ECO 2040 Chapter 20

Other things the same, an increase in the price level makes the dollars people hold worth a. more, so they can buy more. b. more, so they can buy less. c. less, so they can buy more. d. less, so they can buy less.

d. less, so they can buy less.

Refer to Figure 1. If the economy is at A and there is a fall in aggregate demand, in the short run the economy a. stays at A. b. moves to B. c. moves to C. d. moves to D.

d. moves to D.

Refer to Figure 20-1. If the economy is at A and there is a fall in aggregate demand, in the short run the economy a. stays at A. b. moves to B. c. moves to C. d. moves to D.

d. moves to D.

Wages tend to be sticky a. because of contracts, social norms, and notions of fairness. b. because of contracts, but not social norms or notions of fairness. c. because of social norms and notions of fairness, but not contracts. d. None of the above are correct.

a. because of contracts, social norms, and notions of fairness.

Which of the following decreases in response to the interest-rate effect from an increase in the price level? a. both investment and consumption b. consumption but not investment c.investment but not consumption d.neither investment nor consumption

a. both investment and consumption

Other things the same, if the price level falls, people a. increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases. b. increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases. c. decrease foreign bond purchases, so the supply of dollars in market for foreign-currency exchange increases. d. decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.

a. increase foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange increases.

According to the misperceptions theory of aggregate supply, if a firm thought that inflation was going to be 5 percent and actual inflation was 6 percent, then the firm would believe that the relative price of what it produce had a. increased, so it would increase production. b. increased, so it would decrease production. c. decreased, so it would increase production. d. decreased, so it would decrease production.

a. increased, so it would increase production.

If the price level falls, the real value of a dollar a. rises, so people will want to buy more. This response helps explain the slope of the aggregate demand curve. b. rises, so people will want to buy more. This response shifts aggregate demand to the right. c. falls, so people will want to buy less. This response helps explain the slope of the aggregate demand curve. d. falls, so people will want to buy less. This response shifts aggregate demand to the left.

a. rises, so people will want to buy more. This response helps explain the slope of the aggregate demand curve.

Refer to Figure 1. If the economy starts at C, an increase in the money supply moves the economy a. to A in the long run. b. to B in the long run. c. back to C in the long run. d. to D in the long run.

a. to A in the long run.

Other things the same, if the money supply rises by 2% and people were expecting it to rise by 5%, then some firms have a. higher than desired prices which increases their sales. b. higher than desired prices which depresses their sales. c. lower than desired prices which increases their sales. d. lower than desired prices which depresses their sales.

b. higher than desired prices which depresses their sales.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected, a. relative to prices wages are higher and employment rise. b. relative to prices wages are higher and employment falls. c. relative to prices wages are lower and employment rises. d. relative to prices wages are lower and employment falls.

b. relative to prices wages are higher and employment falls.

Suppose a stock market crash makes people feel poorer. This decrease in wealth would induce people to a.decrease consumption, which shifts aggregate supply left. b.decrease consumption, which shifts aggregate demand left. c.increase consumption, which shifts aggregate supply right. d.increase consumption, which shifts aggregate demand right.

b.decrease consumption, which shifts aggregate demand left.

Most economists believe that money neutrality holds a.in the short run but not the long run. b.in the long run but not the short run. c.in both the short run and the long run. d.in neither the short run nor the long run.

b.in the long run but not the short run.

Which of the following typically rises during a recession? a.consumption b.unemployment c.corporate profits d.automobile sales

b.unemployment

Consider the exhibit below for the following questions. Label the axes on Figure 1. Refer to Figure 1. An increase in the money supply would move the economy from C to a. B in the short run and the long run. b. D in the short run and the long run. c. B in the short run and A in the long run. d. D in the short run and C in the long run.

c. B in the short run and A in the long run.

Refer to Figure 20-1. An increase in the money supply would move the economy from C to a. B in the short run and the long run. b. D in the short run and the long run. c. B in the short run and A in the long run. d. D in the short run and C in the long run.

c. B in the short run and A in the long run.

Refer to Figure 1. The economy would be moving to long-run equilibrium if it started at a. A and moved to B. b. C and moved to B. c. D and moved to C. d. None of the above is correct.

c. D and moved to C.

When the price level falls a. people want to hold more money. b. the interest rate rises. c. investment spending rises. d. All of the above are correct.

c. investment spending rises.

Refer to Figure 1. If the economy starts at A and moves to D in the short run, the economy a. moves to A in the long run. b. moves to B in the long run. c. moves to C in the long run. d. stays at D in the long run.

c. moves to C in the long run.

As the price level falls a. people will want to buy more bonds, so the interest rate rises. b. people will want to buy fewer bonds, so the interest rate falls. c. people will want to buy more bonds, so the interest rate falls. d. people will want to buy fewer bonds, so the interest rate rises.

c. people will want to buy more bonds, so the interest rate falls.

According to classical macroeconomic theory, changes in the money supply affect a. real GDP and the price level. b. real GDP but not the price level. c. the price level, but not real GDP. d. neither the price level nor real GDP.

c. the price level, but not real GDP.

Which of the following shifts both the short-run and long-run aggregate supply right? a.an increase in the actual price level b.an increase in the expected price level c.an increase in the capital stock d.None of the above is correct.

c.an increase in the capital stock

According to the aggregate demand and aggregate supply model, in the long run an increase in the money supply leads to a.increases in both the price level and real GDP. b.an increase in real GDP but does not change the price level. c.an increase in the price level but does not change real GDP. d.no change in either the price level or real GDP.

c.an increase in the price level but does not change real GDP.

Which of the following would both shift aggregate demand right? a.the price level decreases and government expenditures increase b.the price level decreases and the government repeals an investment tax credit c.government expenditures increase and the money supply increases d.None of the above are correct.

c.government expenditures increase and the money supply increases

Which of the following effects helps to explain the slope of the aggregate-demand curve? a.the exchange-rate effect b.the wealth effect c.the interest-rate effect d.All of the above are correct.

d. All of the above are correct.

Which of the following effects helps to explain the slope of the aggregate-demand curve? a. the exchange-rate effect b. the wealth effect c. the interest-rate effect d. All of the above are correct.

d. All of the above are correct.

Which of the following is included in the aggregate demand for goods and services? a. consumption demand b. investment demand c. net exports d. All of the above are correct.

d. All of the above are correct.

Which of the following is correct? a. Economic fluctuations are easily predicted by competent economists. b. Recessions have never occurred very close together. c. Spending, income, and production do not fluctuate closely with real GDP. d. None of the above is correct.

d. None of the above is correct.

Which of the following is correct? a. Short run fluctuations in economic activity happen only in developing countries. b. During economic contractions most firms experience rising sales. c. Recessions come at regular intervals and are easy to predict. d. When real GDP falls, the rate of unemployment rises.

d. When real GDP falls, the rate of unemployment rises.

Most economists believe that classical macroeconomic theory is a good description of the economy a. in neither the short nor long run. b. in the short run and in the long run. c. in the short run, but not in the long run. d. in the long run, but not in the short run.

d. in the long run, but not in the short run.

When taxes decrease, consumption a. decreases as shown by a movement to the left along a given aggregate-demand curve. b. decreases as shown by a shift of the aggregate demand curve to the left. c. increases as shown by a movement to the right along a given aggregate-demand curve. d. increases as shown by a shift of the aggregate demand curve to the right.

d. increases as shown by a shift of the aggregate demand curve to the right.

The classical dichotomy refers to the separation of a. variables that move with the business cycle and variables that do not. b. changes in money and changes in government expenditures. c. decisions made by the public and decisions made by the government. d. real and nominal variables.

d. real and nominal variables.

The aggregate quantity of goods and services demanded changes as the price level falls because a. real wealth falls, interest rates rise, and the dollar appreciates. b. real wealth falls, interest rates rise, and the dollar depreciates. c. real wealth rises, interest rates fall, and the dollar appreciates. d. real wealth rises, interest rates fall, and the dollar depreciates.

d. real wealth rises, interest rates fall, and the dollar depreciates.

As the price level rises, the exchange rate a. falls, so exports rise and imports fall. b. falls, so exports fall and imports rise. c. rises, so exports rise and imports fall. d. rises, so exports fall and imports rise.

d. rises, so exports fall and imports rise.

Aggregate demand includes a. only the quantity of goods and services households want to buy. b. only the quantity of goods and services households and firms want to buy. c. only the quantity of goods and services households, firms, and the government want to buy. d. the quantity of goods and services households, firms, the government, and customer abroad want to buy.

d. the quantity of goods and services households, firms, the government, and customer abroad want to buy.

The long-run aggregate supply curve shifts right if a.immigration from abroad increases. b.the capital stock increases. c.technology advances. d.All of the above are correct.

d.All of the above are correct.

Financial Crisis Suppose that banks are less able to raise funds and so lend less. Consequently, because people and households are less able to borrow, they spend less at any given price level than they would otherwise. The crisis is persistent so lending should remain depressed for some time. Refer to Financial Crisis. What happens to the price level and real GDP in the short run? a.both the price level and real GDP rise b.the the price level level rises and real GDP falls c.the the price level level falls and real GDP rises d.both the price level and real GDP fall

d.both the price level and real GDP fall

According to the misperceptions theory of the short-run aggregate supply curve, if a firm thought that inflation was going to be 4 percent and actual inflation was 2 percent, then the firm would believe that the relative price of what it produces had a.increased, so it would increase production. b.increased, so it would decrease production. c.decreased, so it would increase production. d.decreased, so it would decrease production.

d.decreased, so it would decrease production.

Recession come at a. regular intervals. During recessions consumption spending falls relatively more than investment spending. b. regular intervals. During recessions investment spending falls relatively more than consumption spending. c. irregular intervals. During recessions consumption spending falls relatively more than investment spending. d. irregular intervals. During recessions investment spending falls relatively more than consumption spending.

d.irregular intervals. During recessions investment spending falls relatively more than consumption spending.

The sticky-wage theory of the short-run aggregate supply curve says that when the price level is lower than expected, a.production is more profitable and employment rises. b.production is more profitable and employment falls. c.production is less profitable and employment rises. d.production is less profitable and employment falls.

d.production is less profitable and employment falls.

As the price level rises, the exchange rate a.falls, so exports rise and imports fall. b.falls, so exports fall and imports rise. c.rises, so exports rise and imports fall. d.rises, so exports fall and imports rise.

d.rises, so exports fall and imports rise.

The aggregate demand curve shifts right if either a.speculators gain confidence in U.S. assets or foreign countries enter into recession. b.speculators gain confidence in U.S. assets or recessions in foreign countries end. c.speculators lose confidence in U.S. assets or foreign countries enter into recession. d.speculators lose confidence in U.S. assets or recessions in foreign countries end.

d.speculators lose confidence in U.S. assets or recessions in foreign countries end.