Deck 10: Introduction to Economic Fluctuations

Question 1

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.

Answer 1

Okun's law.

Question 2

Business cycles are:

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

Answer 2

irregular and unpredictable.

Question 3

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.

Answer 3

holds approximately in the long run but not at all in the short run.

Question 4

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 5

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 6

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 7

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 8

Measures of average workweeks and of supplier 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 9

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 10

The version of Okun's law studied in Chapter 10 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 11

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 12

The version of Okun's law studied in Chapter 10 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 13

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

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

Question 14

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 15

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 16

Short-run fluctuations in output and employment are called:

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

Question 17

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

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

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

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 20

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

A) one month
B) six to nine months
C) one to two years
D) five to ten years

Question 21

All of the following are suggested by the results of Alan Blinder's survey of firms except:

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 22

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 23

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 24

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 25

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 26

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 27

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 28

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 29

When the Federal Reserve 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 30

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 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

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 33

When the Federal Reserve 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 34

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 35

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 36

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 37

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 38

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 labor and the available technology.
D) preferences of the public.

Question 39

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 40

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 Federal Reserve reduces the money supply.

Question 41

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 42

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 43

If the short-run aggregate supply curve is horizontal and the Fed 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 44

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 45

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 46

The long run refers to a period:

A) of decades.
B) during which capital and labor are sometimes not fully employed.
C) during which prices are flexible.
D) during which output deviates from the full-employment level.

Question 47

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 48

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 49

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 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, 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 52

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 53

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 labor are fully employed.
D) during which there are no fluctuations.

Question 54

Assume that the economy starts from long-run equilibrium. If the Federal Reserve 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

Assume that the economy begins in long-run equilibrium. Then the Fed 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 56

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 57

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 58

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

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

Question 59

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 60

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 61

A supply shock does not occur when:

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

Question 62

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 63

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed 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 64

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 65

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 66

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 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

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 favorable 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 69

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 70

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 71

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 72

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 73

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 74

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 75

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 76

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 labor and capital.
D) preventing increases in the poverty rate.

Question 77

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 78

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 79

A favorable supply shock occurs when:

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

Question 80

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 rate of output