If the price of computers falls during a period when the average price level remains constant, which of the following has occurred?



A recession

A change in relative prices
Price stability refers to:

A constant average price level.

An inflation rate of zero.

Increases in prices equal to or less than the growth rate of the economy.

The absence of significant changes in the average price level.
If the CPI is 119 in Year X, then it costs _______ in Year X to buy the same market basket that cost _______ in the base period.

$100; $119

$19; $100

$100; $19

$119; $100
People who are not working for pay but are actively looking for work are not included in the labor force.


During a period of inflation:

Relative prices are rising, but it is not certain what is happening to average prices.

Both relative prices and average prices are rising.

Specific prices are rising, and relative prices are falling.

Average prices are rising, but it is not certain what is happening to relative prices.
The labor force is smaller than the total population because the labor force does not include:

People looking for a job.

People who have jobs.


The very young and old.
Nominal GDP is defined as the:

Dollar value of services but not goods.

Value of output in current dollars.

Value of output in constant prices.

Output produced by domestically owned factors of production regardless of where the factors are located.

Keynes believed that small disturbances in the economy would be made even greater by the market mechanism and thus government intervention was required.


The total amount of output producers are willing and able to produce at alternative price levels in a given time period is known as:

Aggregate supply.

Real GDP.

Aggregate demand.

Macro equilibrium.
At macro equilibrium:

Exports equal imports.

Aggregate demand equals aggregate supply.

Population growth is stable.

Money supply equals money demand.
According to the real balances effect, if the price level rises then the real value of savings increases and individuals will buy more output.


According to supply-side theories, an increase in supply incentives shifts the aggregate:

Supply curve to the right.

Supply curve to the left.

Demand curve to the left.

Demand curve to the right.
Which of the following is an example of the real balances effect, assuming the U.S. price level decreases?

U.S. production costs stay constant and profits for businesses decrease.

The demand for loans decreases so interest rates decline and loan-financed purchases increase.

U.S. goods are less expensive for foreigners to buy and exports increase.

The purchasing power of money increases and people buy more goods.
Which of the following suggests that lower average prices stimulate more borrowing?

The real balances effect

The cost effect

The profit effect

The interest rate effect
Monetary policy emphasizes the role of money and interest rates in shifting the aggregate supply curve.


At the intersection of the aggregate supply and aggregate demand curves, the economy is experiencing:

Macro equilibrium.

Full employment.

Low levels of inflation.

Population growth.
The Classical view of the economy is characterized by:

Overt fiscal policy.

A laissez-faire approach.

The inherent instability of the economy.

The belief that demand creates its own supply.
Fiscal policy is the use of the government's tax and spending powers to shift the aggregate demand curve.


Figure 11.2‚ÄĒAggregate supply and demand

In Figure 11.2, at what level of output does equilibrium occur?




Individual employment and training programs are levers most likely to be advocated by:


Classical economists.

Supply-side economists.

New classical economists.
Ceteris paribus, based on the real balances effect, if the price level falls:

Purchasing power increases.

Real income decreases.

Wealth decreases.

Business profits increase.
Unlike the Classical economists, Keynes asserted that:

Markets would naturally self-adjust.

Wages and prices were flexible.

Laissez-faire would lead to macro equilibrium.

The economy was inherently unstable.
Macro equilibrium always occurs at an optimal level of output.


A tax hike will increase the level of aggregate demand since the government will have more money to spend.