ECON 405 CH 10

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; inward greater; outward lower; inward lower; outward

greater; outward

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. higher; lower lower; lower higher; higher lower; higher

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. lower; higher higher; lower lower; lower higher; higher

higher; lower

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 increase; left decrease; left decrease; right

increase; right

Over the business cycle, investment spending ______ consumption spending. is more volatile than is less volatile than has about the same volatility as is inversely correlated with

is more volatile than

Okun's law is the ______ relationship between real GDP and the ______. negative; inflation rate negative; unemployment rate positive; inflation rate positive; unemployment rate

negative; unemployment rate

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: does not change. may either increase or decrease. increases. decreases.

decreases.

A difference between the economic long run and the short run is that: monetary and fiscal policy affect output only in the long run. prices and wages are sticky in the long run only. the classical dichotomy holds in the short run but not in the long run. demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

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. prices will rise in both the short run and the long run. output will rise in both the short run and the long run. prices will rise in the short run and output will rise in the long run.

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; output prices; output output; prices prices; prices

output; prices

he assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant: price level in the short run. short-run aggregate supply curve. demand for real balances per unit of output. long-run aggregate supply curve.

demand for real balances per unit of output.

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: the supply of capital. technology. the money supply. the labor supply.

the money supply.

Exhibit: Shift in Aggregate Demand Reference: Ref 10-1 (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 ______. B; C D; A C; B A; D

C; B

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run. either above or below below equal to above

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

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

The aggregate demand curve tells us possible: combinations of M and Y for a given value of P. combinations of P and Y for a given value of M. results if the Federal Reserve reduces the money supply. combinations of M and P for a given value of Y.

combinations of P and Y for a given value of M.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in: both the short run and the long run. in neither the short run nor the long run. in the long run, but not in the short run. in the short run, but not in the long run.

in the long run, but not 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. increase by 4 percent. decrease by 1 percent. decrease by 2 percent.

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 currency but decrease the demand for checking accounts. decrease the demand for money. increase the demand for money. have no effect on the demand for money.

increase the demand for money.

Stabilization policy refers to policy actions aimed at: preventing increases in the poverty rate. equalizing incomes of households in the economy. reducing the severity of short-run economic fluctuations. maintaining constant shares of output going to labor and capital.

reducing the severity of short-run economic fluctuations.