Deck 9: Introduction to Economic Fluctuations

Question 1

Short-run fluctuations in output and employment are called:

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

Answer 1

business cycles.

Question 2

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.

Answer 2

flexible in the long run but many are sticky in the short run.

Question 3

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.

Answer 3

demand for real balances per unit of output.

Question 4

Business cycles are:

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

Question 5

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 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

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 8

Along an aggregate demand curve,derived from the quantity theory of money 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 9

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 10

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

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

Question 11

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 12

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 13

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 14

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 15

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

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

Question 16

Possible explanations for sticky magazine prices include the hypotheses that the costs of charging the wrong price may ______,and perhaps customers ______ frequent price changes inconvenient.

A) be great; do not find
B) be great; find
C) not be great; find
D) not be great; do not find

Question 17

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 18

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 19

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 20

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 21

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 22

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 23

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 24

The long-run aggregate supply curve is vertical at the level of output:

A) determined by aggregate demand.
B) at which unemployment is at its natural rate.
C) at which the inflation rate is zero.
D) at a predetermined price level.

Question 25

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 26

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 27

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 28

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 29

Aggregate supply is the relationship between the quantity of goods and services supplied and the:

A) money supply.
B) unemployment rate.
C) interest rate.
D) price level.

Question 30

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 31

When the Bank of Canada increases 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 32

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 33

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 34

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 35

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 36

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 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

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 39

Looking at the aggregate demand curve alone,one can tell ______ that will prevail in the economy.

A) the quantity of output and the price level
B) the quantity of output
C) the price level
D) neither the quantity of output nor the price level

Question 40

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is ______ the natural rate of output in the short run.

A) above
B) below
C) equal to
D) either above or below

Question 41

If a short-run equilibrium occurs at a level of output below 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 42

If the short-run aggregate supply curve is horizontal,then the:

A) classical dichotomy is satisfied.
B) money supply cannot affect prices in the short run.
C) money supply cannot affect output in the short run.
D) money supply is irrelevant in the short run.

Question 43

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 44

If the short-run aggregate supply curve is horizontal,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 45

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 46

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 47

If the short-run aggregate supply curve is horizontal,and,if 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 48

Starting from long-run equilibrium,if the velocity of money increases (due to,for example,the invention of automatic teller machines)and no action is taken by the government:

A) prices will rise in both the short run and the long run.
B) output will rise in both the short run and the long run.
C) prices will rise in the short run,and output will rise in the long run.
D) output will rise in the short run,and prices will rise in the long run.

Question 49

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 the short-run neutrality of money because prices and wage did not adjust immediately.
D) contradicted Okun's law because decreases in output were not associated with increases in unemployment.

Question 50

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 51

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 52

Assume that the economy begins in long-run equilibrium.Then the Bank of Canada reduces the money supply.In the short run ______,whereas in the long run prices ______ and output returns to its original level.

A) output decreases and prices are unchanged; rise
B) output decreases and prices are unchanged; fall
C) output and prices both decrease; rise
D) output and prices both decrease; fall

Question 53

Stabilization policy:

A) aims at keeping output and employment at their natural rates.
B) always succeeds in keeping output and employment at their natural rates.
C) is generally ineffective.
D) does more harm than good.

Question 54

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 55

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

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

Question 56

The long run refers to a period:

A) of decades.
B) during which capital and labour are sometimes not fully employed.
C) during which prices are flexible.
D) during which capital,labour,and technology can change.

Question 57

The short run refers to a period:

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

Question 58

When the French money supply was reduced by 45 percent in 1724,only ______ fell immediately.

A) prices
B) output
C) exchange rates
D) interest rates

Question 59

In the aggregate demand/aggregate supply model,long-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 60

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

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

Question 61

Use the following to answer questions :
Exhibit: Shift in Aggregate Demand

(Exhibit: Shift in Aggregate Demand)In this graph,initially the economy is at point E,with the price P₀ and output Y.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 AD₂.The economy moves first to point ______ and then,in the long run,to point ______.

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

Question 62

Use the following to answer questions :
Exhibit: Supply Shock

(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 63

Starting from long-run equilibrium,an increase in aggregate demand increases ______ in the short run,but only increases ______ in the long run.

A) output; prices
B) prices; output
C) short-run aggregate supply; long-run aggregate supply
D) the money supply; the natural level of output

Question 64

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

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

Question 65

Stagflation occurs when prices ______ and output ______.

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

Question 66

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 67

Use the following to answer questions :
Exhibit: Supply Shock

(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 68

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 69

On two occasions in the 1970s:

A) world oil prices rose rapidly,inflation was high,and the unemployment rate rose to some extent.
B) world oil prices rose rapidly,inflation was moderate,and the unemployment rate was high.
C) world oil prices rose rapidly,inflation was high,and the unemployment rate rose to very high levels on both occasions.
D) oil prices rose rapidly,but the Bank of Canada used monetary policy to largely avoid inflation.

Question 70

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 71

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 72

In the short run an adverse 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 73

Use the following to answer questions :
Exhibit: Supply Shock

(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 74

Use the following to answer questions :
Exhibit: Supply Shock

(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 75

Use the following to answer questions :
Exhibit: Shift in Aggregate Demand

(Exhibit: Shift in Aggregate Demand)In this graph,initially the economy is at point E,with price P₀ and output Y.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 76

Use the following to answer questions :
Exhibit: Shift in Aggregate Demand

(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 77

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 78

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 79

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 80

The dilemma facing the Bank of Canada in the event that an unfavourable supply shock moves the economy away from the natural level of output is that monetary policy can either return output to the natural level,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