Question 1

An increase in money supply causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Accepted Answer

An increase in money supply causes a decrease in the real interest rate because people have more money to lend, increasing the supply of loanable funds and driving down the interest rate. This stimulates investment and consumption, leading to an increase in output in the short run before prices adjust to restore equilibrium.

Question 2

A decrease in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Accepted Answer

The answer of A decrease in taxes (when Ricardian equivalence...

Question 3

Classical economists think general equilibrium is attained relatively quickly because
A) the real interest rate adjusts quickly.
B) the level of output adjusts quickly.
C) the real wage rate adjusts quickly.
D) the price level adjusts quickly.

Accepted Answer

Classical economists believe that general equilibrium is attained relatively quickly because the price level adjusts quickly. They assume that prices are flexible and can adjust to changes in demand and supply relatively quickly, leading to an equilibrium in the market.

Question 4

Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?
A) a rise in the price level, shifting the LM curve up
B) a fall in the price level, shifting the LM curve down
C) a rise in the price level, shifting the IS curve up
D) a fall in the price level, shifting the IS curve down

Accepted Answer

A rise in the price level shifts the LM curve up, which leads to a decrease in aggregate demand, shifting the IS curve to the left. This adjustment in the goods market brings the economy back to the FE line, eliminating the initial disequilibrium. Therefore, a rise in the price level would most likely eliminate the disequilibrium among the asset, labour, and goods markets.

Question 5

Under an assumption of monetary neutrality, a change in the nominal money supply has
A) no effect on the price level.
B) a less than proportionate effect on the price level.
C) a proportionate effect on the price level.
D) a more than proportionate effect on the price level.

Accepted Answer

Under the assumption of monetary neutrality, a change in the nominal money supply will have a proportional effect on the price level. This means that if the money supply increases by a certain percentage, the price level will also increase by the same percentage. This reflects the basic quantity theory of money which states that the price level is directly proportional to the money supply. However, it should be noted that monetary neutrality may not hold in the short run due to factors such as sticky prices and wages.

Question 6

Keynesian economists believe that in the short run,
A) money neutrality exists and prices adjust rapidly.
B) money neutrality does not exist and prices adjust rapidly.
C) money neutrality exists and prices do not adjust rapidly.
D) money neutrality does not exist and prices do not adjust rapidly.

Accepted Answer

Keynesian economists believe that in the short run, money neutrality does not exist and prices do not adjust rapidly. This is because they believe that in the short run, changes in aggregate demand can have a significant impact on output and employment, and that prices and wages do not adjust quickly enough to eliminate short-term unemployment.

Question 7

A temporary adverse supply shock directly causes
A) a downward shift of the IS curve.
B) a shift to the left of the FE line.
C) a downward shift of the LM curve.
D) an upward shift of the IS curve.

Accepted Answer

A temporary adverse supply shock causes a decrease in output and an increase in prices. This means that the economy is producing less than its potential output, shifting the FE line to the left.

Question 8

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?
A) the LM curve
B) the IS curve
C) the FE line
D) the labour demand curve

Accepted Answer

The answer of An adverse supply shock that is permanent...

Question 9

The aggregate demand curve shows
A) the demand for goods depending on the relative price of goods compared to financial assets.
B) the amount of output that can be obtained given the current production function in the economy.
C) the relation between the aggregate quantity of goods demanded and the price level.
D) the relation between the real interest rate and output when the goods market clears.

Accepted Answer

The aggregate demand curve shows the relation between the aggregate quantity of goods and services demanded at different price levels in an economy. It is a downward sloping curve, indicating that as the price level increases, the quantity of goods demanded decreases, and vice versa. This reflects the inverse relationship between the price level and the purchasing power of money, known as the wealth effect, the interest rate effect, and the international trade effect. Therefore, aggregate demand represents the total demand for goods and services in an economy, coming from households, businesses, governments, and foreigners, and it determines the equilibrium level of output and employment in the short run.

Question 10

After a temporary adverse supply shock hits the economy, general equilibrium is restored by
A) a downward shift of the IS curve.
B) a shift to the left of the FE line.
C) an upward shift of the LM curve.
D) a downward shift of the LM curve.

Accepted Answer

The answer of After a temporary adverse supply shock hits...

Question 11

Which of the following best describes the classical and the Keynesian views on the monetary neutrality?
A) Classical economists believe that money is neutral, but Keynesians do not.
B) Both classical and Keynesian economists believe in monetary neutrality, but they differ in the speed of price adjustment.
C) Classical economists believe in slow adjustment of prices, but Keynesians argue that price adjustment does not take long.
D) Keynesians believe that money affects employment and output in short run and long run, but classical economists argue that money is neutral only in the long run.

Accepted Answer

The answer of Which of the following best describes the...

Question 12

Suppose the intersection of the IS and LM curves is to the right of the FE line. An increase in the price level would most likely eliminate a disequilibrium among the asset, labour, and goods markets by
A) shifting the LM curve up.
B) shifting the IS curve up.
C) shifting the IS curve down.
D) shifting the FE curve to the left.

Accepted Answer

When the intersection of IS and LM curves is to the right of FE line, there is excess demand, which leads to an increase in the price level. This increase in the price level would cause an increase in money demand, which shifts the LM curve up until the equilibrium is reached at the intersection of IS, LM, and FE curves. Therefore, the best choice would be to shift the LM curve up (Option A).

Question 13

An increase in money demand causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Accepted Answer

An increase in money demand leads to an increase in the demand for money, causing the interest rate to rise. With a higher interest rate, borrowing and spending become more expensive, which leads to a decrease in output. This short-term response occurs before prices can adjust to restore equilibrium, which is why the correct answer is B (rise in interest rate and fall in output).

Question 14

Classical economists believe that in the short run,
A) money neutrality exists and prices adjust rapidly.
B) money neutrality does not exist and prices adjust rapidly.
C) money neutrality exists and prices do not adjust rapidly.
D) money neutrality does not exist and prices do not adjust rapidly.

Accepted Answer

Classical economists believe in the concept of money neutrality, which means that changes in the money supply have no long-term effects on the real economy, but only on nominal variables such as prices. In the short run, they believe that prices adjust rapidly to changes in the money supply, leading to no real effects on the economy. Therefore, the correct choice is A.

Question 15

An adverse supply shock to the economy would
A) decrease investment and raise the real interest rate whether the shock were temporary or permanent.
B) decrease investment, but might not raise the real interest rate if the shock were permanent.
C) decrease investment, but might not raise the real interest rate if the shock were temporary.
D) decrease investment, but definitely not raise the real interest rate.

Accepted Answer

An adverse supply shock, such as an increase in the price of oil or a decrease in production due to a natural disaster, would lead to a decrease in investment because it would make it more expensive for firms to produce goods and services. However, if the shock were permanent, then the economy would adjust over time, and the real interest rate may not necessarily rise. In contrast, if the shock were temporary, then the real interest rate might rise as firms compete for scarce resources. Therefore, Choice B is the best answer.

Question 16

An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Accepted Answer

An increase in expected inflation lowers the real interest rate because the nominal interest rate does not immediately adjust. This lower real interest rate stimulates investment and consumption, leading to an increase in output in the short run.

Question 17

Suppose the intersection of the IS and LM curves is to the left of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?
A) a rise in the price level, shifting the LM curve up
B) a fall in the price level, shifting the LM curve down
C) a rise in the price level, shifting the IS curve up
D) a fall in the price level, shifting the IS curve down

Accepted Answer

A leftward shift of the FE line signifies a shortfall of aggregate demand compared to aggregate supply. Thus, there is an excess supply of labour, goods, and assets. To rectify this, there needs to be an increase in aggregate demand, which in turn can be achieved by lowering interest rates. A fall in the price level (deflation) will shift the LM curve down, leading to a lower equilibrium interest rate and higher level of output, returning the economy to equilibrium along the FE line.

Question 18

A temporary decrease in government purchases causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.
A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

Accepted Answer

The answer of A temporary decrease in government purchases causes...

Question 19

Keynesian economists think general equilibrium is not attained quickly because
A) the real interest rate adjusts slowly.
B) the level of output adjusts slowly.
C) the real wage rate adjusts slowly.
D) the price level adjusts slowly.

Accepted Answer

The answer of Keynesian economists think general equilibrium is not...

Question 20

Which market adjusts the most quickly in response to shocks to the economy?
A) the asset market
B) the labour market
C) the goods market
D) The asset, labour, and goods markets adjust at about the same speed to eliminate a disequilibrium in the macroeconomy.

Accepted Answer

The answer of Which market adjusts the most quickly in...

Quiz 9: The IS-LMAD-AS Model: A General Framework for Macroeconomic Analysis

An increase in money supply causes the real interest rate to and output to in the short run, before prices adjust to restore equilibrium.

A decrease in taxes (when Ricardian equivalence doesn't hold) causes the real interest rate to and output to in the short run, before prices adjust to restore equilibrium.

Classical economists think general equilibrium is attained relatively quickly because

Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?

Under an assumption of monetary neutrality, a change in the nominal money supply has

Keynesian economists believe that in the short run,

A temporary adverse supply shock directly causes

An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?

The aggregate demand curve shows

After a temporary adverse supply shock hits the economy, general equilibrium is restored by

Which of the following best describes the classical and the Keynesian views on the monetary neutrality?

Suppose the intersection of the IS and LM curves is to the right of the FE line. An increase in the price level would most likely eliminate a disequilibrium among the asset, labour, and goods markets by

An increase in money demand causes the real interest rate to and output to in the short run, before prices adjust to restore equilibrium.

Classical economists believe that in the short run,

An adverse supply shock to the economy would

An increase in expected inflation causes the real interest rate to and output to in the short run, before prices adjust to restore equilibrium.

Suppose the intersection of the IS and LM curves is to the left of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?

A temporary decrease in government purchases causes the real interest rate to and output to in the short run, before prices adjust to restore equilibrium.

Keynesian economists think general equilibrium is not attained quickly because

Which market adjusts the most quickly in response to shocks to the economy?