along

Answer: DTopic: Potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC

5) Which of the following is true?

A) Aggregate supply is another name for potential GDP.

B) Potential GDP increases as the price level increases.

C) At full employment, aggregate supply is equal to potential GDP.

D) Potential GDP decreases as the price level increases.

E) The potential GDP line has a negative slope.

Answer: CTopic: Potential GDPSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU


6) Moving along the potential GDP line, when the price level changes, thei. real wage rate stays at the full-employment equilibrium level.ii. money wage rate changes by the same percentage.iii. money prices of non-labor resources change by the same percentage.

A) i only.

B) ii only.

C) iii only.

D) i and ii.

E) i, ii, and iii.

Answer: ETopic: Potential GDPSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: TPS

7) The aggregate supply curve shows the relationship between

A) potential GDP and the price level.

B) potential GDP and real GDP.

C) the quantity of real GDP supplied and the price level.

D) the quantity of real GDP supplied and the interest rate.

E) potential GDP and the aggregate demand curve.

Answer: CTopic: Aggregate supplySkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU

8) The slope of the aggregate supply curve shows that, all else the same, the

A) quantity of real GDP supplied increases as the price level increases.

B) quantity of real GDP supplied decreases as the price level increases.

C) quantity of real GDP supplied remains constant as the price level increases.

D) price level remains constant as real GDP increases.

E) price level remains constant as potential GDP increases.

Answer: ATopic: Aggregate supplySkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU


9) Other things remaining the same, an increase in the price level

A) increases aggregate supply.

B) decreases aggregate supply.

C) increases the quantity of real GDP supplied.

D) decreases the quantity of real GDP supplied.

E) neither change aggregate supply nor changes the quantity of real GDP supplied.

Answer: CTopic: Aggregate supplySkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: TPS

10) The ____ the ____ is the quantity of real GDP supplied.

A) lower the price level; greater

B) higher the price level; greater

C) greater the demand for labor; smaller

D) lower the supply of labor; greater

E) lower aggregate demand; greater

Answer: BTopic: Aggregate supplySkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: DMC

11) The slope of the aggregate supply curve shows that the ____ the price level, the

A) higher; greater is the quantity of real GDP supplied.

B) higher; smaller is the quantity of real GDP supplied.

C) lower; greater is the quantity of real GDP supplied.

D) higher; is the quantity of potential GDP supplied.

E) lower; is the quantity of potential GDP supplied.

Answer: ATopic: Aggregate supplySkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: DMC


12) Because there is a ____ relationship between the price level and the quantity of real GDPsupplied, the aggregate supply curve is ____ curve.

A) negative; an upward-sloping

B) positive; a downward-sloping

C) positive; an upward-sloping

D) negative; a downward-sloping

E) positive; a vertical

Answer: CTopic: Aggregate supply curveSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: DMC

13) If the money wage rate does not change, a decrease in the price level will ____ the real wagerate and ____ firms' profit.

A) raise; decrease

B) raise; increase

C) lower; decrease

D) lower; increase

E) lower; not change

Answer: ATopic: Aggregate supply, wage rateSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU

14) The money wage rate is constant when moving along

A) only the aggregate supply curve.

B) only the aggregate supply curve and the potential GDP line.

C) only the potential GDP line.

D) neither the aggregate supply curve nor the potential GDP line.

E) the aggregate supply curve, the potential GDP line, and the aggregate demand curve.

Answer: ATopic: Aggregate supply, wage rateSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU


15) Along the aggregate supply curve, the quantity of real GDP supplied increases when theprice level rises because

A) profits decrease.

B) the real wage rate falls.

C) the real wage rate rises.

D) the real wage rate and profits both fall.

E) the demand for the goods and services increases.

Answer: BTopic: Aggregate supply, wage rateSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU

16) An increase in the price level leads to

A) an upward movement along the aggregate supply curve.

B) a downward movement along the aggregate supply curve.

C) a leftward shift of the aggregate supply curve.

D) a rightward shift of the aggregate supply curve.

E) neither a movement along the aggregate supply curve nor a shift of the aggregatesupply curve.

Answer: ATopic: Aggregate supply, price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: NAU

17) Moving along the aggregate supply curve,

A) the quantity of capital used increases.

B) only the price level changes.

C) technology advances.

D) the stock of human capital increases.

E) the real wage rate is constant.

Answer: BTopic: Aggregate supply curveSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS


18) ____ increases the quantity of real GDP supplied and is shown as a movement along the AScurve.

A) A decrease in the quantity of money

B) A decrease in consumption expenditure

C) A fall in the expected rate of profit

D) A rise in the price level

E) An increase in potential GDP

Answer: DTopic: Aggregate supply curveSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS

19) A change in the price level brings a ____ the aggregate supply curve, NOT a ____ theaggregate supply curve.

A) shift in; movement along

B) vertical displacement of; change in the slope of

C) movement along; shift in

D) change in the slope of; horizontal displacement of

E) shift in; change in the slope of

Answer: CTopic: Aggregate supply, price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: DMC

20) A rise in the price level produces a ____ the aggregate supply curve.





E) rightward shift of the aggregate supply curve and a movement downward along

Answer: DTopic: Aggregate supply, price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: DMC


21) A fall in the price level produces a ____ the aggregate supply curve.





E) rightward shift of the aggregate supply curve and a movement downward along

Answer: BTopic: Aggregate supply, price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: DMC

22) Changes in which of the following do NOT shift the AS curve?i. the price levelii. potential GDPiii. the money wage rate

A) i only.

B) ii only.

C) iii only.

D) i and ii.

E) i, ii, and iii.

Answer: ATopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS

23) The aggregate supply curve slopes ____ because a ____ in the price level brings a ____ inthe real wage rate.

A) upward; rise; rise

B) downward; fall; rise

C) upward; rise; fall

D) upward; fall; fall

E) downward; rise; rise

Answer: CTopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC


24) It is profitable to hire more labor if the price level ____ and the money wage rate ____.

A) rises; falls

B) falls; rises

C) falls; does not change

D) does not change; rises

E) rises; rises by the same percentage

Answer: ATopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS

25) A fall in the price level brings a ____ in the real wage rate that ____ profits and can lead to____.

A) rise; reduces; firms going out of business

B) rise; reduces; new firms entering business

C) fall; increases; firms going out of business

D) rise; increases; new firms entering business

E) fall; decreases; new firms entering business

Answer: ATopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC

26) A fall in the price level brings a ____ in the real wage rate that ____ profits and can lead to____.

A) rise; reduces; firms restarting production

B) rise; reduces; firms temporarily shutting down

C) fall; increases; firms temporarily shutting down

D) rise; increases; firms restarting production

E) rise; increases; firms temporarily shutting down

Answer: BTopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC


27) If the price level falls and the money wage rate does not change, some firms ____ and thereis ____.

A) shut down; a leftward shift of the aggregate supply curve

B) start up; a rightward shift of the aggregate supply curve

C) shut down; a decrease in the quantity of real GDP supplied

D) shut down; a decrease in potential GDP

E) start up; an increase in potential GDP

Answer: CTopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: MR

28) A rise in the price level brings a ____ in the real wage rate that ____ profits and can lead to____ production.

A) rise; reduces; decreasing

B) rise; reduces; increasing

C) fall; increases; increasing

D) rise; increases; decreasing

E) fall; decreases; decreasing

Answer: CTopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC

29) When the price level rises and the money wage rate does not change,

A) the quantity of real GDP supplied increases as more businesses start up and potentialGDP does not change.

B) the quantity of real GDP supplied decreases as more businesses fail and potential GDPdoes not change.

C) profits fall and more businesses fail.

D) existing businesses do not change their level of output.

E) the quantity of potential GDP increases because the quantity of real GDP suppliedincreases.

Answer: ATopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: NAU


30) Changes in which of the following shifts the aggregate supply curve?i. the price level.ii. the money wage rate.iii. potential GDP.

A) i only.

B) ii only.

C) iii only.

D) ii and iii.

E) i, ii, and iii.

Answer: DTopic: Changes in aggregate supplySkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC

31) An increase in the money wage rate leads to

A) an upward movement along the aggregate supply curve.

B) a downward movement along the aggregate supply curve.

C) a leftward shift of the aggregate supply curve.

D) a rightward shift of the aggregate supply curve.

E) a leftward shift of the aggregate demand curve.

Answer: CTopic: Changes in aggregate supply, money wage rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: NAU

32) An increase in the money wage rate shifts the

A) AD curve rightward.

B) AD curve leftward.

C) AS curve rightward.

D) AS curve leftward.

E) potential GDP curve rightward.

Answer: DTopic: Changes in aggregate supply, money wage rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: MR


33) ____ decreases aggregate supply.

A) An increase in potential GDP

B) An increase the quantity of capital

C) A rise in the price level

D) A rise in the money wage rate

E) A fall in the money wage rate

Answer: DTopic: Changes in aggregate supply, money wage rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS

34) A fall in the money wage rate ____ aggregate supply and ____.

A) decreases; shifts the AS curve rightward

B) increases; shifts the AS curve leftward

C) increases; shifts the AS curve rightward

D) decreases; shifts the AS curve leftward

E) does not change; does not shift the AS curve.

Answer: CTopic: Changes in aggregate supply, money wage rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC

35) If the costs of production decrease, there is

A) an increase in aggregate supply and the AS curve shifts rightward.

B) a decrease in aggregate supply and the AS curve shifts leftward .

C) an increase in the quantity of real GDP supplied and a movement up along the AScurve.

D) a decrease in the quantity of real GDP supplied and a movement down along the AScurve.

E) an increase in aggregate supply and the AS curve shifts leftward.

Answer: ATopic: Shifts in the aggregate supply curveSkill: Level 3: Using modelsObjective: Checkpoint 29.2Author: TPS


36) If the costs of production increase, there is

A) an increase in aggregate supply and the AS curve shifts rightward.

B) a decrease in aggregate supply and the AS curve shifts leftward .

C) an increase in the quantity of real GDP supplied and a movement up along the AScurve.

D) a decrease in the quantity of real GDP supplied and a movement down along the AScurve.

E) a decrease in aggregate supply and the AS curve shifts rightward .

Answer: BTopic: Shifts in the aggregate supply curveSkill: Level 3: Using modelsObjective: Checkpoint 29.2Author: TPS

37) Which of the following shifts the aggregate supply curve leftward?

A) a decrease in potential GDP

B) a fall in the money wage rate

C) a decrease in the price level

D) a fall in the real wage rate

E) an increase in potential GDP

Answer: ATopic: Changes in aggregate supply, potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: NAU

38) A technological advance ____ potential GDP, ____ aggregate supply, and shifts theaggregate supply curve ____.

A) increases; increases; leftward

B) decreases; decreases; leftward

C) increases; increases; rightward

D) decreases; increases; rightward

E) increases; decreases; leftward

Answer: CTopic: Changes in aggregate supply, potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC


39) An increase in potential GDP ____ aggregate supply and ____.

A) decreases; shifts the AS curve rightward

B) increases; shifts the AS curve leftward

C) increases; shifts the AS curve rightward

D) decreases; shifts the AS curve leftward

E) has no effect on; does not shift the AS curve.

Answer: CTopic: Changes in aggregate supply, potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: DMC

40) If potential GDP increases, then the

A) aggregate supply curve shifts leftward.

B) aggregate supply curve shifts rightward.

C) real wage rate increases.

D) real wage rate falls.

E) aggregate demand curve shifts rightward.

Answer: BTopic: Changes in aggregate supply, potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: NAU

41) If potential GDP increases,

A) aggregate supply does not change.

B) the quantity of aggregate supply decreases.

C) aggregate supply increases.

D) the price level rises.

E) the money wage rate must have fallen.

Answer: CTopic: Changes in aggregate supply, potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: TPS


42) When potential GDP increases the potential GDP line ____ and the aggregate supply curve____.

A) shifts rightward; shifts rightward

B) shifts rightward; shifts leftward

C) shifts leftward; shifts rightward

D) shifts leftward; shifts leftward

E) shifts rightward; does not shift

Answer: ATopic: Changes in aggregate supply, technologySkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: NAU

43) Moving along the potential GDP line, the money wage rate changes by the same percentageas the price level so that the real wage rate

A) increases.

B) decreases.

C) stays at the full-employment equilibrium level.

D) might either increase or decrease.

E) stays the same, though not necessarily at the full-employment equilibrium level.

Answer: CTopic: Potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: STUDY GUIDE

44) The aggregate supply curve is

A) upward sloping.

B) downward sloping.

C) a vertical line.

D) a horizontal line.

E) U-shaped.

Answer: ATopic: Aggregate supply curveSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: STUDY GUIDE


45) When the price level falls,

A) the AS curve shifts rightward but the potential GDP line does not shift.

B) there is a movement upward along the AS curve.

C) the AS curve shifts leftward but the potential GDP line does not shift.

D) there is a movement downward along the AS curve.

E) both the potential GDP line and the AS curve shift leftward.

Answer: DTopic: Aggregate supply, price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.2Author: STUDY GUIDE

46) As the price level rises relative to costs and the real wage rate falls, profits ____ and thenumber of firms in business ____.

A) increase; increases

B) increase; decreases

C) decrease; increases

D) decrease; decreases

E) do not change; do not change

Answer: ATopic: Aggregate supply, price levelSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: STUDY GUIDE

47) When potential GDP increases,

A) the AS curve shifts rightward.

B) there is a movement up along the AS curve.

C) the AS curve shifts leftward.

D) there is a movement down along the AS curve.

E) there is neither a movement along nor a shift in the AS curve.

Answer: ATopic: Changes in aggregate supply, potential GDPSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: STUDY GUIDE


48) If the money wage rate rises,

A) the AS curve shifts rightward.

B) there is a movement up along the AS curve.

C) the AS curve shifts leftward.

D) there is a movement down along the AS curve.

E) there is neither a movement along or a shift in the AS curve.

Answer: CTopic: Changes in aggregate supply, money wage rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.2Author: STUDY GUIDE

29.3 Aggregate Demand

1) The aggregate demand curve illustrates the relationship between

A) the price level and the quantity of goods demanded by households, firms, government,and foreigners.

B) the real wage rate and the hours of labor demanded by firms.

C) the price level and the potential quantity demanded of real GDP.

D) the price level and the quantity of goods supplied by firms.

E) the price level and the potential demand for real GDP.

Answer: ATopic: Aggregate demand curveSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: NAU

2) Which of the following produces a movement along the aggregate demand curve and doesnot shift the aggregate demand curve?

A) a change in foreign incomes

B) a change in the price level

C) a change in monetary policy

D) a change in expectations about the future

E) a change in government expenditures on goods and services

Answer: BTopic: Aggregate demand curveSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: NAU


3) A change in the price level brings a ____ the aggregate demand curve.i. shift inii. change in the slope ofiii. movement along

A) i only.

B) ii only.

C) iii only.

D) i and iii.

E) i and ii.

Answer: CTopic: Changes in the price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: MR

4) A fall in the price level produces a ____ the aggregate demand curve.





E) change in the slope of

Answer: BTopic: Changes in the price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: DMC

5) A rise in the U.S. price level brings a ____ in the price of U.S. exports relative to imports that____ exports of U.S. goods, bringing a ____ in the quantity of U.S. real GDP demanded.

A) rise; decreases; decrease

B) fall; decreases ; decrease

C) fall; increases ; increase

D) rise; increases ; increase

E) rise; increases; decrease

Answer: ATopic: Relative price of domestic and foreign goodsSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC


6) A rise in the price level brings a ____ in the buying power of money that ____ consumptionexpenditures and causes the quantity of real GDP demanded to ____.

A) rise; decreases; decrease

B) fall; decreases; decrease

C) fall; increases; increase

D) rise; increases; increase

E) fall; decreases; increases

Answer: BTopic: Buying power of moneySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC

7) When the price level increases there is ____ movement along the aggregate demand curvebecause the buying power of money ____.

A) an upward; decreases

B) a downward; decreases

C) an upward; increases

D) a downward; increases

E) no; does not change

Answer: ATopic: Buying power of moneySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: NAU

8) In the short run, a rise in the price level brings a ____ in the real interest rate that ____investment, bringing ____ in the quantity of real GDP demanded.

A) rise; decreases; a decrease

B) fall; decreases ; a decrease

C) fall; increases ; an increase

D) rise; increases ; an increase

E) rise; decreases; an increase

Answer: ATopic: Real interest rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC


9) The aggregate demand curve shifts when any of the following factors change EXCEPT

A) foreign income.

B) the price level.

C) monetary policy.

D) expectations about the future.

E) fiscal policy

Answer: BTopic: Changes in aggregate demandSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: DMC

10) Which of the following does NOT shift the aggregate demand curve?

A) a change in the money wage

B) a change in expectations about the future

C) a change in monetary policy

D) a change in fiscal policy

E) a change in foreign income

Answer: ATopic: Changes in aggregate demandSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: NAU

11) If there is an increase in expected future income, then

A) the aggregate demand curve shifts rightward.

B) the aggregate demand curve shifts leftward.

C) there is an upward movement along the aggregate demand curve.

D) there is a downward movement along the aggregate demand curve.

E) the aggregate demand curve becomes steeper.

Answer: ATopic: Changes in aggregate demand, expectationsSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: NAU


12) Which of the following shifts the aggregate demand curve rightward?

A) a decrease in expected future income

B) a decrease in the price level

C) a tax cut

D) a decrease in the quantity of money

E) a decrease in government expenditures on goods and services

Answer: CTopic: Changes in aggregate demand, fiscal policySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: NAU

13) A tax cut ____ aggregate demand and ____.

A) decreases; shifts the AD curve rightward

B) increases; shifts the AD curve leftward

C) increases; shifts the AD curve rightward

D) decreases; shifts the AD curve leftward

E) does not change; does not shift the AD curve

Answer: CTopic: Changes in aggregate demand, fiscal policySkill: Level 3: Using modelsObjective: Checkpoint 29.3Author: DMC

14) A tax cut ____ aggregate demand and shifts the aggregate demand curve ____.

A) increases; rightward

B) increases; leftward

C) decreases; rightward

D) decreases; leftward

E) does not change; rightward

Answer: ATopic: Changes in aggregate demand, fiscal policySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC


15) If taxes are cut, there is

A) an increase in aggregate demand and the AD curve shifts rightward.

B) a decrease in aggregate demand and the AD curve shifts leftward .

C) an increase in the quantity of real GDP demanded and a movement up along the ADcurve.

D) a decrease in the quantity of real GDP demanded and a movement down along the ADcurve.

E) no change in aggregate demand, only a change in potential GDP.

Answer: ATopic: Changes in aggregate demand, fiscal policySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: TPS

16) An increase in the quantity of money ____ aggregate demand and ____.

A) increases; shifts the aggregate demand curve rightward

B) increases; shifts the aggregate demand curve leftward

C) decreases; shifts the aggregate demand curve rightward

D) decreases; shifts the aggregate demand curve leftward

E) increases; rotates the aggregate demand curve so it is steeper

Answer: ATopic: Changes in aggregate demand, quantity of moneySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC

17) A decrease in foreign income ____ exports of U.S.-made goods, so aggregate demand ____and the aggregate demand curve shifts ____.

A) increases; increases; rightward

B) decreases; decreases; leftward

C) decreases; increases; rightward

D) increases; increases; leftward

E) decreases; decreases; rightward

Answer: BTopic: Changes in aggregate demand, foreign incomeSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC


18) Suppose the exchange rate in the year 2005 was 4 yuan per dollar and in 2006 the exchangerate fell to 3 yuan per dollar. If the price of a Chinese sweater was 120 yuan in both years,the new dollar price in 2006 would be ____ and imports of Chinese sweaters would ____.

A) $40; increase

B) $30; decrease

C) $40; decrease

D) $30; increase

E) $40; stay the same because the price stayed the same at 120 yuan

Answer: CTopic: Changes in aggregate demand, foreign exchange rateSkill: Level 3: Using modelsObjective: Checkpoint 29.3Author: NAU

19) Because of the existence of the aggregate demand multiplier, a $10 billion change inexpenditure

A) shifts the aggregate demand curve by more than exceeds $10 billion.

B) shifts the aggregate demand curve by $10 billion.

C) shifts the aggregate demand curve by less than $10 billion.

D) changes the slope of the aggregate demand curve so it is less steep.

E) changes the slope of the aggregate demand curve so it is steeper.

Answer: ATopic: Aggregate demand multiplierSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: DMC

20) If investment spending increases by $1 million, then the aggregate demand curve shifts

A) rightward by $1 million.

B) rightward by more than $1 million.

C) rightward by less than $1 million.

D) leftward by more than $1 million.

E) leftward by less than $1 million.

Answer: BTopic: Aggregate demand multiplierSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: NAU


21) When the price level rises there is a ____ the aggregate demand curve.


B) movement down along


D) movement up along

E) rotation of

Answer: DTopic: Changes in the price levelSkill: Level 1: DefinitionObjective: Checkpoint 29.3Author: STUDY GUIDE

22) A rise in the price level

A) raises the buying power of money.

B) decreases the prices of exports.

C) lowers the buying power of money.

D) increases aggregate demand.

E) makes the aggregate demand curve steeper.

Answer: CTopic: Buying power of moneySkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: STUDY GUIDE

23) When the price level rises, the real interest rate ____ and the quantity of real GDPdemanded ____.

A) rises; increases

B) rises; decreases

C) falls; increases

D) falls; decreases

E) does not change; does not change

Answer: BTopic: Real interest rateSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: STUDY GUIDE


24) A change in any of the following factors EXCEPT ____ shifts the aggregate demand curve.

A) expectations about the future

B) the money wage rate

C) monetary and fiscal policy

D) foreign income

E) the foreign exchange rate

Answer: BTopic: Changes in aggregate demandSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: STUDY GUIDE

25) Which of the following shifts the aggregate demand curve leftward?

A) a decrease in government expenditures on goods and services

B) an increase in the price level

C) a tax cut

D) an increase in foreign income

E) a decrease in the price level

Answer: ATopic: Changes in aggregate demand, expectationsSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: STUDY GUIDE

26) When investment increases, the ____ in aggregate demand is ____ the change in investment.

A) increase; greater than

B) increase; smaller than

C) increase; the same as

D) decrease; the same as

E) decrease; greater than

Answer: ATopic: Aggregate demand multiplierSkill: Level 2: Using definitionsObjective: Checkpoint 29.3Author: STUDY GUIDE


29.4 Understanding the Business Cycle

1) Macroeconomic equilibrium occurs when

A) there is no inflation.

B) real GDP is equal to potential GDP.

C) the aggregate quantity demanded is equal to the aggregate quantity supplied.

D) the economy is fully employed.

E) the price level equals the potential price level.

Answer: CTopic: Macroeconomic equilibriumSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: NAU

2) A macroeconomic equilibrium occurs when the

A) quantity of real GDP demanded is greater than the quantity of real GDP supplied.

B) quantity of real GDP demanded is less than the quantity of real GDP supplied.

C) quantity of real GDP demanded equals the quantity of real GDP supplied even if theyare not equal to potential GDP.

D) quantity of real GDP demanded equals the quantity of real GDP supplied and bothequal potential GDP.

E) None of the above answers is correct.

Answer: CTopic: Macroeconomic equilibriumSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: TPS

3) If the economy is at macroeconomic equilibrium, then real GDP

A) must equal potential GDP.

B) must be less than potential GDP.

C) must be great than potential GDP.

D) might be equal to, greater than, or less than potential GDP

E) cannot be compared to potential GDP.

Answer: DTopic: Macroeconomic equilibriumSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: MR


4) In its macroeconomic equilibrium, the economy can be producing ati. below full employment.ii. full employment.iii. above full employment.

A) i only.

B) ii only.

C) iii only

D) i or ii.

E) i, ii, or iii.

Answer: ETopic: Macroeconomic equilibriumSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: TPS

5) If the quantity of real GDP demanded is less than the quantity of real GDP supplied, then

A) the economy must be producing at potential GDP.

B) the price level falls and firms decrease production.

C) the price level falls and firms increase production.

D) the price level rises to restore the macroeconomic equilibrium

E) aggregate demand changes to restore the equilibrium.

Answer: BTopic: Macroeconomic equilibriumSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: TPS

6) If the quantity of real GDP demanded is greater than the quantity of real GDP supplied,then

A) the economy must be producing at potential GDP.

B) the price level falls and firms decrease production.

C) the price level rises and firms increase production.

D) the price level falls to restore the macroeconomic equilibrium

E) aggregate demand changes to restore equilibrium.

Answer: CTopic: Macroeconomic equilibriumSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: TPS


7) If the equilibrium price level is 135 but the actual price level is 150, then

A) firms increase their production because they are able to sell their output at a higherthan expected price.

B) the quantity of real GDP demanded is less than the quantity of real GDP supplied.

C) the quantity of real GDP demanded is greater than the quantity of real GDP supplied.

D) aggregate demand will increase to restore equilibrium.

E) aggregate demand will decrease to restore equilibrium.

Answer: BTopic: Macroeconomic equilibriumSkill: Level 4: Applying modelsObjective: Checkpoint 29.4Author: TPS

8) If the equilibrium price level is 135 but the actual price level is 120, then

A) firms decrease their production because they cannot sell the output they produce.

B) the quantity of real GDP demanded is less than the quantity of real GDP supplied.

C) the quantity of real GDP demanded is greater than the quantity of real GDP supplied.

D) aggregate demand will increase to restore equilibrium.

E) aggregate demand will decrease to restore equilibrium.

Answer: CTopic: Macroeconomic equilibriumSkill: Level 4: Applying modelsObjective: Checkpoint 29.4Author: TPS

9) An increase in government expenditures on goods and services ____ aggregate demand,shifting the aggregate demand curve ____ and potentially bringing the ____ phase of thebusiness cycle.

A) decreases; rightward; expansion

B) increases; rightward; recession

C) decreases; leftward; recession

D) increases; rightward; expansion

E) increases; leftward; recession

Answer: DTopic: Aggregate demand fluctuationsSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: DMC


10) A technological advance ____ aggregate supply, shifting the aggregate supply curve ____and potentially bringing the ____ phase of the business cycle.


B) decreases; leftward recession

C) increases; rightward; expansion

D) increases; rightward; recession

E) increases; leftward; expansion

Answer: CTopic: Aggregate supply fluctuationsSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: DMC

11) An increase in the price of oil ____ aggregate supply, shifting the aggregate supply curve____ and potentially bringing the ____ phase of the business cycle.


B) increases; rightward; recession

C) increases; rightward; expansion

D) decreases; leftward; recession

E) decreases; rightward; recession

Answer: DTopic: Aggregate supply fluctuationsSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: DMC

12) Which of the following could result in a recession?

A) a rise in the price of oil

B) an increase in investment

C) a tax cut

D) an increase in the quantity of money

E) an increase in government expenditures on goods and services

Answer: ATopic: Aggregate supply fluctuationsSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: NAU


13) A combination of recession and inflation is called

A) an expansion.

B) stagflation.

C) a business cycle.

D) depression.

E) a recession.

Answer: BTopic: StagflationSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: NAU

14) During an inflationary gap,

A) real GDP is less than potential GDP.

B) the aggregate demand curve and the aggregate supply curve intersect at potentialGDP.

C) the aggregate demand curve and the aggregate supply curve intersect at a level of realGDP that exceeds potential GDP.

D) the aggregate demand curve and the aggregate supply curve do not intersect.

E) the price level will fall to restore the long-run equilibrium.

Answer: CTopic: Inflationary gapSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: NAU

15) Starting from a situation of full employment, an increase in aggregate demand will ____ theprice level, leading to ____

A) raise; an inflationary gap

B) lower; a recessionary gap

C) raise; a recessionary gap

D) lower; an inflationary gap

E) not change; potential GDP increasing.

Answer: ATopic: Inflationary gapSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: DMC


16) Which of the following leads to a recessionary gap?

A) a fall in the price level

B) a tax increase

C) a fall in money wages

D) an increase in expected income

E) an increase in foreign incomes

Answer: BTopic: Recessionary gapSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: NAU

17) Starting from a situation of full employment, a decrease in aggregate demand ____ the pricelevel, leading to ____.

A) raises; an inflationary gap

B) lowers; a recessionary gap

C) raises; a recessionary gap

D) lowers; an inflationary gap

E) does not change; a decrease in potential GDP

Answer: BTopic: Recessionary gapSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: DMC


Price level(GDP deflator)

Potential GDP (billions of 2000 dollars)

Real GDP supplied (billions of 2000 dollars)

Real GDP demanded (billions of 2000 dollars)

150 25 34 16140 25 31 19130 25 28 22120 25 25 25110 25 23 28

18) The table above gives data for the nation of Pearl, a small island in the South Pacific. Theeconomy is at full employment when real GDP is

A) $25 billion.

B) $28 billion.

C) $22 billion.

D) $31 billion.

E) $34 billion.

Answer: ATopic: Equilibrium AD and ASSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: DMC

19) The table above gives data for the nation of Pearl, a small island in the South Pacific. Whenthe economy is at full employment the price level is

A) 130.

B) 120.

C) 110.

D) 140.

E) 150.

Answer: BTopic: Equilibrium AD and ASSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: DMC


20) The table above gives data for the nation of Pearl, a small island in the South Pacific. If asupply shock decreases the quantity of real GDP supplied by $6 billion at each price level,the new equilibrium real GDP is

A) $16 billion.

B) $19 billion.

C) $22 billion.

D) $23 billion.

E) $17 billion.

Answer: CTopic: Equilibrium AD and ASSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: DMC

21) The table above gives data for the nation of Pearl, a small island in the South Pacific. Ifaggregate demand increases so that the quantity of real GDP demanded is $6 billion moreat each price level, the new equilibrium real GDP is

A) $34 billion.

B) $31 billion.

C) $28 billion.

D) $25 billion.

E) $23 billion.

Answer: CTopic: Equilibrium AD and ASSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: DMC


22) According to the figure above, which point or points correspond to full employment?

A) only point a

B) only point b

C) only point c

D) points a and b

E) points a, b, and c

Answer: DTopic: Adjustment to full employmentSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: NAU

23) Oil price hikes

A) increase aggregate supply.

B) decrease aggregate supply.

C) increase aggregate demand.

D) decrease aggregate demand.

E) increase potential GDP.

Answer: BTopic: Eye on the past, oil price cycles in the U.S. and global economiesSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: TPS


24) If the quantity of real GDP supplied equals the quantity of real GDP demanded, then

A) nominal GDP must equal real GDP.

B) real GDP must equal potential GDP.

C) real GDP must be greater than potential GDP.

D) real GDP might be greater than, equal to, or less than potential GDP.

E) real GDP must be less than potential GDP.

Answer: DTopic: Macroeconomic equilibriumSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: STUDY GUIDE

25) An increase in investment ____ aggregate demand, the aggregate demand curve shifts ____and the economy is in the ____ phase of the business cycle.


B) increases; rightward; expansion

C) decreases; leftward; recession

D) increases; rightward; recession

E) increases; leftward; recession

Answer: BTopic: Aggregate demand fluctuationsSkill: Level 2: Using definitionsObjective: Checkpoint 29.4Author: STUDY GUIDE

26) If the price of oil rises, the

A) AD curve shifts rightward, real GDP increases, and the price level rises.

B) AS curve shifts leftward, the price level rises, and real GDP decreases.

C) AD curve and the AS curve shift leftward, real GDP decreases, and the price level rises.

D) AD curve and the AS curve shift rightward, the price level rises, and real GDPdecreases.

E) AS curve shifts leftward, the price level rises, and real GDP increases.

Answer: BTopic: Aggregate supply fluctuationsSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: STUDY GUIDE


27) Stagflation is a combination of ____ real GDP and a ____ price level.

A) increasing; rising

B) increasing; falling

C) decreasing; rising

D) decreasing; falling

E) no change in; rising

Answer: CTopic: StagflationSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: STUDY GUIDE

28) An inflationary gap is created when

A) real GDP is greater than potential GDP.

B) real GDP equal to potential GDP.

C) the inflation rate is less than potential inflation.

D) the price level exceeds the equilibrium price level.

E) potential GDP is greater than real GDP.

Answer: ATopic: Inflationary gapSkill: Level 1: DefinitionObjective: Checkpoint 29.4Author: STUDY GUIDE

29) An economy is at full employment. If aggregate demand increases,

A) an inflationary gap is created and the AS curve shifts leftward as the money wage raterises.

B) an inflationary gap is created and the AD curve shifts leftward.

C) an inflationary gap is created and potential GDP increases to close the gap.

D) a recessionary gap is created and the AS curve shifts leftward as the money wage ratefalls.

E) a recessionary gap is created and the AS curve shifts leftward as the money wage raterises.

Answer: ATopic: Adjustment to full employmentSkill: Level 3: Using modelsObjective: Checkpoint 29.4Author: STUDY GUIDE

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