Deck 9: Application: International Trade

Question 1

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

Answer 1

A

Question 2

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

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

Answer 2

A

Question 3

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

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

Answer 3

C

Question 4

Alan Blinder's survey of firms found that the typical firm adjusts its prices:

A)more than once a week.
B)about once a month.
C)once or twice a year.
D)less than once a year.

Question 5

Alan Blinder's survey of firms found that the theory of price stickiness accepted by the most firms was:

A)menu costs.
B)coordination failure.
C)nominal contracts.
D)procyclical elasticity.

Question 6

Most economists believe that the classical dichotomy:

A)holds approximately in both the short run and the long run.
B)holds approximately in the long run but not at all in the short run.
C)holds approximately in the short run but not at all in the long run.
D)does not hold even approximately in either the long run or the short run.

Question 7

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 8

The version of Okun's law studied in Chapter 9 assumes that, with no change in unemployment, real 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:

A)decrease by 1 percent.
B)decrease by 2 percent.
C)decrease by 3 percent.
D)increase by 1 percent.

Question 9

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
Dis less volatile than

Question 10

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

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

Question 11

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

A)the Phillips curve.
B)the Solow residual.
C)the Fisher effect.
D)Okun's law.

Question 12

The results of Alan Blinder's survey of firms suggest all of the following are true except that:

A)there is only one theory of price stickiness.
B)coordinating wage and price setting could improve welfare.
C)reasons for price stickiness vary by industry.
D)activist monetary policy can be used to cure recessions.

Question 13

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

A)in both the short and long runs.
B)in neither the short nor 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 14

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)standardized statistics compiled by the National Bureau of Economic Research.

Question 15

The version of Okun's law studied in Chapter 9 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:

A)decrease by 1 percent.
B)decrease by 2 percent.
C)increase by 4 percent.
D)increase by 5 percent.

Question 16

Measures of average workweeks and of suppliers' deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate
Future economic activity, and slower deliveries tend to indicate future economic activity.

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

Question 17

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

Question 18

A decline in the Index of Supplier Deliveries is typically an indicator of a future in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future in economic production.

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

Question 19

Business cycles are:

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

Question 20

Short-run fluctuations in output and employment are called:

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

Question 21

According to the quantity theory of money, 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 22

If the Fed 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 will fall below its original equilibrium level in the long run.
D)be unaffected in both the short run and the long run.

Question 23

The advent of interest-earning checking accounts in the early 1980s led many households to keep a larger proportion of their income in checking 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.

Question 24

Throughout much of the 1990s, the United States experienced declining energy prices. Assume that the U.S. economy was in long-run equilibrium before these declines began. a.Use the aggregate demand-aggregate supply model to illustrate graphically the
short-run and long-run impact of this decline on output and prices.
b.If the Federal Reserve attempted to offset this deviation from the natural rate in the short run, should the money supply be increased or decreased?

Question 25

The principal method used by the Federal Reserve to change the money supply is through 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 Federal Reserve 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 26

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 27

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 28

The relationship between the quantity of output demanded and the aggregate price level is called:

A)aggregate demand.
B)aggregate supply.
C)aggregate output.
D)aggregate consumption.

Question 29

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 30

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money:

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

Question 31

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

Question 32

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 equilibrium P and Y after the supply shock?
d.Suppose that after the supply shock the Fed 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 33

Suppose that droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. 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 34

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 35

Suppose that laws are passed banning labor unions and that resulting lower labor 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 favorable 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 36

If Fed A cares only about keeping the price level stable and Fed B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil:

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

Question 37

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 38

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 = 2(M/P) and M = 1,500.
a.If the economy is initially in long-run equilibrium, what are the values of P and
Y?
b.What is the velocity of money in this case?
c.Suppose because banks start paying interest on checking accounts, the aggregate demand function shifts to Y = (1.5)(M/P). What are the short-run values of P and Y?
d.What is the velocity of money in this case?
e.With the new aggregate demand function, once the economy adjusts to long-run equilibrium, what are P and Y?
f.What is the velocity now?

Question 39

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 = 2(M/P) and M = 1,500.
a.If the economy is initially in long-run equilibrium, what are the values of P and Y?
b.If M increases to 2,000, what are the new short-run values of P and Y?
c.Once the economy adjusts to long-run equilibrium at M = 2,000, what are P and Y?

Question 40

Suppose you are an economist working for the Federal Reserve when droughts in the Southeast and floods in the Midwest substantially reduce food production in the United States. 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 Fed accommodation.

Question 41

A central bank reduces the money supply in an economy initially in long-run equilibrium. a.What will happen to output and prices in the short run?
b.What will happen to unemployment in the short run?
c.What will happen to output and prices in the long run?

Question 42

You are given the information about the following leading indicators. For each indicator explain whether the information suggests that a recession or expansion should be expected in the future.
a.Average initial weekly claims for unemployment insurance rises. b.New building permits issued increase.
c.The interest rate spread between the 10-year Treasury note and the 3-month
Treasury bill narrows.
d.The Index of Supplier Deliveries falls.

Question 43

An economy is initially in long-run equilibrium. The introduction of an electronic payments system dramatically reduces the demand for money in the economy.
a.What is the short-run impact on prices and output of the new system?
b.What can the central bank do, if anything, to counteract the short-run changes in output and prices?
c.If the central bank does not take any policy actions, what will be the long-run impact of the electronic payments system on prices and output?

Question 44

The economy of Macroland is initially in long-run equilibrium. A severe drought causes an adverse supply shock.
a.What happens to prices and output in the short run?
b.What would happen to prices and output in the long run if there is no policy accommodation?
c.If the Central Bank of Macroland wants to prevent the short-run changes in price and output, what policy action could it take? How would the results of this policy action differ from the prices and output that would result in the long run with no policy action?

Question 45

The long-run and short-run aggregate supply curves reflect fundamental differences between long-run and short-run macroeconomic analysis.
a.Graphically illustrate the long-run and short-run aggregate supply curves. Be sure to label the axes.
b.What determines the level of output in the long run versus the short run?
c.How do prices behave differently in the long run and the short run?

Question 46

An oil cartel effectively increases the price of oil by 100 percent, leading to an adverse supply shock in both Country A and CountryB. Both countries were in long-run equilibrium at the same level of output and prices at the time of the shock. The central bank of Country A takes no stabilizing-policy actions. After the short-run impacts of the adverse supply shock become apparent, the central bank of Country B increases the money supply to return the economy
to full employment.
a.Describe the short-run impact of the adverse supply shock on prices and output in each country.
b.Compare the long-run impact of the adverse supply shock on prices and output in each country.