EC 111 Final

Refer to Figure 22-5. Starting from C and 3, in the long run, a decrease in money supply growth moves the economy to

a. A and 1.

According to the Phillips curve, policymakers would reduce inflation but raise unemployment if they

a. decreased the money supply.

Assuming a multiplier effect, but no crowding-out or investment-accelerator effects, a $100 billion increase in government expenditures shifts aggregate

a. demand rightward by more than $100 billion.

If policymakers decrease aggregate demand, then in the short run the price level

a. falls and unemployment rises.

The price of imported oil rises. If the government wanted to stabilize output, which of the following could it do?

a. increase government expenditures or increase the money supply

Which of the following policy alternatives would be an appropriate response to a sharp increase in investment spending, assuming policymakers want to stabilize output?

a. increase taxes

In the context of aggregate demand and aggregate supply, the wealth effect refers to the idea that, when the price level decreases, the real wealth of households

a. increases and as a result consumption spending increases. This effect contributes to the downward slope of the aggregate-demand curve.

Refer to Figure 21-2. As we move from one point to another along the money-demand curve MD1,

a. the price level is held fixed at P1.

The sticky-wage theory of the short-run aggregate supply curve says that the quantity of output firms supply will increase if

a. the price level is higher than expected making production more profitable.

Refer to Figure 20-1. An increase in the money supply would move the economy from C to

c. B in the short run and A in the long run.

Disinflation is defined as a

c. reduction in the rate of inflation.

The initial impact of an increase in an investment tax credit is to shift

a. aggregate demand right.

When the actual change in the price level differs from its expected change, which of the following can explain why firms might change their production?

a. both menu costs and mistaking a price level change for a change in relative prices

Refer to Figure 21-2. If the money-supply curve MS on the left-hand graph were to shift to the right, this would

a. represent an action taken by the Federal Reserve.

What, if anything, did policymakers do in response to the recession of 2001?

a. tax cuts and expansionary monetary policy

Refer to Figure 21-2. A decrease in Y from Y1 to Y2 is explained as follows:

b. An increase in P from P1 to P2 causes the money-demand curve to shift from MD1 to MD2; this shift of MD causes r to increase from r1 to r2; and this increase in r causes Y to decrease from Y1 to Y2.

Refer to Figure 22-5. Starting from C and 3, in the short run, an unexpected decrease in money supply growth moves the economy to

b. B and 2.

Which of the following statements is correct for the long run?

b. Output is determined by the amount of capital, labor, and technology; the interest rate adjusts to balance the supply and demand for loanable funds; the price level adjusts to balance the supply and demand for money.

If the central bank decreases the money supply, then in the short run prices

b. fall and unemployment rises.

Refer to Figure 22-5. The economy would move from C to B

b. in the short run if money supply growth decreased unexpectedly.

The aggregate quantity of goods and service demanded changes as the price level falls because

b. real wealth rises, interest rates fall, and the dollar depreciates.

Liquidity preference theory is most relevant to the

b. short run and supposes that the interest rate adjusts to bring money supply and money demand into balance.

Which of the following statements is correct?

c. Liquidity preference theory assumes the interest rate adjusts to bring the money market into equilibrium; classical theory assumes the price level adjusts to bring the money market into equilibrium.

If the stock market booms, then

c. aggregate demand increases, which the Fed could offset by decreasing the money supply.

An economic contraction caused by a shift in aggregate demand remedies itself over time as the expected price level

c. falls, shifting aggregate supply right.

Refer to Figure 22-5. The economy would move from 3 to 5

c. in the long run if money supply growth increases.

The misperceptions theory of the short-run aggregate supply curve says that the quantity of output supplied will increase if the price level

c. increases by more than expected so that firms believe the relative price of their output has increased.

In the long run inflation

c. is primarily determined by the rate of money supply growth while unemployment is primarily determined by labor market factors.

The sticky-price theory of the short-run aggregate supply curve says that when the price level is higher than expected, some firms will have

c. lower than desired prices which leads to an increase in the aggregate quantity of goods and services supplied.

Refer to Figure 21-2. What does Y represent on the horizontal axis of the right-hand graph?

c. real output

The short-run relationship between inflation and unemployment is often called

c. the Phillips curve.

Refer to Figure 20-1. If the economy starts at A and there is a fall in aggregate demand, the economy moves

c. to C in the long run.

The multiplier for changes in government spending is calculated as

d. 1/(1 - MPC).

Critics of stabilization policy argue that

d. All of the above are correct.

During recessions

d. All of the above are correct.

Refer to Figure 21-2. Assume the money market is always in equilibrium. Under the assumptions of the model, Which of the following statements is correct?

d. All of the above are correct.

Which of the following effects helps to explain the downward slope of the aggregate-demand curve?

d. All of the above are correct.

What is slope of the aggregate-demand curve?

d. As the price level increases, the interest rate rises, so spending falls.

Refer to Figure 22-5. Starting from C and 3, in the short run an unexpected increase in money supply growth moves the economy to

d. D and 4.

Refer to Figure 22-5. Starting from C and 3, in the long run, an increase in money supply growth moves the economy to

d. F and 5.

According to liquidity preference theory, the slope of the money demand curve is explained as follows:

d. People will want to hold more money as the cost of holding it falls.

Which of the following results in higher inflation and higher unemployment in the short run?

d. an adverse supply shock such as an increase in the price of oil

Proponents of rational expectations argued that the sacrifice ratio

d. could be low because people might adjust their expectations quickly if they found anti-inflation policy credible.

Other things the same, if the price level rises, people

d. decrease foreign bond purchases, so the supply of dollars in the market for foreign-currency exchange decreases.

When the money supply decreases

d. interest rates rise and so aggregate demand shifts left.

An increase in the expected price level shifts short-run aggregate supply to the

d. left, and an increase in the actual price level does not shift short-run aggregate supply.

Refer to Figure 20-1. If the economy is at A and there is a fall in aggregate demand, in the short run the economy

d. moves to D.

Refer to Figure 21-2. Which of the following quantities is held constant as we move from one point to another on either graph?

d. the expected rate of inflation

Shifts in the aggregate-demand curve can cause fluctuations in

d. the level of output and in the level of prices.

Refer to Figure 21-2. What is measured along the horizontal axis of the left-hand graph?

d. the quantity of money