Econ Chapter 10 (51-99) [Refer to Doc or Chapter 10 PDF for graphs/exhibits]

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

Stagflation occurs when prices _____ and output _____.

rise; falls

(Exhibit: Shift in Aggregate Demand) Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) _____ in the money supply or a(n) _____ in velocity.

increase; increase

If the Fed accomodates an adverse supply shock, output falls _____ and prices rise _____.

less; more

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:

fall and in the long run prices will fall

In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate ______.

fell; low; declined

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a _____ price level, or allow the price level to return to its original level, but with a _____ level of output in the short run.

higher; lower

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:

increasing the money supply, but at the cost of permanently higher prices.

If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

output an employment will decrease in the short run.

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.

output decreases and prices are unchanged; fall

An adverse supply shock _____ the short-run aggregate supply curve _____ the natural level of output.

raises; and may also lower

(Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point _____ represents short-run equilibrium and point _____ represents long-run equilibrium.

E; A

Assume that the long-run aggregate supply curve is vertical at Y=3000 while the shor-run aggregate supply curve is horizontal at P=1.0. The aggregate demand curve is Y=2(M/P) and M=1500 b. If M increases to 2000 what are the new short run values of P and Y

P=1.0; Y=4000

Assume that the long-run aggregate supply curve is vertical at Y=3000 while the shor-run aggregate supply curve is horizontal at P=1.0. The aggregate demand curve is Y=2(M/P) and M=1500 c. Once the economy adjusts to long run equilibrium at M=2000, what are P and Y?

P=1.33; Y=3000

A supply shock does NOT occur when:

The Fed increases the money supply

If the demand for money increases, this will:

decrease velocity

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will ______.

decrease; increase

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines, the Fed might be able to stabilize output by:

decreasing the money supply

When the French money supply was reduced by 45 percent over a period of seven months in 1724, the only values in the economy that adjusted fully and instantaneously were:

foreign exchange rates.

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.

only output; only prices

Which of the following is an example of a demand shock?

the introduction and greater availability of credit cards

On two occasions in the 1970s:

world oil prices rose rapidly, inflation was high, and the unemployment rate was high.

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with the price P0 and output Y, Aggregate demand is given byt curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented byt AD2. The economy moves first to point _____ and then, in the long run, to point _____.

A; D

Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

2.5 percent in the short run but will return to its natural rate in the long run

(Exhibit: Supply Shock) Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point:

A

(Exhibit: Supply Shock) Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:

A

The long run refers to a period:

during which prices are flexible.

The short run refers to a period:

during which prices are sticky and unemployment may occur.

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then

every point on the aggregate demand curve moves 5 percent to the left

If the short-run aggregate supply curve is horizontal, an increase in union aggresiveness that pushes wages and prices up will result in _____ prices and _____ output in the short run.

higher; lower

If a change in government regulations allows banks to start paying interest on checking accounts, this will:

increase the demand for money

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will _____ and output will _____.

increase; decrease

A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____.

increase; right

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then:

output and employment will increase in the short run

Starting from long-run equilibrium, an increase in aggregate demand increases _____ in the short run, but only increases _____ in the long run.

output; prices

In the short run, an adverse supply shock causes:

prices to rise and output to fall.

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:

prices will fall 5 percent in the long run

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:

return to the old level and output will be restored to the natural rate.

If the Fed reduces the money supply by 5 percent, then the real interest rate will:

rise in the short run but return to its original equilibrium level in the long run.

If Centra Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

both Central Bank A and Central Bank B should increase the quantity of money

The economic response to the overnight reduction in the French money supply by 20 percent in 1724,

confirmed that money is not neutral in the short run because both output and prices dropped.

(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point _____ represents the short-run equilibrium immediately following the drought and point _____ represents the eventual long-run equilibrium.

B; A

(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P and output Y, Aggregate demand is given by curve AD0, and SRAS and LRAS represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by AD1,. The economy moves first to point _____ and then, in the long run, to point _____.

C; B

If Centra Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then inresponse to an exogenous increase in the price of oil:

Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

Assume that the long-run aggregate supply curve is vertical at Y=3000 while the shor-run aggregate supply curve is horizontal at P=1.0. The aggregate demand curve is Y=2(M/P) and M=1500 a. If the economy is initially in long-run equilibrium, what are the values of P and Y?

P = 1.0; Y=3000

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

aggregate demand equals short-run aggregate supply

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

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

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:

output will rise in the short run and prices will rise in the long run.

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run.

output; prices