chapter 9

Question 1

Business Cycles are

regular and predictable
irregular but predictable.
regular but unpredictable.
irregular and unpredictable.

Answer 1

irregular and unpredictable.

Question 2

Short-run fluctuations in output and employment are called:

sectoral shifts.
the classical dichotomy.
business cycles.
productivity slowdowns.

Answer 2

business cycles.

Question 3

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

two
four
six
eight

Answer 3

two

Question 4

Over the business cycle, investment spending ______ consumption spending.

is inversely correlated with
is more volatile than
has about the same volatility as
is less volatile than

Answer 4

is more volatile than

Question 5

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

increases; increases
increases; decreases
decreases; decreases
decreases; increases

Answer 5

decreases; decreases

Question 6

Okun’s law is the ______ relationship between real GDP and the ______.

negative; unemployment rate
negative; inflation rate
positive; unemployment rate
positive; inflation rate

Answer 6

negative; unemployment rate

Question 7

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

the Phillips curve.
the Solow residual.
the Fisher effect.
Okun’s law

Answer 7

Okun’s law

Question 8

The version of Okun’s law studied in Chapter 9 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:

decrease by 1 percent.
decrease by 2 percent.
decrease by 3 percent.
increase by 1 percent

Answer 8

decrease by 1 percent.

Question 9

The version of Okun’s law studied in Chapter 9 assumes that, with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun’s law predicts that real GDP would:

decrease by 1 percent.
decrease by 2 percent.
increase by 4 percent.
increase by 5 percent

Answer 9

increase by 5 percent.

Question 10

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

variations in labor-market utilization;
technological progress technological progress; variations in labor-market utilization money supply growth rates;
changes in velocity changes in velocity; money supply growth rates

Answer 10

technological progress; variations in labor-market utilization

Question 11

Leading economic indicators are:

the most popular economic statistics.
data that are used to construct the consumer price index and the unemployment rate.
variables that tend to fluctuate in advance of the overall economy.
standardized statistics compiled by the National Bureau of Economic Research.

Answer 11

variables that tend to fluctuate in advance of the overall economy.

Question 12

A decline in the Index of Supplier Deliveries is typically an indicator of a future ______ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future ______ in economic production

increase; slowdown
increase; increase
slowdown; increase
slowdown; slowdown

Answer 12

slowdown; slowdown

Question 13

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

one month
six to nine months
one to two years
five to ten years

Answer 13

six to nine months

Question 14

Measures of average workweeks and of suppliers’ 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.

stronger; stronger
stronger; weaker
weaker; stronger
weaker; weaker

Answer 14

weaker; stronger

Question 15

Most economists believe that prices are:

flexible in the short run but many are sticky in the long run.
flexible in the long run but many are sticky in the short run.
sticky in both the short and long runs.
flexible in both the short and long runs

Answer 15

flexible in the long run but many are sticky in the short run.

Question 16

Most economists believe that the classical dichotomy

holds approximately in both the short run and the long run.
holds approximately in the long run but not at all in the short run.
holds approximately in the short run but not at all in the long run.
does not hold even approximately in either the long run or the short run.

Answer 16

holds approximately in the long run but not at all in the short run.

Question 17

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in both the short and long runs.
in neither the short nor long run.
in the short run but lead to unemployment in the long run. in the long run but lead to unemployment in the short run.

Answer 17

in the long run but lead to unemployment in the short run.

Question 18

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.

real
nominal
real and nominal
neither real nor nominal

Answer 18

real

Question 19

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

more than once a week.
about once a month.
once or twice a year
. less than once a year

Answer 19

once or twice a year

Question 20

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

menu costs.
coordination failure
. nominal contracts.
procyclical elasticity.

Answer 20

coordination failure

Question 21

The results of Alan Blinder’s survey of firms suggest all of the following are true except that:

there is only one theory of price stickiness.
coordinating wage and price setting could improve welfare.
reasons for price stickiness vary by industry.
activist monetary policy can be used to cure recessions

Answer 21

there is only one theory of price stickiness.

Question 22

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

the classical dichotomy holds in the short run but not in the long run.
monetary and fiscal policy affect output only in the long run.
demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
prices and wages are sticky in the long run only.

Answer 22

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

Question 23

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

positive; money supply
negative; money supply
positive; price level
negative; price level

Answer 23

negative; price level

Question 24

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

aggregate demand.
aggregate supply.
aggregate output.
aggregate consumption

Answer 24

aggregate demand.

Question 25

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. downward; steeper downward; flatter upward; steeper upward; flatter

Answer 25

downward; flatter

Question 26

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

Answer 26

demand for real balances per unit of output

Question 27

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

Answer 27

the money supply and velocity

Question 28

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

Answer 28

higher; lower

Question 29

Question 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: increases. decreases. does not change. may either increase or decrease.

Answer 29

decreases

Question 30

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. higher; greater higher; smaller lower; greater lower; smaller

Answer 30

higher; greater

Question 31

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

Answer 31

combinations of P and Y for a given value of M .

Question 32

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 downward and to the left. downward and to the right. upward and to the left. upward and to the right.

Answer 32

downward and to the left.

Question 33

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 ______. greater; inward greater; outward lower; inward lower; outward

Answer 33

lower; inward

Question 34

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 ______. greater; inward greater; outward lower; inward lower; outward

Answer 34

greater; outward

Question 35

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy. the quantity of output and the price leve l the quantity of output the price level neither the quantity of output nor the price level

Answer 35

neither the quantity of output nor the price level

Question 36

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

Answer 36

aggregate supply.

Question 37

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

Answer 37

price level.

Question 38

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

Answer 38

prices; output

Question 39

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

Answer 39

amounts of capital and labor and the available technology.

Question 40

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: slopes upward and to the right. slopes downward and to the right. is horizontal. is vertical.

Answer 40

is vertical.

Question 41

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does the labor supply. the supply of capital. the money supply. technology.

Answer 41

the money supply.

Question 42

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

Answer 42

prices but not level of output.

Question 43

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

Answer 43

the level of output at which the unemployment rate is at its natural level

Question 44

The long-run aggregate supply curve is vertical at the level of output: determined by aggregate demand. at which unemployment is at its natural rate. at which the inflation rate is zero.

Answer 44

at which unemployment is at its natural rate.

Question 45

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 is horizontal. is vertical. slopes upward and to the right. slopes downward and to the right.

Answer 45

is horizontal.

Question 46

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 above below equal to either above or below

Answer 46

below

Question 47

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

Answer 47

level of output but not prices.

Question 48

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

Answer 48

aggregate demand equals short-run aggregate supply.

Question 49

If the short-run aggregate supply curve is horizontal, then the: classical dichotomy is satisfied. money supply cannot affect prices in the short run. money supply cannot affect output in the short run. money supply is irrelevant in the short run.

Answer 49

money supply cannot affect prices in the short run.

Question 50

The short-run aggregate supply curve is horizontal at: a level of output determined by aggregate demand. the natural level of output. the level of output at which the economy's resources are fully employed . a fixed price level.

Answer 50

. a fixed price level.

Question 51

The short run refers to a period: of several days. during which prices are sticky and unemployment may occur. during which capital and labor are fully employed. during which there are no fluctuations.

Answer 51

during which prices are sticky and unemployment may occur.

Question 52

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

Answer 52

during which prices are flexible.

Question 53

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. only prices; only output only output; only prices both prices and output; only prices both prices and output; both prices and output

Answer 53

only output; only prices

Question 54

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

Answer 54

aggregate demand equals short-run aggregate supply. | aggregate demand equals short-run and long-run aggregate supply

Question 55

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 ______. increase; increase decrease; decrease increase; decrease decrease; increase

Answer 55

increase; decrease

Question 56

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 ______. increase; increase decrease; decrease increase; decrease decrease; increase

Answer 56

decrease; increase

Question 57

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then: output and employment will increase in the short run. output and employment will decrease in the short run . prices will increase in the short run. prices will decrease in the short run.

Answer 57

output and employment will increase in the short run.

Question 58

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 prices; output output; prices output; output prices; prices

Answer 58

output; prices

Question 59

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run, prices ______ and output returns to its original level output decreases and prices are unchanged;rise output decreases and prices are unchanged; fall output and prices both decrease; rise output and prices both decrease; fall

Answer 59

output decreases and prices are unchanged; fall

Question 60

Monetary neutrality is a characteristic of the aggregate demand–aggregate supply model in both the short run and the long run. in neither the short run nor the long run. in the short run, but not in the long run. in the long run, but not in the short run.

Answer 60

in the long run, but not in the short run.

Question 61

The economic response to the overnight reduction in the French money supply by 20 percent in 1724 confirmed the neutrality of money because no real variables were affected by this nominal change. confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level. confirm the short-run neutrality of money because prices and wage did not adjust immediately. contradicted Okun's law because decreases in output were not associated with increases in unemployment.

Answer 61

confirm the short-run neutrality of money because prices and wage did not adjust immediately.

Question 62

When the French money supply was reduced by 45 percent in 1724, only ______ fell immediately prices output exchange rates interest rate

Answer 62

exchange rates

Question 63

The “short run,” represented by the recession that followed the decision to retire “greenbacks” after the Civil War, lasted approximately: six months. one year . three years . six years.

Answer 63

six years

Question 64

Stabilization policy: aims at keeping output and employment at their natural rates. always succeeds in keeping output and employment at their natural rates. is generally ineffective. does more harm than good.

Answer 64

aims at keeping output and employment at their natural rates.

Question 65

Which of the following is an example of a demand shock? a large oil-price increase the introduction and greater availability of credit cards a drought that destroys agricultural crops unions obtaining a substantial wage increase

Answer 65

the introduction and greater availability of credit cards | a drought that destroys agricultural crops

Question 66

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government: prices will rise in both the short run and the long run. output will rise in both the short run and the long run. prices will rise in the short run and output will rise in the long run. output will rise in the short run and prices will rise in the long run

Answer 66

output will rise in the short run and prices will rise in the long run

Question 67

If the short-run aggregate supply curve is horizontal, and if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then: output and employment will increase in the short run. output and employment will decrease in the short run. prices will increase in the short run. prices will decrease in the short run.

Answer 67

output and employment will decrease in the short run.

Question 68

A reduction in the demand for money is the equivalent of a(n) ______ in velocity and will shift the aggregate demand curve to the ______. increase; right increase; left decrease; right decrease; left

Answer 68

increase; right

Question 69

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: decreasing the money supply. increasing the money supply. decreasing the price level. increasing the price level.

Answer 69

decreasing the money supply.

Question 70

Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run. output; prices prices; output short-run aggregate supply; long-run aggregate supply the money supply; the natural rate of outpu

Answer 70

output; prices

Question 71

A supply shock does not occur when: a drought destroys crops. unions push wages up. the Fed increases the money supply. an oil cartel increases world oil prices.

Answer 71

the Fed increases the money supply.

Question 72

A favorable supply shock occurs when: environmental protection laws raise costs of production. the Fed increases the money supply. unions push wages up an oil cartel breaks up and oil prices fall.

Answer 72

an oil cartel breaks up and oil prices fall.

Question 73

An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output. raises; but cannot affect raises; and may also lower lowers; but cannot affect lowers; and may also lower

Answer 73

raises; and may also lower

Question 74

``` If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run. higher; lower lower; higher higher; higher lower; lowe ```

Answer 74

higher; lower

Question 75

In the short run, a favorable supply shock causes: both prices and output to rise. prices to rise and output to fall. prices to fall and output to rise. both prices and output to fall.

Answer 75

prices to fall and output to rise.

Question 76

In the short run, an adverse supply shock causes both prices and output to rise. prices to rise and output to fall. prices to fall and output to rise. both prices and output to fall.

Answer 76

prices to rise and output to fall.

Question 77

Stagflation occurs when prices ______ and output ______. fall; falls fall; increases rise; falls rise; increases

Answer 77

rise; falls

Question 78

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run higher; higher higher; lower lower; lower lower; higher

Answer 78

higher; lower

Question 79

If the Fed accommodates an adverse supply shock, output falls ______ and prices rise less; more less; less more; less more; more

Answer 79

less; more

Question 80

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will: be permanently higher and output will be restored to the natural rate. return to the old level and output will be restored to the natural rate. be permanently higher and output will be permanently lower. return to the old level, but output will be permanently lower

Answer 80

return to the old level and output will be restored to the natural rate.

Question 81

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: increasing the money supply, but at the cost of permanently higher prices. decreasing the money supply, but at the cost of permanently lower prices. increasing the money supply, which would restore the original price level. decreasing the money supply, which would restore the original price level.

Answer 81

increasing the money supply, but at the cost of permanently higher prices.

Question 82

On two occasions in the 1970s world oil prices rose rapidly, inflation was high, and the unemployment rate was high. world oil prices rose rapidly, inflation was moderate, and the unemployment rate was high. world oil prices rose rapidly, inflation was high, and the unemployment rate was moderate. oil prices rose rapidly, but the Fed used monetary policy to curb inflation.

Answer 82

world oil prices rose rapidly, inflation was high, and the unemployment rate was high

Question 83

In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate rose rapidly; high; rose rose slowly; moderate; was high fell; low; declined fell; low; rose

Answer 83

fell; low; declined

Question 84

If a change in government regulations allows banks to start paying interest on checking accounts, this will increase the demand for money. decrease the demand for money. have no effect on the demand for money. increase the demand for currency but decrease the demand for checking accounts

Answer 84

increase the demand for money.

Question 85

If the demand for money increases, this will: increase velocity. decrease velocity. have no effect on velocity. cause the Fed to increase the money supply.

Answer 85

decrease velocity

Question 86

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will: fall and in the long run prices will remain unchanged . remain unchanged and in the long run prices will fall. remain unchanged and in the long run prices will remain unchanged. fall and in the long run prices will fall.

Answer 86

fall and in the long run prices will fall.

Question 87

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then: every point on the aggregate demand curve moves 5 percent to the left. every point on the aggregate demand curve moves up 5 percent. the aggregate demand curve moves down and to the left, but it is impossible to determine exactly by how much. the aggregate demand curve moves up and to the right, but it is impossible to determine exactly by how much.

Answer 87

every point on the aggregate demand curve moves 5 percent to the left.

Question 88

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and: prices will remain unchanged in the long run. output will fall 5 percent in the long run. prices will fall 5 percent in the long run. output will remain unchanged in the long run.

Answer 88

prices will fall 5 percent in the long run.

Question 89

Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about: 5 percent in both the short run and the long run. 2.5 percent in both the short run and the long run. 5 percent in the short run but will return to its natural rate in the long run 2.5 percent in the short run but will return to its natural rate in the long run.

Answer 89

2.5 percent in the short run but will return to its natural rate in the long run.

Question 90

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money: both Fed A and Fed B should increase the quantity of money. Fed A should increase the quantity of money whereas Fed B should keep it stable. Fed A should keep the quantity of money stable whereas Fed B should increase it. both Fed A and Fed B should keep the quantity of money stable.

Answer 90

both Fed A and Fed B should increase the quantity of money.

Question 91

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil: both Fed A and Fed B should increase the quantity of money. Fed A should increase the quantity of money whereas Fed B should keep it stable. Fed A should keep the quantity of money stable whereas Fed B should increase it. both Fed A and Fed B should keep the quantity of money stable.

Answer 91

Fed A should keep the quantity of money stable whereas Fed B should increase it.