Deck 7: Putting All Markets Together: the Asad Model

Question 1

Suppose the minimum wage decreases. Given this event, we would expect which of the following to occur?

A) A decrease in the interest rate in the medium run.
B) No change in the real wage in the medium run.
C) A decrease in the aggregate price level and an increase in output in the short run.
D) A decrease in the natural rate of unemployment.
E) All of the above.

Answer 1

All of the above.

Question 2

Suppose that the current price level is equal to the expected price level. Given this information, we know with certainty that:

A) the unemployment rate is equal to the natural rate of unemployment.
B) only the goods market is in equilibrium.
C) the goods market and financial markets are in equilibrium.
D) the unemployment rate is zero.
E) both the price level and the expected price level are equal to one.

Answer 2

the unemployment rate is equal to the natural rate of unemployment.

Question 3

Assume that the economy is initially operating at the natural level of output. An increase in the price of oil will cause which of the following in the medium run?

A) An increase in output and a decrease in the interest rate.
B) A decrease in unemployment, an increase in the nominal wage and an increase in the aggregate price level.
C) An increase in the interest rate.
D) An increase in the aggregate price level and no change in output.
E) A decrease in output and an increase in the aggregate price level.

Answer 3

An increase in the interest rate.

Question 4

Assume that the economy is initially operating at the natural level of output. When the central bank controls the interest rate, an increase in the price target will cause:

A) a decrease in the interest rate in the medium run.
B) an increase in investment in the medium run.
C) an increase in consumption in the medium run.
D) no change in the nominal wage in the medium run.
E) no change in the real wage in the medium run.

Question 5

In the aggregate supply relation, the current price level depends in the medium run upon:

A) fiscal policy.
B) business confidence.
C) consumer confidence.
D) monetary policy.
E) the expected price level.

Question 6

If u > un, we know with certainty that:

A) P = Pe.
B) Y > Yn.
C) Y = Yn.
D) P > Pe.
E) P < Pe.

Question 7

The aggregate demand curve has its particular shape because of which of the following explanations?

A) A decrease in the aggregate price level will cause an increase in the real wage, a decrease in employment, and a decrease in output.
B) A decrease in the aggregate price level will cause a decrease in the interest rate and an increase in output.
C) As the aggregate price level increases, goods and services become relatively more expensive and individuals respond by decreasing the quantity demanded of goods and services.
D) An increase in the money supply will cause an increase in the interest rate, a decrease in investment, and a decrease in output.
E) An increase in the aggregate price level prompts the government to decrease government spending in the hope of bringing down prices.

Question 8

Assume that the economy is initially operating at the natural level of output. A decrease in consumer confidence will cause:

A) an increase in investment in the short run.
B) a decrease in investment in the short run.
C) an increase in the interest rate in the medium run.
D) an increase in investment in the medium run.
E) a decrease in the real wage in the medium run.

Question 9

Results obtained from the Taylor model suggest that the output effects of a change in the money supply are greatest after approximately how long?

A) Three quarters.
B) Two years.
C) Five years.
D) One quarter.
E) One month.

Question 10

Results obtained from the Taylor model suggest that it takes roughly how long for the effects of money to become neutral?

A) Ten years.
B) Three months.
C) One year.
D) One month.
E) Four years.

Question 11

Suppose the central bank implements expansionary monetary policy. Which of the following will occur in the short run?

A) An increase in output.
B) A decrease in unemployment.
C) An increase in the price level.
D) A decrease in the interest rate.
E) All of the above.

Question 12

Suppose the economy is operating at a point where output is less than the natural level of output. Which of the following statements is correct given this information?

A) The employment rate is greater than the natural employment rate.
B) The price level will be higher next period than this period.
C) The price level is less than the expected price level.
D) Workers will revise upwards price expectations.
E) The unemployment rate is less than the natural unemployment rate.

Question 13

If Y > Yn, we know with certainty that:

A) P = Pe.
B) P < Pe.
C) u > un.
D) P > Pe.
E) u = un,.

Question 14

Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the short run, cause an increase in:

A) the output level.
B) the price level.
C) the interest rate.
D) the nominal wage.
E) All of the above.

Question 15

Which of the following will cause the aggregate demand curve to shift to the right?

A) A decrease in taxes.
B) A decrease in the money supply.
C) A decrease in consumer confidence.
D) A decrease in the price level.
E) An increase in the price level.

Question 16

Assume the economy is initially operating at the natural level of output. Suppose that individuals decide to increase their saving. We know that this increased desire to save will be "neutral" in:

A) both the short run and the medium run.
B) the short run, but not the medium run.
C) the medium run and the long run.
D) neither the medium run nor the short run.
E) the medium run, but not the long run.

Question 17

In the aggregate supply relation, an increase in current output causes:

A) an increase in the expected price level and an upward shift of the AS curve.
B) a shift of the aggregate supply curve.
C) a change in the expected price level this year.
D) an increase in the current price level.
E) an increase in the markup over labour costs.

Question 18

At the current level of output, suppose the actual price level is greater than the price level that individuals expect. We know that:

A) any subsequent decrease in the aggregate price level will cause an increase in the real money supply and a rightward shift in the aggregate demand curve.
B) output is currently less than the natural level of output.
C) the interest rate will tend to rise as the economy adjusts to this situation.
D) the AS curve will tend to shift down over time.
E) the nominal wage will tend to decrease as individuals revise their expectations of the price level.

Question 19

For this question, assume that the economy is initially operating at the natural level of output. A fiscal contraction must cause:

A) an increase in investment in the short run.
B) a decrease in investment in the short run.
C) no change in investment in the medium run.
D) no change in investment in the short run.
E) an increase in investment in the medium run.

Question 20

Assume that the economy is initially operating at the natural level of output. An increase in the minimum wage will cause:

A) an increase in the nominal wage in the medium run.
B) no change in the real wage in the medium run.
C) an increase in the real wage in the medium run.
D) a decrease in the real wage in the medium run.
E) a decrease in the nominal wage in the medium run.

Question 21

Assume the economy is initially operating at the natural level of output. Now suppose that individuals decide to increase their desire to save. We know with certainty which of the following will occur in the short run as a result of the increased desire to save?

A) Higher investment.
B) An increase in the nominal wage.
C) No change in the economy at all.
D) A decrease in the nominal wage.
E) Lower investment.

Question 22

Assume that the economy is initially operating at the natural level of output. When the central bank raises the price target, the subsequent one- time 20% increase in the nominal money supply will cause:

A) a 20% increase in the interest rate in the medium run.
B) a 20% increase in output in the medium run.
C) a 20% increase in the real wage in the medium run.
D) a 20% increase in the price level in the medium run.
E) a 20% increase in the real money supply in the medium run.

Question 23

In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect on:

A) government spending.
B) firms' markup over labour costs.
C) the interest rate.
D) the expected price level.
E) the nominal wage.

Question 24

Assume the economy is initially operating at the natural level of output. Which of the following events will not change the composition of output in the medium run?

A) A decrease in taxes.
B) An increase in government spending.
C) An increase in consumer confidence.
D) An increase in the price target set by the central bank.
E) A decrease in firm confidence.

Question 25

Assume the economy is initially operating at the natural level of output. Which of the following events will initially cause a shift of the aggregate supply curve?

A) An increase in the price target.
B) A decrease in the money supply.
C) An increase in the minimum wage.
D) An increase in government spending.
E) An increase in taxes.

Question 26

When the central bank controls the interest rate, a rise in the price target will, in the short run, cause:

A) the wage setting curve to shift upward.
B) the wage setting curve to shift downward.
C) an increase in the nominal wage.
D) the AD curve to shift leftward.
E) the price setting curve to shift down.

Question 27

The aggregate demand curve has its particular shape because of which of the following explanations?

A) A decrease in the aggregate price level will cause an increase in the interest rate and an increase in output.
B) An increase in the aggregate price level prompts the government to decrease government spending in the hope of bringing down prices.
C) An increase in the money supply will cause a decrease in the interest rate, an increase in investment, and an increase in output.
D) As the aggregate price level increases, goods and services become relatively more expensive and individuals respond by decreasing the quantity demanded of goods and services.
E) A decrease in the aggregate price level will cause an increase in the real wage, a decrease in employment, and a decrease in output.

Question 28

Which of the following events will not cause a decrease in the aggregate price level?

A) A decrease in markup.
B) A decrease in output.
C) A decrease in unemployment benefits.
D) A decrease in unemployment.
E) A decrease in expected prices.

Question 29

Assume that the economy is initially operating at the natural level of output. An increase in government spending will cause:

A) an increase in the real wage in the medium run.
B) no change in the real wage in the medium run.
C) a decrease in the real wage in the medium run.
D) an increase in the nominal wage in the medium run.
E) a decrease in the nominal wage in the medium run.

Question 30

Which of the following represents the medium- run effects of an increase in the price of oil?

A) No change in the level of output.
B) No change in employment.
C) No change in the price level.
D) No change in the interest rate.
E) A decrease in the interest rate.

Question 31

Which of the following represents the short- run effects of an increase in the price of oil?

A) An increase in the interest rate.
B) A decrease in output.
C) An increase in the price level.
D) An increase in unemployment.
E) All of the above.

Question 32

Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a decrease in government spending. This fiscal contraction will, in the medium run, have no effect on which of the following?

A) Output and the interest rate.
B) The price level and the interest rate.
C) Output and consumption.
D) Unemployment and investment.
E) The interest rate and unemployment.

Question 33

A decrease in the price of oil will tend to cause which of the following?

A) An increase in the aggregate price level as output increases.
B) No change in the interest rate in the medium run.
C) No change in the real wage in the medium run.
D) An increase in investment in the medium run.
E) An increase in the natural rate of unemployment.

Question 34

Using the AS- AD model, which of the following would cause an increase in the natural level of output in the medium run?

A) An increase in the money supply.
B) An increase in government spending.
C) A decrease in the oil price.
D) An increase in the price target.
E) A decrease in consumer confidence.

Question 35

Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a tax cut. This fiscal expansion will, in the medium run, have no effect on which of the following?

A) Output and the interest rate.
B) The interest rate and unemployment.
C) The price level and the interest rate.
D) Unemployment and the price level.
E) Output and investment.

Question 36

At the current level of output, suppose the actual price level is less than the price level that individuals expect. We know that:

A) any subsequent increase in the aggregate price level will cause a decrease in the real money supply and a leftward shift in the aggregate demand curve.
B) the AS curve will tend to shift down over time.
C) output is currently greater than the natural level of output.
D) the nominal wage will tend to increase as individuals revise their expectations of the price level.
E) the interest rate will tend to rise as the economy adjusts to this situation.

Question 37

Which of the following represents the medium- run effect of an increase in the price target?

A) An increase in the price level.
B) An increase in the real money supply.
C) An increase in the real wage.
D) An increase in output.
E) An increase in the interest rate.

Question 38

The aggregate supply curve has its particular shape because of which of the following explanations?

A) An increase in the nominal wage causes a decrease in the amount of output that firms are willing to produce.
B) An increase in the aggregate price level will cause an increase in the interest rate and a decrease in output.
C) An increase in output causes an increase in employment, a decrease in unemployment, an increase in the nominal wage and an increase in the price level.
D) A decrease in output causes a decrease in employment, a decrease in unemployment, an increase in the nominal wage and an increase in the price level.
E) A decrease in the aggregate price level causes a decrease in nominal money demand and a decrease in the interest rate.

Question 39

Based on your understanding of the AS- AD model, which of the following is an incorrect statement about the short- run adjustment process for the macroeconomy?

A) A decrease in output decreases employment.
B) Output in excess of the natural level leads to higher prices.
C) An increase in demand increases output.
D) An increase in unemployment leads to higher prices.
E) A decrease in output below the natural level leads to lower nominal wages.

Question 40

Assume that the economy is initially operating at the natural level of output. A simultaneous increase in taxes and a decrease in the price target by the central bank will cause which of the following?

A) A reduction in investment in the medium run.
B) An increase in the aggregate price level, no change in output, and no change in the interest rate in the medium run.
C) An increase in output and an increase in the aggregate price level in the short run.
D) A reduction in the interest rate in the medium run.
E) A decrease in output and a decrease in the nominal wage in the short run.

Question 41

Based on your understanding of the AS- AD model and the IS- LM model, graphically illustrate and explain what effect a tax increase will have on the economy. In your graphs, clearly illustrate the short- run and medium- run equilibria.

Question 42

Assume that the economy is initially operating at the natural level of output. An increase in firm confidence will cause:

A) no change in the real wage in the medium run.
B) an increase in the nominal wage in the medium run.
C) a decrease in the real wage in the medium run.
D) an increase in the real wage in the medium run.
E) a decrease in the nominal wage in the medium run.

Question 43

Which of the following events would cause a shift in the aggregate supply curve in the short run?

A) An increase in the money supply.
B) A decrease in government spending.
C) A decrease in consumer confidence.
D) An increase in taxes.
E) An increase in the markup.

Question 44

When output exceeds the natural level of output, explain what adjustments will occur in the labour market and discuss what effect they will have on output and the price level.

Question 45

Which of the following events will cause the largest rightward shift (as measured horizontally) of the AD curve?

A) A 15% decrease in the aggregate price level.
B) A 15% decrease in the nominal wage.
C) A tax increase.
D) A 15% increase in the nominal money supply.
E) A decrease in government spending.

Question 46

Suppose the economy is operating at a point where output is greater than the natural level of output. Given this information, is the actual price level equal to the expected price level at the current level of output?

Question 47

Based on your understanding of the AS- AD model and the IS- LM model, graphically illustrate and explain what effect an increase in the minimum wage will have on the economy. In your graph, clearly illustrate the short- run and medium- run equilibria. Also include in your answer an explanation of the effects of this change in minimum wage on the labour market and the equilibrium real wage.

Question 48

Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for a decrease in government spending. This fiscal contraction will, in the short run, cause a decrease in:

A) the output level.
B) the price level.
C) the nominal wage.
D) the interest rate.
E) All of the above.

Question 49

At the current level of output, suppose the actual price level is less than the price level that individuals expect. We know that:

A) the AS curve will tend to shift up over time.
B) output is currently less than the natural level of output.
C) the interest rate will tend to rise as the economy adjusts to this situation.
D) the nominal wage will tend to increase as individuals revise their expectations of the price level.
E) any subsequent decrease in the aggregate price level will cause an increase in the real money supply and a rightward shift in the aggregate demand curve.

Question 50

The aggregate supply curve will shift downward when which of the following occurs?

A) A decrease in firm's markup over labour costs.
B) A decrease in the expected price level.
C) A decrease in the level of employment protection.
D) A decrease in unemployment benefits.
E) All of the above.

Question 51

Assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following?

A) A decrease in employment and no change in the nominal wage in the short run.
B) A decrease in output and no change in the aggregate price level in the short run.
C) An increase in the aggregate price level, no change in output and no change in the interest rate in the medium run.
D) An increase in the interest rate and investment in the medium run.
E) An increase in investment in the medium run.

Question 52

The neutrality of money is consistent with which of the following statements?

A) Changes in the money supply will not affect wages in the medium run.
B) Changes in the money supply will not affect employment in the short run.
C) Changes in the money supply will not affect employment in the medium run.
D) Changes in the money supply will not affect the price level in the short run.
E) Changes in the money supply will not affect the price level in the medium run.

Question 53

Results obtained from the Taylor model suggest that the effects of changes in the nominal money supply are neutral after:

A) 2 years.
B) 4 years.
C) 10 years.
D) 6 years.
E) 8 years.

Question 54

As product markets become less competitive and the markup rises, we would expect which of the following to occur?

A) A decrease in the interest rate in the medium run.
B) An increase in the aggregate price level as output increases.
C) A decrease in the real wage in the medium run.
D) No change in the real wage in the medium run.
E) No change in output in the medium run.

Question 55

Which of the following would increase the short- run output effects of a monetary expansion?

A) A decrease in the marginal propensity to save.
B) The slope of the IS curve is very flat.
C) An increase in the marginal propensity to consume.
D) An increase in the interest rate sensitivity of investment.
E) All of the above.

Question 56

Which of the following events will cause an increase in the aggregate price level?

A) An increase in unemployment benefits.
B) An increase in the unemployment rate.
C) A decrease in expected prices.
D) A decrease in markup.
E) A decrease in output.

Question 57

From the mid- 1990s to the end of 2008, the real oil price:

A) steadily increased.
B) steadily decreased.
C) decreased dramatically, then increased dramatically.
D) remained more or less the same.
E) increased dramatically, then decreased dramatically.

Question 58

Explain what is meant by the neutrality of money.

Question 59

An increase in the price of oil will tend to cause which of the following in the short run?

A) An increase in the interest rate.
B) An increase in the natural rate of unemployment.
C) A decrease in output.
D) An increase in the price level.
E) All of the above.

Question 60

An increase in the aggregate price level will cause:

A) a decrease in the interest rate and a rightward shift in the IS curve.
B) a decrease in the interest rate and a downward shift in the LM curve.
C) an increase in the interest rate and a leftward shift in the IS curve.
D) an increase in investment and an increase in output.
E) an increase in the interest rate and an upward shift in the LM curve.

Question 61

Explain what the aggregate supply curve represents and why it is upward sloping.

Question 62

Based on your understanding of the AS- AD model and the IS- LM model, graphically illustrate and explain what effect a decrease in the price target will have on the economy. In your graphs, clearly illustrate the short- run and medium- run equilibria.

Question 63

Explain what effect an increase in the price target has on the aggregate demand curve.

Question 64

Explain how an increase in each of the following variables affects the aggregate price level: (i) the expected price level; (ii) employment; (iii) the markup; and (iv) unemployment benefits.

Question 65

Discuss the possible explanations as to why the oil price effect on inflation and output has been muted in the 2000s compared to the 1970s.

Question 66

Explain what the aggregate demand curve represents and why it is downward sloping. Give explanations about the aggregate demand curve under each of the two possible assumptions about the central bank's conduct of monetary policy: (1) that the central bank controls the nominal money supply; (2) that the central bank controls the interest rate and has a price target.

Question 67

Analysis of the macroeconomic effects of changes in the money supply indicates that money is "neutral" in the medium run. Suppose there is an increase in government spending. Will this fiscal policy action also be neutral in the medium run? Explain.

Question 68

Based on your understanding of the AS- AD model and IS- LM model, graphically illustrate and explain what effect a decrease in the price of oil will have on the economy. In your graphs, clearly illustrate the short- run and medium- run equilibria. Also include in your answer an explanation of the effects of this change in the price of oil on the labour market and the equilibrium real wage.