Chapter 12 Quiz
In ______ cycle theory, fluctuations in investment driven by fluctuations in business confidence are the main source of fluctuations in aggregate demand. In ______ cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuations in aggregate demand.
Keynesian; monetarist
In the real business cycle framework, a technology shock that increases investment demand and the demand for loanable funds leads to a ________ level of saving and a ________ real interest rate.
higher; higher
In real business cycle theory, an increase in productivity ______ the demand for labor by more than it ______ the supply of labor.
increases; increases
When costs increase and the Fed wants to return the economy to full employment, the Fed responds by ______ the quantity of money. If the Fed continually responds to successive increases in costs, a ______ inflation evolves.
increasing; cost-push
The short−run Phillips curve shows the ________ relationship between ________.
negative; inflation and unemployment
The analysis of macroeconomic performance in the news clip reflects the ______ business cycle theory because it discusses ______.
real; factors that change potential GDP
Keynesians believe that
a change in business confidence can affect the amount of investment in the economy.
In the short run, an unexpected increase in the inflation rate leads to
a lower unemployment rate.
In a demandminus−pull inflation, money wage rates rise because
an increase in aggregate demand creates a labor shortage.
If aggregate demand grows faster than potential GDP, ______ gap emerges and if it grows more slowly than potential GDP, ______ gap emerges.
an inflationary; a recessionary
If the government increases its expenditure on goods and services and as a result, the money wage rate increases, the economy has experienced _______.
a demand-pull rise in the price level
In real business cycle theory, all of the following events can be sources of fluctuation in productivity except _______.
changes in the growth rate of money
In the new Keynesian business cycle theory, ________ can effect real GDP.
expected and unexpected changes in aggregate demand
Suppose that last year the economy of Suffera was experiencing an expected inflation rate of 8 percent and unemployment rate of 12 percent. An unanticipated increase in the inflation rate would
increase the inflation rate and decrease the unemployment rate.
Stagflation occurs when the
price level increases and real GDP decreases.
By itself, an increase in aggregate demand increases GDP by the least amount in the ________.
real business cycle theory
Along the long-run Phillips curve, _______.
the unemployment rate is constant at the natural unemployment rate
If inflation is expected, _______.
neither a cost-push inflation nor a demand-pull inflation occur
Phillips curves describe the relationship between
unemployment and inflation.
The long−run Phillips curve is ________.
vertical at the natural unemployment rate
During which decade did the United States suffer from the worst cost−push inflation?
1970s
Which of the following pieces of evidence is most consistent with the real business cycle theory?
Productivity and GDP move closely together.
Which of the following factors could start a demand−pull inflation ?
an increase in exports
Which of the following could start a demand−pull inflation?
an increase in government expenditures
Demand pull inflation can be started by
an increase in government spending.
In the figure, suppose that the economy is at point A. An expected increase in the inflation rate to 6 percent will result in a movement to point
c
In monetarist business cycle theory, decreasing the growth rate of the quantity of money ________ and increasing the growth rate of the quantity of money ________.
causes the economy to enter a recession; causes the economy to enter an expansion
In the figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. If the quantity of money remains constant, the economy will adjust with
short−run aggregate supply shifting leftward to SAS1
An economy is at potential GDP when it experiences an increase in costs. The economy experiences _______.
stagflation
In mainstream business cycle theory, the money wage rate is
sticky
Along the short-run Phillips curve, ______.
the expected inflation rate and the natural unemployment rate are constant
In Figure B, which of the following are being held constant while moving along the curve in the figure?
Both answers A and B are correct.
Suppose the data show that an unexpected change in tax rates caused a recent recession. These data support which model of the business cycle?
Both answers A and B are correct.
If the expected inflation rate increases and the natural rate of unemployment remains constant, then _______.
the short-run Phillips curve shifts upward and the long-run Phillips curve does not shift
Choose the statement about real business cycle theory that is incorrect.
Economists have not been able to isolate the RBC theory impulse.
The new Keynesian cycle theory of the business cycle regards ________ as the main source of economic fluctuations.
expected and unexpected fluctuations in aggregate demand
When the economy moves from point A to point B, it experiences ______, and when the economy moves from point D to point C, it experiences ______.
expected inflation; expected deflation
A decrease in the _____ rate moves the economy from point D to point C. A decrease in the _____ rate moves the economy from point C to point A.
expected inflation; natural unemployment
An increase in the _____ rate moves the economy from point A to point B. An increase in the _____ rate moves the economy from point B to point D
expected inflation; natural unemployment
The claim that if "inflationary expectations" become "strongly entrenched", an economy will experience "a persistent output gap" is ______ because ______.
false; eventually the economy will return to its long-run Phillips curve, unemployment will return to the natural rate, and the output gap will be eliminated
According to RBC theory, the source of the business cycle is _______, which result mainly from _______.
fluctuations in productivity; fluctuations in the pace of technological change
In the figure, the economy initially is at point A and then an increase in the quantity of money moves the economy to point D. If the quantity of money remains constant, the economy will adjust with
shortminus−run aggregate supply shifting leftward to SAS1.
The Phillips curve shows the relationship between the
unemployment rate and the inflation rate.
When workers and employers correctly anticipate an increase in inflation caused by an increase in aggregate demand,
unemployment will be at the natural rate.
The new classical theory argues that the primary factor leading to business cycles are
unexpected changes in aggregate demand.
In the figure, the economy is at point A. The inflation rate unexpectedly falls by two percentage points. As a result, the economy moves to point
D.
The figure shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the economy of Tomorrowland. The economy is currently at point A. A demand-pull rise in the price level will initially move the economy to point _______ and to point _______.
E when aggregate demand increases; D when the money wage rate rises
Which of the figures best shows the start of a demand−pull inflation?
Figure A
______ cycle theory would say that the rise in unemployment is not cyclical but is a change in the natural unemployment rate.
Real business
Which of the following is a criticism of the real business cycle theory?
Real business cycle theory believes that productivity changes are caused by technology changes when in fact they are caused by changes in aggregate demand.
Which of the following is the factor that leads to business cycles in the new classical business cycle theory?
an unexpected change in aggregate demand
In the figure, if people correctly anticipate the increases in aggregate demand and the resulting inflation, the path will be from
point A to D to G.
The mainstream business cycle theory is that ______ grows at a steady rate while ______ grows at a fluctuating rate.
potential GDP; aggregate demand; sticky
The government estimates that the natural unemployment rate has increased from 4.8 percent in 2006 to 5.2 percent in late 2012. If these estimates are accurate, the shortminus−run Phillips curve has ________.
shifted rightward
When inflation is correctly anticipated, _______.
the economy remains at full employment
Moving along a short−run Phillips curve,
the expected inflation rate is constant.
A rational expectation _______.
will often turn out to be wrong, but no other forecast that could have been made with the information available could do better
Stagflation is anathema to the Phillips curve.
False
The anticipated inflation rate is 5 percent. In order for purchasing power to remain constant, the money wage rate must rise by
5%
The figure shows an economy's Phillips curves. Currently, the inflation rate is 6 percent a year. The natural unemployment rate is ________ percent and the expected inflation rate is ________ percent a year.
6; 4
Choose the statement about the long-run Phillips curve that is incorrect.
An unexpected increase in aggregate demand shifts the long-run Phillips curve rightward.
The figure shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the U.S. economy. The economy is currently at point A. A cost-push rise in the price level will initially move the economy to point ________ and to point ________.
C when the money prices of raw materials rise; D when aggregate demand increases
In the figure, the economy is at point A. The inflation rate unexpectedly falls by two percentage points. As a result, the economy moves to point
D
When the AD and SAS curves intersect at a level of real GDP which exceeds potential GDP and there is no government policy undertaken, which of the following will occur?
The SAS curve shifts leftward because the money wage rate rises.
Choose the statement that is incorrect.
Today, as in the 1970s, when people believe that inflation will rise it becomes a self-fulfilling prophecy.
In 2008, when a recession started, the growth of government expenditures on goods and services doubled compared to its growth in 2007. According to the aggregate demand theories of the business cycle
government expenditure was not a cause of the recession.
Inflation expectations create a self-fulfilling prophecy because people who expect rising prices demand ______, which ______ and raises the price level.
higher money wage rates; decreases short-run aggregate supply
In the news clip, productivity gains exceed pay increases because the demand for labor ______ than the ______ in the supply of labor.
increases by less; increase
Which of the following could NOT start a demand−pull inflation?
increases in oil prices
Structural change ______.
increases the natural unemployment rate and shifts both the short-run Phillips curve and the long-run Phillips curve rightward
In real business cycle theory, an increase in productivity ______ the demand for labor by more than it ______ the supply of labor.
increases; increases
The long−run Phillips curve shows that in the long run, policymakers can
lower inflation without increasing unemployment
Suppose the growth rate of the quantity of money increased from 5 percent per year to 8 percent per year. According to the ________, this event would trigger a business cycle expansion.
monetarist cycle model
The ________ theory of the business cycle asserts that expected and unexpected changes in aggregate demand lead to fluctuations in real GDP.
new Keynesian cycle
Suppose that forecasters have incorrectly estimated aggregate demand. According to the ________, this mistake could trigger a business cycle.
new classical cycle model
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.
new classical; new Keynesian
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve.
new classical; new Keynesian
According to mainstream business cycle theory, _______.
the money wage rate is sticky and consequently if aggregate demand grows faster than potential GDP, an inflationary gap emerges
A cost-push rise in the price level can arise from an increase in _______.
the money wage rate or money prices of raw materials
Which business cycle theory emphasizes that, because of long−term wage agreements, both expected and unexpected fluctuations in aggregate demand can change real GDP?
the new Keynesian cycle theory
According to real business cycle theory, workers' decisions to work now versus later depend on
the real interest rate.
"Intertemporal substitution" in labor supply describes changes in labor supply in response to changes in
the real interest rate.
If the natural unemployment rate increases and the expected inflation rate remains constant, then ______.
the long-run Phillips curve shifts rightward and the short-run Phillips curve shifts rightward
The real business cycle theory asserts that changes in ________ lead to changes in ________.
technology; productivity
A movement ______ along the short-run Phillips curve occurs when there is an ______ increase in aggregate demand.
up; unexpected