Deck 9: Introduction to Economic Fluctuations

Question 1

The results of Alan Blinder"s survey of firms suggest all of the following except that:

A)there is only one theory of price stickiness.
B)coordinating wage and price setting could improve welfare.
C)reasons for price stickiness vary by industry.
D)activist monetary policy can be used to cure recessions.

Answer 1

coordinating wage and price setting could improve welfare.

Question 2

When GDP growth declines, investment spending typically and consumption spending typically .

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Answer 2

decreases; decreases

Question 3

Okun"s law is the relationship between real GDP and the .

A)negative; unemployment rate
B)negative; inflation rate
C)positive; unemployment rate
D)positive; inflation rate

Answer 3

negative; unemployment rate

Question 4

Long-run growth in real GDP is determined primarily by , while short-run movements in real GDP are associated with .

A)variations in labor-market utilization; technological progress
B)technological progress; variations in labor-market utilization
C)money supply growth rates; changes in velocity
D)changes in velocity; money supply growth rates

Question 5

The version of Okun"s law studied in Chapter 9 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun"s law predicts that real GDP would:

A)decrease by 1 percent.
B)decrease by 2 percent.
C)increase by 4 percent.
D)increase by 5 percent.

Question 6

Most economists believe that the classical dichotomy:

A)holds approximately in both the short run and the long run.
B)holds approximately in the long run but not at all in the short run.
C)holds approximately in the short run but not at all in the long run.
D)does not hold even approximately in either the long run or the short run.

Question 7

Short-run fluctuations in output and employment are called:

A)sectoral shifts.
B)the classical dichotomy.
C)business cycles.
D)productivity slowdowns.

Question 8

Alan Blinder"s survey of firms found that the theory of price stickiness accepted by the most firms was:

A)menu costs.
B)coordination failure.
C)nominal contracts.
D)procyclical elasticity.

Question 9

A decline in the Index of Supplier Deliveries is typically an indicator of a future in economic production and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury Bill is typically an indicator of a future in economic production.

A)increase; slowdown
B)increase; increase
C)slowdown; increase
D)slowdown; slowdown

Question 10

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

A)in both the short and long runs.
B)in neither the short nor long run.
C)in the short run but lead to unemployment in the long run.
D)in the long run but lead to unemployment in the short run.

Question 11

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about in advance.

A)one month
B)six to nine months
C)one to two years
D)five to ten years

Question 12

Measures of average workweeks and of suppliers' deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate future economic activity and slower deliveries tend to indicate future economic activity.

A)stronger; stronger
B)stronger; weaker
C)weaker; stronger
D)weaker; weaker

Question 13

The version of Okun"s law studied in Chapter 9 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun"s law predicts that real GDP would:

A)decrease by 1 percent.
B)decrease by 2 percent.
C)decrease by 3 percent.
D)increase by 1 percent.

Question 14

Leading economic indicators are:

A)the most popular economic statistics.
B)data that are used to construct the consumer price index and the unemployment rate.
C)variables that tend to fluctuate in advance of the overall economy.
D)standardized statistics compiled by the National Bureau of Economic Research.

Question 15

Most economists believe that prices are:

A)flexible in the short run but many are sticky in the long run.
B)flexible in the long run but many are sticky in the short run.
C)sticky in both the short and long runs.
D)flexible in both the short and long runs.

Question 16

Business cycles are:

A)regular and predictable.
B)irregular but predictable.
C)regular but unpredictable.
D)irregular and unpredictable.

Question 17

Over the business cycle, investment spending consumption spending.

A)is inversely correlated with
B)is more volatile than
C)has about the same volatility as
D)is less volatile than

Question 18

Alan Blinder"s survey of firms found that the typical firm adjusts its prices:

A)more than once a week.
B)about once a month.
C)once or twice a year.
D)less than a once a year.

Question 19

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

A)the Phillips Curve.
B)the Solow residual.
C)the Fisher effect.
D)Okun"s Law.

Question 20

Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long run.

A)real
B)nominal
C)real and nominal
D)neither real nor nominal

Question 21

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is and the aggregate demand curve shifts .

A)greater; inward
B)greater; outward
C)lower; inward
D)lower; outward

Question 22

According to the quantity theory of money, if output is higher, real balances are required, and for fixed M this means P.

A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Question 23

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

A)money supply.
B)unemployment rate.
C)interest rate.
D)price level.

Question 24

The relationship between the quantity of goods and services supplied and the price level is called:

A)aggregate demand.
B)aggregate supply.
C)aggregate investment.
D)aggregate production.

Question 25

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes to the right and gets as it moves farther to the right.

A)downward; steeper
B)downward; flatter
C)upward; steeper
D)upward; flatter

Question 26

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

A)slopes upward and to the right.
B)slopes downward and to the right.
C)is horizontal.
D)is vertical.

Question 27

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is and the aggregate demand curve shifts .

A)greater; inward
B)greater; outward
C)lower; inward
D)lower; outward

Question 28

The aggregate demand curve is the relationship between the quantity of output demanded and the .

A)positive; money supply
B)negative; money supply
C)positive; price level
D)negative; price level

Question 29

In the long run, the level of output is determined by the:

A)interaction of supply and demand.
B)money supply and the levels of government spending and taxation.
C)amounts of capital and labor and the available technology.
D)preferences of the public.

Question 30

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

A)increases.
B)decreases.
C)does not change.
D)may either increase or decrease.

Question 31

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

A)the labor supply.
B)the supply of capital.
C)the money supply.
D)technology.

Question 32

A difference between the economic long run and the short run is that:

A)the classical dichotomy holds in the short run but not in the long run.
B)monetary and fiscal policy affect output only in the long run.
C)demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
D)prices and wages are sticky in the long run only.

Question 33

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

A)downward and to the left.
B)downward and to the right.
C)upward and to the left.
D)upward and to the right.

Question 34

The relationship between the quantity of output demanded and the aggregate price level is called:

A)aggregate demand.
B)aggregate supply.
C)aggregate output.
D)aggregate consumption.

Question 35

A short-run aggregate supply curve shows fixed , and a long-run aggregate supply curve shows fixed .

A)output; output
B)prices; prices
C)prices; output
D)output; prices

Question 36

The aggregate demand curve tells us possible:

A)combinations of M and Y for a given value of P.
B)combinations of M and P for a given value of Y.
C)combinations of P and Y for a given value of M.
D)results if the Federal Reserve reduces the money supply.

Question 37

Along an aggregate demand curve, which of the following are held constant?

A)real output and prices
B)nominal output and velocity
C)the money supply and real output
D)the money supply and velocity

Question 38

Looking at the aggregate demand curve alone, one can tell that will prevail in the economy.

A)the quantity of output and the price level
B)the quantity of output
C)the price level
D)neither the quantity of output nor the price level

Question 39

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

A)short-run aggregate supply curve.
B)long-run aggregate supply curve.
C)price level in the short run.
D)demand for real balances per unit of output.

Question 40

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are generating a quantity of output demanded.

A)higher; greater
B)higher; smaller
C)lower; greater
D)lower; smaller

Question 41

The long-run aggregate supply curve is vertical at the level of output:

A)determined by aggregate demand.
B)at which unemployment is at its natural rate.
C)at which the inflation rate is zero.
D)at a predetermined price level.

Question 42

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

A)both the short run and the long run.
B)in neither the short run nor the long run.
C)in the short run, but not in the long run.
D)in the long run, but not in the short run.

Question 43

The economic response to the overnight reduction in the French money supply by 20 percent in 1724,

A)confirmed the neutrality of money because no real variables were affected by this nominal change.
B)confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level.
C)confirmed that money is not neutral in the short run because both output and prices dropped.
D)contradicted Okun"s law because decreases in output were not associated with increases in unemployment.

Question 44

If the short-run aggregate supply curve is horizontal and the Federal Reserve increases the money supply, then:

A)output and employment will increase in the short run.
B)output and employment will decrease in the short run.
C)prices will increase in the short run.
D)prices will decrease in the short run.

Question 45

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

A)is horizontal.
B)is vertical.
C)slopes upward and to the right.
D)slopes downward and to the right.

Question 46

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

A)neither prices nor level of output.
B)both prices and level of output.
C)level of output but not prices.
D)prices but not level of output.

Question 47

If the short-run aggregate supply curve is horizontal, then a change in the money supply will change in the short run and change in the long run.

A)only prices; only output
B)only output; only prices
C)both prices and output; only prices
D)both prices and output; both prices and output

Question 48

The short-run aggregate supply curve is horizontal at:

A)a level of output determined by aggregate demand.
B)the natural level of output.
C)the level of output at which the economy"s resources are fully employed.
D)a fixed price level.

Question 49

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

A)level of output but not prices.
B)prices but not level of output.
C)both prices and level of output.
D)neither prices nor level of output.

Question 50

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will and output will .

A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

Question 51

When the French money supply was reduced by 45 percent in 1724 only fell immediately.

A)prices output
B)exchange rates
C)interest rates

Question 52

In the aggregate demand/aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

A)aggregate demand equals long-run aggregate supply.
B)aggregate demand equals short-run aggregate supply.
C)aggregate demand equals short-run and long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Question 53

The long run refers to a period:

A)of decades.
B)during which capital and labor are sometimes not fully employed.
C)during which prices are flexible.
D)during which output deviates from the full-employment level.

Question 54

If the short-run aggregate supply curve is horizontal, then the:

A)classical dichotomy is satisfied.
B)money supply cannot affect prices in the short run.
C)money supply cannot affect output in the short run.
D)money supply is irrelevant in the short run.

Question 55

The short run refers to a period:

A)of several days.
B)during which prices are sticky and unemployment may occur.
C)during which capital and labor are fully employed.
D)during which there are no fluctuations.

Question 56

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

A)aggregate demand equals long-run aggregate supply.
B)aggregate demand equals short-run aggregate supply.
C)aggregate demand equals short-run and long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Question 57

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is the natural rate of output in the short run.

A)above
B)below
C)equal to
D)either above or below

Question 58

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then increase(s) in the short run and increase(s) in the long run.

A)prices; output
B)output; prices
C)output; output
D)prices; prices

Question 59

The natural level of output is:

A)affected by aggregate demand.
B)the level of output at which the unemployment rate is zero.
C)the level of output at which the unemployment rate is at its natural level.
D)permanent and unchangeable.

Question 60

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will and output will .

A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

Question 61

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

A) If the economy is initially in long-run equilibrium, what are the values of P and Y?
B) What is the velocity of money in this case?
C) Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y?
D) What is the velocity of money in this case?
E) With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y?
F) What is the velocity now?

Question 62

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

A)rise in both the short run and the long run.
B)rise in the short run but return to its original equilibrium level in the long run.
C)rise in the short run but will fall below its original equilibrium level in the long run.
D)be unaffected in both the short run and the long run.

Question 63

The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.
a. What happens to prices and output in the short run?
b. What would happen to prices and output in the long run if there is no policy accommodation?
c. If the Central Bank of Macroland wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

Question 64

The long-run and short-run aggregate supply curves reflect fundamental differences between long-run and short-run macroeconomic analysis.
a. Graphically illustrate the long-run and short-run aggregate supply curves. Be sure to label the axes.
b. What determines the level of output in the long run versus the short run?
c. How do prices behave differently in the long run and the short run?

Question 65

Which of the following is an example of a demand shock?

A)a large oil-price increase
B)the introduction and greater availability of credit cards
C)a drought that destroys agricultural crops
D)unions obtain a substantial wage increase

Question 66

A central bank reduces the money supply in an economy initially in long-run equilibrium. a. What will happen to output and prices in the short run?
b. What will happen to unemployment in the short run?
c. What will happen to output and prices in the long run?

Question 67

The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their income in checking accounts. Use the aggregate demand- aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and
vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Question 68

Suppose you are an economist working for the Federal Reserve when droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal
equilibrium values. State in words what happens to prices and output as a combined result of the supply shock and the recommended Fed accommodation.

Question 69

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

A)both Fed A and Fed B should increase the quantity of money.
B)Fed A should increase the quantity of money whereas Fed B should keep it stable.
C)Fed A should keep the quantity of money stable whereas Fed B should increase it.
D)both Fed A and Fed B should keep the quantity of money stable.

Question 70

Suppose that laws are passed banning labor unions and that resulting lower labor costs are passed along to consumers in the form of lower prices. Use the aggregate demand- aggregate supply model to illustrate graphically the impact in the short run and the long run of this favorable supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Question 71

Suppose that droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Question 72

Stabilization policy:

A)aims at keeping output and employment at their natural rates.
B)always succeeds in keeping output and employment at their natural rates.
C)is generally ineffective.
D)does more harm than good.

Question 73

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:

A)prices will rise in both the short run and the long run.
B)output will rise in both the short run and the long run.
C)prices will rise in the short run and output will rise in the long run.
D)output will rise in the short run and prices will rise in the long run.

Question 74

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse
supply shock in both Country A and Country B. Both countries were in long-run equilibrium at the same level of output and prices at the time of the shock. The central bank of Country A
takes no stabilizing-policy actions. After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to return the economy to full employment.
a. Describe the short-run impact of the adverse supply shock on prices and output in each country.
b. Compare the long-run impact of the adverse supply shock on prices and output in each country.

Question 75

Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M = 1,500.

A) If the economy is initially in long-run equilibrium, what are the values of P and Y?
B) If M increases to 2,000, what are the new short-run values of P and Y?
C) Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

Question 76

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

A)both Fed A and Fed B should increase the quantity of money.
B)Fed A should increase the quantity of money whereas Fed B should keep it stable.
C)Fed A should keep the quantity of money stable whereas Fed B should increase it.
D)both Fed A and Fed B should keep the quantity of money stable.

Question 77

Explain the meaning of monetary neutrality and illustrate graphically that there is monetary neutrality in the long run in the aggregate demand-aggregate supply model. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. Explain in words what your graph illustrates.

Question 78

The principal method used by the Federal Reserve to change the money supply is through open-market operations. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of a Federal Reserve decision to increase open-market purchases. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the
short run and the long run.

Question 79

An economy is initially in long-run equilibrium. The introduction of an electronic payments system dramatically reduces the demand for money in the economy.
a. What is the short-run impact on prices and output of the new system?
b. What can the central bank do, if anything, to counteract the short-run changes in output and prices?
c. If the central bank does not take any policy actions, what will be the long-run impact of the electronic payments system on prices and output?

Question 80

Throughout much of the 1990s, the United States experienced declining energy prices. Assume that the U.S. economy was in long-run equilibrium before these declines began.
a. Use the aggregate demand-aggregate supply model to illustrate graphically the short-run and long-run impact of this decline on output and prices.
b. If the Federal Reserve attempted to offset this deviation from the natural rate in the short run, should the money supply be increased or decreased?