Chapter 11

Okun's law is the _____ relationship between real gross domestic product (GDP) and the _____.

negative; unemployment rate

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change _____ in the short run and change _____ in the long run.

only output; only prices

If the short-run aggregate supply curve is horizontal, and 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 decrease in the short run.

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.

output; prices

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 fall 5 percent in the long run.

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

prices; output

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will:

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

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

rise in the short run but return to its original equilibrium level in the long run.

Stagflation occurs when prices _____ and output _____.

rise; falls

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.

an oil cartel breaks up and oil prices fall.

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money.

Short-run fluctuations in output and employment are called:

business cycles.

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

confirmed that money is not neutral in the short run because both output and prices dropped.

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 fall.

Most economists believe that prices are:

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

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

higher; lower

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where

aggregate demand equals short-run aggregate supply.

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

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

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

demand for real balances per unit of output.

The short run refers to a period:

during which prices are sticky and cyclical unemployment may occur.

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; lower

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

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

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.

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices.

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 _____.

lower; inward

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

the Fed increases the money supply.

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

the introduction and greater availability of credit cards

The natural level of output is:

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

Recessions typically, but not always, include at least _____ consecutive quarters of declining real gross domestic product (GDP).

two