Econ 102, Chapter 10
Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:
2.5 percent in the short run but will return to its natural rate in the long run.
(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
(Exhibit: Supply Shock) Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point:
A
In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:
aggregate demand equals short-run aggregate supply.
In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:
aggregate demand equals short-run and long-run aggregate supply.
The relationship between the quantity of output demanded and the aggregate price level is called:
aggregate demand.
The relationship between the quantity of goods and services supplied and the price level is called:
aggregate supply.
In the long run, the level of output is determined by the:
amounts of capital and labor and the available technology.
(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 ______.
C; B
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:
Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it.
(Exhibit: Supply Shock) In this graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium.
E; A
The statistical relationship between changes in real GDP and changes in the unemployment rate is called:
Okun's law.
The short-run aggregate supply curve is horizontal at:
a fixed price level.
Which of the following is an example of a demand shock?
the introduction and greater availability of credit cards
The natural level of output is:
the level of output at which the unemployment rate is at its natural level.
Along an aggregate demand curve, which of the following are held constant?
the money supply and velocity
The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on
the money supply.
A favorable supply shock occurs when:
an oil cartel breaks up and oil prices fall.
The long-run aggregate supply curve is vertical at the level of output:
at which unemployment is at its natural rate.
The price level decreases and output increases in the transition from equilibrium is _____ the natural rate of output in the short run.
below
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 increase the quantity of money.
Short-run fluctuations in output and employment are called:
business cycles.
The economic response to the overnight reduction in the French money supply by 20 percent in 1724,
confirmed that money is not neutral in the short run because both output and prices dropped.
Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was:
coordination failure.
If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will ______ and output will ______.
decrease; increase
According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased:
decreases
When GDP growth declines, investment spending typically ______ and consumption spending typically ______.
decreases; decreases
Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by:
decreasing the money supply.
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 assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:
demand for real balances per unit of output.
When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift:
downward and to the left.
If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right.
downward; flatter
The long run refers to a period:
during which prices are flexible.
The short run refers to a period:
during which prices are sticky and unemployment may occur.
If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then:
every point on the aggregate demand curve moves 5 percent to the left.
If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:
fall and in the long run prices will fall.
In the mid-1980s, oil prices ______, inflation was ______, and the unemployment rate ______.
fell; low; declined
Most economists believe that prices are:
flexible in the long run but many are sticky in the short run.
When the French money supply was reduced by 45 percent over a period of seven months in 1724, the only values in the economy that adjusted fully and instantaneously were:
foreign exchange rates.
When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
greater; outward
For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are ______, generating a ______ quantity of output demanded.
higher; greater
According to the quantity theory of money, 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
The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.
higher; lower
Most economists believe that the classical dichotomy:
holds approximately in the long run but not at all in the short run
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 fell by 1 percentage point over a year, Okun's law predicts that real GDP would:
increase by 5 percent.
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
(Exhibit: Shift in Aggregate Demand) Assume that the economy is initially at point A with aggregate demand given by AD2. A shift in the aggregate demand curve to AD0 could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity.
increase; increase
A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the _____.
increase; right
Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by:
increasing the money supply, but at the cost of permanently higher prices.
Business cycles are
irregular and unpredictable.
If all prices are stuck at a predetermined level, then when a short-run (Y) along the horizontal axis and the price level (P) along the vertical aggregate supply curve is drawn with real GDP axis, this curve:
is horizontal.
Over the business cycle, investment spending ______ consumption spending.
is more volatile than
When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
is vertical.
When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
lower; inward
If the short-run aggregate supply curve is horizontal, then the:
money supply cannot affect prices in the short run.
The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.
negative; price level
Okun's law is the ______ relationship between real GDP and the ______.
negative; unemployment rate
Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.
neither the quantity of output nor the price level
Alan Blinder's survey of firms found that the typical firm adjusts its prices:
once or twice a year.
If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run.
only output; only prices
If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:
output and employment will decrease in the short run.
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 begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run prices ______ and output returns to its original level.
output decreases and prices are unchanged; fall
Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government:
output will rise in the short run and prices will rise in the long 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
Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run.
output; prices
Aggregate supply is the relationship between the quantity of goods and services supplied and the:
price level.
If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
prices but not level of output.
In the short run, a favorable supply shock causes:
prices to fall and output to rise.
In the short run an adverse supply shock causes:
prices to rise and output to fall.
If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:
prices will fall 5 percent in the long run.
A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______.
prices; output
An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output.
raises; and may also lower
Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.
real
Stabilization policy refers to policy actions aimed at:
reducing the severity of short-run economic fluctuations.
Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:
return to the old level and output will be restored to the natural rate.
If the Fed reduces the money supply by 5 percent, then the real interest rate will:
rise in the short run but return to its original equilibrium level in the long run.
Stagflation occurs when prices ______ and output ______.
rise; falls
The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance.
six to nine months
A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.
slowdown; slowdown
(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; D
(Exhibit: Supply Shock) Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium.
B; A
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.
If the demand for money increases, this will:
decrease velocity.
A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:
in the long run but lead to unemployment in the short run.
Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:
in the long run, but not in the short run.
If the Fed accommodates an adverse supply shock, output falls ______ and prices rise ______.
less; more
If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:
level of output but not prices.
Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.
technological progress; variations in labor-market utilization
A supply shock does not occur when:
the Fed increases the money supply.
All of the following are suggested by the results of Alan Blinder's survey of firms except:
there is only one theory of price stickiness.
Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.
two
Leading economic indicators are:
variables that tend to fluctuate in advance of the overall economy.
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
On two occasions in the 1970s:
world oil prices rose rapidly, inflation was high, and the unemployment rate was high.
