Ch 10

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

If Central 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 increases the quantity of money

In this graph, initially the economy is at point E, with price P0 and output Ȳ 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

Assuming velocity is constant, the aggregate demand curve tells us possible:

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

The version of Okun's law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would:

decrease by 1 percent

A difference between the economic long run and the short run is that:

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

The short run refers to a period:

during which prices are sticky and cyclical unemployment may occur.

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

higher; lower

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

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

Over the business cycle, investment spending ______ consumption spending

is more volatile than

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 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

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

the introduction and greater availability of credit cards

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on:

the money supply.

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

weaker; stronger