Chapter 15

2. The economics of the short run is: a. Keynesian economics. b. classical economics. c. cyclical economics. d. All of the above. e. undefined.

A

Long-run aggregate supply curve

A vertical aggregate supply curve that reflects the idea that in the long run, output is determined solely by the factors of production and technology

1. The economics of the long run is: a. Keynesian economics. b. classical economics. c. cyclical economics. d. All of the above. e. undefined.

B

Wage-price spiral

The process by which changes in wages and price cause further changes in wages and prices

When unemployment is below the natural rate, output is ______________.

above full employment potential, causing wages and prices rise; and vice versa

_____________ decrease demand for money and the rate on interest, which increase investment.

falling prices

In the long run, increases in the supply of money are __________; that is, they do not affect real interest rates, investment, or output.

neutral

16. If GDP is above potential output, then we expect to see: a. increasing wages cause the Keynesian aggregate supply curve to shiftup. b. increasing wages cause the Keynesian aggregate supply curve to shiftdown. c. falling wages cause the Keynesian aggregate supply curve to shift up. d. falling wages cause the Keynesian aggregate supply curve to shiftdown. e. None of the above.

A

19. GDP for the nation of Economia is currently below potential output. Ifthe adjustment to the long-run equilibrium occurs slowly, the governmentof Economia is likely to pursue a policy of: a. increasing government spending to increase aggregate demand. b. decreasing the money supply to increase aggregate demand. c. taking no action and allowing the economy to adjust naturally. d. decreasing government spending to increase aggregate demand. e. None of the above.

A

20. A decrease in the price level causes: a. a decrease in the demand for money. b. an increase in the demand for money. c. has no effect on the demand for money. d. may increase or decrease the demand for money. e. a decrease in the supply of money.

A

25. Investment is "crowded out" by an increase in government spendingbecause: a. an increase in government spending causes output and prices to rise,which in turn causes interest rates to rise. b. an increase in government spending causes output and prices to fall,which in turn causes interest rates to rise. c. an increase in government spending causes output and prices to rise,which in turn causes interest rates to fall. d. an increase in government spending causes output and prices to fall,which in turn causes interest rates to fall. e. None of the above.

A

4. If GDP is above potential output, the economy is in a: a. boom and prices and wages will tend to increase. b. boom and prices and wages will tend to decrease. c. recession and prices and wages will tend to increase. d. recession and prices and wages will tend to decrease. e. Both A and D.

A

5. If the unemployment rate is above the natural rate, then GDP is: a. below potential output. b. above potential output. c. equal to potential output. d. indeterminate. e. Any of the above is possible.

A

7. A wage-price spiral occurs when: a. rising wages cause higher prices, which in turn cause higher wages. b. rising wages cause higher prices, which in turn cause lower wages. c. falling wages cause higher prices, which in turn cause lower wages. d. falling wages cause falling prices, which in turn cause higher wages. e. The economy is producing at a level of output that is less than thepotential output.

A

long-run neutrality of money

A change in the supply of money has no effect on real interest rates, investment, or output in the long run.

Aggregate demand curve

A curve that shows the relationship between the level of prices and the quantity of real GDP demanded

short-run aggregate supply curve

A relatively flat aggregate supply curve that represents the idea that prices do not change very much in the short run and the firms adjust production to meet demand

Liquidity trap

A situation in which nominal interest rates are so low, they can no longer fall; also known as the zero lower bound.

10. The classical aggregate supply curve is vertical because: a. in the short run, prices are flexible but output is equal topotential output. b. in the long run, prices are flexible but output is equal to potentialoutput. c. in the short run, prices are fixed but output may be above, below, orequal to potential output. d. in the long run, prices are fixed and output is equal to potentialoutput. e. in the long run, prices are fixed and output is above potentialoutput.

B

23. The Federal Reserve can use monetary policy to: a. change output in the long run, but not the short run. b. change output in the short run, but not the long run. c. change output in both the short run and the long run. d. Monetary policy has no effect on output. e. Only Congress can use monetary policy.

B

3. In the long run: a. prices are sticky. b. the economy operates at full employment. c. increases in government spending do not effect other uses of output. d. increases in the money supply increase the level of output. e. All of the above.

B

18. Economists who believe that adjustment to the long-run equilibriumhappens quickly suggest that the government: a. actively pursue economic stabilization policies. b. increase defense spending. c. avoid economic stabilization policies. d. increase unemployment benefits. e. None of the above.

C

22. Suppose that the unemployment rate is above the natural rate. We wouldexpect: a. prices to rise, money demand to fall, interest rates to fall, andtotal demand to fall. b. prices to rise, money demand to rise, interest rates to rise, andtotal demand to fall. c. prices to fall, money demand to fall, interest rates to fall, andtotal demand to rise. d. prices to fall, money demand to rise, interest rates to fall, andtotal demand to fall. e. prices to fall, money demand to fall, interest rates to rise, andtotal demand to fall.

C

8. Suppose that an economy has been experiencing 3% annual inflation. Ifoutput is less than full employment, prices will generally rise at: a. a rate of 3%. b. a rate greater than 3%. c. a rate less than 3%. d. a rate of 0%. e. None of the above.

C

9. The Keynesian aggregate supply curve is horizontal because: a. in the short run, prices are flexible but output is equal topotential output. b. in the long run, prices are flexible but output is equal to potentialoutput. c. in the short run, prices are fixed but output may be above, below, orequal to potential output. d. in the long run, prices are fixed and output is equal to potentialoutput. e. in the long run, prices are fixed and output is above potentialoutput.

C

24. In the long-run, an increase in the money supply: a. decreases interest rates, increases investment, and decreases output. b. decreases interest rates, but has no effect on investment or output. c. increases output, but has no effect on interest rates or output. d. has no effect on interest rates, investment or output. e. Increases interest rates, decreases investment, and increases output.

D

6. Suppose the unemployment rate is below the natural rate. We would expectto see: a. GDP below potential output, rising wages, and rising prices. b. GDP above potential output, rising wages, and falling prices. c. GDP below potential output, falling wages, and falling prices. d. GDP above potential output, rising wages, and rising prices. e. None of the above.

D

17. If the unemployment rate is less than the natural rate, then we expectto see: a. falling wages cause the classical aggregate supply curve to shift up. b. increasing wages cause the classical aggregate supply curve to shiftdown. c. increasing wages cause the classical aggregate supply curve to shiftup. d. increasing wages cause the Keynesian aggregate supply curve to shiftdown. e. None of the above.

E

Political business cycle

The effects on the economy of using monetary or fiscal policy stimulate the economy before an election to improve reelection prospects

Short-run in macroeconomics

The period of time in which prices do not change or do not change very much

Long-run in macroeconomics

The period of time in which prices have fully adjusted to any economic changes

Economic policies are most effective when the _____________________. However, to improve their chances of being reelected, politicians can potentially take advantage of _____________________________.

adjustment process is slow, the difference between the short-run effects and the long-run effects of economic policies.

When output exceeds full employment, wages and prices rise __________ their past trends. If output is less than full employment, wages and prices ___________ to past trends.

faster than, fall relative

Decreases in government spending will _____________.

lower real interest rates and crowd in investment in the long run.

The reverse situation occurs when ___________________. Increases in wages and prices will ________________. As investment spending falls, the economy ___________________.

output exceeds full employment, increase money demand and interest rates, returns to full employment.

The price changes that occur when the economy is away from full employment _______________________________. Economists disagree on the length that this adjustment process takes, with estimates ranging from _______________________.

push the economy back to full employment, two to six years

Increases in government spending will ________________.

raise real interest rates and crowd out investment in the long run

If the economy is operating below full employment, falling wages and prices will _____________________. The fall in interest rates will ___________________________.

reduce money demand and lower interest rates, stimulate investment and lead the economy back to full employment.

Say's Law:

supply creates its own demand

Moreover, with long-run full employment, GNP output is determined by ___________________.

supply of labor, stock of capital, and technological progress, i.e., by supply factors, not by demand factors.

Increase in government spending raises output above full employment, which causes ________________. This causes the demand for money to shift to the right, which ___________ interest rates, and "crowds out" investment.

wages and prices to increase, increases