Economics of Money: Chapter 22

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Aggregate Demand and Supply Analysis
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1

The aggregate demand curve is the total quantity of an economy's

  1. A) intermediate goods demanded at different inflation rates.
  2. B) intermediate goods demanded at a particular inflation rate.
  3. C) final goods and services demanded at a particular inflation rate.
  4. D) final goods and services demanded at different inflation rates.

Answer: D

2

The total quantity of an economy's final goods and services demanded at different inflation rates is

  1. A) the aggregate supply curve.
  2. B) the aggregate demand curve.
  3. C) the Phillips curve.
  4. D) the aggregate expenditure function.

Answer: B

3

One way to derive aggregate demand is by looking at its four component parts, which are

  1. A) consumer expenditures, planned investment spending, government spending, and net exports.
  2. B) consumer expenditures, actual investment spending, government spending, and net exports.
  3. C) consumer expenditures, planned investment spending, government spending, and gross exports.
  4. D) consumer expenditures, planned investment spending, government spending, and taxes.

Answer: A

4

By analyzing aggregate demand through its component parts, we can conclude that, everything else held constant, a decline in the inflation rate causes

  1. A) an increase in real interest rates, an increase in investment spending, and a decline in aggregate output demand.
  2. B) a decline in real interest rates, a decrease in investment spending, and an increase in aggregate output demand.
  3. C) a decline in real interest rates, an increase in investment spending, and an increase in aggregate output demand.
  4. D) an increase in real interest rates, a decline in investment spending, and a decline in aggregate output demand.

Answer: C

5

By looking at aggregate demand via its component parts, we can conclude that the aggregate demand curve is downward sloping because

  1. A) a lower inflation rate causes the real interest rate to fall, and stimulates planned investment spending.
  2. B) a lower inflation rate causes the real interest rate to rise, and stimulates planned investment spending.
  3. C) a higher inflation rate causes the real interest rate to fall, and stimulates planned investment spending.
  4. D) a higher inflation rate causes the real interest rate to rise, and stimulates planned investment spending.

Answer: A

6

Which of the followings is NOT true about the word "autonomous" that economists use?

  1. A) Changes in autonomous components are associated with movements along a curve.
  2. B) Changes in autonomous components are associated with shifts of a curve.
  3. C) The autonomous component of a variable is exogenous.
  4. D) The autonomous component of a variable is independent of other variables in the model.

Answer: A

7

Which of the followings is NOT true about the word "autonomous" that economists use?

  1. A) Changes in autonomous components are associated with shifts of a curve.
  2. B) The autonomous component of a variable is exogenous.
  3. C) The autonomous component of a variable is independent of other variables in the model.
  4. D) The autonomous component of a variable is induced by other variables in the model.

Answer: D

8

Everything else held constant, an autonomous monetary policy easing ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: A

9

Everything else held constant, an autonomous monetary policy tightening ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: B

10

Everything else held constant, when financial frictions increase, the real cost of borrowing ________ so that planned investment spending ________ at any given inflation rate.

  1. A) increases; falls
  2. B) decreases; falls
  3. C) decreases; rises
  4. D) increases; rises

Answer: A

11

Everything else held constant, an increase in financial frictions ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: B

12

Everything else held constant, an increase in government spending ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: A

13

Everything else held constant, a decrease in government spending ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: B

14

Everything else held constant, a decrease in net taxes ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: A

15

Everything else held constant, an increase in net taxes ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: Bvd

16

Everything else held constant, a balanced budget increase in government spending (that is, an increase in government spending that is matched by an identical increase in net taxes) will

  1. A) increase aggregate demand, but not by as much as if just government spending increases.
  2. B) increase aggregate demand by more than if just government spending increases.
  3. C) not affect aggregate demand.
  4. D) decrease aggregate demand.

Answer: A

17

Everything else held constant, an increase in net exports ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: A

18

Everything else held constant, a decrease in net exports ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: B

19

Everything else held constant, an increase in planned investment expenditure ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: A

20

Everything else held constant, a decrease in planned investment expenditure ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) decreases; supply
  4. D) increases; supply

Answer: B

21

Everything else held constant, aggregate demand increases when

  1. A) taxes are cut.
  2. B) government spending is reduced.
  3. C) animal spirits decrease.
  4. D) the money supply is reduced.

Answer: A

22

Everything else held constant, aggregate demand increases when

  1. A) net exports decrease.
  2. B) taxes increase.
  3. C) planned investment spending increases.
  4. D) the money supply decreases.

Answer: C

23

Everything else held constant, which of the following does NOT cause aggregate demand to increase?

  1. A) an increase in net exports
  2. B) an increase in government spending
  3. C) an increase in taxes
  4. D) an increase in consumer optimism

Answer: C

24

Explain through the component parts of aggregate demand why the aggregate demand curve slopes down with respect to the inflation rate. Be sure to discuss two channels through which changes in inflation rates affect demand.

Answer: A fall in the inflation rate lowers real interest rates. Lower rates increase investment, thereby increasing aggregate demand. Lower interest rates also cause depreciation of the domestic currency, increasing net exports and aggregate demand.

25

The aggregate supply curve is the total quantity of

  1. A) raw materials offered for sale at different inflation rates.
  2. B) final goods and services offered for sale at the current inflation rate.
  3. C) final goods and services offered for sale at different inflation rates.
  4. D) intermediate and final goods and service offered for sale at different inflation rates.

Answer: C

26

The aggregate supply curve shows the relationship between

  1. A) the level of inputs and aggregate output.
  2. B) the inflation rate and the level of inputs.
  3. C) the wage rate and the level of employment.
  4. D) the inflation rate and the level of aggregate output supplied.

Answer: D

27

The long-run rate of unemployment to which an economy always gravitates is the

  1. A) normal rate of unemployment.
  2. B) natural rate of unemployment.
  3. C) neutral rate of unemployment.
  4. D) inflationary rate of unemployment.

Answer: B

28

The long-run aggregate supply curve is

  1. A) a vertical line through the non-inflationary rate of output.
  2. B) a vertical line through the current level of output.
  3. C) a vertical line through the natural rate level of output.
  4. D) a horizontal line through the current level of output.

Answer: C

29

The long-run aggregate supply curve is a vertical line passing through

  1. A) the natural rate of output.
  2. B) the natural-rate price level.
  3. C) the actual rate of unemployment.
  4. D) the expected rate of inflation.

Answer: A

30

________ flexible wages and prices imply that the short-run aggregate supply curve is ________.

  1. A) More; flatter
  2. B) Less; steeper
  3. C) less; vertical
  4. D) More; steeper

Answer: D

31

Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________.

  1. A) short-run; decreases
  2. B) short-run; increases
  3. C) long-run; increases
  4. D) long-run; decreases

Answer: A

32

Everything else held constant, if workers expect an increase in inflation, ________ aggregate supply ________.

  1. A) long-run; increases
  2. B) long-run; decreases
  3. C) short-run; decreases
  4. D) short-run; increases

Answer: C

33

Everything else held constant, a change in workers' expectations about inflation will cause ________ to change.

  1. A) aggregate demand
  2. B) short-run aggregate supply
  3. C) the production function
  4. D) long-run aggregate supply

Answer: B

34

Which of the following increases aggregate supply in the short-run, everything else held constant?

  1. A) an increase in the price of crude oil
  2. B) a successful wage push by workers
  3. C) expectations of a higher inflation
  4. D) a technological improvement that increases worker productivity

Answer: D

35

The long-run aggregate supply curve shifts to the right when there is

  1. A) a decrease in the total amount of capital in the economy.
  2. B) a decrease in the total amount of labor supplied in the economy.
  3. C) a decrease in the available technology.
  4. D) a decline in the natural rate of unemployment.

Answer: D

36

The long-run aggregate supply curve shifts to the right when there is

  1. A) an increase in the total amount of capital in the economy.
  2. B) an increase in the available technology.
  3. C) a decrease in the natural rate of unemployment.
  4. D) A and B.
  5. E) A, B, and C.

Answer: E

37

The short-run aggregate supply curve shifts to the right when

  1. A) output gap is higher.
  2. B) output gap is lower.
  3. C) expected inflation is higher.
  4. D) expected inflation is lower.

Answer: D

38

Which of the followings does NOT shift the short-run aggregate supply curve?

  1. A) supply shocks.
  2. B) persistent positive output gap.
  3. C) changes in expected inflation.
  4. D) an increase in output gap.

Answer: D

39

The fact that an economy always returns to the natural rate level of output is known as

  1. A) the excess demand hypothesis.
  2. B) the price-adjustment mechanism.
  3. C) the self-correcting mechanism.
  4. D) the natural rate of unemployment.

Answer: C

40

Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation.

  1. A) a decrease; supply
  2. B) a decrease; demand
  3. C) an increase; supply
  4. D) an increase; demand

Answer: D

41

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) a decrease; an increase
  4. D) no change; no change

Answer: B

42

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the long run and ________ in inflation in the short run.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; a decrease
  4. D) no change; no change

Answer: C

43

Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate and ________ in the inflation in the long run.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) a decrease; an increase
  4. D) no change; no change

Answer: D

44

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: A

45

Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: C

46

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: B

47

Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: D

48

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP the the short run and ________ in inflation in the short run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: A

49

Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: C

50

Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: B

51

Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: D

52

Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: A

53

Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: A

54

Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: B

55

Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) no change; an increase
  4. D) no change; a decrease

Answer: B

56

Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run, everything else held constant.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) a decrease; an increase
  4. D) an increase; a decrease

Answer: D

57

According to aggregate demand and supply analysis, the negative demand shock of 2000-2004 had the effect of

  1. A) increasing aggregate output, lowering unemployment, and raising inflation.
  2. B) decreasing aggregate output, raising unemployment, and raising inflation.
  3. C) increasing aggregate output, lowering unemployment, and lowering inflation.
  4. D) decreasing aggregate output, raising unemployment, and lowering inflation.

Answer: D

58
card image

Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.

Answer: See figure Chapt. 22 Figure 58

An increase in the money supply increases aggregate demand, from AD to AD'. The economy moves from point 1 to point 2. In the short run both inflation rate and real output increase. In the long run, wages adjust, decreasing short-run aggregate supply, to AS', raising prices further and reducing real output until the economy returns to the natural level of output. The long-run result is to only increase inflation. The path is from 1 to 2 to 3.

59

Everything else held constant, an increase in the cost of production ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) increases; supply
  4. D) decreases; supply

Answer: D

60

Everything else held constant, a decrease in the cost of production ________ aggregate ________.

  1. A) increases; demand
  2. B) decreases; demand
  3. C) increases; supply
  4. D) decreases; supply

Answer: C

61

Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply.

  1. A) above; fall
  2. B) above; rise
  3. C) below; fall
  4. D) below; rise

Answer: C

62

Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply.

  1. A) above; fall
  2. B) above; rise
  3. C) below; fall
  4. D) below; rise

Answer: B

63

If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.

  1. A) rises; leftward
  2. B) rises; rightward
  3. C) falls; leftward
  4. D) falls; rightward

Answer: A

64

A decrease in the availability of raw materials that increases the price level is called a ________ shock

  1. A) negative demand
  2. B) positive demand
  3. C) negative supply
  4. D) positive supply

Answer: C

65

A negative supply shock causes ________ to ________.

  1. A) aggregate demand; increase
  2. B) aggregate demand; decrease
  3. C) short-run aggregate supply; decrease
  4. D) short-run aggregate supply; increase

Answer: C

66

A positive supply shock causes ________ to ________.

  1. A) aggregate demand; increase
  2. B) aggregate demand; decrease
  3. C) short-run aggregate supply; decrease
  4. D) short-run aggregate supply; increase

Answer: D

67

Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.

  1. A) an increase; an increase
  2. B) a decrease; a decrease
  3. C) a decrease; an increase
  4. D) no change; no change

Answer: A

68

Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.

  1. A) no change; an increase
  2. B) no change; a decrease
  3. C) an increase; an increase
  4. D) a decrease; a decrease

Answer: A

69

A theory of aggregate economic fluctuations called real business cycle theory holds that

  1. A) changes in the real money supply are the only demand shocks that affect the natural rate of output.
  2. B) aggregate demand shocks do affect the natural rate of output.
  3. C) aggregate supply shocks do affect the natural rate of output.
  4. D) changes in net exports are the only demand shocks that affect the natural rate of output.

Answer: C

70

This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.

  1. A) the natural rate hypothesis
  2. B) hysteresis
  3. C) real business cycle theory
  4. D) the Phillips curve model

Answer: C

71

Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They" refers to proponents of

  1. A) the natural rate hypothesis.
  2. B) monetarism.
  3. C) the Phillips curve model.
  4. D) real business cycle theory.

Answer: D

72

According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of

  1. A) increasing aggregate output, lowering unemployment, and raising the inflation.
  2. B) decreasing aggregate output, lowering unemployment, and lowering the inflation.
  3. C) increasing aggregate output, raising unemployment, and raising the inflation.
  4. D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Answer: A

73

According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of

  1. A) increasing aggregate output, lowering unemployment, and raising the inflation.
  2. B) decreasing aggregate output, raising unemployment, and raising the inflation.
  3. C) increasing aggregate output, raising unemployment, and raising the inflation.
  4. D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Answer: B

74

According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of

  1. A) increasing aggregate output, lowering unemployment, and raising inflation.
  2. B) decreasing aggregate output, raising unemployment, and raising inflation.
  3. C) increasing aggregate output, lowering unemployment, and lowering inflation.
  4. D) decreasing aggregate output, raising unemployment, and lowering inflation.

Answer: C

75

According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.

  1. A) increase; increase
  2. B) increase; decrease
  3. C) decrease; increase
  4. D) decrease; decrease

Answer: B

76
card image

Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.

Answer: See Chapt. 22 Figure 76

The supply shock decreases short-run aggregate supply from AS1 to AS2, reducing real output and raising inflation rate, or from points 1 to 2 in the graph. In the long run, the supply curve eventually adjusts back to the original position as wages fall. The economy adjusts from 2 back to 1.

77

The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued?

  1. A) The increase in the price of oil would have immediately shifted the AS curve to the right.
  2. B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right.
  3. C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run.
  4. D) All of the above.
  5. E) None of the above.

Answer: C

78

The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the United Kingdom's experience?

  1. A) The increase in the price of oil immediately shifted the AS curve to the left.
  2. B) The financial crisis did not take hold right away so the AD curve did not immediately shift.
  3. C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate.
  4. D) All of the above.
  5. E) None of the above.

Answer: D

79

The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the Chinese experience?

  1. A) The worldwide decline in demand led to a collapse of Chinese exports.
  2. B) Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly.
  3. C) The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S.
  4. D) All of the above.
  5. E) None of the above.

Answer: D

80

In the long run, following a combination of a negative demand shock and a temporary negative supply shock,

  1. A) both inflation and output return to the original long-run equilibrium values.
  2. B) inflation is permanently increased, while output returns to potential output.
  3. C) output returns to potential output, while inflation may be higher or lower than its initial value.
  4. D) inflation is permanently reduced, while output returns to potential output.
  5. E) None of the above.

Answer: D

81

As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.

Answer: Policy in China reversed the decline in aggregate demand, substituting fiscal and monetary stimulus for the reduced demand for China's exports. The result was a rapid recovery of output and avoidance of downward shifts of the short-run aggregate supply curve that would have meant declining inflation. With output at or near potential in China, the rise in exports that will accompany faster growth of the global economy will cause a positive output gap and accelerating inflation, unless policy makers in China can again intervene with policies to counteract the positive output gap.

82

The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply increases.

  1. A) easy; rise
  2. B) easy; fall
  3. C) tight; fall
  4. D) tight; rise

Answer: B

83

The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply decreases.

  1. A) easy; rise
  2. B) easy; fall
  3. C) tight; fall
  4. D) tight; rise

Answer: D

84

The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages ________ to prevent real wages from ________.

  1. A) fall; rising
  2. B) fall; falling
  3. C) rise; falling
  4. D) rise; rising

Answer: C

85

An autonomous monetary policy easing temporarily ________ real interest rates and ________ aggregate output in the short run, but in the long run real interest rates and aggregate output return to the equilibrium levels.

  1. A) reduces; raises
  2. B) reduces; lowers
  3. C) increases; lowers
  4. D) increases; raises

Answer: A

86

An autonomous monetary policy easing reduces real interest rates and raises aggregate output ________ and the inflation rate rises ________.

  1. A) temporarily; permanently
  2. B) permanently; temporarily
  3. C) permanently; permanently
  4. D) temporarily; temporarily

Answer: A

87

Monetary policy authorities can affect real interest rates

  1. A) in the short run, but not in the long run.
  2. B) in the long run, but not in the short run.
  3. C) permanently.
  4. D) both in the long run and the short run.

Answer: A

88

positive spending shocks lead to ________ real interest rates ________.

  1. A) higher; in both the short and long runs
  2. B) higher; in the short run but not in the long run
  3. C) lower; in both the short and long runs
  4. D) lower; in the short run but not in the long run

Answer: A

89

Positive spending shocks lead to ________ output ________.

  1. A) higher; in both the short and long runs
  2. B) higher; in the short run but not in the long run
  3. C) lower; in both the short and long runs
  4. D) lower; in the short run but not in the long run

Answer: B

90

Positive spending shocks lead to ________ inflation ________.

  1. A) higher; in both the short and long runs
  2. B) higher; in the short run but not in the long run
  3. C) lower; in both the short and long runs
  4. D) lower; in the short run but not in the long run

Answer: A

91

A temporary supply shock that raises prices will cause the real interest rate to

  1. A) rise in both the short and long runs.
  2. B) rise in the short run but not in the long run.
  3. C) fall in both the short and long runs.
  4. D) fall in the short run but not in the long run.

Answer: B

92

A temporary supply shock that raises prices

  1. A) will cause the real interest rate to rise in the long run.
  2. B) has no long-run impact on inflation and output.
  3. C) causes output to fall in the long run.
  4. D) causes inflation to rise in the long run.

Answer: B

93

A permanent negative supply shock leads to ________ real interest rates ________.

  1. A) higher; in both the short and long runs
  2. B) higher; in the short run but not in the long run
  3. C) lower; in both the short and long runs
  4. D) lower; in the short run but not in the long run

Answer: A

94

A permanent negative supply shock leads to ________ output ________.

  1. A) higher; in both the short and long runs
  2. B) higher; in the short run but not in the long run
  3. C) lower; in both the short and long runs
  4. D) lower; in the short run but not in the long run

Answer: C

95

A permanent negative supply shock leads to ________ inflation ________.

  1. A) higher; in both the short and long runs
  2. B) higher; in the short run but not in the long run
  3. C) lower; in both the short and long runs
  4. D) lower; in the short run but not in the long run

Answer: A

96

An autonomous monetary policy easing ________ real interest rates and ________ output in the short run, thereby ________ stock prices.

  1. A) raises; lowers; lowering
  2. B) raises; raises; raising
  3. C) lowers; raises; raising
  4. D) lowers; raises; lowering

Answer: C

97

A positive spending shock ________ real interest rates and ________ output in the short run, thereby its effect on stock prices is ________.

  1. A) raises; lowers; positive
  2. B) raises; raises; ambiguous
  3. C) lowers; raises; negative
  4. D) lowers; raises; positive

Answer: B

98

A temporary negative supply shock ________ real interest rates and ________ output in the short run, thereby its effect on stock prices is ________.

  1. A) raises; lowers; negative
  2. B) raises; raises; ambiguous
  3. C) lowers; raises; negative
  4. D) lowers; raises; positive

Answer: A

99

A permanent negative supply shock causes stock prices to ________ than they would if the

supply shock were temporary.

  1. A) fall more
  2. B) fall less
  3. C) rise more
  4. D) rise less

Answer: A

100

If firms and households form their expectations about inflation by looking at past inflation, this form of expectations formation is known as ________ expectations.

  1. A) adaptive
  2. B) forward-looking
  3. C) rational
  4. D) perfect

Answer: A

101

Suppose that the short-run aggregate supply curve is: π= 2 + 1.5 (Y-10), where π is inflation and Y is output; and the aggregate demand curve is Y= 11 - 0.5π. The equilibrium output is ________ and the equilibrium inflation rate is ________ %.

  1. A) 10; 2
  2. B) 17.5; 2
  3. C) 2; 10
  4. D) 10; 7.5

Answer: A

102

The more willing monetary policymakers are to raise interest rates when faced with inflation, the ________ the AD curve is, and the ________ responsive equilibrium output is to the inflation rate.

  1. A) steeper; more
  2. B) steeper; less
  3. C) flatter; more
  4. D) flatter; less

Answer: A

103

An autonomous easing of monetary policy results in a ________ level of equilibrium output, shifting the aggregate demand curve to the ________.

  1. A) higher; right
  2. B) lower; right
  3. C) higher; left
  4. D) lower; left

Answer: A

104

The lon-run aggregate supply curve can be expressed by

  1. A) output as a function of potential output.
  2. B) inflation as a function of past inflation.
  3. C) inflation as a function of past inflation and output gap.
  4. D) output as a function of inflation and output gap.

Answer: A

105

In the long-run equilibrium

  1. A) output is a function of autonomous expenditures.
  2. B) inflation is a function of past inflation.
  3. C) inflation equals potential output.
  4. D) output equals potential output.

Answer: D

106

A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. Therefore, higher inflation will lead to a ________ in real interest rates, resulting in ________-sloping monetary policy curves.

  1. A) decline; downward
  2. B) rise; downward
  3. C) rise; upward
  4. D) decline; upward

Answer: A

107

With downward-sloping monetary policy and IS curves,the aggregate demand curve is

  1. A) downward sloping.
  2. B) flat.
  3. C) vertical.
  4. D) upward sloping.

Answer: D

108

A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. As a result, the monetary policy curve is ________ sloping and the aggregate demand curve is ________ sloping.

  1. A) upward; downward
  2. B) downward; downward
  3. C) upward; upward
  4. D) downward; upward

Answer: D


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