Macro econ chapter 15

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Output and the price level are unchanged from their initial values. b. Output falls; prices are unchanged from the initial value. c. Prices fall; output is unchanged from its initial value. d. Prices rise; output is unchanged from its initial value. e. Output rises; prices are unchanged from the initial value.

A. Output and the price level are unchanged from their initial values.

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the a. sticky-price theory of the short-run aggregate-supply curve. b. misperceptions theory of the short-run aggregate-supply curve. c. classical dichotomy theory of the short-run aggregate-supply curve. d. sticky-wage theory of the short-run aggregate-supply curve.

B. Misperceptions theory of the short-run aggregate-supply curve.

Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers allow the economy to adjust to the long-run natural level on its own, a. people will reduce their price expectations and aggregate demand will shift right. b. people will reduce their price expectations and the short-run aggregate supply will shift right. c. people will raise their price expectations and the short-run aggregate supply will shift left. d. people will raise their price expectations and aggregate demand will shift left.

B. People will reduce their price expectations and the short run aggregate supply will shift right.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices rise; output rises. b. Prices fall; output falls. c. Prices rise; output falls. d. Prices fall; output rises.

B. Price falls, output rises.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Output falls; prices are unchanged from the initial value. b. Prices fall; output is unchanged from its initial value. c. Output rises; prices are unchanged from the initial value. d. Prices rise; output is unchanged from its initial value. e. Output and the price level are unchanged from their initial values.

B. Prices fall; output is unchanged from its initial value.

Policymakers are said to "accommodate" an adverse supply shock if they a. respond to the adverse supply shock by decreasing aggregate demand, which lowers prices. b. respond to the adverse supply shock by decreasing short-run aggregate supply. c. respond to the adverse supply shock by increasing aggregate demand, which further raises prices. d. fail to respond to the adverse supply shock and allow the economy to adjust on its own.

B. Respond to the adverse supply shock by decreasing short-run aggregate supply.

Which of the following events shifts the short-run aggregate-supply curve to the right? a. an increase in government spending on military equipment b. an increase in price expectations c. a drop in oil prices d. a decrease in the money supply e. none of the above

C. A drop in oil prices

According to the interest-rate effect, aggregate demand slopes downward (negatively) because a. lower prices decrease the value of money holdings and consumer spending decreases. b. lower prices increase the value of money holdings and consumer spending increases. c. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. d. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls.

C. Lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause a. prices to fall and output to remain unchanged. b. prices to fall and output to fall. c. prices to rise and output to remain unchanged. d. prices to rise and output to rise

C. Prices to rise and output to remain unchanged.

Policymakers are said to "accommodate" an adverse supply shock if they a. respond to the adverse supply shock by decreasing aggregate demand, which lowers prices. b. respond to the adverse supply shock by decreasing short-run aggregate supply. c. respond to the adverse supply shock by increasing aggregate demand, which further raises prices. d. fail to respond to the adverse supply shock and allow the economy to adjust on its own.

C. Respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to a. shift long-run aggregate supply to the left. b. shift short-run aggregate supply to the right. c. shift aggregate demand to the right. d. shift aggregate demand to the left. e. shift short-run aggregate supply to the left.

C. Shift aggregate demand to the right

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the a. classical dichotomy theory of the short-run aggregate-supply curve. b. misperceptions theory of the short-run aggregate-supply curve. c. sticky-wage theory of the short-run aggregate-supply curve. d. sticky-price theory of the short-run aggregate-supply curve.

C. Sticky- wage theory of the short-run aggregate-supply curve.

Which of the following is not a reason why the aggregate-demand curve slopes downward? a. the wealth effect b. the interest-rate effect c. the classical dichotomy/monetary neutrality effects d. the exchange-rate effect e. All of the above are reasons why the aggregate-demand curve slopes downward.

C. The classical dichotomy/monetary neutrality effects

Which of the following statements about economic fluctuations is true? a. A recession is when output rises above the natural level of output. b. A depression is a mild recession. c. Economic fluctuations have been termed the "business cycle" because the movements in output are regular and predictable. d. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together. e. None of the above is true.

D. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together.

Which of the following would not cause a shift in the long-run aggregate-supply curve? a. an increase in the available labor b. an increase in the available capital c. an increase in the available technology d. an increase in price expectations e. All of the above shift the long-run aggregate-supply curve.

D. An increase in price expectations

Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve a. shifts left when the natural rate of unemployment falls. b. is positively sloped because price expectations and wages tend to be fixed in the long run. c. shifts right when the government raises the minimum wage. d. is vertical because an equal change in all prices and wages leaves output unaffected.

D. Is vertical because an equal change in all prices and wages leaves output unaffected.

Stagflation occurs when the economy experiences a. rising prices and rising output. b. falling prices and falling output. c. falling prices and rising output. d. rising prices and falling output.

D. Rising prices and falling output

The natural level of output is the amount of real GDP produced a. when the economy is at the natural level of aggregate demand. b. when there is no unemployment. c. when the economy is at the natural level of investment. d. when the economy is at the natural rate of unemployment.

D. When the economy is at the natural rate of unemployment

According to the wealth effect, aggregate demand slopes downward (negatively) because a. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls. b. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. c. lower prices decrease the value of money holdings and consumer spending decreases. d. lower prices increase the value of money holdings and consumer spending increases.

D. lower prices increase the value of money holdings and consumer spending increases

Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers wished to move output to its long-run natural level, they should attempt to

Shift the aggregate demand to the right.