Deck 7: Putting All Markets Togetherthe As-Ad Model

Question 1

Which of the following will cause the aggregate supply curve to shift down?

A)an increase in firms' markup over labor costs
B)an increase in the expected price level
C)an increase in unemployment benefits
D)all of the above
E)none of the above

Answer 1

E

Question 2

Which of the following represents a short-run effect of a monetary expansion?

A)an increase in output
B)a reduction in the interest rate
C)an increase in the price level
D)all of the above
E)none of the above

Answer 2

D

Question 3

Results obtained from the Taylor model suggest that the output effects of a change in the money supply are greatest after approximately how long?

A)one month
B)one quarter
C)three quarters
D)four years
E)ten years

Answer 3

C

Question 4

Assume the economy is initially operating at the natural level of output.Which of the following events will initially cause a shift of the aggregate supply curve?

A)an increase in the money supply
B)an increase in government spending
C)an increase in consumer confidence
D)all of the above
E)none of the above

Question 5

Assume the economy is initially operating at the natural level of output.Now suppose a budget is passed that calls for an increase in government spending.This increase in government spending will,in the short run,cause an increase in

A)the interest rate.
B)the price level.
C)the nominal wage.
D)all of the above
E)none of the above

Question 6

When the current price level is equal to the expected price level,we know that

A)the unemployment rate is zero.
B)the goods market and financial markets are in equilibrium.
C)the output is equal to the natural level of output.
D)the money market is in equilibrium.
E)none of the above

Question 7

The neutrality of money is consistent with which of the following statements?

A)changes in the money supply will not affect employment in the short run.
B)changes in the money supply will not affect employment in the medium.
C)changes in the money supply will not affect the price level in the short run
D)changes in the money supply will not affect the price level in the medium run

Question 8

Assume the economy is initially operating at the natural level of output.Now suppose that individuals decide to reduce their desire to save.We know with certainty that which of the following will occur in the short run as a result of decreased desire to save?

A)greater investment
B)less investment
C)an increase in the nominal wage
D)higher output and lower investment
E)no change in the economy at all

Question 9

Based on the aggregate supply relation,an increase in current output will cause

A)a shift of the aggregate supply curve.
B)an increase in the current price level.
C)a change in the expected price level this year.
D)an increase in the expected price level and an upward shift of the AS curve.
E)an increase in the markup over labor costs.

Question 10

In the aggregate demand relation,an increase in the price level causes output to decrease because of its effect on

A)government spending.
B)the money market and,subsequently,investment.
C)the nominal wage.
D)firms' markup over labor costs.
E)the expected price level.

Question 11

When the economy is operating at a point where output is greater than the natural level of output,which of the following occurs?

A)the unemployment rate is less than the natural unemployment rate.
B)the price level is greater than the expected price level.
C)the price level will be higher next period than it is this period.
D)all of the above
E)none of the above

Question 12

In the aggregate supply relation,the current price level depends upon

A)expected price level.
B)monetary policy.
C)fiscal policy.
D)consumer confidence.
E)all of the above

Question 13

Results obtained from the Taylor model suggest that it takes roughly how long for the effects of money to become neutral?

A)one month
B)three months
C)one year
D)four years
E)ten years

Question 14

Suppose a central bank implements a monetary contraction.Which of the following would we expect to occur in the medium run?

A)a decline in output
B)an increase in the interest rate
C)a decrease in the nominal wage
D)all of the above
E)none of the above

Question 15

Based on your understanding of the AS / AD model,which of the following is an INCORRECT statement about the short-run adjustment process for the macroeconomy?

A)output in excess of the natural level leads to higher prices.
B)a reduction in employment leads to lower prices.
C)an increase in demand increases output.
D)an increase in output above the natural level leads to higher nominal wages.
E)none of the above

Question 16

The aggregate demand curve will shift to the right when which of the following occurs?

A)a reduction in the money supply
B)a reduction in consumer confidence
C)a rise in the price level
D)a reduction in taxes
E)a decrease in the price level

Question 17

Which of the following would increase the short-run output effects of a monetary expansion?

A)an increase in the marginal propensity to consume
B)an increase in the interest rate sensitivity of investment
C)the IS curve is very flat
D)all of the above
E)none of the above

Question 18

Suppose a central bank implements a monetary contraction.Which of the following would we expect to occur in the short run?

A)a reduction in the nominal wage
B)the AD curve to shift to the right
C)the price setting curve to shift down
D)the wage setting curve to shift upward
E)the wage setting curve to shift downward

Question 19

Assume the economy is initially operating at the natural level of output.Now suppose a budget is passed that calls for an increase in government spending.This increase in government spending will,in the medium run,have NO effect on which of the following?

A)employment
B)the interest rate
C)the price level
D)all of the above
E)none of the above

Question 20

Assume the economy is initially operating at the natural level of output.Which of the following events will NOT change the composition of output (i.e.,the percentage of GDP composed of consumption,investment,...etc.)in the medium run?

A)a reduction in government spending
B)a cut in taxes
C)a reduction in the desire to save
D)an increase in consumer confidence
E)an increase in the money supply

Question 21

Answer this question using the AS / AD model presented in the textbook.Which of the following would cause a reduction in the natural level of output in the medium run?

A)a decrease in government spending
B)a decrease in the money supply
C)an increase in taxes
D)both A and C
E)none of the above

Question 22

The aggregate demand (AD)curve presented in the textbook has its particular shape because of which of the following explanations?

A)an increase in the money supply (M)will cause a reduction in the interest rate,an increase in investment,and an increase in output .
B)an increase in the aggregate price level (P)will cause an increase in the interest rate and a reduction in output.
C)an increase in P will cause a reduction in the real wage,an increase in employment,and an increase in output.
D)as P decreases in a closed economy,goods and services become relatively cheaper and individuals respond by increasing the quantity demanded of goods and services.

Question 23

An increase in the price of oil will cause which of the following in the medium run?

A)no change in the level of output
B)no change in the price level
C)an increase in the unemployment rate
D)a reduction in the interest rate
E)none of the above

Question 24

Which of the following events will NOT cause an increase in the aggregate price level?

A)an increase in unemployment benefits
B)an increase in the markup
C)an increase in Pe
D)a reduction in output
E)none of the above

Question 25

Which of the following events will cause an increase in the aggregate price level?

A)an increase in the unemployment benefits
B)a reduction in the markup
C)a reduction in Pe
D)an increase in the unemployment rate
E)none of the above

Question 26

Which of the following events will cause the largest rightward shift (as measured horizontally)of the AD curve?

A)a tax increase
B)a 15% reduction in the aggregate price level
C)a 10% increase in the nominal money supply
D)a 15% reduction in the nominal wage
E)none of the above

Question 27

If u < un,we know with certainty that

A)P > Pe.
B)P < Pe.
C)P = Pe.
D)Y < Yn.

Question 28

Assume the economy is initially operating at the natural level of output.Suppose that individuals decide to decrease their saving.We know that this decreased desire to save will be "neutral" in

A)the short run,but not the medium run.
B)the medium run,but not the long run.
C)neither the medium run nor the short run.
D)both the short run and the medium run.
E)none of the above

Question 29

For this question,assume that the economy is initially operating at the natural level of output.An increase in taxes will cause which of the following?

A)a reduction in output and no change in the aggregate price level in the short run
B)a reduction in employment and no change in the nominal wage in the short run
C)an increase in investment in the medium run
D)an increase in the aggregate price level,no change in output and no change in the interest rate in the medium run

Question 30

For this question,assume that the economy is initially operating at the natural level of output.An increase in the price of oil will cause which of the following in the medium run?

A)a reduction in the interest rate
B)a reduction in output and an increase in the aggregate price level
C)a reduction in output and a reduction in the interest rate
D)a reduction in unemployment,an increase in the nominal wage and an increase in the aggregate price level
E)a reduction in the aggregate price level and no change in output

Question 31

A reduction in the aggregate price level will cause

A)an increase in the interest rate and a leftward shift in the IS curve.
B)a downward shift in the LM curve and a reduction in the interest rate.
C)a reduction in investment and a reduction in output .
D)an ambiguous effect on investment.

Question 32

For this question,assume that the economy is initially operating at the natural level of output.An increase in unemployment benefits will cause

A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.

Question 33

If Y < Yn,we know with certainty that

A)P > Pe.
B)P < Pe.
C)P = Pe.
D)u < un.

Question 34

For this question,assume that the economy is initially operating at the natural level of output.A reduction in consumer confidence will cause

A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.

Question 35

At the current level of output,suppose the actual price level is greater than the price level that individuals expect (i.e.,Pt > Pet).We know that

A)output is currently below the natural level of output.
B)the interest rate will tend to rise as the economy adjusts to this situation.
C)the nominal wage will tend to decrease as individuals revise their expectations of the price level.
D)the AS curve will tend to shift down over time.
E)none of the above

Question 36

From 1970 to the mid-1990s,the relative price of crude petroleum

A)steadily increased.
B)steadily decreased.
C)increased dramatically,then decreased dramatically.
D)decreased dramatically,then increased dramatically.
E)remained more or less the same.

Question 37

In the short run,a reduction in the price of oil will cause

A)a reduction in output.
B)an increase in the price level.
C)a reduction in the interest rate.
D)all of the above
E)none of the above

Question 38

The short-run aggregate supply curve (AS)presented in the textbook has its particular shape because of which of the following explanations?

A)a reduction in the aggregate price level will cause a reduction in the interest rate and an increase in output.
B)an increase in the aggregate price level causes an increase in nominal money demand and an increase in the interest rate.
C)a drop in the nominal wage causes an increase in the amount of output that firms are willing to produce.
D)a reduction in output causes a reduction in employment,an increase in unemployment,a reduction in the nominal wage and a reduction in the price level.

Question 39

For this question,assume that the economy is initially operating at the natural level of output.A reduction in taxes will cause

A)an increase in the real wage in the medium run.
B)a reduction in the real wage in the medium run.
C)no change in the nominal wage in the medium run.
D)ambiguous effects on the real wage in the medium run.
E)none of the above

Question 40

For this question,assume that the economy is initially operating at the natural level of output.A monetary expansion will cause

A)no change in the real wage in the medium run.
B)an increase in investment in the medium run.
C)a reduction in the interest rate in the medium run.
D)no change in the nominal wage in the medium run.

Question 41

As product markets become more competitive and the markup decreases,we would expect which of the following to occur?

A)no change in the real wage in the medium run.
B)an increase in the aggregate price level and an increase in output in the medium run.
C)an increase in the interest rate in the medium run.
D)no change in output in the medium run.
E)an increase in the real wage in the medium run.

Question 42

When the economy is operating at a point where output is less than the natural level of output,which of the following occurs?

A)the unemployment rate is greater than the natural unemployment rate.
B)the price level is less than the expected price level.
C)the price level will be lower next period than it is this period.
D)all of the above
E)none of the above

Question 43

A reduction in the price of oil will tend to cause which of the following?

A)no change in the real wage in the medium run
B)an increase in the aggregate price level as output increases
C)an increase in investment in the medium run
D)no change in the interest rate in the medium run

Question 44

Results obtained from the Taylor model suggest that the effects of changes in the nominal money supply are neutral after

A)2 years.
B)4 years.
C)6 years.
D)8 years.

Question 45

Suppose a central bank implements a monetary expansion.Which of the following would we expect to occur in the medium run?

A)an increase in output
B)a decrease in the interest rate
C)a decline in the nominal wage
D)all of the above
E)none of the above

Question 46

An increase in the price of oil will tend to cause which of the following?

A)an increase in the natural rate of unemployment
B)an increase in the price level
C)an increase in the interest rate
D)all of the above

Question 47

For this question,assume that the economy is initially operating at the natural level of output.A simultaneous reduction in taxes and reduction in the money supply will cause which of the following?

A)an increase in output and an increase in the aggregate price level in the short run
B)a reduction in output and a reduction in the nominal wage in the short run
C)a reduction in investment in the medium run
D)a reduction in the interest rate in the medium run
E)an increase in the aggregate price level,no change in output,and no change in the interest rate in the medium run

Question 48

Suppose the minimum wage decreases.Given this event,we would expect which of the following to occur?

A)a reduction in the price level and an increase in output in the medium run
B)an increase in the aggregate price level as output increases
C)an increase in the interest rate in the medium run
D)none of the above

Question 49

The aggregate demand curve will shift to the left when which of the following occurs?

A)an increase in the money supply.
B)an increase in consumer confidence.
C)a reduction in the price level.
D)an increase in taxes.
E)a rise in the price level.

Question 50

For this question,assume that the economy is initially operating at the natural level of output.A simultaneous increase in taxes and increase in the money supply will cause which of the following?

A)a reduction in output and a reduction in the aggregate price level in the short run.
B)an increase in output and an increase in the nominal wage in the short run.
C)an increase in investment in the medium run.
D)an increase in the interest rate in the medium run.
E)a reduction in the aggregate price level,no change in output,and no change in the interest rate in the medium run.

Question 51

Suppose a central bank implements a monetary expansion.Which of the following would we expect to occur in the short run?

A)an increase in the nominal wage
B)the AD curve to shift to the left
C)the price setting curve to shift up
D)the wage setting curve to shift downward
E)the wage setting curve to shift upward

Question 52

In the short run,an increase in the price of oil will cause

A)an increase in output
B)a reduction in the price level
C)an increase in the interest rate.
D)all of the above
E)none of the above

Question 53

The current crisis and the sharp decrease in output in 2010 had its origins in

A)housing market.
B)stock market.
C)bond market.
D)foreign exchange market.

Question 54

An increase in the aggregate price level will cause

A)a reduction in the interest rate and a rightward shift in the IS curve.
B)a upward shift in the LM curve and an increase in the interest rate.
C)an increase in investment and an increase in output.
D)an ambiguous effect on investment.

Question 55

For this question,assume that the economy is initially operating at the natural level of output.A fiscal contraction must cause

A)an increase in investment in the medium run.
B)a reduction in investment in the short run.
C)no change in investment in the medium run.
D)an increase in investment in the short run.
E)none of the above

Question 56

For this question,assume that the economy is initially operating at the natural level of output.A reduction in consumer confidence will cause

A)an increase in investment in the short run.
B)a reduction in the real wage in the medium run.
C)an increase in the interest rate in the medium run.
D)ambiguous effects on investment in the medium run.
E)none of the above

Question 57

For this question,assume that the economy is initially operating at the natural level of output.An increase in consumer confidence will cause

A)a reduction in the real wage in the medium run.
B)an increase in the real wage in the medium run.
C)no change in the real wage in the medium run.
D)ambiguous effects on the real wage in the medium run.

Question 58

Explain what the aggregate supply curve represents and why it is upward sloping.

Question 59

Which of the following represents a short-run effect of a monetary contraction?

A)a reduction in output
B)an increase in the interest rate
C)a reduction in the price level
D)all of the above
E)none of the above

Question 60

For this question,assume that the economy is initially operating at the natural level of output.A one- time 5% reduction in the nominal money supply will cause

A)a 5% reduction in the price level in the medium run.
B)a 5% increase in the interest rate (i)in the medium run.
C)a 5% reduction in the real money supply in the medium run.
D)all of the above

Question 61

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect an increase in the money supply will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.

Question 62

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect a tax cut will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.

Question 63

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect an increase in the minimum wage will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.Also include in your answer an explanation of the effects of this change in the minimum wage on the labor market and the equilibrium real wage.

Question 64

Explain how a reduction in each of the following variables affects the aggregate price level (P): (1)the expected price level; (2)employment; (3)the markup; and (4)unemployment benefits.

Question 65

Explain what effect an increase in the money supply has on the aggregate demand curve.

Question 66

Analysis of the macroeconomic effects of changes in the money supply indicates that money is "neutral" in the medium run.Suppose there is a reduction in government spending.Will this fiscal policy action also be neutral in the medium run? Explain.

Question 67

Explain what the aggregate demand curve represents and why it is downward sloping.

Question 68

Analysis of the macroeconomic effects of changes in the money supply indicates that money is "neutral" in the medium run.Suppose there is an increase in government spending.Will this fiscal policy action also be neutral in the medium run? Explain.

Question 69

Suppose the economy is operating at a point where output is greater than the natural level of output.Given this information,is the actual price level equal to the expected price level at the current level of output? Explain.

Question 70

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect a reduction in the price of oil will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.Also include in your answer an explanation of the effects of this change in the price of oil on the labor market and the equilibrium real wage.

Question 71

Suppose the economy is operating at a point where output is less than the natural level of output.Given this information,is the actual price level equal to the expected price level at the current level of output? Explain..

Question 72

When output exceeds the natural level of output,explain what adjustments will occur in the labor market and discuss what effect they will have on output and the price level.

Question 73

Explain what effect a reduction in the money supply has on the aggregate demand curve.

Question 74

When output is less than the natural level of output,explain what adjustments will occur in the labor market and discuss what effect they will have on output and the price level.

Question 75

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect an decrease in the money supply will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.

Question 76

Explain what is meant by the neutrality of money.

Question 77

Based on your understanding of the aggregate supply and aggregate demand model and the IS-LM model,graphically illustrate and explain what effect a tax increase will have on the economy.In your graphs,clearly illustrate the short-run and medium-run equilibria.