Chapter- 3   Aggregate Demand

1. What does aggregate demand express?

• The quantity of goods and services demanded in an economy
• The quantity of goods and services produced in an economy
• The quantity of goods produced in an economy
• The quantity of services demanded in an economy

2. What is the aggregate demand curve most similar to?

• A demand schedule
• The demand curve for a firm
• A demand system
• The supply curve for a firm

3. Which of the following sources of purchases is not included in aggregate demand?

• Businesses
• Consumers
• Foreigners
• Government

4. What is the horizontal axis of the aggregate demand curve?

• Interest rate
• Price level
• Inputs
• Output or income

5. What is the vertical axis of the aggregate demand curve?

• Price level
• Income
• Output
• Interest rate

6. When the price level is high, what is aggregate demand?

• High
• Low
• Unchanged
• Need more information

7. When the price level is low, what is aggregate demand?

• High
• Low
• Unchanged
• Need more information

8. What is the general slope of the aggregate demand curve?

• Horizontal
• Vertical
• Upwards
• Downwards

9. What is the general equation for aggregate demand?

• Y = C(Y - T) + I(r) + G + NX(e)
• Y = C(Y - T) + I(r) + G
• Y = C(Y - T) + I(r) + NX(e)
• Y = C(Y - T) + G + NX(e)

10. The term C(Y - T) means that consumption is dependant upon what?

• Income
• Disposable income
• Taxes
• Output

11. The term I(r) means that investment is dependent upon what?

• Real income
• Disposable income
• Real interest rate
• Real exchange rate

12. The term NX(e) means that net exports are dependent upon what?

• Nominal interest rate
• Real interest rate
• Nominal exchange rate
• Real exchange rate

13. What does the real exchange rate represent?

• The rate at which the goods from one country can be traded for the goods of another country
• The rate at which the goods from one country can be purchased from another country
• The rate at which the goods from one country can be traded for goods of that country
• The rate at which the goods from one country can be purchased in another country

14. What economic number can be derived from output?

• Standard of living
• National income
• GDP per capita
• Nominal GDP

15. What area of aggregate demand would movie tickets fall under?

• Net exports
• Investment
• Consumption
• Government spending

16. What are of aggregate demand would social security fall under?

• Net exports
• Investment
• Consumption
• Government spending

17. What are of aggregate demand would raw materials shipped to Asia fall under?

• Net exports
• Investment
• Consumption
• Government spending

18. What are of aggregate demand would new housing fall under?

• Net exports
• Investment
• Consumption
• Government spending

19. Which of the following would not be considered consumption under aggregate demand?

• Books
• Movie tickets
• New houses
• Food

20. Which of the following would not be considered investment under aggregate demand?

• Education
• Machinery
• Factories
• Used housing

21. Which of the following types of economic activity are not represented in aggregate demand?

• Aid from foreigners
• Aid to foreigners
• Government transfers
• Consumption spending

22. Which model of aggregate demand is based upon exchange rates?

• Laffer model
• Mundell-Fleming model
• Keynes model
• Pigou model

23. Which of the aggregate demand models is based on investment spending?

• Laffer model
• Mundell-Fleming model
• Keynes model
• Pigou model

24. Which of the aggregate demand models is based on consumption spending?

• Laffer model
• Mundell-Fleming model
• Keynes model
• Pigou model

25. Which of the following is not a model of aggregate demand?

• Laffer model
• Mundell-Fleming model
• Keynes model
• Pigou model

26. What is the effect of a decrease in the price level on wealth?

• It decreases wealth
• It increases wealth
• It has not effect on wealth
• It has an indeterminate effect on wealth

27. When consumers feel or become wealthier, what is the effect on consumption spending?

• It increases consumption spending
• It decreases consumption spending
• It has no effect on consumption spending
• It has an indeterminate effect on consumption spending

28. What is the effect of a high price level on interest rates?

• Interest rates tend to be low
• Interest rates tend to be high
• There is no relationship between the price level and interest rates
• Need more information

29. Which of the following is not related to the interest rate?

• The price of output
• The price of consumption
• The price of loans
• The price of investment

30. What happens when the domestic interest rate is lower than foreign interest rates?

• Foreign investment shift domestically
• Domestic investment shifts abroad
• Domestic investment is unchanged
• Foreign investment is unchanged

31. When the real exchange rate decreases, what happens to net exports?

• Net exports are unaffected
• Net exports fall
• Net exports rise
• Net exports fall sometimes and rise other times

32. What is the horizontal axis of the IS-LM model?

• Interest rate
• Growth rate
• Exchange rate
• Income and output

33. What is the vertical axis of the IS-LM model?

• Interest rate
• Exchange rate
• Income and output
• Growth rate

34. Which market does the IS curve reflect?

• The money market
• The market for goods and services
• The market for exports
• The market for imports

35. Which market does the LM curve reflect?

• The market for goods and services
• The money market
• The market for imports
• The markets for exports

36. Which direction does the IS curve slope?

• Horizontal
• Vertical
• Upward
• Downward

37. Which direction does the LM curve slope?

• Upward
• Downward
• Horizontal
• Vertical

38. Why is the LM curve upward sloping?

• Because higher income leads to lower money demand which leads to lower interest rates
• Because higher income leads to higher money demand which leads to higher interest rates
• Because lower income leads to higher money demand which leads to higher interest rates
• Because lower income leads to lower money demand which leads to higher interest rates

39. Why is the IS curve downward sloping?

• Because as the interest rate rises, investment increases, thus increasing output
• Because as the interest rate rises, investment decreases, thus increasing output
• Because as the interest rate falls, investment increases, thus increasing output
• Because as the interest rate falls, investment decreases, thus increasing output

40. What is an example of an exogenous change in the IS-LM model?

• Changes in output
• Changes in the money supply
• Changes in the interest rate
• Changes in tastes

41. When the price level increases, which direction does the LM curve shift?

• Inward
• Outward
• Upward
• None of the above

42. What happens when the aggregate demand curve shifts left?

• Output increases at all price levels
• Output decreases at all price levels
• Input increases at all price levels
• Input decreases at all price levels

43. What happens when the aggregate demand curve shifts right?

• Input increases at all price levels
• Input decreases at all price levels
• Output increases at all price levels
• Output decreases at all price levels

44. When disposable income falls, what happens to the aggregate demand curve?

• It shifts left
• It shifts right
• It is inverted
• It does not change

45. When happens to the aggregate demand curve when the savings rate increases?

• It shifts left
• It shifts right
• It is inverted
• It does not shift

46. What happens to the aggregate demand curve when government spending increases?

• It shifts left
• It shifts right
• It does not shift
• It is inverted

47. What happens to the aggregate demand curve when the real exchange rate rises?

• It is inverted
• It does not shift
• It shifts left
• It shifts right

48. What happens to the aggregate demand curve when the marginal propensity to consume increases?

• It is inverted
• It does not shift
• It shifts left
• It shifts right

49. What other curve is required to complete the AS-AD model?

• Aggregate supply
• Aggregate demand
• IS
• LM

50. What information can be obtained from the AS-AD model of the economy?

• Equilibrium in the foreign market for goods and services
• Equilibrium in the domestic market for goods and services
• Changes in the domestic market for goods only
• Changes in the foreign market for goods only
• ANSWERS
• 1.A
• 2.B
• 3.C
• 4.D
• 5.A
• 6.B
• 7.A
• 8.D
• 9.A
• 10.B
• 11.C
• 12.D
• 13.A
• 14.B
• 15.C
• 16.D   17.A   18.B  19.C   20.D   21.A   22.B   23.C   24.D   25.A   26.B   27.A
• 28.B  29.A  30.B  31.C   32.D   33.A   34.B   35.B    36.D    37.A   38.B   39.C
• 40.D  41.A  42.B  43.C  44.A  45.A  46.B  47.C  48.D  49.A  50.B