Question 1

If a short-run equilibrium occurs at a level of output below the natural rate,then in the transition to the long run prices will ______ and output will ______.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Accepted Answer

The answer of If a short-run equilibrium occurs at a...

Question 2

If the short-run aggregate supply curve is horizontal,then the:
A) classical dichotomy is satisfied.
B) money supply cannot affect prices in the short run.
C) money supply cannot affect output in the short run.
D) money supply is irrelevant in the short run.

Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that the economy is operating at full capacity and any change in demand will only affect prices, not output. Therefore, an increase in the money supply will not affect output, but it will cause prices to rise since there is excess demand in the economy. Hence, money supply can affect prices in the short run.

Question 3

In the aggregate demand-aggregate supply model,short-run equilibrium occurs at the combination of output and prices where:
A) aggregate demand equals long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.

Accepted Answer

Short-run equilibrium occurs at the point where aggregate demand equals short-run aggregate supply. In the short run, prices are assumed to be fixed, so output adjusts to bring supply and demand into balance. Long-run equilibrium occurs at the point where aggregate demand equals both short-run and long-run aggregate supply, but this requires prices to be flexible and able to adjust.

Question 4

If the short-run aggregate supply curve is horizontal,then a change in the money supply will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output

Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that the economy is operating at full capacity, and any increase in demand can only increase output without affecting the price level. Therefore, a change in the money supply will only affect output in the short run, but not prices. However, in the long run, the production capacity of the economy will increase, causing the short-run aggregate supply curve to shift to the right, and the general price level will adjust accordingly. Thus, the long-run effect will only be on prices, but not on output.

Question 5

The short-run aggregate supply curve is horizontal at:
A) a level of output determined by aggregate demand.
B) the natural level of output.
C) the level of output at which the economy's resources are fully employed.
D) a fixed price level.

Accepted Answer

The short-run aggregate supply curve is horizontal at a fixed price level, indicating that firms are willing to supply any amount of goods at that price level, assuming other factors like wages and resource costs are constant.

Question 6

A reduction in the demand for money is the equivalent of a(n)______ in velocity and will shift the aggregate demand curve to the ______.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left

Accepted Answer

A reduction in the demand for money means that each unit of currency is used more frequently for transactions, which is equivalent to an increase in the velocity of money. This increase in velocity can stimulate economic activity, shifting the aggregate demand curve to the right.

Question 7

If the short-run aggregate supply curve is horizontal,and,if each member of the general public chooses to hold a larger fraction of his or her income as cash balances,then:
A) output and employment will increase in the short run.
B) output and employment will decrease in the short run.
C) prices will increase in the short run.
D) prices will decrease in the short run.

Accepted Answer

When individuals choose to hold a larger fraction of their income as cash balances, it implies a decrease in consumption and investment spending. In the short run, with a horizontal aggregate supply curve (indicating a situation of excess capacity or slack in the economy), this reduction in spending leads to a decrease in demand for goods and services. Consequently, output and employment will decrease as businesses respond to the lower demand by reducing production and possibly laying off workers. Prices tend not to change immediately due to the horizontal nature of the supply curve, which suggests prices are sticky in the short run.

Question 8

Starting from long-run equilibrium,if the velocity of money increases (due to,for example,the invention of automatic teller machines)and no action is taken by the government:
A) prices will rise in both the short run and the long run.
B) output will rise in both the short run and the long run.
C) prices will rise in the short run,and output will rise in the long run.
D) output will rise in the short run,and prices will rise in the long run.

Accepted Answer

An increase in velocity (V) of money, without any corresponding increase in the money supply (M), results in an increase in nominal GDP (M*V=P*Y). Since there is no change in the supply side, the increase in nominal GDP reflects an increase in real output (Y). Therefore, in the short run, output will rise. However, in the long run, prices will rise as firms try to adjust to the higher level of output by increasing prices. This is known as the quantity theory of money.

Question 9

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:
A) confirmed the neutrality of money because no real variables were affected by this nominal change.
B) confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level.
C) confirmed the short-run neutrality of money because prices and wage did not adjust immediately.
D) contradicted Okun's law because decreases in output were not associated with increases in unemployment.

Accepted Answer

The short-run neutrality of money suggests that nominal changes in the money supply do not affect real variables such as output, employment, or growth in the short run. The fact that prices and wages did not adjust immediately in response to the 20 percent reduction in the French money supply suggests that the economy confirmed the short-run neutrality of money. It is important to note that this does not imply that money is neutral in the long run or that changes in the money supply do not have any impact on the economy over time.

Question 10

If a short-run equilibrium occurs at a level of output above the natural rate,then in the transition to the long run prices will ______ and output will ______.
A) increase; increase
B) decrease; decrease
C) increase; decrease
D) decrease; increase

Accepted Answer

In the transition to the long run, if the short-run equilibrium occurs at a level of output above the natural rate, prices will increase due to higher demand and output will decrease as the economy adjusts back towards the natural rate of output.

Question 11

If the short-run aggregate supply curve is horizontal and the bank of Canada increases the money supply,then:
A) output and employment will increase in the short run.
B) output and employment will decrease in the short run.
C) prices will increase in the short run.
D) prices will decrease in the short run.

Accepted Answer

If the short-run aggregate supply curve is horizontal, it means that in the short run, output and employment can be increased without affecting prices. If the Bank of Canada increases the money supply, it will lead to an increase in aggregate demand, causing firms to increase output and employment to meet the new demand. Therefore, output and employment will increase in the short run.

Question 12

Assume that the economy begins in long-run equilibrium.Then the Bank of Canada reduces the money supply.In the short run ______,whereas in the long run prices ______ and output returns to its original level.
A) output decreases and prices are unchanged; rise
B) output decreases and prices are unchanged; fall
C) output and prices both decrease; rise
D) output and prices both decrease; fall

Accepted Answer

In the short run, the reduction in money supply leads to a decrease in aggregate demand, which leads to a decrease in output and employment. However, prices remain unchanged because firms are reluctant to lower prices in the short run. In the long run, prices will eventually adjust downward to restore long-run equilibrium, and output will return to its original level. Therefore, in the long run, output decreases initially but returns to its original level, and prices fall.

Question 13

Stabilization policy:
A) aims at keeping output and employment at their natural rates.
B) always succeeds in keeping output and employment at their natural rates.
C) is generally ineffective.
D) does more harm than good.

Accepted Answer

Stabilization policy aims at keeping output and employment at their natural rates through various measures such as fiscal and monetary policy. While it may not always succeed in achieving this goal, its aim is to stabilize the economy during periods of fluctuation or crisis. Therefore, option A is the best choice.

Question 14

Assume that the economy starts from long-run equilibrium.If the Bank of Canada increases the money supply,then ______ increase(s)in the short run and ______ increase(s)in the long run.
A) prices; output
B) output; prices
C) output; output
D) prices; prices

Accepted Answer

According to the classical theory, in the long run, the economy will return to its long-run equilibrium, regardless of any changes in the money supply. However, in the short run, an increase in the money supply will lead to an increase in spending, which in turn will lead to an increase in output. This is because firms will increase production in response to higher demand. However, as output increases, eventually firms will run up against production constraints such as labor and capital, which will cause the price level to rise. Therefore, in the long run, the increase in the money supply will lead to higher prices, but no permanent increase in output.

Question 15

Which of the following is an example of a demand shock?
A) a large oil-price increase
B) the introduction and greater availability of credit cards
C) a drought that destroys agricultural crops
D) unions obtain a substantial wage increase

Accepted Answer

The answer of Which of the following is an example...

Question 16

The long run refers to a period:
A) of decades.
B) during which capital and labour are sometimes not fully employed.
C) during which prices are flexible.
D) during which capital,labour,and technology can change.

Accepted Answer

The answer of The long run refers to a period:
A)...

Question 17

The short run refers to a period:
A) of several days.
B) during which prices are sticky and unemployment may occur.
C) during which capital and labour are fully employed.
D) during which there are no fluctuations.

Accepted Answer

The short run refers to a period during which prices are sticky and unemployment may occur. This is because in the short run, firms may not be able to adjust their prices quickly in response to changes in demand or supply, leading to a situation where some resources, including labor, may be underutilized.

Question 18

When the French money supply was reduced by 45 percent in 1724,only ______ fell immediately.
A) prices
B) output
C) exchange rates
D) interest rates

Accepted Answer

The answer of When the French money supply was reduced...

Question 19

In the aggregate demand/aggregate supply model,long-run equilibrium occurs at the combination of output and prices where:
A) aggregate demand equals long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.

Accepted Answer

In the long-run equilibrium of the aggregate demand/aggregate supply model, aggregate demand equals both short-run and long-run aggregate supply, indicating that the economy is producing at its full potential output level.

Question 20

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:
A) both the short run and the long run.
B) in neither the short run nor the long run.
C) in the short run,but not in the long run.
D) in the long run,but not in the short run.

Accepted Answer

Monetary neutrality implies that in the long run, changes in the money supply only affect the price level but not real GDP. This is because in the long run, output and employment levels are determined by factors such as technology, capital, and labor, rather than changes in the money supply. In the short run, however, changes in the money supply can have an effect on real GDP and employment due to sticky prices and wages. Therefore, monetary neutrality does not hold in the short run but does hold in the long run.

Quiz 9: Introduction to Economic Fluctuations

If a short-run equilibrium occurs at a level of output below the natural rate,then in the transition to the long run prices will and output will .

If the short-run aggregate supply curve is horizontal,then the:

In the aggregate demand-aggregate supply model,short-run equilibrium occurs at the combination of output and prices where:

If the short-run aggregate supply curve is horizontal,then a change in the money supply will change in the short run and change in the long run.

The short-run aggregate supply curve is horizontal at:

A reduction in the demand for money is the equivalent of a(n) in velocity and will shift the aggregate demand curve to the .

If the short-run aggregate supply curve is horizontal,and,if each member of the general public chooses to hold a larger fraction of his or her income as cash balances,then:

Starting from long-run equilibrium,if the velocity of money increases (due to,for example,the invention of automatic teller machines) and no action is taken by the government:

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

If a short-run equilibrium occurs at a level of output above the natural rate,then in the transition to the long run prices will and output will .

If the short-run aggregate supply curve is horizontal and the bank of Canada increases the money supply,then:

Assume that the economy begins in long-run equilibrium.Then the Bank of Canada reduces the money supply.In the short run ,whereas in the long run prices and output returns to its original level.

Stabilization policy:

Assume that the economy starts from long-run equilibrium.If the Bank of Canada increases the money supply,then increase(s) in the short run and increase(s) in the long run.

Which of the following is an example of a demand shock?

The long run refers to a period:

The short run refers to a period:

When the French money supply was reduced by 45 percent in 1724,only ______ fell immediately.

In the aggregate demand/aggregate supply model,long-run equilibrium occurs at the combination of output and prices where:

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: