Deck 10: Introduction to Economic Fluctuations

Question 1

Along an aggregate demand curve, which of the following are held constant?

A)real output and prices
B)nominal output and velocity
C)the money supply and real output
D)the money supply and velocity

Answer 1

the money supply and velocity

Question 2

The version of Okun's law studied in Chapter 10 assumes that when real GDP grows at 2.88 percent over a year, the unemployment rate does not change. If real GDP instead grows at 1.88 percent over a year, Okun's law predicts that unemployment would:

A)increase by 0.33 percent.
B)decrease by 0.33 percent.
C)decrease by 3 percent.
D)increase by 3 percent.

Answer 2

increase by 0.33 percent.

Question 3

Okun's law is the _____ relationship between real GDP and the _____.

A)negative; unemployment rate
B)negative; inflation rate
C)positive; unemployment rate
D)positive; inflation rate

Answer 3

negative; unemployment rate

Question 4

Measures of average workweeks and of new orders for durable goods are included in the index of leading indicators, because shorter workweeks tend to indicate _____ future economic activity, and more robust orders tend to indicate _____ future economic activity.

A)stronger; stronger
B)stronger; weaker
C)weaker; stronger
D)weaker; weaker

Question 5

The aggregate demand curve is the _____ relationship between the quantity of output demanded and the _____.

A)positive; money supply
B)negative; money supply
C)positive; price level
D)negative; price level

Question 6

Leading economic indicators are:

A)the most popular economic statistics.
B)data that are used to construct the consumer price index and the unemployment rate.
C)variables that tend to fluctuate in advance of the overall economy.
D)data that are computed by the Bank of Canada.

Question 7

Recessions typically, but not always, include at least _____ consecutive quarters of declining real GDP.

A)two
B)four
C)six
D)eight

Question 8

When GDP growth declines, investment spending typically _____ and consumption spending typically _____.

A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Question 9

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

A)in both the short run and the long run.
B)in neither the short nor the long run.
C)in the short run but lead to unemployment in the long run.
D)in the long run but lead to unemployment in the short run.

Question 10

A difference between the economic long run and the short run is that:

A)the classical dichotomy holds in the short run but not in the long run.
B)monetary and fiscal policy affect output only in the long run.
C)demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
D)prices and wages are sticky in the long run only.

Question 11

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.

A)real
B)nominal
C)real and nominal
D)neither real nor nominal

Question 12

Over the business cycle, investment spending _____ consumption spending.

A)is inversely correlated with
B)is more volatile than
C)has about the same volatility as
D)is less volatile than

Question 13

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

A)short-run aggregate supply curve.
B)long-run aggregate supply curve.
C)price level in the short run.
D)demand for real balances per unit of output.

Question 14

Long-run growth in real GDP is determined primarily by _____, while short-run movements in real GDP are associated with _____.

A)variations in labour-market utilization; technological progress
B)technological progress; variations in labour-market utilization
C)money supply growth rates; changes in velocity
D)changes in velocity; money supply growth rates

Question 15

Business cycles are:

A)regular and predictable.
B)irregular but predictable.
C)regular but unpredictable.
D)irregular and unpredictable.

Question 16

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.

A)downward; steeper
B)downward; flatter
C)upward; steeper
D)upward; flatter

Question 17

Short-run fluctuations in output and employment are called:

A)sectoral shifts.
B)the classical dichotomy.
C)business cycles.
D)productivity slowdowns.

Question 18

Most economists believe that prices are:

A)flexible in the short run but many are sticky in the long run.
B)flexible in the long run but many are sticky in the short run.
C)sticky in both the short and long runs.
D)flexible in both the short and long runs.

Question 19

The index of leading indicators compiled by the Conference Board of Canada includes 10 data series that are used to forecast economic activity about _____ in advance.

A)1 month
B)6 to 9 months
C)1 to 2 years
D)5 to 10 years

Question 20

A decline in new orders for durable goods is typically an indicator of a future _____ in economic production, and a fall in the average weekly hours in manufacturing is typically an indicator of a future _____ in economic production.

A)increase; slowdown
B)increase; increase
C)slowdown; increase
D)slowdown; slowdown

Question 21

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect:

A)level of output but not prices.
B)prices but not level of output.
C)both prices and level of output.
D)neither prices nor level of output.

Question 22

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

A)aggregate demand is greater than long-run aggregate supply.
B)aggregate demand equals short-run aggregate supply.
C)aggregate demand equals short-run and long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Question 23

The relationship between the quantity of goods and services supplied and the price level is called:

A)aggregate demand.
B)aggregate supply.
C)aggregate investment.
D)aggregate production.

Question 24

In the long run, the level of output is determined by the:

A)interaction of supply and demand.
B)money supply and the levels of government spending and taxation.
C)amounts of capital and labour and the available technology.
D)preferences of the public.

Question 25

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

A)output; output
B)prices; prices
C)prices; output
D)output; prices

Question 26

The natural level of output is:

A)affected by aggregate demand.
B)the level of output at which the unemployment rate is zero.
C)the level of output at which the unemployment rate is at its natural level.
D)permanent and unchangeable.

Question 27

The short run refers to a period:

A)of several days.
B)during which prices are sticky and cyclical unemployment may occur.
C)during which capital and labour are fully employed.
D)during which there are no fluctuations.

Question 28

When the Bank of Canada reduces the money supply, at a given price level the amount of output demanded is _____, and the aggregate demand curve shifts _____.

A)greater; inward
B)greater; outward
C)lower; inward
D)lower; outward

Question 29

According to the quantity theory of money, when velocity is constant, if output is higher, _____ real balances are required, and for fixed M this means _____ P.

A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Question 30

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:

A)increases.
B)decreases.
C)does not change.
D)may either increase or decrease.

Question 31

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

A)neither prices nor level of output.
B)both prices and level of output.
C)level of output but not prices.
D)prices but not level of output.

Question 32

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:

A)slopes upward and to the right.
B)slopes downward and to the right.
C)is horizontal.
D)is vertical.

Question 33

In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:

A)aggregate demand equals long-run aggregate supply.
B)aggregate demand equals short-run aggregate supply.
C)aggregate demand equals short-run and long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Question 34

The short-run aggregate supply curve is horizontal at:

A)a level of output determined by aggregate demand.
B)the natural level of output.
C)the level of output at which the economy's resources are fully employed.
D)a fixed price level.

Question 35

Assuming velocity is constant, the aggregate demand curve tells us possible:

A)combinations of M and Y for a given value of P.
B)combinations of M and P for a given value of Y.
C)combinations of P and Y for a given value of M.
D)results if the Bank of Canada reduces the money supply.

Question 36

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

A)the labour supply.
B)the supply of capital.
C)the money supply.
D)technology.

Question 37

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:

A)is horizontal.
B)is vertical.
C)slopes upward and to the right.
D)slopes downward and to the right.

Question 38

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.

A)only prices; only output
B)only output; only prices
C)both prices and output; only prices
D)both prices and output; both prices and output

Question 39

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:

A)downward and to the left.
B)downward and to the right.
C)upward and to the left.
D)upward and to the right.

Question 40

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.

A)higher; greater
B)higher; smaller
C)lower; greater
D)lower; smaller

Question 41

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.

A)higher; lower
B)lower; higher
C)higher; higher
D)lower; lower

Question 42

A supply shock does not occur when:

A)a drought destroys crops.
B)unions push wages up.
C)the Bank of Canada increases the money supply.
D)an oil cartel increases world oil prices.

Question 43

Exhibit: Supply Shock In this graph, assume that the economy starts at point A, and there is a favourable supply shock that does not last forever. In this situation, point _____ represents short-run equilibrium, and point _____ represents long-run equilibrium.

A)B; C
B)B; A
C)E; D
D)E; A

Question 44

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) _____ in velocity and will shift the aggregate demand curve to the _____.

A)increase; right
B)increase; left
C)decrease; right
D)decrease; left

Question 45

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Bank of Canada might be able to stabilize output by:

A)decreasing the money supply.
B)increasing the money supply.
C)decreasing the price level.
D)increasing the price level.

Question 46

If the short-run aggregate supply curve is horizontal and the Bank of Canada increases the money supply, then:

A)output and employment will increase in the short run.
B)output and employment will decrease in the short run.
C)prices will increase in the short run.
D)prices will decrease in the short run.

Question 47

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:

A)prices in grain markets.
B)real wages.
C)foreign exchange rates.
D)interest rates.

Question 48

Exhibit: Shift in Aggregate Demand In this graph, initially the economy is at point E, with price P₀ and output Ȳ 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 _____.

A)A; D
B)D; A
C)C; B
D)B; C

Question 49

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

A)both the short run and the long run.
B)neither the short run nor the long run.
C)the short run but not in the long run.
D)the long run but not in the short run.

Question 50

Assume that the economy starts from long-run equilibrium. If the Bank of Canada increases the money supply, then _____ increase(s) in the short run, and _____ increase(s) in the long run.

A)prices; output
B)output; prices
C)output; output
D)prices; prices

Question 51

Which of the following is an example of a demand shock?

A)a large increase in the price of oil
B)the introduction and greater availability of credit cards
C)a drought that destroys agricultural crops
D)unions obtain a substantial wage increase

Question 52

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)A.
B)B.
C)C.
D)D.

Question 53

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

A)confirmed the neutrality of money because no real variables were affected by this nominal change.
B)confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level.
C)confirmed that money is not neutral in the short run because both output and prices dropped.
D)contradicted Okun's law because decreases in output were not associated with increases in unemployment.

Question 54

Stabilization policy refers to policy actions aimed at:

A)reducing the severity of short-run economic fluctuations.
B)equalizing incomes of households in the economy.
C)maintaining constant shares of output going to labour and capital.
D)preventing increases in the poverty rate.

Question 55

A favourable supply shock occurs when:

A)environmental protection laws raise costs of production.
B)the Bank of Canada increases the money supply.
C)unions push wages up.
D)an oil cartel breaks up and oil prices fall.

Question 56

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.

A)increase; increase
B)increase; decrease
C)decrease; increase
D)decrease; decrease

Question 57

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 _____.

A)increase; increase
B)decrease; decrease
C)increase; decrease
D)decrease; increase

Question 58

If the short-run aggregate supply curve is horizontal, and each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then:

A)output and employment will increase in the short run.
B)output and employment will decrease in the short run.
C)prices will increase in the short run.
D)prices will decrease in the short run.

Question 59

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)A.
B)B.
C)C.
D)D.

Question 60

An adverse supply shock _____ the short-run aggregate supply curve _____ the natural level of output.

A)raises; but cannot affect
B)raises; and may also lower
C)lowers; but cannot affect
D)lowers; and may also lower

Question 61

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Bank of Canada could move the economy more rapidly back to full employment output by:

A)increasing the money supply, but at the cost of permanently higher prices.
B)decreasing the money supply, but at the cost of permanently lower prices.
C)increasing the money supply, which would restore the original price level.
D)decreasing the money supply, which would restore the original price level.

Question 62

One of the methods the Bank of Canada uses to change the money supply is open-market operations. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of a Bank of Canada decision to increase open-market purchases. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Question 63

Stagflation occurs when prices _____ and output _____.

A)fall; falls
B)fall; increases
C)rise; falls
D)rise; increases

Question 64

In the short run, a favourable supply shock causes:

A)both prices and output to rise.
B)prices to rise and output to fall.
C)prices to fall and output to rise.
D)both prices and output to fall.

Question 65

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:

A)both Central Bank A and Central Bank B should increase the quantity of money.
B)Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable.
C)Central Bank A should keep the quantity of money stable, whereas Central Bank B should increase it.
D)both Central Bank A and Central Bank B should keep the quantity of money stable.

Question 66

If a change in government regulations allows banks to start paying interest on chequing accounts, this will:

A)increase the demand for money.
B)decrease the demand for money.
C)have no effect on the demand for money.
D)increase the demand for currency but decrease the demand for chequing accounts.

Question 67

Suppose that laws are passed banning labour unions and that resulting lower labour costs are passed along to consumers in the form of lower prices. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this favourable supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Question 68

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.

A)B; C
B)B; A
C)E; D
D)D; A

Question 69

Starting from long-run equilibrium, without policy intervention, the long-run impact of a temporary adverse supply shock is that prices will:

A)be permanently higher, and output will be restored to the natural rate.
B)return to the old level, and output will be restored to the natural rate.
C)be permanently higher, and output will be permanently lower.
D)return to the old level, but output will be permanently lower.

Question 70

If the Bank of Canada reduces the money supply by 5 percent, then the real interest rate will:

A)rise in both the short run and the long run.
B)rise in the short run but return to its original equilibrium level in the long run.
C)rise in the short run but fall below its original equilibrium level in the long run.
D)be unaffected in both the short run and the long run.

Question 71

Making use of Okun's law, if the Bank of Canada reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about:

A)5 percent in both the short run and the long run.
B)1.66 percent in both the short run and the long run.
C)5 percent in the short run, but will return to its natural rate in the long run.
D)1.66 percent in the short run, but will return to its natural rate in the long run.

Question 72

Suppose that droughts in Ontario and floods in Manitoba substantially reduce food production in Canada. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this adverse supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

Question 73

If the demand for money increases, but the Bank of Canada keeps the money supply the same, then in the short run output will:

A)fall, and in the long run prices will remain unchanged.
B)remain unchanged, and in the long run prices will fall.
C)remain unchanged, and in the long run prices will remain unchanged.
D)fall, and in the long run prices will fall.

Question 74

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:

A)both Central Bank A and Central Bank B should increase the quantity of money.
B)Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable.
C)Central Bank A should decrease the quantity of money, whereas Central Bank B should increase it.
D)both Central Bank A and Central Bank B should keep the quantity of money stable.

Question 75

Assume that the long-run aggregate supply curve is vertical at Y = 3,000, while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 3 × M / P, and M = 1,000.
a.If the economy is initially in long-run equilibrium, what are the values of P and Y?
b.Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y?
c.If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibriumPandYafter the supply shock?
d.Suppose that after the supply shock the Bank of Canada wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

Question 76

Suppose you are an economist working for the Bank of Canada when droughts in Ontario and floods in Manitoba substantially reduce food production in Canada. Use the aggregate demand-aggregate supply model to illustrate graphically your policy recommendation to accommodate this adverse supply shock, assuming that your top priority is maintaining full employment in the economy. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; and v. the terminal equilibrium values. State in words what happens to prices and output as a combined result of the supply shock and the recommended Bank of Canada accommodation.

Question 77

If the Bank of Canada 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:

A)prices will remain unchanged in the long run.
B)output will fall 5 percent in the long run.
C)prices will fall 5 percent in the long run.
D)output will remain unchanged in the long run.

Question 78

The dilemma facing the Bank of Canada in the event that an unfavourable 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.

A)higher; higher
B)higher; lower
C)lower; lower
D)lower; higher

Question 79

If the Bank of Canada accommodates an adverse supply shock, output falls _____, and prices rise _____.

A)less; more
B)less; less
C)more; less
D)more; more

Question 80

The advent of interest-earning chequing accounts in the early 1980s led many households to keep a larger proportion of their wealth in chequing accounts. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this change in money demand. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.