Question 1

In the short run, when government purchases decrease, real GDP falls by more than the change in government purchases because

Accepted Answer

A) prices increase. 
B) taxes increase. 
C) consumption decreases. 
D) investment decreases. 
E) taxes decrease. 
A) prices increase. 
B) taxes increase. 
C) consumption decreases. 
D) investment decreases. 
E) taxes decrease.

Question 2

A change in the price of a key commodity such as oil, usually because of a shortage, that causes a shift in the inflation adjustment line is known as a

Accepted Answer

A) commodity shock. 
B) price shock. 
C) price revamping. 
D) disinflation. 
E) None of these 
A) commodity shock. 
B) price shock. 
C) price revamping. 
D) disinflation. 
E) None of these

Question 3

The long-run effect of a change in government spending will not cause real GDP to differ from its baseline value. However, in the long run, the values of the individual components of aggregate expenditure will differ from their baseline values. Why is this the case?

Accepted Answer

The change in government purch

Question 4

According to real business cycle theory, changes in real GDP are caused by

Accepted Answer

A) increases in aggregate demand. 
B) political changes. 
C) changes in the consumption level. 
D) changes in government spending. 
E) changes in technology. 
A) increases in aggregate demand. 
B) political changes. 
C) changes in the consumption level. 
D) changes in government spending. 
E) changes in technology.

Question 5

When Paul Volcker first started to head the Fed, the Federal Reserve began a policy of

Accepted Answer

A) reinflation. 
B) disinflation. 
C) accommodation. 
D) deflation. 
E) stagflation. 
A) reinflation. 
B) disinflation. 
C) accommodation. 
D) deflation. 
E) stagflation.

Question 6

A price shock is typically caused by a change in

Accepted Answer

A) aggregate demand. 
B) consumption. 
C) tax policy. 
D) government spending. 
E) aggregate supply. 
A) aggregate demand. 
B) consumption. 
C) tax policy. 
D) government spending. 
E) aggregate supply.

Question 7

The housing bubble and bust was partly caused by the Fed's policy of keeping low interest rates.

Accepted Answer

A) True 
 B)False

Question 8

Exhibit 25-1  
-Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the medium run as a result of the change in spending?

Accepted Answer

A) F 
B) D 
C) B 
D) E 
E) C 
A) F 
B) D 
C) B 
D) E 
E) C

Question 9

Explain why the Fed would ever pursue a policy to cause reinflation.

Accepted Answer

It seems unlikely the Fed would willingl

Question 10

An increase in government purchases

Accepted Answer

A) has a positive effect on real GDP in the long run. 
B) has a negative effect on real GDP in the long run. 
C) results in a lower rate of inflation in the long run. 
D) results in lower interest rates in the long run. 
E) results in a higher rate of inflation in the long run. 
A) has a positive effect on real GDP in the long run. 
B) has a negative effect on real GDP in the long run. 
C) results in a lower rate of inflation in the long run. 
D) results in lower interest rates in the long run. 
E) results in a higher rate of inflation in the long run.

Question 11

The difference between the medium run and the long run is that inflation is constant in the long run.

Accepted Answer

A) True 
 B)False

Question 12

Assume that real and potential GDP are initially equal. If government purchases permanently increase, we would expect that in the short run

Accepted Answer

A) consumption and investment will be higher than baseline, and net exports will be lower. 
B) consumption will be higher than baseline, and net exports and investment will be the same. 
C) consumption, investment, and net exports will be higher than baseline. 
D) consumption and net exports will be higher than baseline, and investment will be the same. 
E) consumption will be higher than baseline, net exports will be lower, and investment will be the same. 
A) consumption and investment will be higher than baseline, and net exports will be lower. 
B) consumption will be higher than baseline, and net exports and investment will be the same. 
C) consumption, investment, and net exports will be higher than baseline. 
D) consumption and net exports will be higher than baseline, and investment will be the same. 
E) consumption will be higher than baseline, net exports will be lower, and investment will be the same.

Question 13

If exports increase, investment and consumption will be lower in the long run.

Accepted Answer

A) True 
 B)False

Question 14

When government purchases decline, the Fed can prevent a change in inflation or real GDP by increasing the target rate of inflation.

Accepted Answer

A) True 
 B)False

Question 15

In 2008, stock markets in the United States and worldwide registered

Accepted Answer

A) increases of 30-50%. 
B) decreases of 30-50%. 
C) decreases of 5-10%. 
D) increases of 5-10%. 
E) decreases of over 100%. 
A) increases of 30-50%. 
B) decreases of 30-50%. 
C) decreases of 5-10%. 
D) increases of 5-10%. 
E) decreases of over 100%.

Question 16

Discuss why the Fed may in some cases need to cause a small recession to reduce inflation in the economy. Hint: Think about how firms set their prices.

Accepted Answer

Firms make pricing decisions based on th

Question 17

If a shock to aggregate demand occurs, the period of the initial change in real GDP is called

Accepted Answer

A) the short run. 
B) the medium run. 
C) the long run. 
D) a recovery. 
E) the steady state. 
A) the short run. 
B) the medium run. 
C) the long run. 
D) a recovery. 
E) the steady state.

Question 18

Monetary policy that attempts to increase the rate of inflation is called a

Accepted Answer

A) reinflation. 
B) supply shock. 
C) recession. 
D) temporary growth slowdown. 
E) disinflation. 
A) reinflation. 
B) supply shock. 
C) recession. 
D) temporary growth slowdown. 
E) disinflation.

Question 19

The long-run interest rate effect of decreased government purchases is that

Accepted Answer

A) consumption is lower, and investment is higher. 
B) consumption and net exports are the same, and investment is higher. 
C) investment is higher. 
D) consumption, investment, and net exports are all higher. 
E) consumption and net exports are higher. 
A) consumption is lower, and investment is higher. 
B) consumption and net exports are the same, and investment is higher. 
C) investment is higher. 
D) consumption, investment, and net exports are all higher. 
E) consumption and net exports are higher.

Question 20

Exhibit 25-1  
-Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the long run as a result of the change in spending?

Accepted Answer

A) F 
B) D 
C) B 
D) E 
E) C 
A) F 
B) D 
C) B 
D) E 
E) C

Exam 25: Using the Economic Fluctuations Model

In the short run, when government purchases decrease, real GDP falls by more than the change in government purchases because

A change in the price of a key commodity such as oil, usually because of a shortage, that causes a shift in the inflation adjustment line is known as a

The long-run effect of a change in government spending will not cause real GDP to differ from its baseline value. However, in the long run, the values of the individual components of aggregate expenditure will differ from their baseline values. Why is this the case?

According to real business cycle theory, changes in real GDP are caused by

When Paul Volcker first started to head the Fed, the Federal Reserve began a policy of

A price shock is typically caused by a change in

The housing bubble and bust was partly caused by the Fed's policy of keeping low interest rates.

Exhibit 25-1 -Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the medium run as a result of the change in spending?

Explain why the Fed would ever pursue a policy to cause reinflation.

An increase in government purchases

The difference between the medium run and the long run is that inflation is constant in the long run.

Assume that real and potential GDP are initially equal. If government purchases permanently increase, we would expect that in the short run

If exports increase, investment and consumption will be lower in the long run.

When government purchases decline, the Fed can prevent a change in inflation or real GDP by increasing the target rate of inflation.

In 2008, stock markets in the United States and worldwide registered

Discuss why the Fed may in some cases need to cause a small recession to reduce inflation in the economy. Hint: Think about how firms set their prices.

If a shock to aggregate demand occurs, the period of the initial change in real GDP is called

Monetary policy that attempts to increase the rate of inflation is called a

The long-run interest rate effect of decreased government purchases is that

Exhibit 25-1 -Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the long run as a result of the change in spending?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

The Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

Filters