Question 1

The long-run aggregate supply curve is vertical at the level of output:
A)determined by aggregate demand.
B)at which unemployment is at its natural rate.
C)at which the inflation rate is zero.
D)at a predetermined price level.

Accepted Answer

The long-run aggregate supply curve represents the level of output that can be sustained in the long run at which all factors of production are used efficiently and effectively, and unemployment is at its natural rate. Therefore, the correct choice is B.

Question 2

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 refers to the idea that changes in the money supply do not affect real output in the long run (i.e. in the absence of any supply-side shocks). This means that the long-run aggregate supply (LRAS) curve is vertical and independent of monetary factors. However, in the short run, changes in the money supply can affect real output, which means that the short-run aggregate supply (SRAS) curve is upward sloping. Therefore, monetary neutrality only holds in the long run, but not in the short run.

Question 3

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 that money is not neutral in the short run because both output and prices dropped.
D)contradicted Okun"s law because decreases in output were not associated with increases in unemployment.

Accepted Answer

The overnight reduction in the French money supply by 20 percent in 1724 led to a drop in both output and prices, indicating that money is not neutral in the short run. This contradicts the idea of neutrality of money in the short run as real variables were affected by this nominal change. The quantity theory suggests that there should be an immediate 20 percent reduction in the price level, but it does not address the impact on output. Additionally, Okun's law relates changes in unemployment to changes in output, but it does not specifically address the relationship between output and money supply. Therefore, option C is the best choice.

Question 4

If the short-run aggregate supply curve is horizontal and the Federal Reserve 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 producers can increase output without an increase in prices. If the Federal Reserve increases the money supply, it will increase aggregate demand, leading to increased output and employment in the short run.

Question 5

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A)is horizontal.
B)is vertical.
C)slopes upward and to the right.
D)slopes downward and to the right.

Accepted Answer

When all prices are stuck at a predetermined level, it means that the price level does not change regardless of changes in real GDP. This scenario is represented by a horizontal short-run aggregate supply curve, indicating that output can change without affecting the price level.

Question 6

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A)neither prices nor level of output.
B)both prices and level of output.
C)level of output but not prices.
D)prices but not level of output.

Accepted Answer

A vertical long-run aggregate supply curve means that the economy has reached its potential output, so any changes in aggregate demand will only affect prices and not the level of output.

Question 7

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 output can be increased without affecting prices in the short run. Therefore, a change in the money supply will only affect output in the short run, as prices remain constant. However, in the long run, prices will adjust to reflect the increase in the money supply, resulting in higher prices and potentially higher output. Therefore, the change in the money supply will affect only output in the short run and only prices in the long run.

Question 8

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 9

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:
A)level of output but not prices.
B)prices but not level of output.
C)both prices and level of output.
D)neither prices nor level of output.

Accepted Answer

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand will only affect the level of output, but not prices. This is because in the short-run, firms are willing to supply any amount of output at the current price level, and so an increase in demand will lead to an increase in output but not an increase in prices. Conversely, a decrease in demand will lead to a decrease in output but not a decrease in prices.

Question 10

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

In the transition to the long run, as firms and workers adjust to the lower level of output, wages and resource prices will eventually fall, decreasing production costs and causing firms to increase output. At the same time, lower prices will increase the demand for goods and services, leading to an increase in output. Therefore, prices will decrease and output will increase, which is consistent with option D.

Question 11

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

Accepted Answer

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

Question 12

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

The answer of In the aggregate demand/aggregate supply model, long-run...

Question 13

The long run refers to a period:
A)of decades.
B)during which capital and labor are sometimes not fully employed.
C)during which prices are flexible.
D)during which output deviates from the full-employment level.

Accepted Answer

The long run is a period during which prices are flexible, as opposed to the short run where some prices may be sticky or fixed. The other options, while relevant to macroeconomics, do not specifically define or distinguish the long run.

Question 14

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 there is excess capacity in the economy and firms are willing to supply any amount of output at the current price level. In this case, an increase in the money supply will not lead to an increase in prices as there is no upward pressure on prices due to excess supply. This implies that the money supply cannot affect prices in the short run.

Question 15

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 labor are fully employed.
D)during which there are no fluctuations.

Accepted Answer

The short run is a period during which prices are sticky and unemployment may occur. This is due to the fact that in the short run, firms may not be able to adjust their prices quickly enough to changes in market conditions, and as a result, they may have to reduce production and employment.

Question 16

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 when aggregate demand equals short-run aggregate supply. This is because in the short run, firms adjust output levels in response to changes in demand, but prices are sticky and do not adjust fully. In the long run, however, prices have adjusted and the economy has reached its potential output, meaning that equilibrium occurs when aggregate demand equals long-run aggregate supply.

Question 17

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is the natural rate of output in the short run.
A)above
B)below
C)equal to
D)either above or below

Accepted Answer

In the short run, if the equilibrium output is below the natural rate of output, firms are operating below their capacity and are likely to increase production. As a result, output increases and the price level decreases as more goods are supplied in the market. In the long run, all input prices adjust to the changes in output and the economy reaches its natural rate of output with lower prices. Therefore, the price level decreases and output increases, only if the short-run equilibrium is below the natural rate of output.

Question 18

Assume that the economy starts from long-run equilibrium. If the Federal Reserve 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

When the Federal Reserve increases the money supply, it lowers interest rates and increases investment spending and consumption, which leads to an increase in output and employment in the short run. However, in the long run, the increase in money supply leads to inflation, which reduces the purchasing power of money and increases prices. Therefore, in the long run, output returns to its potential level, but prices remain higher than before the increase in money supply.

Question 19

The natural level of output is:
A)affected by aggregate demand.
B)the level of output at which the unemployment rate is zero.
C)the level of output at which the unemployment rate is at its natural level.
D)permanent and unchangeable.

Accepted Answer

The natural level of output is the level of output at which the unemployment rate is at its natural level, meaning that there is no cyclical unemployment and only frictional and structural unemployment exist. It is not affected by aggregate demand, as it is determined by the economy's structural factors, such as labor market conditions and technology. However, it is not permanent and can change over time due to shifts in these structural factors.

Question 20

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.

Quiz 9: Introduction to Economic Fluctuations

The long-run aggregate supply curve is vertical at the level of output:

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

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

If the short-run aggregate supply curve is horizontal and the Federal Reserve increases the money supply, then:

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

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:

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

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 .

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:

The long run refers to a period:

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

The short run refers to a period:

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

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is the natural rate of output in the short run.

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

The natural level of output is:

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 .