Chapter 20

Suppose 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 the short-run aggregate supply will shift right.

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

According to the wealth effect, aggregate demand slopes downward (negatively) because

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

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause

b. prices to rise and output to remain unchanged.

Stagflation occurs when the economy experiences

b. rising prices and falling output.

In the model of aggregate demand and aggregate supply, the initial impact of an increase in consumer optimism is to

b. shift aggregate demand to the right.

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?

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

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

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

Policymakers are said to "accommodate" an adverse supply shock if they

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

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

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.

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?

d. Prices fall; output falls.

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?

d. Prices rise; output falls.

According to the interest-rate effect, aggregate demand slopes downward (negatively) because

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

The natural level of output is the amount of real GDP produced

when the economy is at the natural rate of unemployment.

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

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

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

Suppose 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

d. shift aggregate demand to the right.

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?

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