CH. 20 Practice

Stagflation occurs when the economy experiences a. rising prices and rising output. b. falling prices and falling output. c. rising prices and falling output. d. falling prices and rising output.

c. rising prices and falling output.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices rise; output falls. b. Prices fall; output rises. c. Prices fall; output falls. d. Prices rise; output rises.

a. Prices rise; output falls.

An increase in the aggregate demand for goods and services has a larger impact on output ________ and a larger impact on the price level ________. a. in the short run; in the long run b. in the short run; also in the short run c. in the long run; also in the long run d. in the long run; in the short run

a. in the short run; in the long run

Which of the following statements is true regarding the long-run aggregate-supply curve? The long-run aggregate-supply curve a. is vertical because an equal change in all prices and wages leaves output unaffected. b. is positively sloped because price expectations and wages tend to be fixed in the long run. c. shifts left when the natural rate of unemployment falls. d. shifts right when the government raises the minimum wage.

a. is vertical because an equal change in all prices and wages leaves output unaffected.

According to the interest-rate effect, aggregate demand slopes downward (negatively) because a. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. b. lower prices increase the value of money holdings and consumer spending increases. c. lower prices decrease the value of money holdings and consumer spending decreases. d. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls.

a. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases.

In the model of aggregate demand and aggregate supply, the quantity of ________ is on the horizontal axis, and the ________ is on the vertical axis. a. output; price level b. money; interest rate c. output; interest rate d. money; price level

a. output; price level

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause a. prices to rise and output to remain unchanged. b. prices to fall and output to remain unchanged. c. prices to fall and output to fall. d. prices to rise and output to rise.

a. prices to rise and output to remain unchanged.

The natural level of output is the amount of real GDP produced a. when the economy is at the natural rate of unemployment. b. when there is no unemployment. c. when the economy is at the natural level of investment. d. when the economy is at the natural level of aggregate demand.

a. when the economy is at the natural rate of unemployment.

A sudden increase in business pessimism shifts the aggregate-________ curve, leading to ________ output. a. demand; higher b. demand; lower c. supply; higher d. supply; lower

b. demand; lower

According to the wealth effect, aggregate demand slopes downward (negatively) because a. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases. b. lower prices increase the value of money holdings and consumer spending increases. c. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls. d. lower prices decrease the value of money holdings and consumer spending decreases.

b. lower prices increase the value of money holdings and consumer spending increases.

Q17Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers wished to move output to its long-run natural level, they should attempt to a. shift short-run aggregate supply to the left. b. shift aggregate demand to the right. c. shift aggregate demand to the left. d. shift short-run aggregate supply to the right.

b. shift aggregate demand to the right.

The aggregate-demand curve slopes downward because a fall in the price level causes a. real wealth to decrease. b. the interest rate to decline. c. the currency to appreciate. d. All of the above

b. the interest rate to decline.

According to classical macroeconomic theory and monetary neutrality, changes in the money supply affect a. the unemployment rate. b. real GDP. c. the GDP deflator. d. none of the above.

c. GDP deflator

Suppose the economy is initially in long-run equilibrium. Then suppose there is a drought that destroys much of the wheat crop. If policymakers allow the economy to adjust to long-run equilibrium on its own, according to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Prices fall; output is unchanged from its initial value. b. Output falls; prices are unchanged from the initial value. c. Output and the price level are unchanged from their initial values. d. Output rises; prices are unchanged from the initial value. e. Prices rise; output is unchanged from its initial value.

c. Output and the price level are unchanged from their initial values.

Which of the following events shifts the short-run aggregate-supply curve to the right? a. an increase in government spending on military equipment b. an increase in price expectations c. a drop in oil prices d. a decrease in the money supply e. none of the above

c. a drop in oil prices

When the economy goes into a recession, real GDP ________ and unemployment ________. a. rises; falls b. falls; falls c. falls; rises d. rises; rises

c. falls; rises

Stagflation is caused by a a. rightward shift in the aggregate-supply curve. b. rightward shift in the aggregate-demand curve. c. leftward shift in the aggregate-supply curve. d. leftward shift in the aggregate-demand curve.

c. leftward shift in the aggregate-supply curve.

Suppose the price level falls but suppliers only notice that the price of their particular product has fallen. Thinking there has been a fall in the relative price of their product, they cut back on production. This is a demonstration of the a. sticky-wage theory of the short-run aggregate-supply curve. b. classical dichotomy theory of the short-run aggregate-supply curve. c. misperceptions theory of the short-run aggregate-supply curve. d. sticky-price theory of the short-run aggregate-supply curve.

c. misperceptions theory of the short-run aggregate-supply curve.

One reason the short-run aggregate-supply curve slopes upward is that a higher price level a. raises real wages if nominal wages are sticky. b. reduces nominal wages if real wages are sticky. c. reduces real wages if nominal wages are sticky. d. raises nominal wages if real wages are sticky.

c. reduces real wages if nominal wages are sticky.

Suppose the price level falls. Because of fixed nominal wage contracts, firms become less profitable and they cut back on production. This is a demonstration of the a. sticky-price theory of the short-run aggregate-supply curve. b. misperceptions theory of the short-run aggregate-supply curve. c. sticky-wage theory of the short-run aggregate-supply curve. d. classical dichotomy theory of the short-run aggregate-supply curve.

c. sticky-wage theory of the short-run aggregate-supply curve.

Which of the following is not a reason why the aggregate-demand curve slopes downward? a. the wealth effect b. the interest-rate effect c. the classical dichotomy/monetary neutrality effects d. the exchange-rate effect e. All of the above are reasons why the aggregate-demand curve slopes downward.

c. the classical dichotomy/monetary neutrality effects

A change in which of the following would shift the short-run aggregate-supply curve but not the long-run aggregate-supply curve? a. the capital stock b. the labor force c. the expected price level d. the state of technology

c. the expected price level

Which of the following statements about economic fluctuations is true? a. A recession is when output rises above the natural level of output. b. A depression is a mild recession. c. Economic fluctuations have been termed the "business cycle" because the movements in output are regular and predictable. d. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together. e. None of the above is true.

d. A variety of spending, income, and output measures can be used to measure economic fluctuations because most macroeconomic quantities tend to fluctuate together.

Which of the following would shift the aggregate-demand curve to the left? a. A decline in the stock market b. An increase in taxes c. A decrease in government spending d. All of the above

d. All of the above

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices rise; output rises. b. Prices fall; output rises. c. Prices rise; output falls. d. Prices fall; output falls.

d. Prices fall; output falls.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in military spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Output falls; prices are unchanged from the initial value. b. Output rises; prices are unchanged from the initial value. c. Output and the price level are unchanged from their initial values. d. Prices fall; output is unchanged from its initial value. e. Prices rise; output is unchanged from its initial value

d. Prices fall; output is unchanged from its initial value.

Which of the following would not cause a shift in the long-run aggregate-supply curve? a. an increase in the available labor b. an increase in the available capital c. an increase in the available technology d. an increase in price expectations e. All of the above shift the long-run aggregate-supply curve.

d. an increase in price expectations

Recessions occur a. regularly, about every 12 years. b. regularly, about every 7 years. c. regularly, about every 3 years. d. irregularly.

d. irregularly.

Most economists believe that classical macroeconomic theory a. is never valid. b. is always valid. c. is valid only in the short run. d. is valid only in the long run

d. is valid only in the long run

Q18Suppose the economy is operating in a recession such as point B in Exhibit 4. If policymakers allow the economy to adjust to the long-run natural level on its own, a. people will reduce their price expectations and aggregate demand will shift right. b. people will raise their price expectations and aggregate demand will shift left. c. people will raise their price expectations and the short-run aggregate supply will shift left. d. people will reduce their price expectations and the short-run aggregate supply will shift right.

d. people will reduce their price expectations and the short-run aggregate supply will shift right.

Policymakers are said to "accommodate" an adverse supply shock if they a. respond to the adverse supply shock by decreasing short-run aggregate supply. b. respond to the adverse supply shock by decreasing aggregate demand, which lowers prices. c. fail to respond to the adverse supply shock and allow the economy to adjust on its own. d. respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

d. respond to the adverse supply shock by increasing aggregate demand, which further raises prices.

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to a. shift short-run aggregate supply to the left. b. shift aggregate demand to the left. c. shift long-run aggregate supply to the left. d. shift short-run aggregate supply to the right. e. shift aggregate demand to the right.

e. shift aggregate demand to the right.