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

Question 1

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

Answer 1

C

Question 2

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.

Answer 2

B

Question 3

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.

Answer 3

B

Question 4

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 5

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

Question 6

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 7

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 8

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

Question 9

How does an increase in interest rates affect net exports?

Question 10

An increase in all of the following will increase AD EXCEPT

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

Question 11

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 12

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 13

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 14

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.

Question 15

The aggregate demand curve illustrates the relationship between

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

Question 16

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 17

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 18

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 19

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

Question 20

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

Question 21

Which of the following best describes a price setter?

A) firms in perfect competition
B) pricing of products that are not standardized
C) firms setting prices equal to the market price
D) firms setting price equal to the aggregate price level

Question 22

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 23

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 24

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 25

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 26

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 27

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 28

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

Question 30

Which of the following best describes a price taker?

A) a firm taking the market price as given
B) price strategies found in monopolistically competitive markets
C) prices being set by long-term contracts
D) firms taking the aggregate price level as given

Question 31

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 32

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 33

An important difference between the new classical and new Keynesians views is that new classicals

A) assume that all firms are price takers, but new Keynesians assume that some firms are price setters.
B) take into account the existence of long-term nominal wage and price contracts, but new Keynesians do not believe they are important.
C) focus on the importance of investment spending, but new Keynesians believe that government spending is more important.
D) believe that the aggregate supply curve is horizontal, even in the short run, but new Keynesians believe that the aggregate supply curve slopes upward in the short run.

Question 34

In which of the following markets is a producer likely to be a price taker?

A) the apple market
B) the automobile market
C) the steel market
D) the college textbook market

Question 35

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 36

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 37

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 38

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 39

A monopolistically competitive market differs from a perfectly competitive market in that a monopolistically competitive market has

A) more sellers.
B) products that are identical.
C) less sticky prices.
D) firms that are price setters.

Question 40

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 41

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

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

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

Question 44

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 45

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

Question 46

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 47

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 48

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 49

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 50

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

Question 51

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 52

The Polish experience indicates that

A) the aggregate supply curve is vertical, even in the short run.
B) changes in the expected price level do not affect aggregate supply.
C) the transition from a centrally planned to a market economy can result in an upward shift in the short-run aggregate supply curve.
D) increases in the factor productivity will shift the long-run aggregate supply curve to the left.

Question 53

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

Question 54

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 55

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 56

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

A) a decrease in the price level
B) an increase in government regulation of workplace safety
C) an increase in the labor supply
D) a decrease in real money balances

Question 57

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 58

What are the principal sources of change in productivity growth?

Question 59

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 60

Between 1992 and the 2000s,Poland experienced

A) strong economic growth, but increasing inflation.
B) weak economic growth, but falling inflation.
C) strong economic growth and falling inflation.
D) weak economic growth and increasing inflation.

Question 61

In the aggregate demand-aggregate supply model,if the Federal Reserve decides to decrease the nominal money supply,

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 62

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 63

Suppose that many households look to the stock market to gauge how the economy is likely to perform in the future.When stock prices are rising,then households will be optimistic about the future state of the economy and will increase their spending on houses and consumer durables,such as cars and furniture.When stock prices are falling,then households will be pessimistic about the future and will cut back on their spending.If this view of the link between stock prices and household spending is correct,then what will be the effect of a decline in stock prices on output in the new Keynesian view? Be sure to distinguish the short run from the long run.

Question 64

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 65

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 66

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 67

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 68

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.

Question 69

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 70

Stabilization policy refers to attempts to

A) shift the AD curve to smooth short-run fluctuations in output.
B) shift the SRAS curve to smooth short-run fluctuations in output.
C) shift the AD curve to keep the price level as low as possible.
D) shift the SRAS curve to keep the nominal interest rate as low as possible.

Question 71

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 72

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 73

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 74

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 75

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 76

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 77

Why are many economists skeptical of the Fed's ability to fine tune the economy?

A) monetary policy only affects output in the long run
B) lags in policy make it difficult to properly time policy
C) fiscal policy can be implemented more quickly than monetary policy
D) monetary policy does not have any effect on output

Question 78

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 79

Analyze the following statement: "I know the fact that prices have started to rise rapidly seems like bad news,but at least prices starting to go up means that output must be starting to go up as well."

Question 80

Suppose that initially U.S.households are saving only a small fraction of their incomes because they are relying on rapid increase in stock prices to increase their wealth.If stock prices decline and households decide to increase their saving rate,what will be impact on output in the new Keynesian view? Be sure to distinguish the short run from the long run.