Question 1

Price instability of commodities is due to:
A) inelastic supply
B) inelastic demand
C) elastic supply
D) elastic demand
E) both a and b

Accepted Answer

Price instability of commodities is mainly due to the interaction of inelastic supply and inelastic demand. When either the supply or demand is inelastic, even a small change in either can lead to significant fluctuations in price. When both are inelastic, the fluctuations can be even greater. Therefore, the correct choice is E as it includes both A and B.

Question 2

How can a commodity boom have negative macroeconomic consequences?
A) increased employment
B) increased government tax revenue
C) increased profits
D) rising price level
E) none of the above

Accepted Answer

A commodity boom can lead to rising prices, which can cause inflation and harm macroeconomic stability. This can lead to negative consequences such as reduced purchasing power and increased uncertainty in the economy. While a commodity boom can have benefits such as increased employment, government tax revenue, and profits, rising prices can outweigh these benefits. Therefore, D is the best choice as it highlights the potential negative consequence of a commodity boom.

Question 3

The term X/Y signifies what?
A) balance of trade
B) government spending to GDP ratio
C) exports to GDP ratio
D) imports to GDP ratio
E) none of the above

Accepted Answer

X/Y typically represents the ratio of exports (X) to the Gross Domestic Product (GDP) of a country (Y).

Question 4

Which international institution was formed to influence low oil prices?
A) OPEC
B) the World Bank
C) the IMF
D) Inter-American development bank
E) none of the above

Accepted Answer

OPEC (Organization of the Petroleum Exporting Countries) was formed to coordinate and unify the petroleum policies of its member countries and ensure the stabilization of oil markets in order to secure an efficient, economic, and regular supply of petroleum to consumers, a steady income to producers, and a fair return on capital for those investing in the petroleum industry.

Question 5

Oil prices rose dramatically in the:
A) 1950s.
B) 1960s.
C) 1970s.
D) 1980s.
E) none of the above

Accepted Answer

The 1970s saw a significant rise in oil prices, especially after the Middle East oil embargo of 1973. Prices quadrupled in just a few months, leading to economic turmoil in many countries heavily dependent on oil imports.

Question 6

A large increase in the price of oil over a short period of time is known as:
A) oil disaster
B) oil surprise
C) oil collapse
D) oil shock
E) none of the above

Accepted Answer

A large increase in the price of oil over a short period of time is known as an oil shock. This term became popular after the oil crisis of the 1970s, when oil prices increased dramatically, leading to economic recessions in many countries.

Question 7

The macroeconomic effect of an oil shock is to shift the _____ curve to the _____.
A) AD, right
B) AD, left
C) SRAS, right
D) SRAS, left
E) none of the above

Accepted Answer

An oil shock increases the cost of production for firms, resulting in a decrease in aggregate supply (SRAS) and a shift to the left. This is because firms must spend more money on oil to produce the same amount of goods, and may need to reduce production if the cost of oil becomes too high. This shift in SRAS will lead to higher prices and lower output, unless there is a corresponding shift in AD to compensate.

Question 8

An oil shock would tend to:
A) increase inflation.
B) lower GDP.
C) raise GDP.
D) a and b
E) b and c

Accepted Answer

An oil shock typically leads to higher energy prices, contributing to inflation and potentially slowing economic growth by increasing production costs, thus lowering GDP.

Question 9

Oil shocks tend to cause the price level to ______, and the real GDP to ______.
A) increase, increase
B) increase, decrease
C) decrease, decrease
D) decrease, increase
E) none of the above

Accepted Answer

Oil shocks, such as sudden increases in oil prices, typically lead to a decrease in real GDP due to increased production costs for businesses and reduced purchasing power for consumers. This decrease in real GDP is often accompanied by an increase in the overall price level as businesses pass on higher costs to consumers. Therefore, the best choice is B, which indicates that the price level increases and real GDP decreases.

Question 10

If a social preference for low inflation is strong, then the optimal policy response to oil shocks might be reducing ____ to keep the price level _____.
A) AD, constant
B) AD, increasing
C) SRAS, constant
D) SRAS, increasing
E) none of the above

Accepted Answer

Reducing Aggregate Demand (AD) can help to counteract inflationary pressures caused by oil shocks, keeping the price level more constant. This aligns with a social preference for low inflation.

Question 11

Expansionary fiscal policy in the face of an oil shock will stabilize _____, but at the cost of ____.
A) price level, high unemployment
B) price level, lower real GDP
C) employment levels, lower price levels
D) real GDP, higher price levels
E) both c and d

Accepted Answer

Expansionary fiscal policy, such as increasing government spending or cutting taxes, aims to boost economic activity. In the face of an oil shock, which typically raises prices and slows economic growth, such a policy can help stabilize real GDP by stimulating demand. However, by increasing demand in an already inflationary environment, it can lead to higher price levels, exacerbating inflation.

Question 12

The tendency for the trade balance to deteriorate in the short run following a depreciation of the exchange rate is known as:
A) exchange rate shock
B) J-curve
C) K-curve
D) commodity price shock
E) none of the above

Accepted Answer

The J-curve effect refers to the initial deterioration in the trade balance that occurs after a depreciation of the exchange rate. This is due to the fact that it takes time for exports to increase and imports to decrease in response to the price changes resulting from the exchange rate depreciation. Over time, however, the trade balance is expected to improve as the volume of exports increases and imports decrease due to the more favorable exchange rate.

Question 13

According to the J-curve, following a depreciation, the current account has a tendency to become more _____ initially, and then _____.
A) positive, improve
B) positive, worsen
C) negative, improve
D) negative, worsen
E) none of the above

Accepted Answer

The J-curve theory suggests that after a currency depreciates, a country's current account balance might initially deteriorate (become more negative) because the prices of imports become more expensive faster than the volume of exports increases. Over time, as demand adjusts to the new prices, the volume of exports can increase, leading to an improvement in the current account balance.

Question 14

Rising inflationary expectations can shift the ______ curve to the _____.
A) AD, left
B) AD, right
C) SRAS, left
D) SRAS, right
E) none of the above

Accepted Answer

Rising inflationary expectations increase the cost of production, which leads to a decrease in profitability for firms. As a result, firms are less willing to produce goods and services at the given price level, so the short-run aggregate supply (SRAS) curve shifts to the left. This causes prices to increase, and output to decrease in the short-run.

Question 15

Which of these is a policy designed to lower/restrain aggregate demand?
A) lower taxes
B) increased government spending
C) increased protective tariffs
D) decreased government spending
E) none of the above

Accepted Answer

Decreased government spending is a policy designed to lower/restrain aggregate demand. When the government spends less, there is less money circulating in the economy, which can help reduce inflationary pressure by decreasing demand for goods and services. On the other hand, lower taxes and increased government spending, as well as increased protective tariffs, can all potentially increase aggregate demand. Therefore, D is the correct answer.

Question 16

Which of these is a policy designed to decrease the rate of growth of the money supply?
A) increased interest rates
B) decreased interest rates
C) lower taxes
D) higher taxes
E) none of the above

Accepted Answer

The answer of Which of these is a policy designed...

Question 17

Exchange rate shocks shift the ____ curve to the ____.
A) AD, right
B) AD, left
C) SRAS, right
D) SRAS, left
E) none of the above

Accepted Answer

An exchange rate shock affects the production costs of firms in the economy, thus shifting the short-run aggregate supply (SRAS) curve. An increase in exchange rate leads to higher import costs for firms, increasing their overall production costs. This shift results in a leftward shift of the SRAS curve.

Question 18

Exchange rate shocks can lead to an increase in ____ as well as _____.
A) level of employment, real GDP
B) level of employment, inflation
C) level of unemployment, real GDP
D) level of unemployment, inflation
E) none of the above

Accepted Answer

The answer of Exchange rate shocks can lead to an...

Question 19

An exchange rate shock coupled with austerity would tend to:
A) lower real GDP.
B) raise real GDP.
C) increase SRAS.
D) lower LRAS.
E) none of the above

Accepted Answer

Austerity policies typically involve government spending cuts and tax increases, which can decrease aggregate demand and therefore lower real GDP. Additionally, an exchange rate shock can cause fluctuations in trade and investment, potentially further reducing aggregate demand and real GDP.

Question 20

An exchange rate shock is associated with:
A) higher inflation.
B) lower real GDP.
C) a depreciating currency.
D) all of the above
E) none of the above

Accepted Answer

An exchange rate shock can lead to higher inflation because it makes imported goods more expensive, leading to higher prices for consumers. It can also lead to lower real GDP because it makes exports more expensive, leading to a decrease in demand for exports and a decline in production. Additionally, an exchange rate shock can cause a depreciating currency, which affects trade and investment in a country's economy. Therefore, all of the above (higher inflation, lower real GDP, and a depreciating currency) are associated with an exchange rate shock.

Quiz 11: Macroeconomic Stability

Price instability of commodities is due to:

How can a commodity boom have negative macroeconomic consequences?

The term X/Y signifies what?

Which international institution was formed to influence low oil prices?

Oil prices rose dramatically in the:

A large increase in the price of oil over a short period of time is known as:

The macroeconomic effect of an oil shock is to shift the _ curve to the _.

An oil shock would tend to:

Oil shocks tend to cause the price level to , and the real GDP to .

If a social preference for low inflation is strong, then the optimal policy response to oil shocks might be reducing to keep the price level _.

Expansionary fiscal policy in the face of an oil shock will stabilize _, but at the cost of .

The tendency for the trade balance to deteriorate in the short run following a depreciation of the exchange rate is known as:

According to the J-curve, following a depreciation, the current account has a tendency to become more _ initially, and then _.

Rising inflationary expectations can shift the __ curve to the _.

Which of these is a policy designed to lower/restrain aggregate demand?

Which of these is a policy designed to decrease the rate of growth of the money supply?

Exchange rate shocks shift the curve to the .

Exchange rate shocks can lead to an increase in as well as _.

An exchange rate shock coupled with austerity would tend to:

An exchange rate shock is associated with: