Deck 9: An Introduction to the Short Run

Question 1

Taxes,oil price changes,government spending,interest rate changes,new technologies,and disasters are examples of __________.

A)long-term economic shocks
B)short-term economic shocks
C)political unrest
D)monetary policy
E)fiscal policy

Answer 1

B

Question 2

The short-run model determines __________ and __________.

A)current output;current inflation
B)current output;long-run inflation
C)unemployment;current inflation
D)unemployment;potential output
E)potential output;unemployment

Answer 2

A

Question 3

Defining
As current output,
As potential output,and
As short-run fluctuations,which of the following equations is correct?

A)
B)
C)
D)
E)

Answer 3

B

Question 4

New technology,oil price changes,pork-barrel spending,interest rate changes,changes in planned investment,and disasters are examples of __________.

A)long-term economic shocks
B)short-term economic shocks
C)political unrest
D)monetary policy
E)fiscal policy

Question 5

Which of the following is not an example of a short term macroeconomic "shock"?

A)increased oil prices
B)a drought
C)increased military spending
D)a change in the tax code
E)none of the above

Question 6

Which of the following is not an example of a short term macroeconomic "shock"?

A)a change in the tax code
B)pork-barrel spending
C)increased military spending
D)planned investment expenditures
E)political unrest

Question 7

Output fluctuations are defined as __________.

A)the amount of output where inflation is about 2 percent
B)what an economy produces when it is at capacity
C)the percentage difference between current output and potential output
D)the amount of total output if all inputs were utilized at their long-run sustainable levels
E)the amount of output where unemployment is zero

Question 8

Which of the following is not an example of a short term macroeconomic "shock"?

A)political unrest
B)a change in the tax code
C)a drought
D)increased military spending
E)none of the above

Question 9

What is the best definition of the short term in the short-term model?

A)about two years
B)There is no such thing as the short term.
C)the length of time for short-term deviations to return to their long-run values
D)the length of a recession
E)the amount of time the economy spends at its potential output

Question 10

The long-run model determines __________ and __________.

A)current output;unemployment
B)potential output;unemployment
C)current output;long-run inflation
D)potential output;unemployment
E)potential output;long-run inflation

Question 11

Which of the following is not an example of a short term macroeconomic "shock"?

A)a drought
B)planned investment expenditures
C)increased military spending
D)a change in the tax code
E)political unrest

Question 12

One implication of the Keynes quote,"In the long run we are all dead," is __________.

A)the economy is always in its long-run equilibrium.
B)we know with certainty what the long run is.
C)the long run is made up of a sequence of short runs.
D)there is no difference between the long and short runs.
E)there is no short run.

Question 13

Defining
As current output,
As potential output,and
As short-run fluctuations,which of the following equations does the text use to measure the fluctuations component of output?

A)
B)
C)
D)
E)

Question 14

Which of the following is not an example of a short term macroeconomic "shock"?

A)a drought
B)high unemployment
C)increased military spending
D)a change in the tax code
E)political unrest

Question 15

Potential output is defined as __________.

A)the amount of total output if all inputs were utilized at their long-run,sustainable levels
B)what an economy produces when it is at capacity
C)the current level of output
D)the amount of output where inflation is zero
E)none of the above

Question 16

Defining
As current output,
As potential output,and
As short-run fluctuations,which of the following equations is correct?

A)
B)
C)
D)
E)

Question 17

The long-run model determines __________ and __________,while the short-run model determines __________ and __________.

A)potential output;long-run inflation;current output;current inflation
B)potential output;unemployment;current output;long-run inflation
C)current output;long-run inflation;unemployment;current inflation
D)potential output;unemployment;unemployment;current inflation
E)current output;unemployment;potential output;current inflation

Question 18

Which of the following is not an example of a short term macroeconomic "shock"?

A)planned investment expenditures
B)a hurricane
C)increased military spending
D)a change in the tax code
E)new technology

Question 19

Current output is defined as __________.

A)the amount of output when inflation is about 2 percent
B)what an economy produces when it is at capacity
C)the amount of total output at the current level of input utilization
D)the amount of total output if all inputs were utilized at their long-run sustainable levels
E)the amount of output where unemployment is zero

Question 20

John Maynard Keynes is famous for saying,"In the long run __________."

A)there is no tomorrow.
B)we are all dead.
C)the only thing we have to fear is fear itself.
D)the study of economics will be redundant.
E)none of the above

Question 21

If current output is
Billion and potential output
Billion,then the economy is in a(n)__________ and
Is about __________.

A)recession;-4.7 percent
B)boom;4.7 percent
C)boom;-4.7 percent
D)recession;- 5 percent
E)boom;5 percent

Question 22

According to the Phillips curve,short-term changes in inflation are due to

A)changes in interest rates.
B)changes in unemployment.
C)changes in short-term output fluctuations.
D)changes in long-term inflation.
E)changes in long-term output.

Question 23

Suppose an economy exhibits a large unexpected decrease in productivity growth that lasts for a decade.However,monetary policymakers are slow to recognize that the change is to potential,not current,output,and interpret the decrease in output as a recession that leads current to fall below potential output.In this scenario,policymakers believe that __________ pressures are building and incorrectly respond by __________ interest rates,sending the economy into a(n)___________ gap.

A)inflationary;raising;inflationary
B)inflationary;reducing;inflationary
C)inflationary;raising;recessionary
D)recessionary;reducing;inflationary
E)Not enough information is given.

Question 24

Consider Figure 9.2.In approximately which of the following years was current output equal to potential output?

A)1953,1966,1974,1979,and 2000
B)1954,1961,1975,1983,and 2002
C)1957,1964,1980,1991,and 2001
D)1954,1961,1975,1979,and 2000
E)1953,1966,1974,1983,and 2002

Question 25

Which is responsible for dating business cycles?

A)Business Cycle Committee of the National Bureau of Economic Research
B)Business Cycle Committee of the Department of Treasury
C)Department of Treasury
D)Commerce Department
E)Board of Governors of the Federal Reserve System

Question 26

Consider Figure 9.2,which represents
T)In approximately what years did the U.S.economy experience its longest economic downturn,using the text's definition?

A)1990-1997
B)1974-1978
C)1980-1988
D)1957-1963
E)cannot be determined from the information given

Question 27

Suppose an economy exhibits a large unexpected increase in productivity growth that lasts for a decade.However,monetary policymakers are slow to recognize that the change is to potential,not current,output,and interpret the increase in output as a boom that leads current to exceed potential output.In this scenario,policymakers believe that __________ pressures are building and incorrectly respond by __________ interest rates,sending the economy into a(n)__________ gap.

A)inflationary;raising;recessionary
B)inflationary;reducing;recessionary
C)recessionary;raising;expansionary
D)recessionary;reducing;recessionary
E)Not enough information is given.

Question 28

If current output is
Billion and potential output
Billion,then the economy is in a __________ and
Is about __________.

A)boom;-6.7 percent
B)recession;- 6.7 percent
C)recession;-6.2 percent
D)boom;6.7 percent
E)None of the above is correct.

Question 29

Consider Figure 9.2.In 1989,the U.S.economy experienced a(n)economic __________,and current output was about __________ potential output.

A)boom;1 percent above
B)recession;1 percent above
C)boom;2 percent above
D)cannot be determined from the information given
E)none of the above

Question 30

The Phillips curve in the text shows the __________ relationship between __________ and __________.

A)positive;the change in inflation;short-term economic fluctuations
B)negative;the change in inflation;short-term economic fluctuations
C)positive;inflation;unemployment
D)negative;inflation;unemployment
E)negative;the change in inflation;unemployment

Question 31

According to the text,which of the following can be used to approximate potential output?
I)Assume a perfectly smooth trend is passing through the quarter-to-quarter movements in the real GDP.
Ii)Survey leading economists.
Iii)Gather current data from statistical agencies,such as the Bureau of Economic Analysis.

A)i only
B)ii only
C)ii and iii
D)i and ii
E)iii only

Question 32

Generally speaking,the rate of inflation __________ during a recession.

A)stays the same
B)falls
C)rises
D)falls,then rises
E)none of the above

Question 33

Defining
As current output,
As potential output,and
As short-run fluctuations,how can the equation

Be best defined?

A)the percentage deviation of current output from potential output
B)the difference between current output and potential output
C)the percentage deviation of potential output from current output
D)the deviation of current output from potential output
E)the difference between potential output and current output

Question 34

According to the text,which of the following can be used to characterize potential output?
I)Assume a perfectly smooth trend is passing through the quarter-to-quarter movements in the real GDP.
Ii)Take averages of the surrounding actual GDP numbers.
Iii)Gather current data from statistical agencies,such as the Bureau of Economic Analysis.

A)i only
B)ii only
C)ii and iii
D)i and ii
E)iii only

Question 35

Consider Figure 9.2.The line represents short-run fluctuations,
)Since 1950,the largest boom was in about __________ and the deepest recession was in about __________.

A)1983;1965
B)1974;1976
C)2000;1983
D)1966;1983
E)The economy always produces at its potential.

Question 36

Consider Figure 9.1.The dashed line is potential output and the solid line is current output;therefore,

A)areas a and b are booms.
B)area b represents an economic boom,and area a is a recession.
C)the economy is in neither a recession nor a boom in areas a and b.
D)area a represents an economic boom,and area b is a recession.

Question 37

Which is responsible for dating business cycles?

A)Congressional Budget Office
B)Business Cycle Committee of the National Bureau of Economic Research
C)President's Council of Economic Advisors
D)New York City Federal Reserve Bank president
E)Board of Governors of the Federal Reserve System

Question 38

Consider Figure 9.2,which represents
T)In approximately what years did the U.S.economy experience its longest economic expansion?

A)1964-1970
B)1950-1954
C)1996-2001
D)1972-1974
E)cannot be determined from the information given

Question 39

Consider Figure 9.1.

A)Area a is where current output is less than potential output,and area b is where current output is greater than potential output.
B)Area a is where current output is greater than potential output,and area b is where current output is less than potential output.
C)Point c is where economic fluctuations are zero,and at point b,the economy is in a boom.
D)At point c,current output equals the short-term fluctuations.
E)Area a is where current output is greater than potential output,and at point c,the economy is in a boom.

Question 40

According to the text,which of the following can be used to estimate potential output?
I)Get the data from the Census Bureau.
Ii)Survey leading economists.
Iii)Gather current data from statistical agencies,such as the Bureau of Economic Analysis.

A)i only
B)ii only
C)iii only
D)i and ii
E)None of the above is correct.

Question 41

Consider the Phillips curve at
,1 in Figure 9.3.

A)The economy is booming.
B)The economy is inflationary.
C)The economy is at potential output.
D)The economy is in recession.
E)Both a and b are correct.

Question 42

If
,the macroeconomy is:

A)in a recession.
B)in an expansion.
C)at its potential level of output.
D)Not enough information is given.
E)none of the above

Question 43

If
,the macroeconomy is:

A)at its potential level of output.
B)in a recession.
C)in an expansion.
D)Not enough information is given.
E)none of the above

Question 44

In 1980,the inflation rate reached about 14 percent,due in part to ___________.The Board of Governors of the Federal Reserve under __________ decided to __________ interest rates,sending the economy into a __________.

A)a fall in oil prices;Volcker;raise;recession
B)an increase consumer spending;Volcker;reduce;recession
C)an increase in oil prices;Volcker;raise;recession
D)an increase in oil prices;Volcker;reduce;boom
E)a fall in oil prices;Greenspan;raise;recession

Question 45

If
,the macroeconomy is:

A)in an expansion.
B)at its potential level of output.
C)in a recession.
D)none of the above
E)Not enough information is given.

Question 46

If
,the macroeconomy is:

A)in a recession.
B)in an expansion.
C)at its potential level of output.
D)Not enough information is given.
E)none of the above

Question 47

The Phillips curve in the text shows the __________ relationship between __________ and __________.

A)positive;inflation;unemployment
B)positive;inflation;short-term economic fluctuations
C)positive;the change in inflation;short-term economic fluctuations
D)negative;inflation;unemployment
E)negative;the change in inflation;unemployment

Question 48

Okun's law shows the __________ relationship between __________ and __________.

A)negative;unemployment gap;economic fluctuations
B)positive;unemployment gap;economic fluctuations
C)negative;unemployment gap;inflation
D)positive;unemployment gap;inflation
E)negative;inflation;economic fluctuations

Question 49

If
,the macroeconomy is:

A)in a recession.
B)in an expansion.
C)at its potential level of output.
D)Not enough information is given.
E)none of the above

Question 50

Consider the Phillips curve at
,2 in Figure 9.3.

A)The economy is booming.
B)The economy is inflationary.
C)The economy is in recession.
D)The economy is at potential output.
E)Not enough information is given to determine.

Question 51

According to the Phillips curve presented in the text,a negative macroeconomic shock:

A)increases the rate of inflation.
B)decreases the rate of inflation.
C)has no effect on the rate of inflation.
D)has a negative effect on the unemployment rate.
E)has a positive effect on the unemployment rate.

Question 52

Defining u as the unemployment rate and
As the natural rate of unemployment,Okun's law is given by the following equation:

A)
B)
C)
D)
E)

Question 53

According to Okun's law,if the Federal Reserve wants to reduce unemployment,it should __________ interest rates,which would __________ output.

A)reduce;reduce
B)increase;increase
C)reduce;increase
D)reduce;not change
E)not change;increase

Question 54

If
,the macroeconomy is:

A)in an expansion.
B)in a recession.
C)at its potential level of output.
D)Not enough information is given.
E)none of the above

Question 55

According to the Phillips curve presented in the text,a positive macroeconomic shock:

A)increases the rate of inflation.
B)decreases the rate of inflation.
C)has no effect on the rate of inflation.
D)has a negative effect on the unemployment rate.
E)has a positive effect on the unemployment rate.

Question 56

Taken together,the Phillips curve and Okun's law imply there is a short-term __________ relationship between __________ and inflation.

A)positive;interest rates
B)positive;unemployment
C)negative;interest rates
D)negative;unemployment
E)Not enough information is given.

Question 57

Consider the Phillips curve at
In Figure 9.3.

A)The economy is booming.
B)The economy is inflationary.
C)The economy is at its potential output.
D)The economy is in recession.
E)Not enough information is given to determine.

Question 58

Defining u as the unemployment rate and
As the natural rate of unemployment,Okun's law is given by the following equation:

A)
B)
C)
D)
E)

Question 59

In 1980,the inflation rate reached about 14 percent.The Federal Reserve __________ interest rates,sending the economy into a(n)__________.When doing so,the Federal Reserve knew this would be the case because of the __________.

A)raised;expansion;Phillips curve
B)raised;recession;Phillips curve
C)raised;recession;Okun relationship
D)decreased;recession;Phillips curve
E)decreased;expansion;Phillips curve

Question 60

According to Okun's law,if the Federal Reserve wants to increase unemployment,it should __________ interest rates,which would __________ output.

A)increase;increase
B)increase;reduce
C)reduce;reduce
D)reduce;not change
E)not change;increase

Question 61

Defining Yt as current output,
as potential output,and
as short-run fluctuations,the equation
is defined as the percentage deviation of current output from potential output.

Question 62

If an economy has a horizontal Phillips curve and experiences an expansion,inflation:

A)falls.
B)rises sharply.
C)rises,but not very much.
D)does not change.
E)falls sharply.

Question 63

The relationship between actual output in an economy,the long-run component,and the short-run component is given as: Long-run trend = Current output + Shortrun fluctuations.

Question 64

In Figure 9.5,area b represents an economic boom,and area a is a recession.

Question 65

Defining Yt as current output,
as potential output,and
as short-run fluctuations,the relationship between the three can be written as
.

Question 66

Defining
as current output,
as potential output,and
as short-run fluctuations,the text uses the following equation to measure the fluctuations component of output:

Question 67

You are a staff economist with the Federal Reserve.The chairman says to you,"The rate of change in inflation is too high and I think the Phillips curve is horizontal.What should we do to reduce these inflationary increases?" You respond with,

A)"Because the Phillips curve is flat,we can do nothing to change the rate of inflation,as it does not respond to changes in output."
B)"Because the Phillips curve is flat,we need to increase interest rates a lot,as the change in inflation is not very responsive to changes in output."
C)"Because the Phillips curve is flat,we need to decrease interest rates a lot,as the change in inflation is not very responsive to changes in output."
D)"Because the Phillips curve is flat,we need to increase interest rates a lot,as the change in inflation is infinitely responsive to changes in output."
E)"You are not giving me enough information."

Question 68

Consider two economies.Economy 1 has a steep Phillips curve and Economy 2 has a gently sloped Phillips curve.If each economy experiences an identical economic expansion,__________ would increase less in __________ and would experience a relatively __________ change in output.

A)the change in inflation;Economy 2;smaller
B)the change in unemployment;Economy 1;larger
C)the change in inflation;Economy 2;larger
D)the change in interest rates;Economy 1;smaller
E)Not enough information is given.

Question 69

Consider Figure 9.4,which shows the annual inflation rate month to month.According to the Phillips curve,the period from about 2001.01 to 2001.12 is a period of ___________.

A)expansion
B)recession
C)stagnation
D)none of the above
E)Not enough information is given.

Question 70

According to the Phillips curve presented in the text,a positive macroeconomic shock decreases the rate of inflation.

Question 71

Generally speaking,the rate of inflation rises during a recession.

Question 72

Consider Figure 9.4,which shows the annual inflation rate month to month.According to the Phillips curve,the period from about 2003.10 to 2005.08 is a period of ___________.

A)recession
B)expansion
C)stagnation
D)none of the above
E)Not enough information is given.

Question 73

Suppose an economy's natural rate of unemployment is 5 percent.If the unemployment rate is 3 percent,according to Okun's law,
Is:

A)2 percent.
B)-4 percent.
C)4 percent.
D)-2 percent.
E)Not enough information is given.

Question 74

Consider Figure 9.4,which shows the annual inflation rate month to month.According to the Phillips curve,the period from about 1998.04 to 2000.02 is a period of ___________.

A)stagnation
B)recession
C)expansion
D)none of the above
E)Not enough information is given.

Question 75

The Board of Governors of the Federal Reserve is responsible for dating business cycles.

Question 76

The Phillips curve shows the negative relationship between output fluctuations and the change in inflation.

Question 77

Suppose an economy's natural rate of unemployment is 5 percent.If the unemployment rate is 7 percent,according to Okun's law,
Is:

A)4 percent.
B)-4 percent.
C)2 percent.
D)-2 percent.
E)Not enough information is given.

Question 78

Taken together,the Phillips curve and Okun's law imply there is a __________ relationship between __________ and unemployment.

A)positive;inflation
B)negative;inflation
C)negative;interest rates
D)positive;interest rates
E)Not enough information is given.

Question 79

The relationship between actual output in an economy,the long-run component,and the short-run component is given as: Current output = Long-run trend + Short-run fluctuations

Question 80

You are a staff economist with the Federal Reserve.The chairman says to you,"The rate of change in inflation is too high,and I don't think the Phillips curve is very steep.What should we do to reduce these inflationary increases?" You respond with,

A)"Because the Phillips curve is relatively flat,we need to increase interest rates a lot,as the change in inflation is not very responsive to changes in output."
B)"Because the Phillips curve is relatively flat,we need to decrease interest rates a lot,as the change in inflation is not very responsive to changes in output."
C)"Because the Phillips curve is relatively flat,we need to increase interest rates only a little,as the change in inflation is very responsive to changes in output."
D)"Because the Phillips curve is relatively flat,we need to increase interest rates only a little,as the change in inflation is not very responsive to changes in output."
E)"Because the Phillips curve is relatively flat,we can do nothing to interest rates,as the change in inflation does not respond to changes in output."