Deck 9: An Introduction to the Short Run

Question 1

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.

Answer 1

short-term economic shocks.

Question 2

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

Answer 2

planned investment expenditures

Question 3

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

Answer 3

planned investment expenditures

Question 4

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 these answers is correct.

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 these answers is correct.

Question 6

The long-run model determines ________ output and ________.

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

Question 7

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) the level of output when unemployment is 10 percent.

Question 8

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.

Question 9

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

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

Question 10

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

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 11

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 12

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) we will tear down this wall

Question 13

Defining as current output,
As potential output, and
As short-run output, which of the following equations defines short-run output as the short-run fluctuation's share of potential GDP?

A)
B)
C)
D)
E)

Question 14

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 15

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 16

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 are utilized at their long-run sustainable levels.
E) the amount of output where unemployment is zero.

Question 17

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 18

The long-run model determines ________ output and ________, while the short-run model determines ________ and ________ inflation.

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

Question 19

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 20

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

Question 21

According to the data presented in the text, the largest negative output gap since 1970 was ________ percent, which occurred during the ________ recession.

A) about -3.5; 1980
B) -5; 1973-1975
C) about -8; 1981-1982
D) more than -7; 2007-2009
E) -5; 2001

Question 22

Refer to the following figure when answering the following questions.
Figure 9.2: U.S. Output Fluctuations 1960-2015

-Consider Figure 9.2. The line represents short-run fluctuations, . Since 1960, the largest economic "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 23

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 24

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 25

Since 1950, economic fluctuations in the United States (i.e., the output gap) have generally been in the ________ percent to ________ percent range.

A) -4; 4
B)-5; 1
C) -8; 8
D) -2; 2
E) -3; 0

Question 26

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 they 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 27

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

A) recessionary gap; -4.7
B) boom; 4.7
C) boom; -4.7
D) recessionary gap; -5
E) boom; 5

Question 28

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 they 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 29

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

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

Question 30

Refer to the following figure when answering the following questions.
Figure 9.1: Output versus Time


Considering 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 31

Refer to the following figure when answering the following questions.
Figure 9.2: U.S. Output Fluctuations 1960-2015

-Consider Figure 9.2. In approximately what years did the U.S. economy experience its longest economic expansion?

A) 1964-1970
B) 1978-1980
C) 1996-2001
D) 1972-1974
E) This cannot be determined from the information given.

Question 32

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 33

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 34

Defining as current output, and
As potential output, 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 35

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

A) boom;
B) recession;
C) recession;
D) boom; 6.7
E) None of these answers is correct.

Question 36

Refer to the following figure when answering the following questions.
Figure 9.2: U.S. Output Fluctuations 1960-2015

-Consider Figure 9.2. In 1989, the U.S. economy experienced an economic ________, and current output was about ________ percent above potential output.

A) boom; 1
B) recession; 1
C) boom; 2
D) This cannot be determined from the information given.
E) None of these answers is correct.

Question 37

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 these answers is correct.

Question 38

Since 1970, for the U.S. economy, the largest negative output gap occurred during the recession of ________; however, the largest percentage drop in employment was during the recession of ________.

A) 1981-1982; 1974
B) 2007-2009; 2001
C) 1973-1975; 2007-2009
D) 2001; 1979
E) 1990-1991; 2001

Question 39

Refer to the following figure when answering the following questions.
Figure 9.2: U.S. Output Fluctuations 1960-2015

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

A) 1966, 1974, 1979, 2000, and 2004
B) 1961, 1975, 1983, 2002, and 2009
C) 1963, 1970, 1974, 1985, 1998, 2001, and 2005
D) 1961, 1975, 1979, 2000, and 2008
E) 1966, 1974, 1983, 2002, and 2010

Question 40

Refer to the following figure when answering the following questions.
Figure 9.2: U.S. Output Fluctuations 1960-2015

-Consider Figure 9.2. In approximately what years did the U.S. economy experience its longest economic downturn, using the text's definition of a recessionary gap?

A) 1990-1997
B) 1974-1978
C) 1980-1988
D) 1957-1963
E) 2008-2016

Question 41

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 42

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

A) stays the same
B) falls
C) rises
D) falls, then rises
E) None of these answers is correct.

Question 43

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 44

In 1979, 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 ________.

A) raised; expansion; the Phillips curve
B) raised; recession; the Phillips curve
C) raised; recession; Okun's law
D) lowered; recession; the Phillips curve
E) lowered; expansion; the Phillips curve

Question 45

Refer to the following figure when answering the following questions.
Figure 9.4: Phillips Curve
Consider the Phillips curve at in Figure 9.4. The economy is:

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

Question 46

When the U.S. economy bottomed out during the Great Depression, the unemployment rate hit about ________ percent in ________.

A) 9; 1977
B) 10; 1929
C) 25; 1933
D) 10; 2010
E) 10.5; 1982

Question 47

If , the macroeconomy is:

A) at its potential level of output.
B) in a recessionary gap.
C) in an expansionary gap.
D) Not enough information is given.
E) None of these answers is correct.

Question 48

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 49

The short-run model is built on which of the following?
i. The economy is constantly being hit by so-called shocks.
ii. Economic policy has no impact on output.
iii. There is trade-off between output and inflation.

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

Question 50

If , the macroeconomy is:

A) in an expansionary gap.
B) at its potential level of output.
C) in a recessionary gap.
D) None of these answers is correct.
E) Not enough information is given.

Question 51

Refer to the following figure to answer the following questions.
Figure 9.3: Percent Change in U.S. Employment: 1980-2015

-Based on the data presented in Figure 9.3, which of the following periods is/are likely (an) expansion(s)?

A) 1988, 2006, and 2014
B) 1988 and 2014
C) 1981, 1990, and 2001
D) 2002
E) Not enough information is given.

Question 52

The Great Depression stimulated ________ to write ________, which is considered to be the birth of modern macroeconomics.

A) John Hicks; Value and Capital
B) Karl Marx; Das Kapital
C) David Ricardo; Principles of Political Economy and Taxation
D) Milton Friedman and Anna J. Schwartz; A Monetary History of the United States, 1867-1960
E) John Maynard Keyes; The General Theory of Employment, Interest, and Money

Question 53

Refer to the following figure when answering the following questions.
Figure 9.4: Phillips Curve
Consider the Phillips curve at in Figure 9.4. Which of the following is true?

A)The economy is booming.
B)The economy is deflationary.
C)The economy is at potential output.
D)The economy is in recession.
E)Unemployment is above the natural level.

Question 54

If , the macroeconomy is:

A) in a recessionary gap.
B) in an expansionary gap.
C) at its potential level of output.
D) Not enough information is given.
E) None of these answers is correct.

Question 55

If , the macroeconomy is:

A) in a recessionary gap.
B) in an expansionary gap.
C) at its potential level of output.
D) Not enough information is given.
E) None of these answers is correct.

Question 56

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 57

If , the macroeconomy is:

A) in a recession.
B) in an expansionary gap.
C) at its potential level of output.
D) Not enough information is given.
E) None of these answers is correct.

Question 58

Refer to the following figure when answering the following questions.
Figure 9.4: Phillips Curve
Consider the Phillips curve at in Figure 9.4. The economy is:

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

Question 59

Refer to the following figure to answer the following questions.
Figure 9.3: Percent Change in U.S. Employment: 1980-2015

-Based on the data presented in Figure 9.3, which of the following periods is/are likely (a) recession(s)?

A) 1984, 1988, and 2006
B) 1988 and 2014
C) 1983, 1990, and 2001
D) 2005
E) Not enough information is given.

Question 60

If , the macroeconomy is:

A) in an expansionary gap.
B) in a recessionary gap.
C) at its potential level of output.
D) Not enough information is given.
E) None of these answers is correct.

Question 61

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

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

Question 62

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics)

-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2009 to 2010 was a period of:

A) a slumping economy.
B) a booming economy.
C) stagnation.
D) macroeconomic equilibrium.
E) Not enough information is given.

Question 63

In 1979, 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 in consumer spending; Volcker; lower; recession
C) an increase in oil prices; Volcker; raise; recession
D) an increase in oil prices; Volcker; lower; boom
E) a fall in oil prices; Greenspan; raise; recession

Question 64

In the text, Okun's law is given as:

A) .
B) .
C) .
D) .
E) .

Question 65

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

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

Question 66

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 67

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, the change in ________ would increase less in Economy ________.

A) inflation; 2
B) unemployment; 1
C) unemployment; 2
D) interest rates; 1
E) Not enough information is given.

Question 68

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics)

-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2001 to 2002 was a period of:

A) a booming economy.
B) a slumping economy.
C) stagnation.
D) None of these answers is correct.
E) Not enough information is given.

Question 69

Yale professor Ray Fair uses ________ to predict ________.

A) macroeconomic variables; presidential elections
B) a policy rule; the federal funds rate
C) Okun's law; the output gap
D) an econometric model;recessions
E) a theoretical model; fiscal policy

Question 70

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 71

According to the text, the slope of the Phillips curve in the United States is about ________. Thus, if the change in inflation is 3 percent, the gap would be ________ percent.

A) 1/4; 0.25
B) 1/3; 3
C) 1/2; 2
D) 2; 0.5
E) 1/3; 1

Question 72

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 73

Defining u as the unemployment rate and as the natural rate of unemployment, we can write Okun's law as the following equation:

A) .
B) .
C) .
D) .
E) .

Question 74

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 75

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics)

-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 1998 to 2000 was a period of:

A) stagnation.
B) a slumping economy.
C) a booming economy.
D) None of these answers is correct.
E) Not enough information is given.

Question 76

Refer to the following figure when answering the following questions.
Figure 9.5: U.S. Inflation 1960-2015 (Source: Bureau of Labor Statistics)

-Consider Figure 9.5, which shows the annual inflation rate. According to the Phillips curve, the period from about 2003 to 2005 was a period of:

A) a slumping economy.
B) a booming economy.
C) stagnation.
D) None of these answers is correct.
E) Not enough information is given.

Question 77

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

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

Question 78

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 79

According to the text, the slope of the Phillips curve in the United States is about ________. Thus, if the gap is 6 percent, the change in inflation would be ________ percent.

A) 1/4; 1.5
B) 1/3; 12
C) 1/3; 2
D) 1/2; 3
E) 1/2; 12

Question 80

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.