Econ Chapter 12 Pearson Questions
According to mainstream business cycle theory, _______. A. the money wage rate is sticky and consequently if aggregate demand grows faster than potential GDP, an inflationary gap emerges B. in a business cycle expansion, short-run aggregate supply increases by more than aggregate demand C. the economy is always at full employment D. the money wage rate is sticky and consequently if aggregate demand grows faster than potential GDP, a recessionary gap emerges
A
An economy at a full-employment equilibrium experiences an increase in aggregate demand. The unemployment rate ______ its natural rate, and to return to the long-run equilibrium, the money wage rate begins to ______. A. falls below; rise B. rises above; fall C. falls below; fall D. rises above; rise
A
A cost-push rise in the price level can arise from an increase in _______. A. the money wage rate or money prices of raw materials B. the quantity of money C. exports D. government expenditure
A
Choose the correct statement. A. The long-run Phillips curve shifts rightward when the natural unemployment rises and leftward when the natural unemployment rate falls. B. The long-run Phillips curve shifts rightward when the expected inflation rate rises. C. The long-run Phillips curve shifts leftward when the expected inflation rate falls. D. The long-run Phillips curve shifts rightward when the inflation rate rises.
A
Choose the statement about real business cycle theory that is incorrect. A. Economists have not been able to isolate the RBC theory impulse. B. The impulse in RBC theory is the growth rate of productivity that results from technological change. C. Productivity fluctuations are correlated with real GDP fluctuations. D. The impulse in RBC theory is generated mainly by the process of research and development.
A
Choose the statement about the long-run Phillips curve that is incorrect. A. An unexpected increase in aggregate demand shifts the long-run Phillips curve rightward. B. It shows the relationship between inflation and unemployment when the actual inflation rate equals the expected inflation rate. C. It tells us that any expected inflation rate is possible at the natural unemployment rate. D. It is vertical at the natural unemployment rate.
A
Choose the statement that is incorrect. A. The price level falls if aggregate supply increases at a persistently slower rate than aggregate demand. B. During a period of deflation, the inflation rate is negative. C. An economy experiences deflation when it has a persistently falling price level. D. A one-time fall in the price level is not deflation.
A
If the expected inflation rate increases and the natural rate of unemployment remains constant, then _______. A. the short-run Phillips curve shifts upward and the long-run Phillips curve does not shift B. the long-run Phillips curve shifts rightward and the short-run Phillips curve does not shift C. the long-run Phillips curve shifts rightward and the short-run Phillips curve shifts rightward D. neither the long-run Phillips curve nor the short-run Phillips curve shifts
A
If the trend rate of change of velocity is 1 percent a year, potential GDP grows by 4 percent a year, and the money growth rate is 2 percent a year, what is the trend inflation rate? A. -1 percent a year B. 7 percent a year C. 1 percent a year D. -5 percent a year
A
In an expansion, an increase in the rate of technological change _______ investment demand. The real interest rate _______. A. increases; rises B. decreases; rises C. decreases; falls D. increases; falls
A
In real business cycle theory, all of the following events can be sources of fluctuation in productivity except _______. A. changes in the growth rate of money B. natural disasters C. climate fluctuations D. the pace of technological change
A
In ______ cycle theory, animal spirits are the main source of fluctuations in aggregate demand. In ______ cycle theory, fluctuations in both investment and consumption expenditure, driven by fluctuations in the growth rate of the quantity of money, are the main source of fluctuations in aggregate demand. A. Keynesian; monetarist B. new classical; new Keynesian C. monetarist; Keynesian D. new Keynesian; new classical
A
In ______ cycle theory, the rational expectation of the price level, which is determined by potential GDP and expected aggregate demand, determines the money wage rate and the position of the SAS curve. In ______ cycle theory, past rational expectations of the current price level influence the money wage rate and the position of the SAS curve. A. new classical; new Keynesian B. Keynesian; monetarist C. new Keynesian; new classical D. monetarist; Keynesian
A
Draw the short-run Phillips curve if the natural unemployment rate is 8 percent and the expected inflation rate is 2 percent a year. Label it. Draw a point at the natural unemployment rate and the expected inflation rate. Along the short-run Phillips curve, ______. A. the expected inflation rate and the natural unemployment rate are constant B. the expected inflation rate is constant and the natural unemployment rate varies C. the expected inflation rate varies and the natural unemployment rate is constant D. the expected inflation rate and the natural unemployment rate vary
A (graph is a point on SRPC curve at 8 and 2)
The graph shows the aggregate demand curve, short-run aggregate supply curve, and the long-run aggregate supply curve. Draw a curve that shows the effect of an increase in the quantity of money. Label it C1. Draw a curve that shows the money wage rate response that returns the economy to potential GDP. Label it C2. Draw a curve that shows the effect of another increase in the quantity of money. Label it C3. Draw a curve that shows the money wage rate response that returns the economy to potential GDP. Label it C4. Draw a point at the new price level and real GDP when the economy returns to its new long-run equilibrium.
AD increase upward for C1, SAS increase straight up for C2, repeat for C3 and C4, point intersection at C3 and C4
If the government increases its expenditure on goods and services and as a result, the money wage rate increases, the economy has experienced _______. A. demand-pull inflation B. a demand-pull rise in the price level C. demand-push inflation D. cost-push inflation
B
If the natural unemployment rate increases and the expected inflation rate remains constant, then ______. A. the long-run Phillips curve shifts rightward and the short-run Phillips curve does not shift B. the long-run Phillips curve shifts rightward and the short-run Phillips curve shifts rightward C. neither the long-run Phillips curve nor the short-run Phillips curve shifts D. the short-run Phillips curve shifts rightward and the long-run Phillips curve does not shift
B
In RBC theory, the lower the real interest rate, other things remaining the same, the ______ today. A. larger is the supply of labor B. smaller is the supply of labor C. higher is the money wage rate D. larger is the demand for labor
B
In real business cycle theory, _______ are the main source of economic fluctuations. A. unexpected changes in government expenditure B. random fluctuations in productivity C. random fluctuations in investment D. unexpected changes in the full-employment quantity of labor
B
The best forecast available, which is based on all the relevant information is called _______. A. a rational forecast B. a rational expectation C. a correct expectation D. a correct forecast
B
The figure shows the aggregate demand, short-run aggregate supply, and long-run aggregate supply curves for the economy of Tomorrowland. The economy is currently at point A. A demand-pull rise in the price level will initially move the economy to point _______ and to point _______. A. E; A when aggregate demand changes B. E when aggregate demand increases; D when the money wage rate rises C. C when the money wage rate rises; D when aggregate demand increases D. B when aggregate demand decreases; C when the money wage rate rises
B
The impulse in RBC theory is _______. A. unanticipated changes in aggregate demand B. the growth rate of productivity that results from technological change .C. the growth rate of the quantity of money D. future sales and profits
B
The graph shows an economy's aggregate demand curve, short-run aggregate supply curve, long-run aggregate supply curve, and equilibrium. Draw the AD curve when it is correctly expected that the inflation rate will be 10 percent a year. Label it. Draw the SAS curve when a change to the money wage rate occurs that correctly expects the increase in aggregate demand. Label it. Draw a point at the new equilibrium. When inflation is correctly anticipated, _______. A. the unemployment rate is zero B. the economy remains at full employment C. the economy moves between recession and expansion D. potential GDP increases
B ; AD curve upward shift, SAS curve equal shift, equilibrium point where they cross
The graph shows a short-run Phillips curve. Draw an arrow on the curve that shows the effect of an unexpected increase in aggregate demand. When aggregate demand unexpectedly increases, ______. A. the expected inflation rate increases B. the natural unemployment rate does not change C. the inflation rate decreases D. the natural unemployment rate decreases
B ; arrow upward on SRPC curve
Draw the short-run Phillips curve if the expected inflation rate is 5 percent a year. Label it SRPC1. Draw a point at the expected inflation rate and the natural unemployment rate. Label it 1. Draw the short-run Phillips curve if the expected inflation rate is 15 percent a year. Label it SRPC2. Draw a point at the expected inflation rate and the natural unemployment rate. Label it 2. A movement ______ along the short-run Phillips curve occurs when there is an ______ increase in aggregate demand. A. up; expected B. up; unexpected C. down; unexpected D. down; expected
B ; graph of SRPC1 crosses 5 inflation rate, SRPC2 crosses 15 inflation rate
The graph shows the aggregate demand curve, short-run aggregate supply curve, and long-run aggregate supply curve for this year. Draw a point at the price level and real GDP next year, if an inflation is correctly expected. If inflation is expected, _______. A. either a cost-push inflation or a demand-pull inflation occurs B. neither a cost-push inflation nor a demand-pull inflation occur C. a cost-push inflation occurs D. a demand-pull inflation occurs
B ; the point at price level and real GDP should be above SAS curve and along LAS curve
A rational expectation _______. A. predicts the inflation rate to be higher than it actually turns out to be B. predicts the inflation rate to be lower than it actually turns out to be C. will often turn out to be wrong, but no other forecast that could have been made with the information available could do better D. is a correct forecast
C
A stagflation can turn into a cost-push inflation process when _______. A. the money wage rate decreases B. the quantity of money persistently decreases C. the quantity of money persistently increases D. taxes consistently increase
C
According to mainstream business cycle theory, ______ grows at a steady rate and ______ grows at a fluctuating rate. A. potential GDP; short-run aggregate supply B. aggregate demand; long-run aggregate supply C. potential GDP; aggregate demand D. short-run aggregate supply; long-run aggregate supply
C
Along the long-run Phillips curve, _______. A. a fall in the inflation rate brings a higher unemployment rate Your answer is not correct.B. the inflation rate is constant C. the unemployment rate is constant at the natural unemployment rate D. an increase in the unemployment rate brings a lower inflation rate
C
An economy is at potential GDP when it experiences an increase in costs. The economy experiences _______. A. a rise in the price level and a decrease in potential GDP B. a rise in the price level and an increase in real GDP C. stagflation D. a fall in the price level and a decrease in real GDP
C
Deflation in Japan arose because _______. A. money wage rates decreased B. real wage rates decreased and the country's debt increased C. Japan's money stock did not grow fast enough to accommodate the growth of potential GDP and a trend rise in velocity. D. investment decreased and the capital stock increased more slowly than anticipated
C
When costs increase and the Fed wants to return the economy to full employment, the Fed responds by ______ the quantity of money. If the Fed continually responds to successive increases in costs, a ______ inflation evolves. A. decreasing; demand-pull B. decreasing; cost-push C. increasing; cost-push D. increasing; demand-pull
C
A stagflation can turn into a cost-push inflation process when _______. A. taxes consistently increase B. the quantity of money persistently decreases C. the money wage rate decreases D. the quantity of money persistently increases
D
Choose the correct statement about the U.S. short-run Phillips curve. A. U.S. inflation and unemployment data cannot be interpreted in terms of the short-run Phillips curve. B. The U.S. short-run Phillips curve has been shifting steadily upward since 2001. C. The U.S. short-run Phillips curve has been shifting steadily downward since 2001. D. We can interpret U.S. inflation and unemployment data in terms of a shifting short-run Phillips curve, which sometimes shifts upward and sometimes shifts downward.
D
Unanticipated deflation does all of the following except _______. A. redistributes income B. lowers real GDP C. diverts resources from production D. increases the velocity of circulation
D
The graph shows the aggregate demand curve, short-run aggregate supply curve, and long-run aggregate supply curve. Draw a curve that shows the effect of a rise in the price of oil. Label it. Draw a point at the new equilibrium in the economy. A rise in the price of oil creates _______. A. a recession that can be eliminated only by a decrease in potential GDP B. a one-time demand-pull rise in the price level C. a persistent increase in the price level D. a one-time cost-push rise in the price level
D ; SAS curve upward shift, point where SAS1 crosses AD curve
The natural unemployment rate is 6 percent and the expected inflation rate is 10 percent a year. Draw the long-run Phillips curve. Label it LRPC0. Draw the short-run Phillips curve. Label it SRPC0. Draw a point at the natural unemployment rate and the expected inflation rate. Label it 1. Now the natural unemployment rate rises to 9 percent with no change in the expected inflation rate. Draw and label LRPC1. Draw and label SRPC1. Draw a point at the natural unemployment rate and the expected inflation rate. Label it 2.
LRPC0 at 6%, LRPC1 rightward shift to 9% ; SRPC0 crosses at 10% inflation, SRPC1 crosses LRPC1 at 10%, points where both intersect
