Deck 17: Monetary Theory I: The Aggregate Demand and Aggregate Supply Model

Question 1

A decrease in the price level will lead to

A)a decrease in the real interest rate and an increase in net exports.
B)an increase in the real interest rate and an increase in net exports.
C)a decrease in the real interest rate and a decrease in net exports.
D)an increase in the real interest rate and a decrease in net exports.

Answer 1

a decrease in the real interest rate and an increase in net exports.

Question 2

Which of the following would shift the aggregate demand curve to the left?

A)an increase in the money supply
B)a cut in federal income taxes
C)an expected decrease in future income
D)an increase in the price level

Answer 2

an expected decrease in future income

Question 3

Which of the following would NOT shift the aggregate demand curve to the left?

A)an increase in money demand
B)a cut in federal government spending
C)a reduction in federal income taxes
D)a decrease in consumption spending

Answer 3

a reduction in federal income taxes

Question 4

An increase in all of the following will increase aggregate demand EXCEPT

A)investment.
B)savings.
C)exports.
D)government spending.

Question 5

How does an increase in the short-term interest rate affect peoples' desire to hold real money balances?

A)People will hold more money to compensate for the higher interest rate.
B)People will hold more money in anticipation of higher inflation.
C)People will hold less money since they would be sacrificing more interest by holding money.
D)People will hold less money since it is not worth as much.

Question 6

How does an increase in the price level lead to a higher interest rate?

Question 7

An increase in the price level reduces net exports because

A)it leads indirectly to a higher exchange rate.
B)it leads indirectly to a lower exchange rate.
C)it leads indirectly to a lower real interest rate.
D)it leads directly to higher real money balances.

Question 8

How does an increase in the price level result in higher interest rates?

A)It increases the real money supply.
B)It decreases the real money supply.
C)It increases the real money demand.
D)It decreases the real money demand.

Question 9

The opportunity cost of holding money is measured by:

A)short-term nominal interest rate
B)short-term real interest rate
C)long-term nominal interest rate
D)long-term real interest rate

Question 10

Which of the following expressions is correct?

A)AE = C + I + G - NX.
B)AE = C + I + G + NX.
C)AE = C + I + (G - T)+ NX.
D)AE = C + I + (G - T)- NX.

Question 11

A rise in the real interest rate will cause which of the components of aggregate demand to decline?

A)Only C
B)Only C and I
C)Only C, I, and NX
D)C, I, G, and NX

Question 12

The aggregate demand curve illustrates the relationship between

A)the aggregate expenditure for goods and services, and the real interest rate.
B)the aggregate expenditure for goods and services, and the level of current output.
C)the level of current output and the real interest rate.
D)the aggregate expenditure for goods and services, and the price level.

Question 13

If there is a decrease in the expected future profitability of capital,

A)the aggregate demand curve will shift right.
B)the aggregate demand curve will shift left.
C)the aggregate demand curve will become steeper.
D)the aggregate demand curve will be unaffected.

Question 14

Which of the following is NOT included in aggregate demand?

A)Demand for goods and services for consumption
B)Investment in business plant and equipment
C)Net exports
D)Investment in Treasury bonds

Question 15

The best explanation of why the aggregate demand curve has a negative slope is that

A)at a higher price level households cut back on their spending on goods and services.
B)at a higher price level business firms wish to produce more goods and services.
C)a higher price level results in lower real balances and a higher real interest rate.
D)a higher price level results in less government spending on transfers, such as unemployment insurance and social security payments.

Question 16

If there is a decrease in foreign demand for U.S. goods due to a recession in Europe

A)the U.S. aggregate demand will shift right.
B)the U.S. aggregate demand will shift left.
C)the U.S. aggregate demand will not be affected.
D)the U.S. aggregate demand will become steeper.

Question 17

A shift of the AD curve

A)to the right is considered expansionary, and a shift to the left is considered contractionary.
B)to the left is considered expansionary, and a shift to the right is considered contractionary.
C)to the right or to the left is considered contractionary.
D)to the right or to the left is considered expansionary.

Question 18

Which of the following will NOT shift the aggregate demand curve to the right?

A)a decline in the price level
B)an increase in government expenditures
C)an increase in investment
D)an increase in the money supply

Question 19

Why is the short-term nominal interest rate the opportunity cost of holding money?

Question 20

Everything else being constant, a lower real interest rate

A)increases desired saving and net exports.
B)decreases desired saving but increases net exports.
C)increases desired saving and investment.
D)increases desired investment but decreases net exports.

Question 21

The new classical explanation of aggregate supply in the short run builds on research by

A)Irving Fisher.
B)John Maynard Keynes.
C)Robert Lucas.
D)Robert Solow.

Question 22

The new classical approach to the aggregate supply curve assumes that businesses are

A)better informed about the general price level than they are about prices in their own markets.
B)better informed about prices in their own markets than they are about the general price level.
C)equally well informed about prices in their own markets and the general price level.
D)reluctant to engage in investment spending because of a lack of information concerning future prices.

Question 23

According to the new classical view, when the actual price level is greater than the expected price level

A)aggregate output is above the full employment level.
B)aggregate output is below the full employment level.
C)the aggregate supply curve will slope downward.
D)the coefficient a is equal to zero.

Question 24

If in the short run prices did not respond at all to changes in aggregate demand, the short-run aggregate supply curve would

A)be vertical.
B)be horizontal.
C)slope up.
D)slope down.

Question 25

If the coefficient a in the new classical expression for short-run aggregate supply were equal to zero,

A)aggregate output would always be at its full-employment level.
B)the short-run aggregate supply curve would slope down.
C)the short-run aggregate supply curve would be a horizontal line.
D)aggregate output would only differ from its full-employment level if the actual price level did not equal the expected price level.

Question 26

Which of the following is NOT a characteristic of competitive markets?

A)standardized product
B)purchases and sales of individual traders are small relative to the total volume traded
C)prices adjust quickly
D)there are relatively few sellers

Question 27

Suppose a company expects prices in general to rise by 5%, but the price of its product rises by 2%. How will the company respond to the price change?

A)It will increase production since it's getting a higher price for the product.
B)It will increase production more slowly since it's price is rising more slowly than average.
C)It will reduce production since it perceives a relative decline in the demand for its product.
D)It will stop production and shut down until prices rise more quickly.

Question 28

The new classical explanation of aggregate supply is also known as

A)Monetarism.
B)Keynesianism.
C)the misperception theory.
D)the adaptive expectations theory.

Question 29

Which of the following is the correct expression for short-run aggregate supply in the new classical view?

A)Y^{P = Y + a}(P - )
B)Y = Y^{P + a}(P - )
C)Y^{P = Y + a}(P + )
D)Y = Y^{P + a}(P + )

Question 30

Most economists believe that the short-run aggregate supply curve

A)slopes down.
B)slopes up.
C)is a vertical line.
D)is a horizontal line.

Question 31

Which of the following is NOT an example of a monopolistically competitive market?

A)high fashion clothing
B)medical care
C)wheat
D)automobiles

Question 32

According to the new classical approach to the aggregate supply curve, the aggregate supply curve slopes upward because

A)increases in the price level result in lower real balances.
B)higher current output results in higher desired investment.
C)higher prices result in higher levels of spending as consumers attempt to stay ahead of inflation.
D)businesses have difficulty in distinguishing relative price increases from general price increases.

Question 33

How is a monopolistically competitive firm likely to respond to fluctuations in demand in the short run?

A)by selling more or less at the posted price
B)by changing prices
C)by reducing menu costs
D)by increasing menu costs

Question 34

Most economists believe that changes in the price level have

A)no effect on the quantity of output supplied in either the short run or the long run.
B)an effect on the quantity of output supplied in the short run, but not in the long run.
C)an effect on the quantity of output supplied in the long run, but not in the short run.
D)an effect on the quantity of output supplied in both the short run and the long run.

Question 35

How does an increase in interest rates affect net exports?

Question 36

The aggregate supply curve represents levels of output that producers are willing to sell at

A)each level of the real interest rate.
B)each level of real GDP.
C)each price level.
D)each inflation rate.

Question 37

Most economists believe that the aggregate supply curve is

A)upward-sloping in the short run, but vertical in the long run.
B)upward-sloping in the long run, but vertical in the short run.
C)upward-sloping in both the short run and in the long run.
D)vertical in both the short run and in the long run.

Question 38

What does the coefficient a in the new classical expression for short-run aggregate supply represent?

A)the full employment level of output
B)the price level in the previous period
C)how much output responds when the actual price level differs from the expected price level
D)how much the price level responds when the actual level of output differs from the full employment level of output

Question 39

The key concept in the new classical approach to the aggregate supply curve is

A)the impact of imperfect information on business decisions.
B)the impact of changes in the price level on real balances.
C)the inverse relationship between the real interest rate and desired investment spending.
D)the crowding out of investment spending by government spending.

Question 40

According to the new classical view, aggregate output will differ from full-employment output

A)whenever saving does not equal investment.
B)only if the actual price level does not equal the expected price level.
C)only if the federal government's expenditures are greater than its tax receipts.
D)whenever imports exceed exports.

Question 41

An increase in oil prices will

A)shift the short-run aggregate supply curve up and to the left.
B)shift the short-run aggregate supply curve down and to the right.
C)cause a movement along the short-run aggregate supply curve.
D)not affect the short-run aggregate supply curve.

Question 42

How do New Keynesians use the existence of long-term nominal contracts to help explain the failure of prices to adjust in the short run?

Question 43

How do new Keynesians use menu costs to help explain price stickiness in the short run?

Question 44

An increase in the price level

A)shifts the short-run aggregate supply curve up and to the left.
B)shifts the short-run aggregate supply curve down and to the right.
C)shifts the long-run aggregate supply curve to the left.
D)results in a movement along the short-run aggregate supply curve, rather than a shift in the short-run aggregate supply curve.

Question 45

Which of the following statements is correct?

A)New classicals believe that the aggregate supply curve is vertical in the short run.
B)New Keynesians believe that the aggregate supply curve is vertical in the short run.
C)New Keynesians believe that the aggregate supply curve slopes upward in the long run.
D)New classicals believe that the aggregate supply curve slopes upward in the short run.

Question 46

Explain what happens to the short-run aggregate supply curve when output exceeds its potential.

Question 47

Which of the following is NOT an example of a supply shock?

A)a drought in the Midwest
B)a decline in natural gas prices following discovery of new fields
C)the introduction of a new line of computer-controlled machine tools in manufacturing
D)a substantial increase in federal government spending on Medicare

Question 48

According to the New Classical theory, why may output differ from its full-employment level in the short run?

Question 49

Fracking involves:

A)extracting certain forms of energy from shale rock formations
B)deep water drilling for energy with minimal externalities
C)the reduction of menu costs thus allowing prices to adjust more freely
D)breaking down the production of goods resulting in more competitive markets

Question 50

Which of the following is most likely to have an impact on the growth of productivity?

A)a decrease in the price level
B)a decrease in real money balances
C)an increase in the labor supply
D)improvements in worker training

Question 51

Which of the following would cause the long-run aggregate supply curve to shift?

A)an increase in the price level
B)a decrease in the expected price level
C)an increase in labor productivity
D)an autonomous increase in consumption spending

Question 52

Which of the following will NOT shift the short-run aggregate supply function?

A)changes in labor costs
B)changes in the costs of nonlabor inputs
C)changes in the price level
D)changes in the expected price level

Question 53

According to New Keynesians, why can firms increase output in the short run in response to higher prices?

Question 54

Productivity growth occurs when:

A)there are more inputs
B)firms can produce more output per unit of input
C)more output is produced
D)employees work extra hours

Question 55

In the new Keynesian view, the larger the proportion of firms in the economy with sticky prices,

A)the steeper the SRAS curve will be.
B)the flatter the SRAS curve will be.
C)the greater the increase in the price level for a given shift in the AD curve.
D)the less effective is fiscal policy in increasing output.

Question 56

Which of the following statements is correct?

A)New classicals believe that the aggregate supply curve is a vertical line in both the short run and the long run.
B)Both new classicals and new Keynesians believe that the aggregate supply curve is vertical in the long run.
C)New Keynesians believe that the aggregate supply curve is vertical in the short run but not in the long run.
D)New Keynesians believe that the aggregate supply curve slopes upward in the long run.

Question 57

Make use of the misperceptions theory to explain why the short-run aggregate supply curve is upward sloping.

Question 58

An increase in the expected price level

A)shifts the short-run aggregate supply curve up and to the left.
B)shifts the short-run aggregate supply curve down and to the right.
C)has no effect on the short-run aggregate supply curve.
D)results in a movement along the short-run aggregate supply curve, rather than a shift in the short-run aggregate supply curve.

Question 59

In the new Keynesian view a monopolistically competitive firm may fail to increase the price of its product as demand increases because

A)if it does so it will lose all of its customers.
B)the cost to it of changing prices may exceed the benefit of doing so.
C)prices of monopolistically competitive firms are regulated by the federal government and may only be changed with permission.
D)for a monopolistically competitive firm, price is below marginal cost.

Question 60

Some economists have predicted that recent developments in energy production in the United States are estimated to result in all of the following EXCEPT:

A)millions of new jobs
B)the United States having the lowest energy costs of any country in the industrialized world
C)a substantial increase in GDP over time
D)significant increases in pollution

Question 61

If labor costs rise at the same time that the federal government decreases its purchases, in the short run

A)aggregate output and the price level will both increase.
B)aggregate output will increase, but the price level will fall.
C)aggregate output and the price level will both fall.
D)aggregate output will fall, but the price level may either increase or decrease.

Question 62

In the long run, one-time increases or decreases in the nominal money supply affect

A)real output, but not the price level.
B)the price level, but not real output.
C)both real output and the price level.
D)neither real output nor the price level.

Question 63

The proposition of monetary neutrality states that changes in the money supply have:

A)no impact on output in the short run
B)no impact on output in the long run
C)no impact on the price level in the short run
D)no impact on the price level in the long run

Question 64

When output exceeds its full-employment level,

A)the short-run aggregate supply function shifts up.
B)wages fall.
C)the short-run aggregate supply function shifts down.
D)aggregate supply exceeds aggregate demand.

Question 65

In the aggregate demand-aggregate supply model, if entrepreneurs become convinced that future profitability of capital has increased,

A)current output will fall, but the price level will rise.
B)current output will rise, but the price level will fall.
C)current output and the price level will both rise.
D)current output and the price level will both fall.

Question 66

If oil prices fall at the same time that the federal government increases its purchases, in the short run

A)aggregate output and the price level will both increase.
B)aggregate output will increase, but the price level will fall.
C)aggregate output and the price level will both fall.
D)aggregate output will increase, but the price level may either increase or decrease.

Question 67

According to AD-AS model, the primary long-run effect of increases in the money supply is

A)higher price level.
B)higher GDP.
C)lower price level.
D)lower GDP.

Question 68

The result of the supply shocks of 1973-1974 was to

A)reduce aggregate output and raise the price level.
B)reduce the price level and raise aggregate output.
C)reduce both aggregate output and the price level.
D)raise both aggregate output and the price level.

Question 69

Monetary neutrality refers to the fact that changes in the money supply

A)affect output more in the long run than in the short run.
B)have no effect on output in the long run.
C)affect only output in the long run.
D)have a greater effect on prices in the short run than in the long run.

Question 70

When output is below its full-employment level, the short-run aggregate supply will shift down and to the right because

A)the expected price level will be below the actual price level.
B)workers' wages will decline.
C)prices of nonlabor inputs will rise.
D)workers' wages will rise.

Question 71

In the long run, the key reason that money is neutral is that

A)the federal budget is balanced.
B)prices are flexible.
C)business cycles have become much milder.
D)the nominal interest rate must equal the real interest rate.

Question 72

Economists generally agree that in the long run changes in aggregate demand affect

A)aggregate output but not the price level.
B)the price level but not aggregate output.
C)both the price level and aggregate output.
D)neither the price level nor aggregate output.

Question 73

If the expected price level increases at the same time that the federal government cuts taxes, in the short run

A)aggregate output and the price level will both increase.
B)aggregate output will increase, but the price level will fall.
C)aggregate output and the price level will both fall.
D)the price level will increase, but aggregate output may either increase or decrease.

Question 74

When economists state that money is neutral in the long run, they mean that in the long run,

A)fluctuations in the money supply are equally likely to lead to recessions as to expansions.
B)changes in the money supply have the same impact on the rich as they do on the poor.
C)the level of output is independent of the nominal money supply.
D)the price level is independent of the nominal money supply.

Question 75

According to the aggregate demand-aggregate supply model, what is the short-run impact of a reduction in the money supply by the Fed?

A)Current output will fall, but the price level will rise.
B)Current output will rise, but the price level will fall.
C)Current output and the price level will both rise.
D)Current output and the price level will both fall.

Question 76

During the years from 1964 to 1969, inflation increased in the United States

A)when the AD curve shifted up and to the right, even though the SRAS curve remained stable.
B)when the SRAS curve shifted up and to the left, even though the AD curve remained stable.
C)when the AD curve shifted up and to the right and the SRAS curve shifted up and to the left.
D)despite the AD and SRAS curves remaining stable.

Question 77

The automatic mechanism can best be described as:

A)the process of the economy adjusting back to potential GDP without any action taken by the government
B)the result of monetary policy implemented by the Fed restoring full employment
C)how fiscal policy is used to return the economy to its potential
D)using rule-based policies to stabilize the economy

Question 78

If the economy is initially at equilibrium and an unexpected decline in aggregate demand takes place, in the short run aggregate output will

A)fall in the new classical view, but not in the new Keynesian view.
B)fall in the new Keynesian view, but not in the new classical view.
C)fall in both the new Keynesian and new classical views.
D)remain at full employment in both the new classical and new Keynesian views.

Question 79

What are the principal sources of change in productivity growth?

Question 80

The Federal Reserve pursued an expansionary monetary policy during 1964 in order to

A)pull the United States out of a deep recession.
B)counteract the effects of a deep cut in federal income taxes.
C)keep interest rates from rising.
D)bring down the inflation rate.