Chapter 9 Homework

(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. A. b. B. c. C. d. D.

a. 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. A. b. B. c. C. d. D.

a. A.

(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 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 AD2. The economy moves first to point ______ and then, in the long run, to point ______. a. A; D b. D; A c. A; B d. B; A

a. A; D

Okun's law is the ______ relationship between real GDP and the ______. a. negative; unemployment rate b. negative; inflation rate c. positive; unemployment rate d. positive; inflation rate

a. negative; unemployment rate

(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. a. B; C b. B; A c. E; D d. D; A

b. B; A

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where: a. aggregate demand equals long-run aggregate supply. b. aggregate demand equals short-run aggregate supply. c. aggregate demand equals short-run and long-run aggregate supply. d. short-run aggregate supply equals long-run aggregate supply.

b. aggregate demand equals short-run aggregate supply.

The short run refers to a period: a. of several days. b. during which prices are sticky and unemployment may occur. c. during which capital and labor are fully employed. d. during which there are no fluctuations.

b. during which prices are sticky and unemployment may occur.

Most economists believe that prices are: a. flexible in the short run but many are sticky in the long run. b. flexible in the long run but many are sticky in the short run. c. sticky in both the short and long runs. d. flexible in both the short and long runs.

b. flexible in the long run but many are sticky in the short run.

Over the business cycle, investment spending ______ consumption spending. a. is inversely correlated with b. is more volatile than c. has about the same volatility as d. is less volatile than Feedback

b. is more volatile than

(Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with price P0 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 ______. a. A; D b. D; A c. C; B d. B; C

c. C; B

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where: a. aggregate demand is greater than long-run aggregate supply. b. aggregate demand equals short-run aggregate supply. c. aggregate demand equals short-run and long-run aggregate supply. d. short-run aggregate supply equals long-run aggregate supply.

c. aggregate demand equals short-run and long-run aggregate supply.

In the long run, the level of output is determined by the: a. interaction of supply and demand. b. money supply and the levels of government spending and taxation. c. amounts of capital and labor and the available technology. d. preferences of the public.

c. amounts of capital and labor and the available technology.

When GDP growth declines, investment spending typically ______ and consumption spending typically ______. a. increases; increases b. increases; decreases c. decreases; decreases d. decreases; increases

c. decreases; decreases

A difference between the economic long run and the short run is that: a. the classical dichotomy holds in the short run but not in the long run. b. monetary and fiscal policy affect output only in the long run. c. demand can affect output and employment in the short run, whereas supply is the ruling force in the long run. d. prices and wages are sticky in the long run o

c. demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______. a. output; output b. prices; prices c. prices; output d. output; prices

c. prices; output

The natural level of output is: a. affected by aggregate demand. b. the level of output at which the unemployment rate is zero. c. the level of output at which the unemployment rate is at its natural level. d. permanent and unchangeable.

c. the level of output at which the unemployment rate is at its natural level.

(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. a. B; C b. B; A c. E; D d. E; A

d. E; A

A favorable supply shock occurs when: a. environmental protection laws raise costs of production. b. the Fed increases the money supply. c. unions push wages up. d. an oil cartel breaks up and oil prices fall.

d. an oil cartel breaks up and oil prices fall.

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy. a. the quantity of output and the price level b. the quantity of output c. the price level d. neither the quantity of output nor the price level

d. neither the quantity of output nor the price level

Aggregate supply is the relationship between the quantity of goods and services supplied and the: a. money supply. b. unemployment rate. c. interest rate. d. price level.

d. price level.