Question 1

When GDP growth declines, investment spending typically and consumption spending typically .
A).increases; increases.
B)increases; decreases. 
C)decreases; decreases.
D)decreases; increases.

Accepted Answer

A

Question 2

Business cycles are:
A)regular and predictable.
B)irregular but predictable.
C)regular but unpredictable.
D)irregular and unpredictable.

Accepted Answer

Business cycles are irregular and unpredictable, as they are affected by a variety of factors such as changes in consumer behavior, technological advancements, government policies, and global events. Although they may follow certain patterns, such as the typical phases of expansion, peak, contraction, and trough, the timing and severity of these phases can vary greatly.

Question 3

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate future economic activity and slower deliveries tend to indicate future economic activity.
A)stronger; stronger.
B)stronger; weaker.
C)weaker; stronger.
D)weaker; weaker.

Accepted Answer

Shorter workweeks tend to indicate weaker future economic activity because it suggests that companies may be cutting back on production and therefore reducing the amount of hours worked by their employees. Slower deliveries from suppliers also indicate weaker future economic activity because it suggests that demand for goods and services may be slowing down. Therefore, the best choice is C, where weaker workweeks and stronger vendor performance are both indicators of weaker future economic activity.

Question 4

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:
A)short-run aggregate supply curve.
B)long-run aggregate supply curve.
C)price level in the short run.
D)demand for real balances per unit of output.

Accepted Answer

The quantity equation is MV=PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output. Assuming constant velocity means that V remains fixed, which implies that the demand for real balances (M/P) per unit of output (Y) is constant. Therefore, the correct answer is D: demand for real balances per unit of output.

Question 5

Short-run fluctuations in output and employment are called:
A)sectoral shifts.
B)the classical dichotomy.
C)business cycles.
D)productivity slowdowns.

Accepted Answer

Short-run fluctuations in output and employment are commonly referred to as business cycles. Sectoral shifts refer to the movement of resources between industries, the classical dichotomy describes the separation of real and nominal variables in the long run, and productivity slowdowns refer to a sustained period of declining productivity growth.

Question 6

According to the quantity theory of money, if output is higher, real balances are required, and for fixed M this means P.
A)higher; lower.
B)lower; higher.
C)higher; higher.
D)lower; lower.

Accepted Answer

According to the quantity theory of money, the equation of exchange is MV=PY, where M is the money supply, V is the velocity of money, P is the price level, and Y is real output. Holding V constant, an increase in Y means that an increase in real balances (PY/M) is required to maintain equilibrium. Since M is fixed in this scenario, an increase in PY means that P must increase as well. Therefore, if output is higher, P must also be higher.

Question 7

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

If the long-run aggregate supply curve is vertical, it means that the economy has reached its full potential output level, and any changes in aggregate demand will affect only the price level, but not the level of output. Therefore, the correct answer is D, prices but not level of output.

Question 8

Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was:
A)menu costs.
B)coordination failure.
C)nominal contracts.
D)procyclical elasticity.

Accepted Answer

The answer of Alan Blinder's survey of firms found that...

Question 9

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about in advance.
A)one month.
B)six to nine months.
C)one to two years.

Accepted Answer

The index of leading indicators is used to forecast economic activity six to nine months in advance.

Question 10

Over the business cycle, investment spending consumption spending.
A)is inversely correlated with.
B)is more volatile than.
C)has about the same volatility as.
D)is less volatile than.

Accepted Answer

Investment spending is more volatile than consumption spending over the business cycle, meaning it experiences larger fluctuations in response to economic conditions such as changes in interest rates or market uncertainty. Consumption spending, on the other hand, tends to be more stable over time as it is impacted by a variety of factors such as personal income and demographics.

Question 11

A difference between the economic long run and the short run is that:
A)the classical dichotomy holds in the short run but not in the long run.
B)monetary and fiscal policy affect output only in the long run.
C)demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
D)prices and wages are sticky in the long run only.

Accepted Answer

In the short run, changes in demand can affect output and employment, while supply plays a bigger role in the long run. This is because in the short run, firms may not be able to adjust their production levels as easily due to factors like fixed costs and sticky prices. In the long run, however, firms have more flexibility to adjust their production and resource allocation, and supply becomes the dominant force in determining output and employment levels. The other statements in options A, B, and D are not accurate differentiations between the short and long run.

Question 12

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are , generating a quantity of output demanded.
A)higher; greater.
B)higher; smaller.
C)lower; greater.
D)lower; smaller.

Accepted Answer

At a lower price level, the real value of money balances increases because each unit of currency buys more goods and services. This increase in real money balances makes consumers and businesses feel wealthier, which tends to increase spending and thus the quantity of output demanded.

Question 13

Alan Blinder's survey of firms found that the typical firm adjusts its prices:
A)more than once a week.
B)about once a month.
C)once or twice a year.
D)less than once a year.

Accepted Answer

Alan Blinder's survey found that the typical firm adjusts its prices once or twice a year.

Question 14

Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long run.
A)real.
B)Nomina.
C)real and nominal.

Accepted Answer

Monetary neutrality refers to the long-run relationship between changes in the money supply and changes in the price level, which is a real variable. Therefore, monetary neutrality is a property of the real economy in the long run, not the nominal economy.

Question 15

When a long-term 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)slopes upward and to the right.
B)slopes downward and to the right.
C)is horizontal.
D)is vertical.

Accepted Answer

Long-term aggregate supply curve is vertical because it represents the maximum potential output of an economy given the available resources and technology in the long-run, which is not affected by changes in the price level.

Question 16

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:
A)decrease by 1 percent.
B)decrease by 2 percent.
C)decrease by 3 percent.
D)increase by 1 percent.

Accepted Answer

Okun's law posits that for every 1 percentage point increase in the unemployment rate, a country's GDP will be roughly an additional 2 percentage points lower than its potential GDP. Therefore, if the unemployment rate rises by 2 percentage points, real GDP would decrease by 4 percent from its potential growth rate. However, since the normal growth rate is 3 percent, the actual decrease in real GDP would be 1 percent (3 percent potential growth minus 4 percent due to increased unemployment).

Question 17

Looking at the aggregate demand curve alone, one can tell that will prevail in the economy.
A)the quantity of output and the price level.
B)the quantity of output.
C)the price level.
D)neither the quantity of output nor the price level.

Accepted Answer

The answer of Looking at the aggregate demand curve alone,...

Question 18

In the long run, the level of output is determined by the:
A)interaction of supply and demand.
B)money supply and the levels of government spending and taxation.
C)amounts of capital and labor and the available technology.
D)preferences of the public.

Accepted Answer

The level of output is primarily determined by the amounts of capital and labor available, along with the available technology. This is because capital and labor are the primary inputs into production, and the technology used determines how efficiently those inputs can be used to produce output. Supply and demand, government spending and taxation, and public preferences can all influence the level of output in the short run, but in the long run, the available factors of production are the most important determinant.

Question 19

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes to the right and gets as it moves farther to the right.
A)downward; steeper.
B)downward; flatter.
C)upward; steeper.
D)upward; flatter.

Accepted Answer

According to the quantity theory of money, aggregate demand is positively related to the money supply (M), which in turn is positively related to the price level (P). Therefore, as the money supply increases, aggregate demand increases and the aggregate demand curve shifts to the right. However, in the short run, prices may not adjust immediately, causing a flatter slope of the aggregate demand curve. In the long run, prices are expected to adjust fully, causing a steeper slope of the aggregate demand curve. Therefore, the correct answer is B: downward; flatter.

Question 20

The relationship between the quantity of output demanded and the aggregate price level is called:
A)aggregate demand.
B)aggregate supply.
C)aggregate output.
D)aggregate consumption.

Accepted Answer

The relationship between the quantity of output demanded by households, firms, and the government and the aggregate price level is known as aggregate demand. This relationship is usually depicted as a downward-sloping curve, indicating that as the price level rises, the quantity of output demanded decreases, and vice versa. Aggregate demand is a critical concept in macroeconomics, as it helps explain fluctuations in economic activity, such as recessions, booms, and inflation.

Quiz 10: Aggregate Demand I: Building the Is-Lm Model

When GDP growth declines, investment spending typically and consumption spending typically .

Business cycles are:

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate future economic activity and slower deliveries tend to indicate future economic activity.

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

Short-run fluctuations in output and employment are called:

According to the quantity theory of money, if output is higher, real balances are required, and for fixed M this means P.

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

Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was:

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about in advance.

Over the business cycle, investment spending consumption spending.

A difference between the economic long run and the short run is that:

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are , generating a quantity of output demanded.

Alan Blinder's survey of firms found that the typical firm adjusts its prices:

Monetary neutrality, the irrelevance of the money supply in determining values of variables, is generally thought to be a property of the economy in the long run.

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

Looking at the aggregate demand curve alone, one can tell that will prevail in the economy.

In the long run, the level of output is determined by the:

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes to the right and gets as it moves farther to the right.

The relationship between the quantity of output demanded and the aggregate price level is called: