Chapter 10 Practice Problems PDF

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Chapter 10 Multiple Choice Problems...

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Quiz 8-24-2014 1. An adverse supply shock ______ the short-run aggregate supply curve ______ the natu output. A. raises; but cannot affect B. raises; and may also lower C. lowers; but cannot affect D. lowers; and may also lower 2. If a short-run equilibrium occurs at a level of output below the natural rate, then in the t long run prices will ______ and output will ______. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase 3. Most economists believe that the classical dichotomy: A. holds approximately in both the short run and the long run. B. holds approximately in the long run but not at all in the short run. C. holds approximately in the short run but not at all in the long run. D. does not hold even approximately in either the long run or the short run. 4. Monetary neutrality, the irrelevance of the money supply in determining values of _____ generally thought to be a property of the economy in the long run. A. real B. nominal C. real and nominal D. neither real nor nominal 5. In the short run, a favorable supply shock causes: A. both prices and output to rise. B. prices to rise and output to fall. C. prices to fall and output to rise. D. both prices and output to fall. 6. The model of aggregate supply and aggregate demand in the short run differs from our l of the economy because, in the short run:

economy away from the natural rate of output is that monetary policy can either return o natural rate, but with a ______ price level, or allow the price level to return to its origina a ______ level of output in the short run. A. higher; higher B. higher; lower C. lower; lower D. lower; higher 8. Starting from long-run equilibrium, if a drought pushes up food prices throughout the ec could move the economy more rapidly back to full employment output by: A. increasing the money supply, but at the cost of permanently higher prices. B. decreasing the money supply, but at the cost of permanently lower prices. C. increasing the money supply, which would restore the original price level. D. decreasing the money supply, which would restore the original price level. 9. Exhibit: Supply Shock

Reference: Ref 10-2

(Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and th supply shock that does not last forever. In this situation, point ______ represents short-r and point ______ represents long-run equilibrium. A. B; C B. B; A C. E; D D. E; A 10. If the Fed accommodates an adverse supply shock, output falls ______ and prices rise

B. upward sloping. C. horizontal. D. downward sloping. 12. 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. 13. Assume that the long-run aggregate supply curve is vertical at Y = 3,000 while the sho supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 2(M/P) and M a. If the economy is initially in long-run equilibrium, what are the values of P and Y? b.

If M increases to 2,000, what are the new short-run values of P and Y?

c.

Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y

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14. The price level decreases and output increases in the transition from the short run to th the short-run equilibrium is _____ the natural rate of output in the short run. A. above B. below C. equal to D. either above or below 15. The short-run aggregate supply curve is horizontal at: A. a level of output determined by aggregate demand. B. the natural level of output. C. the level of output at which the economy's resources are fully employed. D. a fixed price level. 16. Okun's law is the ______ relationship between real GDP and the ______. A. negative; unemployment rate

A. decrease by 1 percent. B. decrease by 2 percent. C. decrease by 3 percent. D. increase by 1 percent. 18. Making use of Okun's law, it may be computed that if the Fed reduces the money suppl the quantity theory of money is true, then the unemployment rate will rise about: A. 5 percent in both the short run and the long run. B. 2.5 percent in both the short run and the long run. C. 5 percent in the short run but will return to its natural rate in the long run. D. 2.5 percent in the short run but will return to its natural rate in the long run. 19. If the short-run aggregate supply curve is horizontal, and, if each member of the gener to hold a larger fraction of his or her income as cash balances, then: A. output and employment will increase in the short run. B. output and employment will decrease in the short run. C. prices will increase in the short run. D. prices will decrease in the short run. 20. In the short run an adverse supply shock causes: A. both prices and output to rise. B. prices to rise and output to fall. C. prices to fall and output to rise. D. both prices and output to fall. 21. A supply shock does not occur when: A. a drought destroys crops. B. unions push wages up. C. the Fed increases the money supply. D. an oil cartel increases world oil prices. 22. Suppose the economy is faced with an adverse supply shock. The Fed decides to immed accommodate the shock. What path of income and prices would be observed in the eco A. Y: 100, 90, 100; P: 1, 1, 0.9 B. Y: 100, 90, 90; P: 1, 1.2, 1.2 C. Y: 100, 100, 100; P: 1, 1, 1

C. D. upward and to the right. 24. Exhibit: Shift in Aggregate Demand

Reference: Ref 10-1

(Exhibit: Shift in Aggregate Demand) Assume that the economy is initially at point A w demand given by AD2. A shift in the aggregate demand curve to AD0 could be the resu ______ in the money supply or a(n) ______ in velocity. A. increase; increase B. increase; decrease C. decrease; increase D. decrease; decrease 25. Monetary policy can be either a stabilizing influence on the economy or a source of inst explanation for both possibilities.

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26. Recessions typically, but not always, include at least ______ consecutive quarters of de A. two B. four C. six D. eight

D. steelworker labor market. 28. Assume that the economy begins in long-run equilibrium. Then the Fed reduces the mo the short run ______, whereas in the long run prices ______ and output returns to its A. output decreases and prices are unchanged; rise B. output decreases and prices are unchanged; fall C. output and prices both decrease; rise D. output and prices both decrease; fall 29. You are given information about the following leading indicators. For each indicator exp information suggests that a recession or expansion should be expected in the future. a. Average initial weekly claims for unemployment insurance rise. b.

New building permits issued increases.

c.

The interest rate spread between the 10-year Treasury note and the 3-month Trea bill narrows.

d.

The Index of Supplier Deliveries falls.

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30. Starting from long-run equilibrium, an increase in aggregate demand increases ______ but only increases ______ in the long run. A. output; prices B. prices; output C. short-run aggregate supply; long-run aggregate supply D. the money supply; the natural rate of output 31. Short-run fluctuations in output and employment are called: A. sectoral shifts. B. the classical dichotomy. C. business cycles. D. productivity slowdowns. 32. Assume that the economy starts from long-run equilibrium. If the Federal Reserve incre supply, then ______ increase(s) in the short run and ______ increase(s) in the long ru

B. about once a month. C. once or twice a year. D. less than once a year. 34. If a short-run equilibrium occurs at a level of output above the natural rate, then in the long run prices will ______ and output will ______. A. increase; increase B. decrease; decrease C. increase; decrease D. decrease; increase 35. Exhibit: Supply Shock

Reference: Ref 10-2

(Exhibit: Supply Shock) Assume that the economy is at point E. With no further shocks the economy in the long run will be at point: A. B. C. D. 36. If the short-run aggregate supply curve is horizontal and the long-run aggregate supply vertical, then a change in the money supply will change ______ in the short run and ch the long run. A. only prices; only output B. only output; only prices C. both prices and output; only prices

D. 38. Which of the following is an example of a demand shock? A. a large oil-price increase B. the introduction and greater availability of credit cards C. a drought that destroys agricultural crops D. unions obtain a substantial wage increase 39. Starting from long-run equilibrium, if the velocity of money increases (due to, for exam invention of automatic teller machines) and no action is taken by the government: A. prices will rise in both the short run and the long run. B. output will rise in both the short run and the long run. C. prices will rise in the short run and output will rise in the long run. D. output will rise in the short run and prices will rise in the long run. 40. If the Fed reduces the money supply by 5 percent and the quantity theory of money is A. every point on the aggregate demand curve moves 5 percent to the left. B. every point on the aggregate demand curve moves up 5 percent. C. the aggregate demand curve moves down and to the left, but it is impossible to d exactly by how much. D. the aggregate demand curve moves up and to the right, but it is impossible to de by how much. 41. If the short-run aggregate supply curve is horizontal and the Fed increases the money s A. output and employment will increase in the short run. B. output and employment will decrease in the short run. C. prices will increase in the short run. D. prices will decrease in the short run. 42. On two occasions in the 1970s: A. world oil prices rose rapidly, inflation was high, and the unemployment rate was B. world oil prices rose rapidly, inflation was moderate, and the unemployment rate C. world oil prices rose rapidly, inflation was high, and the unemployment rate was D. world oil prices rose rapidly, but the Fed used monetary policy to curb inflation. 43. The assumption of constant velocity in the quantity equation is the equivalent of the as constant:

A. environmental protection laws raise costs of production. B. the Fed increases the money supply. C. unions push wages up. D. an oil cartel breaks up and oil prices fall. 45. When the Federal Reserve increases the money supply, at a given price level the amoun demanded is ______ and the aggregate demand curve shifts ______. A. greater; inward B. greater; outward C. lower; inward D. lower; outward 46. Stagflation—a period of rising unemployment coupled with rising prices—could most ea a(n): A. increase in the money supply. B. decrease in the money supply. C. increase in the price of oil. D. decrease in the price of oil. 47. Suppose that the price level is 1 and output is 100. Then the Fed suddenly increases th by 10 percent. According to the AS/AD model, what would be the most probable paths prices? A. Y: 100, 105, 100; P: 1, 1, 1.1 B. Y: 100, 100, 100; P: 1, 1.1, 1.1 C. Y: 100, 105, 105; P: 1, 1, 1.1 D. Y: 100, 100, 105; P: 1, 1.1, 1 48. If the short-run aggregate supply curve is horizontal, an increase in union aggressivene wages and prices up will result in ______ prices and ______ output in the short run. A. higher; lower B. lower; higher C. higher; higher D. lower; lower 49. Exhibit: Supply Shock

Reference: Ref 10-2

(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drou reduces agricultural output in the economy for just one year. In this situation, point ___ the short-run equilibrium immediately following the drought and point ______ represen long-run equilibrium. A. B; C B. B; A C. E; D D. D; A 50. When the Federal Reserve reduces the money supply, at a given price level the amount demanded is ______ and the aggregate demand curve shifts ______. A. greater; inward B. greater; outward C. lower; inward D. lower; outward...