ECON204 Chapter 9&10

(Exhibit: Shift in Aggregate Demand) LOOK UP The Graph!! (Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P0 and output Y. Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1. The economy moves first to point ______ and then, in the long run, to point ______. a. C; B b. B; C c. D; A d. A; D

A

A decrease in the price level, holding nominal money supply constant, will shift the LM curve: a. downward and to the right. b. upward and to the left. c. downward and to the left. d. upward and to the right.

A

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. decreases. b. does not change. c. increases. d. may either increase or decrease.

A

According to the theory of liquidity preference, tightening the money supply will ______ nominal interest rates in the short run, and according to the Fisher effect, tightening the money supply will ______ nominal interest rates in the long run. a. increase; decrease b. decrease; decrease c. increase; increase d. decrease; increase

A

Exhibit: Supply Shock) Look Up the Graph! (Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium. a. B; A b. D; A c. E; D d. B; C

A

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 ______. a. decrease; increase b. increase; decrease c. increase; increase d. decrease; decrease

A

If the Bank of Canada reduces the money supply by 5 percent, then the real interest rate will: a. rise in the short run but return to its original equilibrium level in the long run. b. rise in both the short run and the long run. c. be unaffected in both the short run and the long run. d. rise in the short run but will fall below its original equilibrium level in the long run.

A

If the demand function for money is M/P = 0.5Y - 100r, then the slope of the LM curve is: a. 0.005. by (0.5 / 100) b. 0.05. c. 0.001. d. 0.01.

A

The IS curve shows combinations of ______ that are consistent with equilibrium in the market for goods and services: a. the interest rate and the level of income b. inflation and unemployment c. the price level and real output d. the interest rate and real money balances

A

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

A

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

A

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income: a. planned expenditure falls. b. unplanned inventory investment is negative. c. prices rise. d. income falls.

B

Assume that the money demand function is (M/P)d = 2,200 - 200r, where r is the interest rate in percent. The money supply M is 2,000 and the price level P is 2. The equilibrium interest rate is ______ percent. a. 2 b. 6 c. 8 d. 4

B

In the Keynesian-cross model, the equilibrium level of income is determined by: a. the money supply. b. planned spending. c. liquidity preference. d. the factors of production.

B

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the a. aggregate demand equals short-run and long-run aggregate supply. b. aggregate demand equals short-run aggregate supply. c. short-run aggregate supply equals long-run aggregate supply. d. aggregate demand equals long-run aggregate supply.

B

→(Exhibit: Keynesian Cross and Loanable Funds) Look Up The Graph! (Exhibit: Keynesian Cross and Loanable Funds) Both graphs illustrate the inverse relationship between the equilibrium interest rate and the equilibrium level of income. The economy moves from equilibrium A to equilibrium B in the Loanable Funds diagram as a result of a ______ that shifts saving. a. increase in the interest rate b. increase in income c. decrease in the interest rate d. decrease in income

B

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent: a. in the short run but lead to unemployment in the long run. b. in both the short and long runs. c. in the long run but lead to unemployment in the short run. d. in neither the short nor long run

C

A rise in government spending shifts the IS curve because it ______ national saving for any given level of income, and this ______ the interest rate for any given level of income. a. reduces; reduction lowers b. increases; increase lowers c. reduces; reduction raises d. increases; increase raises

C

Changes in fiscal policy shift the: a. money demand curve. b. money supply curve. c. IS curve. d. LM curve.

C

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: a. both Central Bank A and Central Bank B should keep the quantity of money stable. b. Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. c. both Central Bank A and Central Bank B should increase the quantity of money. d. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

C

If the short-run aggregate supply curve is horizontal and the bank of Canada increases the money supply, then: (Remember that: In short run price is sticky) a. prices will increase in the short run. b. prices will decrease in the short run. c. output and employment will increase in the short run. d. output and employment will decrease in the short run

C

Short-run fluctuations in output and employment are called: a. the classical dichotomy. b. sectoral shifts. c. business cycles. d. productivity slowdowns

C

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

C

The LM curve generally determines: a. the interest rate. b. income. c. neither income nor the interest rate. d. both income and the interest rate.

C

The interest rate is a determinant of ______ in the goods market and money ______ in the money market. a. government spending; demand b. government spending; supply c. investment spending; demand d. investment spending; supply

C

The tax multiplier indicates how much ______ change(s) in response to a $1 change in taxes. a. the budget deficit b. consumption c. income d. real balances

C

The theory of liquidity preference implies that: a. as the interest rate rises, income will rise. b. as the interest rate rises, the demand for real balances will rise. c. as the interest rate rises, the demand for real balances will fall. d. the interest rate will have no effect on the demand for real balances.

C

A favourable supply shock occurs when: a. environmental protection laws raise costs of production. b. the Bank of Canada increases the money supply. c. unions push wages up. d. an oil cartel breaks up and oil prices fall.

D

Along any given IS curve: a. both government spending and tax rates vary. b. tax rates are fixed, but government spending varies. c. government spending is fixed, but tax rates vary. d. both government spending and tax rates are fixed

D

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

D

Exhibit: Keynesian Cross Look Up The Graph! (Exhibit: Keynesian Cross) In this graph, if firms are producing at level Y1, then inventories will ______ inducing firms to ______ production. Select one: a. rise; increase b. rise; decrease c. fall; decrease d. fall; increase

D

If neither investment nor consumption depends on the interest rate, then the IS curve is ______ and ______ policy has no effect on output. a. horizontal; monetary b. vertical; fiscal c. horizontal; fiscal d. vertical; monetary

D

In the Keynesian-cross model, as the interest rate increases, the equilibrium level of income ______, whereas in the loanable funds model, as the level of income increases, the equilibrium level of the interest rate ______. a. decreases; increases b. increases; decreases c. increases; increases d. decreases; decreases

D

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: a. in neither the short run nor the long run. b. in the short run, but not in the long run. c. both the short run and the long run. d. in the long run, but not in the short run.

D

Planned expenditure is a function of: a. planned investment. b. planned investment, government spending, and taxes. c. planned government spending and taxes. d. national income and planned investment, government spending and taxes.

D

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

D

When firms experience unplanned inventory accumulation, they typically: a. hire more workers and increase production. b. build new plants. c. call for more government spending. d. lay off workers and reduce production.

D