Chapter 12 Quiz

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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


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