ECN Chapter 10

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.

neither the quantity of output nor the price level

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

raises; and may also lower

Stagflation occurs when prices ______ and output ______.

rise; falls

The long-run aggregate supply curve is vertical at the level of output:

at which unemployment is at its natural rate.

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

confirm the short-run neutrality of money because prices and wage did not adjust immediately.

Most economists believe that prices are:

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

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P

higher; lower

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.

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

higher; lower

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

in the long run but lead to unemployment in the short run.

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

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

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.

lower; inward

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

negative; price level

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

only output; only 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 and employment will decrease in the short run.

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.

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

The "short run," represented by the recession that followed the decision to retire "greenbacks" after the Civil War, lasted approximately:

six years.

A decline in the Index of Supplier Deliveries is typically an indicator of a future ______ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future ______ in economic production.

slowdown; slowdown

Leading economic indicators are:

variables that tend to fluctuate in advance of the overall economy.

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

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

Stabilization policy:

aims at keeping output and employment at their natural rates.

A favorable supply shock occurs when:

an oil cartel breaks up and oil prices fall.

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

decrease; increase

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

The version of Okun's law studied in Chapter 9 assumes that, with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun's law predicts that real GDP would:

increase by 5 percent.

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

level of output but not prices.

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

technological progress; variations in labor-market utilization

The natural level of output is:

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