Question 1

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.

Accepted Answer

The answer of Assume the economy is initially operating at...

Question 2

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.

Accepted Answer

When the central bank raises the price target, the subsequent increase in nominal money supply will increase aggregate demand. This will lead to an increase in both output and price level (inflation) in the medium run. The increase in the nominal money supply will not directly affect the real wage or real money supply, and there is no clear relationship between the nominal money supply and interest rate in the short-run. Therefore, the correct answer is (D) a 20% increase in the price level in the medium run.

Question 3

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.

Accepted Answer

An increase in the price level leads to higher interest rates, which in turn reduces investment and consumption, causing a decrease in aggregate demand and output.

Question 4

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.

Accepted Answer

An increase in the price target set by the central bank primarily affects the overall price level and inflation expectations rather than the composition of output. Changes in taxes, government spending, and confidence levels directly influence the types of goods and services produced and consumed, thereby altering the composition of output.

Question 5

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.

Accepted Answer

An increase in the minimum wage will increase the costs of production for firms, causing a shift to the left in the aggregate supply curve. None of the other events listed would cause an initial shift in the aggregate supply curve.

Question 6

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.

Accepted Answer

A rise in the price target typically leads to higher inflation expectations, which can result in an increase in the nominal wage as workers demand higher wages to keep up with expected inflation.

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 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.

Accepted Answer

The answer of The aggregate demand curve has its particular...

Question 8

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.

Accepted Answer

A decrease in unemployment typically leads to an increase in consumer spending due to more people having jobs and earning wages, which can lead to higher demand for goods and services. This increased demand can push prices up, not down.

Question 9

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.

Accepted Answer

According to the classical dichotomy, changes in nominal variables like government spending do not affect real variables like the real wage in the long run. In the short run, however, an increase in government spending might result in a slight increase in the real wage due to an increase in aggregate demand. However, in the medium run, the economy adjusts and returns to the natural level of output, and the real wage should remain unchanged. Therefore, the correct option is B, no change in the real wage in the medium run.

Question 10

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.

Accepted Answer

In the medium-run, the increase in the price of oil will not change the price level as businesses have not yet adjusted their prices to respond to the increase in production costs. There may be some adjustments to output and employment levels, as businesses may need to cut back on production due to higher input costs, but these effects are not clearly identified in the given choices. There is also no clear link between an increase in oil prices and changes in the interest rate, so choices D and E can be eliminated.

Question 11

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.

Accepted Answer

An increase in the price of oil can lead to higher production costs for many businesses, which can contribute to inflation (an increase in the price level). This can prompt central banks to raise interest rates to combat inflation. Higher costs can also lead to reduced output as businesses cut back on production, and this reduction in output can lead to higher unemployment as businesses need fewer workers.

Question 12

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.

Accepted Answer

The answer of Assume the economy is initially operating at...

Question 13

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.

Accepted Answer

A decrease in the price of oil typically reduces production costs for many businesses, leading to an increase in investment as firms expand operations or invest in new projects due to lower costs.

Question 14

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.

Accepted Answer

A decrease in the oil price would cause a shift to the right in the SRAS curve, as production costs decrease, leading to an increase in the natural level of output in the medium run. A, B, D, and E would only have short-term effects on output levels or no effect at all.

Question 15

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.

Accepted Answer

In the medium run, the economy returns to the natural level of output, so unemployment remains at its natural rate and the price level adjusts, leaving them unaffected by the tax cut.

Question 16

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.

Accepted Answer

The answer of At the current level of output, suppose...

Question 17

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.

Accepted Answer

In the medium run, an increase in the price target typically leads to an increase in the price level as the economy adjusts to the new target.

Question 18

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.

Accepted Answer

The aggregate supply curve is upward sloping because as output increases, employment rises, unemployment falls, nominal wages increase, and the price level increases, reflecting the positive relationship between output and price level in the short run.

Question 19

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.

Accepted Answer

An increase in unemployment does not lead to higher prices. In fact, it leads to a decrease in prices due to a decrease in demand.

Question 20

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.

Accepted Answer

An increase in taxes reduces disposable income, leading to lower consumption and output. A decrease in the price target by the central bank typically implies tighter monetary policy, which can further reduce output and nominal wages in the short run.

Quiz 7: Putting All Markets Together: the Asad Model

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?

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:

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

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?

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?

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

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

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

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

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

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

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

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

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?

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

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

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

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?

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?