Macrotheory Chapter 11

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

Business cycles are:v

irregular and unpredictable.

Stabilization policy refers to policy actions aimed at:

reducing the severity of short-run economic fluctuations.

Stagflation—lower output and higher prices—is caused by

an adverse shock to aggregate supply

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.

aggregate demand shifters

consumer spending, investment spending, government spending (change in money supply)

The version of Okun's law studied in Chapter 11 assumes that with no change in unemployment, real gross domestic product (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.

In a typical recession, consumption ____________. Investment moves in the same direction but proportionately ____________.

falls, more

1. If a computer glitch at credit card companies makes stores start accepting only cash payments, the demand for money will ____

increase

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

Over the business cycle, investment spending _____ consumption spending.

is more volatile than

If the Fed responds to an adverse supply shock by expanding the money supply, it will

keep the economy closer to its natural levels of output and employment.

If the money supply is held constant, the aggregate demand curve will shift to the _____

left

Okun's Law

negative relationship between unemployment and GDP

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.

In the short run, a favorable supply shock causes:

prices to fall and output to rise.

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

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

Using the aggregate demand-aggregate supply (AD-AS) model, the economic downturn caused by Covid-19 can be BEST described by a:

leftward shift of LRAS and leftward shift of AD.

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 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.

Which of the following changes would contribute to a decline in the index of leading indicators, suggesting that a recession is more likely?

a decline in the slope of the yield curve

If the Fed accommodates an adverse supply shock, output falls _____, and prices rise _____.

less; more

Measures of average workweeks and building permits for new housing units are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity and increased permits for new units tend to indicate _____ future economic activity.

weaker; stronger

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.

Since the Covid-19 health crisis caused many businesses to temporarily shut down and lay off their workers, there was a(n) _____ in the natural rate of unemployment and the long-run aggregate supply (LRAS) curve shifted _____.

increase; left

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.

prices; output

An expansion in aggregate demand increases____ in the short run In the long run, however, it increases only the _____

real GDP, price level