Question 1

All of the following are suggested by the results of Alan Blinder's survey of firms except:
A) there is only one theory of price stickiness.
B) coordinating wage and price setting could improve welfare.
C) reasons for price stickiness vary by industry.
D) activist monetary policy can be used to cure recessions.

Accepted Answer

The survey results do not suggest that there is only one theory of price stickiness. Instead, they suggest that there are multiple reasons for price stickiness that vary by industry. The survey also suggests that coordinating wage and price setting could improve welfare, and that activist monetary policy can be used to cure recessions.

Question 2

The relationship between the quantity of goods and services supplied and the price level is called:
A) aggregate demand.
B) aggregate supply.
C) aggregate investment.
D) aggregate production.

Accepted Answer

The relationship between the quantity of goods and services supplied and the price level is called aggregate supply. This relationship is typically shown by an upward sloping curve, indicating that firms are willing to supply more goods and services at higher price levels.

Question 3

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 aggregate demand curve shows the relationship between the overall price level and the quantity of goods and services demanded, but it does not determine the actual price level or output quantity, as these depend on the intersection with the aggregate supply curve.

Question 4

Aggregate supply is the relationship between the quantity of goods and services supplied and the:
A) money supply.
B) unemployment rate.
C) interest rate.
D) price level.

Accepted Answer

Aggregate supply is the relationship between the quantity of goods and services supplied by producers and the price level in the economy. As the price level increases, producers are incentivized to increase their supply of goods and services, leading to an upward sloping aggregate supply curve. Therefore, the correct answer is the price level (choice D). The money supply (choice A), unemployment rate (choice B) and interest rate (choice C) may have an impact on the economy and overall supply and demand, but they do not have a direct relationship with aggregate supply.

Question 5

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

A long-term aggregate supply curve is considered to be vertical because in the long run, output is determined by the economy's ability to produce goods and services, which is independent of the price level. Therefore, changes in the price level have no effect on the economy's potential output in the long run.

Question 6

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.
A) positive; money supply
B) negative; money supply
C) positive; price level
D) negative; price level

Accepted Answer

The aggregate demand curve shows a negative relationship between the quantity of output demanded and the price level. As the price level rises, the quantity of output demanded decreases, and vice versa.

Question 7

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:
A) downward and to the left.
B) downward and to the right.
C) upward and to the left.
D) upward and to the right.

Accepted Answer

When the money supply is decreased, it results in higher interest rates which reduces investment and consumption spending. This causes a decrease in AD, shifting the curve downward and to the left.

Question 8

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.
A) output; output
B) prices; prices
C) prices; output
D) output; prices

Accepted Answer

In the short run, firms adjust production based on changes in prices, but in the long run, they have the ability to adjust all factors of production, including output levels, leading to a fixed output and variable prices. Therefore, a short-run aggregate supply curve shows fixed prices and a long-run aggregate supply curve shows fixed output levels.

Question 9

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
A) greater; inward
B) greater; outward
C) lower; inward
D) lower; outward

Accepted Answer

When the Federal Reserve reduces the money supply, it decreases the amount of money available for borrowing and spending. This leads to a decrease in consumer and business spending, which leads to a decrease in aggregate demand. As a result, the aggregate demand curve shifts inward. At a given price level, the amount of output demanded also decreases as a result of the decrease in aggregate demand. Therefore, option C is the correct answer.

Question 10

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, an increase in the supply of money will lead to an increase in spending and aggregate demand. This will shift the aggregate demand curve to the right. However, as real GDP increases, the economy is able to produce more output, so the effect of additional money on the price level becomes relatively smaller. Therefore, the aggregate demand curve slopes downward but gets flatter as it moves farther to the right.

Question 11

Along an aggregate demand curve, which of the following are held constant?
A) real output and prices
B) nominal output and velocity
C) the money supply and real output
D) the money supply and velocity

Accepted Answer

The aggregate demand curve is derived assuming that the money supply and velocity of money are constant.

Question 12

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, demand can affect output and employment, while in the long run, supply dominates. This is because in the short run, firms may be able to adjust their output to meet changes in demand without fully adjusting their prices or wages. However, in the long run, firms will adjust their prices and wages based on changes in demand, which will ultimately affect the overall level of output and employment in the economy. The other options are incorrect: A is incorrect because the classical dichotomy holds in both the short and long run; B is incorrect because monetary and fiscal policy can affect output in both the short and long run; and D is incorrect because prices and wages can be sticky in both the short and long run.

Question 13

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
A) greater; inward
B) greater; outward
C) lower; inward
D) lower; outward

Accepted Answer

When the Federal Reserve increases the money supply, it reduces interest rates and encourages borrowing and spending, leading to an increase in aggregate demand. This shift in aggregate demand causes the aggregate demand curve to shift outward. As a result, at a given price level, the amount of output demanded is greater.

Question 14

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:
A) increases.
B) decreases.
C) does not change.
D) may either increase or decrease.

Accepted Answer

The quantity equation is MV = PQ, where M is the money supply, V is the velocity of money, P is the price level, and Q is the quantity of goods and services purchased. If V and M are fixed and P increases, then Q must decrease to maintain the equality, as the increase in P would require a decrease in Q to keep the product PQ constant.

Question 15

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 16

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, if output is higher, higher real balances are required to facilitate the transactions of the increased output. For fixed M (money supply), an increase in real balances (B) results in a decrease in P (price level) according to the equation of exchange (M*V=P*T, where V is velocity of money and T is the value of transactions). Therefore, higher output requires higher real balances, which leads to lower price levels.

Question 17

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 and the aggregate price level is known as aggregate demand. It represents the total demand of all goods and services in an economy at a given price level.

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 amount of output is primarily determined by the amounts of capital and labor, as well as available technology. The availability and efficiency of these factors of production ultimately impact the level of output that can be produced. Supply and demand, government policies, and consumer preferences can certainly impact output in the short run, but in the long run it is the factors of production that are the primary determinants.

Question 19

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 given by M x V = P x Y, where M represents the money supply, V is the velocity of money, P is the price level, and Y is real output. The assumption of constant velocity implies that V is constant over time. This means that the demand for real balances per unit of output (which is equal to 1/V) is also constant. The other options (A, B, and C) are not directly related to the quantity equation and the assumption of constant velocity.

Question 20

The aggregate demand curve tells us possible:
A) combinations of M and Y for a given value of P.
B) combinations of M and P for a given value of Y.
C) combinations of P and Y for a given value of M.
D) results if the Federal Reserve reduces the money supply.

Accepted Answer

The aggregate demand curve shows the combinations of the price level (P) and real GDP (Y) that are in equilibrium for a given state of the economy, assuming other factors like the money supply (M) are constant. It does not directly relate to changes in the money supply or specific combinations of M and Y or M and P for given values of other variables.

Quiz 10: Introduction to Economic Fluctuations

All of the following are suggested by the results of Alan Blinder's survey of firms except:

The relationship between the quantity of goods and services supplied and the price level is called:

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

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

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 aggregate demand curve is the relationship between the quantity of output demanded and the .

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

A short-run aggregate supply curve shows fixed , and a long-run aggregate supply curve shows fixed .

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is and the aggregate demand curve shifts .

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.

Along an aggregate demand curve, which of the following are held constant?

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

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is and the aggregate demand curve shifts .

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:

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.

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

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

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

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

The aggregate demand curve tells us possible: