Chapter 11 Homework

(Exhibit: Supply Shock) Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point: a. A. b. B. c. C. d. D.

a. A.

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where: a. aggregate demand is greater than long-run aggregate supply. b. aggregate demand equals short-run aggregate supply. c. aggregate demand equals short-run and long-run aggregate supply. d. short-run aggregate supply equals long-run aggregate supply.

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

(Exhibit: Shift in Aggregate Demand) 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 ______. a. A; D b. D; A c. C; B d. B; C

c. C; B

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at D, then the long-run equilibrium will be at ____ with a _____ price level. a. B; higher b. B; lower c. C; higher d. C; lower

c. C; higher

An increase in the demand for money, at any given income level and level of interest rates, will, within the IS-LM framework, ______ output and ______ interest rates. a. increase; lower b. increase; raise c. lower; lower. d. lower; raise

d. lower; raise

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: a. both Central Bank A and Central Bank B should increase the quantity of money. b. Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. c. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. d. both Central Bank A and Central Bank B should keep the quantity of money stable.

a. both Central Bank A and Central Bank B should increase the quantity of money.

(Exhibit: Policy Interaction) Based on the graph, starting from equilibrium at interest rate r3, income Y2, IS1, and LM1, if there is an increase in government spending that shifts the IS curve to IS2, then in order to keep the interest rate constant, the Federal Reserve should _____ the money supply shifting to _____. a. increase; LM2 b. decrease; LM2 c. increase; LM3 d. decrease; LM3

a. increase; LM2

(Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM1 shifts to LM2 because the price level decreases from P1 to P2 then, holding other factors constant: a. the aggregate demand curve will shift to the right. b. the aggregate demand curve will shift to the left. c. this represents a movement up the aggregate demand curve. d. this represents a movement down the aggregate demand curve.

d. this represents a movement down the aggregate demand curve.

Exhibit: Shift in Aggregate Demand) In this graph, initially the economy is at point E, with the 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 AD2. The economy moves first to point ______ and then, in the long run, to point ______. a. A; D b. D; A c. A; B d. B; A

a. A; D

The aggregate demand curve generally slopes downward and to the right because, for any given money supply M a higher price level P causes a ______ real money supply M/P, which ______ the interest rate and ______ spending. a. lower; raises; reduces b. higher; lowers; increases c. lower; lowers; increases d. higher; raises; reduces Feedback

a. lower; raises; reduces

(Exhibit: Short Run to Long Run) Based on the graph, if the economy starts from a short-term equilibrium at A, then the long-run equilibrium will be at ____ with a _____ price level. a. B; higher b. B; lower c. C; higher d. C; lower

b. B; lower

An increase in investment demand for any given level of income and interest rates—due, for example, to an increase in business confidence about economic prospects—will, within the IS-LM framework, ______ output and ______ interest rates. a. increase; lower b. increase; raise c. lower; lower d. lower; raise

b. increase; raise

Starting from a short-run equilibrium greater than the natural rate of output, as the economy returns to a long-run equilibrium: a. both output and the price level will increase. b. output will decrease, but the price level will increase. c. output will increase, but the price level will decrease. d. both output and the price level will decrease.

b. output will decrease, but the price level will increase.

Exhibit: IS-LM to Aggregate Demand) Based on the graph, if LM3 shifts to LM2 because the money supply decreases from M3 to M2 then, holding other factors constant: a. the aggregate demand curve will shift to the right. b. the aggregate demand curve will shift to the left. c. this represents a movement up the aggregate demand curve. d. this represents a movement down the aggregate demand curve.

b. the aggregate demand curve will shift to the left.

Which of the following is an example of a demand shock? a. a large oil-price increase b. the introduction and greater availability of credit cards c. a drought that destroys agricultural crops d. unions obtain a substantial wage increase

b. the introduction and greater availability of credit cards

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 increase in the price of oil: a. both Central Bank A and Central Bank B should increase the quantity of money. b. Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. c. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. d. both Central Bank A and Central Bank B should keep the quantity of money stable.

c. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.

One policy response to the U.S. economic slowdown of 2001 was tax cuts. This policy response can be represented in the IS-LM model by shifting the ______ curve to the ______. a. LM; right b. LM; left c. IS; right d. IS; left

c. IS; right

An increase in the money supply shifts the ______ curve to the right, and the aggregate demand curve ______. a. IS; shifts to the right b. IS; does not shift c. LM: shifts to the right d. LM; does not shift

c. LM: shifts to the right

An economic change that does not shift the aggregate demand curve is a change in: a. the money supply. b. the investment function. c. the price level. d. taxes. Feedback

c. the price level.

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______. a. positive; money supply b. negative; money supply c. positive; price level d. negative; price level

d. negative; price level