Set 1

When GDP growth declines, investment spending typically ______ and consumption spending typically ______.

decreases; decreases

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:

downward and to the left.

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 government-purchases multiplier indicates how much ______ change(s) in response to a $1 change in government purchases.

income

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

is horizontal.

In the Keynesian-cross model with a given MPC, the government-expenditure multiplier ______ the tax multiplier (in absolute value).

is larger than

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

Equilibrium levels of income and interest rates are ______ related in the goods and services market, and equilibrium levels of income and interest rates are ______ related in the market for real money balances.

negatively; positively

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

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.

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.

prices; output

The intersection of the IS and LM curve determines the values of:

r and Y, given G, T, M, and P.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

With planned expenditure and the equilibrium condition Y = PE drawn on a graph with income along the horizontal axis, if income exceeds expenditure, then income is to the ______ of equilibrium income and there is unplanned inventory ______.

right; accumulation

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

The IS curve shifts when any of the following economic variables change except:

the interest rate.

According to the analysis underlying the Keynesian cross, when planned expenditure exceeds income:

unplanned inventory investment is negative.

A decrease in the nominal money supply, other things being equal, will shift the LM curve:

upward and to the left.

The relationship between the quantity of output demanded and the aggregate price level is called:

aggregate demand.

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.

In the Keynesian-cross model, if the MPC equals 0.55, then a $500 million increase in government spending increases planned expenditures by ______ and increases the equilibrium level of income by ______.

$500 million; more than $500 million

Assume that the money demand function is (M/P)d = 1000 - 100r, where r is the interest rate in percent. The price level P is 2. If the price level is fixed and the Fed wants to fix the interest rate at 5 percent, it should set the money supply at:

1,000

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 ______.

C; B

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