ECON - Chapter 20

According to the wealth effect, aggregate demand slopes downward because _______. a. lower prices increase the value of money holdings and consumer spending increases b. lower prices decrease the value of money holdings and consumer spending decreases c. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases d. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls

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

According to the interest-rate effect, aggregate demand slopes downward because _______. a. lower prices reduce money holdings, increase lending, interest rates fall, and investment spending increases b. lower prices decrease the value of money holdings and consumer spending decreases c. lower prices increase the value of money holdings and consumer spending increases d. lower prices increase money holdings, decrease lending, interest rates rise, and investment spending falls

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

Suppose the economy is operating in a recession such as point B in the graph. 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 b. people will raise their price expectations and the short-run aggregate supply will shift left c. people will raise their price expectations and aggregate demand will shift left d. people will reduce their price expectations and aggregate demand will shift right

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 b. sticky-price theory of the short-run aggregate-supply curve c. misperceptions theory of the short-run aggregate-supply curve d. classical theory of the long-run aggregate-supply curve

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

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in investment spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the long run? a. Prices rise and output is unchanged from its initial value. b. Prices fall and output is unchanged from its initial value. c. Output rises and prices are unchanged from the initial value. d. Output falls and prices are unchanged from the initial value. e. Output and the price level are unchanged from their initial values.

b. Prices fall and output is unchanged from its initial value.

Suppose the economy is initially in long-run equilibrium. Then suppose there is a sudden rise in the price of crude oil due to a military conflict in the Middle East. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices rise and output rises. b. Prices rise and output falls. c. Prices fall and output falls. d. Prices fall and output rises.

b. Prices rise and output falls.

According to the model of aggregate supply and aggregate demand, in the long run, an increase in the money supply should cause _______. a. prices to fall and output to remain unchanged b. prices to rise and output to remain unchanged c. prices to rise and output to rise d. prices to fall and output to fall

b. prices to rise and output to remain unchanged

Policymakers are said to "accommodate" an adverse supply shock if they _______. a. respond to the adverse supply shock by decreasing short-run aggregate supply b. respond to the adverse supply shock by increasing aggregate demand, which further raises prices c. fail to respond to the adverse supply shock and allow the economy to adjust on its own d. respond to the adverse supply shock by decreasing aggregate demand, which lowers prices

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

Which of the following events shifts the short-run aggregate-supply curve to the right? a. An increase in government spending on health care b. An increase in price expectations c. A drop in oil prices d. A decrease in the money supply e. None of the answer choices are correct.

c. A drop in oil prices

Suppose the economy is initially in long-run equilibrium. Then suppose there is a reduction in investment spending. According to the model of aggregate demand and aggregate supply, what happens to prices and output in the short run? a. Prices rise and output rises. b. Prices rise and output falls. c. Prices fall and output falls. d. Prices fall and output rises

c. Prices fall and output falls.

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 effect d. The exchange-rate effect e. All of the answer choices are reasons why the aggregate-demand curve slopes downward.

c. The classical effect

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

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 _______. a. classical theory of the long-run aggregate-supply curve b. sticky-price theory of the short-run aggregate-supply curve c. misperceptions theory of the short-run aggregate-supply curve d. sticky-wage theory of the short-run aggregate-supply curve

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

Which of the following would not cause a shift in the long-run aggregate-supply curve? a. A change in the available labor b. A change in the available capital c. A change in the available technology d. A change in price expectations e. All of the answer choices shift the long-run aggregate-supply curve

d. A change in price expectations

Stagflation occurs when the economy experiences _______.

d. rising prices and falling output

In the model of aggregate demand and aggregate supply, the initial impact of a decrease in consumer optimism is to _______. a. shift short-run aggregate supply to the right b. shift short-run aggregate supply to the left c. shift aggregate demand to the right d. shift aggregate demand to the left e. shift long-run aggregate supply to the right

d. shift aggregate demand to the left

the natural level of output is the amount of real GDP produced _______. a. when there is no unemployment b. when the government has a balanced budget c. when the economy is at the natural level of consumption d. when the economy is at the natural rate of unemployment

d. when the economy is at the natural rate of unemployment

Suppose the economy is initially in long-run equilibrium. Then suppose there is a sudden rise in the price of crude oil due to a military conflict in the Middle East. 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? a. Prices rise and output is unchanged from its initial value. b. Prices fall and output is unchanged from its initial value. c. Output rises and prices are unchanged from the initial value. d. Output falls and prices are unchanged from the initial value. e. Output and the price level are unchanged from their initial values.

e. Output and the price level are unchanged from their initial values.