Discussion of harder questions on the second 30 minute quiz, 19 October.

7.  Which of the following shifts the consumption function upward?

This was, surprisingly, by far the hardest question on the quiz. Only 21% got it right. The consumption function shows planned expenditure on consumption for different levels of disposable income, other things unchanged. 72% of you answered "increases in disposable income" -- asleep at the wheel! That is the one thing that CANNOT shift the consumption function, it represents a movement along it! The right answer was "decreases in the real interest rate" -- which make buying things with borrowed money cheaper. The other two responses, "decreases in wealth" and "expectations of harder times ahead" both would shift it down, not up.

20.  In the above figure, suppose the economy had been at point A [on the LRAS] and now is at B [to the right of LRAS, at intersection of AD and the SAS through A shown]. What could have caused the movement to B?

If the economy has gotten to a point to the right of LRAS, it has moved up the short run Aggregate Supply [SAS] shown [sorry, its too hard to draw it]. So AD must have increased, i.e. moved up/to the right. So the correct answer will be something that increased aggregate demand. Of the responses offered, only one would do that -- B, Government purchases increased. Only 39% of you got it. 37% opted for "money wages rose" -- but that would in the first instance shift the SAS, NOT AD -- and could not produce a change that was on the same SAS.

16.  The quantity of real GDP demanded equals $7.2 trillion when the GDP deflator is 90. If the GDP deflator rises to 95, the quantity of real GDP demanded equals

This is a question about Aggregate Demand, AD, which shows real GDP demanded for different levels of the price level, measured by the price index GDP deflator. The AD curve slopes down to the right, i.e. when the price level is lower there is greater demand for output, ceteris paribus. So this should have been straightforward -- if the price level rises [from 90 to 95], real GDP demanded will decrease, so the right answer was A), less than $7.2 trillion. However, only 42% of you got it; one third of you responded, D)more than $7.2 trillion but without more information ….. NO, if the price level increases output demanded must fall.

21.  In the short run, a rightward shift of the short-run aggregate supply curve causes

OK, SAS is moving to the right; so its intersection with AD must also move to the right and down; so that means that real GDP is going to be larger, and the price level lower than it was before [you could have seen this in the diagram for question 20 just above]. But somehow only 49% of you got this [it was response D)]; 35% said an increase in GDP and in the price level -- NO, if supply has increased, ceteris paribus, prices are going to go down, not up.

These were the only questions that over half of you got wrong.