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7 AGGREGATE
SUPPLY AND
AGGREGATE
DEMAND*
* This is Chapter 23 in Economics.
Aggregate Supply
Topic: Aggregate Supply/Aggregate Demand
Model
Skill: Recognition
1) The aggregate supply/aggregate demand model is
used to help understand all of the following ex-
cept
A) inflation.
B) business cycle fluctuations.
C) the aggregate value of stock traded in the stock
market.
D) growth of potential GDP.
Answer: C
Topic: Aggregate Supply Fundamentals
Skill: Recognition
2) At any given time, which of the factors in the
aggregate supply function, Y = F(L, K, T), is
NOT fixed?
A) Y
B) L
C) K
D) T
Answer: B
Topic: Aggregate Supply Fundamentals
Skill: Recognition
3) Which of the following variables does NOT di-
rectly influence aggregate production?
A) the state of technology
B) the quantity of capital
C) the quantity demanded
D) the quantity of labor
Answer: C
Topic: Aggregate Supply Fundamentals
Skill: Conceptual
4) The supply of real GDP is a function of
A) the total expenditures of consumers, investors
and government.
B) the sum of wages, salaries, corporate profits,
rents and interest.
C) only the state of technology.
D) the quantities of labor, capital and the state of
technology.
Answer: D
Topic: Aggregate Supply
Skill: Recognition
5) The quantity of real GDP supplied ____ the
amount of ____.
A) increases as; labor input decreases
B) decreases as; capital input increases
C) decreases as; capital and labor input decreases
D) is unaffected by; technology
Answer: C
Topic: Aggregate Supply
Skill: Recognition
6) Aggregate supply describes the behavior of
A) foreign buyers.
B) households.
C) government.
D) producers.
Answer: D
C h a p t e r
2 1 0 C H A P T E R 7
Topic: Aggregate Supply
Skill: Recognition
7) An aggregate supply (AS) curve depicts the rela-
tionship between
A) the price level and nominal GDP.
B) household expenditures and household income.
C) the price level and the aggregate quantity sup-
plied.
D) the price level and the aggregate quantity de-
manded.
Answer: C
Topic: Macroeconomic Long Run
Skill: Recognition
8) In the macroeconomic long run,
A) GDP always is below potential GDP.
B) there is full employment with no unemploy-
ment.
C) output always is above potential GDP.
D) there is full employment and real GDP is equal
to potential GDP.
Answer: D
Topic: Macroeconomic Long Run
Skill: Recognition
9) The quantity of real GDP supplied at full em-
ployment is called
A) hypothetical GDP.
B) short-run equilibrium GDP.
C) potential GDP.
D) all of the above.
Answer: C
Topic: Macroeconomic Long Run
Skill: Conceptual
10) At potential GDP
A) there is no unemployment but there is not nec-
essarily full employment.
B) there is no unemployment and there is full em-
ployment.
C) unemployment is at its natural rate.
D) None of the above are correct.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Recognition
11) The long-run aggregate supply (LAS) curve
A) has a positive slope.
B) has a negative slope.
C) is vertical.
D) is horizontal.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Recognition
12) In the long-run
A) the aggregate supply curve is upward sloping.
B) real GDP is equal to potential GDP.
C) aggregate supply depends on the price level.
D) All of the above answers are correct.
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Recognition
13) In the macroeconomic long run,
A) real GDP = potential GDP.
B) the economy is at full employment.
C) regardless of the price level, the economy is pro-
ducing at potential GDP.
D) All of the above are correct.
Answer: D
Topic: Long-Run Aggregate Supply
Skill: Recognition
14) The long-run aggregate supply curve is ____ be-
cause along it, as prices rise, the money wage rate
____.
A) vertical; falls
B) vertical; rises
C) upward sloping; falls
D) upward sloping; stays constant
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Conceptual
15) The long-run aggregate supply curve illustrates
the
A) relationship of prices with the level of GDP
when real GDP equals potential GDP.
B) relationship of aggregate supply and aggregate
demand.
C) amount of products producers offer at various
prices when money wages and other resource
prices do not change.
D) surpluses, shortages and equilibrium level of
GDP.
Answer: A
A G G R E G A T E S U P P L Y A N D A G G R E G A T E D E M A N D 2 1 1
Topic: Long-Run Aggregate Supply
Skill: Conceptual
16) The long-run aggregate supply curve
A) is negatively sloped.
B) is positively sloped.
C) is vertical at the level of potential GDP.
D) is horizontal at the level of potential GDP.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Conceptual
17) If the economy is at the natural rate of unem-
ployment,
A) real GDP > potential GDP.
B) real GDP < potential GDP.
C) real GDP = potential GDP.
D) All of the above can occur when the economy is
at the natural rate of unemployment.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Conceptual
18) For movements along the long-run aggregate sup-
ply curve,
A) potential GDP is dependent on the price level.
B) the prices of goods and services change while the
prices of productive resources hold steady.
C) the price level and the money wage rate change
in the same proportion.
D) All of the above are correct.
Answer: C
Topic: Long-Run Aggregate Supply
Skill: Conceptual
19) The long-run aggregate supply curve shows the
A) maximum GDP the nation will ever produce.
B) full-employment level of real GDP.
C) level of real GDP associated with a constant
price level.
D) level of output for which real GDP equals
nominal GDP.
Answer: B
Topic: Long-Run Aggregate Supply
Skill: Conceptual
20) Which of the following is true about the long-run
aggregate supply curve?
A) It is vertical at the level of potential GDP.
B) It shows the relationship between the price level
and real GDP when wages and other costs are at
an equilibrium level.
C) It does not shift in response to temporary
changes in aggregate demand.
D) All of the above are true.
Answer: D
Topic: Macroeconomic Short Run
Skill: Recognition
21) In the macroeconomic short run,
A) actual real GDP may be less than or more than
potential GDP.
B) the unemployment rate is zero.
C) the economy is always moving away from full
employment.
D) actual real GDP always equals potential GDP.
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Recognition
22) The short-run aggregate supply curve
A) is vertical.
B) has a negative slope.
C) has a positive slope.
D) is horizontal.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Recognition
23) In the short run, the aggregate supply curve is
A) horizontal.
B) vertical.
C) upward sloping.
D) downward sloping.
Answer: C
2 1 2 C H A P T E R 7
Topic: Short-Run Aggregate Supply
Skill: Recognition
24) The short-run aggregate supply curve is upward
sloping because
A) a lower price level creates a wealth effect.
B) lower taxes motivate people to work more.
C) money wages do not immediately change when
the price level changes.
D) most business firms operate with long-term con-
tracts for output but not labor.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Recognition
25) The short-run aggregate supply curve
A) is vertical.
B) shows the impact changes in the price level have
on the quantity of real GDP when resource
prices are constant.
C) illustrates the level of potential real GDP.
D) shifts because of changes in the price level.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Recognition
26) In the short-run
A) the aggregate supply curve is upward sloping.
B) real GDP is always equal to potential GDP.
C) the money wage rate can change.
D) the price level does not change.
Answer: A
Topic: Short-Run Aggregate Supply
Skill: Conceptual
27) The short-run aggregate supply curve is upward
sloping because
A) firms need to receive higher prices to cover the
higher costs of producing increasing levels of
output.
B) technology is scarce.
C) capital is scarce.
D) potential GDP is less than real GDP when the
price level falls.
Answer: A
Topic: Long-Run Aggregate Supply
Skill: Analytical
28) In the figure above, potential GDP equals
A) $9.5 trillion.
B) $10.0 trillion.
C) $10.5 trillion.
D) None of the above answers is correct.
Answer: B
Topic: Short-Run Aggregate Supply
Skill: Analytical
29) In the figure above, the economy is at point A
when the price level rises to 120. Money wages
and other resource prices remain constant. Firms
are willing to supply output equal to
A) $9.5 trillion.
B) $10.0 trillion.
C) $10.5 trillion.
D) None of the above answers is correct.
Answer: C
Topic: Short-Run Aggregate Supply
Skill: Analytical
30) In the figure above, the economy is at
