Exercise 6 Answer KeyChapter 12 Aggregate Demand and Aggregate Supply Analysis12.1 Aggregate Demand1) The basic aggregate demand and aggregate supply curve model helps explainA) short term fluctuations in real GDP and the price level.B) long term growth.C) price fluctuations in an individual market.D) output fluctuations in an individual market.Answer: AComment: RecurringDiff: 1 Page Ref: 788/384Topic: Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None2) When the economy enters into a recession, your employer is ________ to reduceyour wages because ________.A) unlikely; output and input prices generally fall during recessionB) unlikely; lower wages reduce productivity and moraleC) likely; output prices always fall during recessionD) likely; aggregate demand is vertical in the long runAnswer: ADiff: 1 Page Ref: 787/383Topic: Business CycleObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: Economics in YOUR LIFE!: Is an Employer Likely to Cut Your PayDuring a Recession?3) Because of the slope of the aggregate demand curve, we can say thatA) a decrease in the price level leads to a lower level of real GDP demanded. B) an increase in the price level leads to no change in the level of real GDPdemanded. C) a decrease in the price level leads to a higher level of real GDP demanded. D) an increase in the price level leads to a higher level of real GDP demanded. Answer: CComment: RecurringDiff: 1 Page Ref: 789/385Topic: Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None4) Which of the following best describes the "wealth effect"?A) When the price level falls, the real value of household wealth falls.B) When the price level falls, the nominal value of household wealth falls.C) When the price level falls, the nominal value of household wealth rises.D) When the price level falls, the real value of household wealth rises.Answer: DComment: RecurringDiff: 2 Page Ref: 789/385Topic: Wealth EffectObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None5) An increase in the price level results in a(n) ________ in the quantity of real GDPdemanded because ________.A) decrease; a higher price level reduces consumption, investment, and net exports.B) increase; a higher price level reduces consumption, investment, and net exports.C) decrease; a higher price level increases consumption, investment, and net exports.D) increase; a higher price level increases consumption, investment, and net exports.Answer: AComment: RecurringDiff: 2 Page Ref: 790/386Topic: Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None6) The international trade effect states that A) an increase in the price level will raise net exports.B) an increase in the price level will lower net exports.C) an increase in the price level will raise exports.D) an increase in the price level will lower imports.Answer: BComment: RecurringDiff: 1 Page Ref: 789-790/385-386Topic: International Trade EffectObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None7) An increase in the price level willA) shift the aggregate demand curve to the left.B) shift the aggregate demand curve to the right.C) move the economy up along a stationary aggregate demand curve.D) move the economy down along a stationary aggregate demand curve.Answer: CComment: RecurringDiff: 2 Page Ref: 790/386Topic: Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None8) Spending on the war in Iraq is essentially categorized as government purchases.How do increases in spending on the war in Iraq affect the aggregate demand curve?A) They will move the economy up along a stationary aggregate demand curve.B) They will move the economy down along a stationary aggregate demand curve.C) They will shift the aggregate demand curve to the left.D) They will shift the aggregate demand curve to the right.Answer: DComment: RecurringDiff: 2 Page Ref: 790/386Topic: Shifts in Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None9) Higher personal income taxesA) increase aggregate demand.B) increase disposable income.C) decrease aggregate demand.D) both B and CAnswer: CComment: RecurringDiff: 2 Page Ref: 790/386Topic: Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement along the aggregate demand curve and a shift of the curve.AACSB: Reflective ThinkingSpecial Feature: None10) German luxury car exports were hurt in 2009 as a result of the recession. Howwould this decrease in exports have affected Germany's aggregate demand curve?A) The aggregate demand curve would have shifted to the right.B) The aggregate demand curve would not have shifted, but there would have been amovement up the aggregate demand curve.C) The aggregate demand curve would not have shifted, but there would have been amovement down the aggregate demand curve.D) The aggregate demand curve would have shifted to the left.Answer: DComment: RecurringDiff: 2 Page Ref: 791/387Topic: Aggregate DemandObjective: LO1: Identify the determinants of aggregate demand and distinguishbetween a movement