Question 1

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions:
-According to the application, as individuals increase spending on health- care:

Accepted Answer

A)  investment spending increases causing a rise in living standards in the long- run. 
B)  investment spending decreases causing a decline in living standards in the long- run. 
C)  government spending decreases causing a decline in living standards in the long- run. 
D)  government spending increases further causing a rise in living standards in the long- run.

Question 2

According to Say's law:

Accepted Answer

A)  because households save some of their income, not all goods and services produced will be purchased. 
B)  the demand for products creates the supply of products. 
C)  recessions occur because income from the production of goods is insufficient to ensure full employment. 
D)  the act of producing goods and services generates income that is equivalent to the value of goods and services produced enabling buyers to purchase those goods.

Question 3

If the economy is producing at a level above full employment, wages will have to fall until equilibrium is restored.

Accepted Answer

A) True 
 B)False

Question 4

In the long run, the level of output:

Accepted Answer

A)  depends on the price level. 
B)  depends on the money supply. 
C)  is determined by the supply of resources and the level of technological progress. 
D)  all of the above

Question 5

Fiscal policy affects the real interest rate through its impact on:

Accepted Answer

A)  money supply and the price level. 
B)  real GDP and money demand. 
C)  money supply and money demand. 
D)  real GDP and money supply.

Question 6

When the unemployment rate is greater than the natural rate, wages and prices will fall eventually.

Accepted Answer

A) True 
 B)False

Question 7

Classical economists assumed:

Accepted Answer

A)  there is never full employment. 
B)  involuntary unemployment exists. 
C)  the wage rate cannot adjust to equate the quantity of labor demanded with quantity of labor supplied. 
D)  the wage rate adjusts to maintain labor market equilibrium.

Question 8

Monetary neutrality implies that a decrease in the money supply will:

Accepted Answer

A)  not affect the price level. 
B)  increase real GDP. 
C)  decrease real interest rates. 
D)  not affect unemployment.

Question 9

Keynes and Friedman disagreed on the speed of adjustment of nominal wages to changes in prices.

Accepted Answer

A) True 
 B)False

Question 10

Figure 15.3
-Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $15 billion to $10 billion if:

Accepted Answer

A)  the government increases net taxes. 
B)  the government increases government expenditures. 
C)  the government reduces government expenditures. 
D)  the Fed increases the money supply.

Question 11

When the economy is in a liquidity trap, the adjustment process without active policy:

Accepted Answer

A)  will succeed because interest rates are already low. 
B)  will require an increase in the money supply to get the economy back to full employment. 
C)  may fail because interest rates cannot fall any further. 
D)  becomes more effective with lower interest rates.

Question 12

Classical economists believed that:

Accepted Answer

A)  government could intervene in the economy and increase the level of output and employment. 
B)  recessions were not self- correcting. 
C)  unemployment could not persist for extended periods of time. 
D)  the government could lift the economy out of recession.

Question 13

Recall Application 2, "Elections, Political Parties, and Voter Expectations," to answer the following questions:
-According to the application, which political party puts more emphasis on fighting inflation?

Accepted Answer

A)  Democrats 
B)  Republicans 
C)  Libertarians 
D)  Green

Question 14

In the long run, without government intervention, the economy responds to a decrease in aggregate demand with:

Accepted Answer

A)  an increase in short- run aggregate supply. 
B)  a decrease in short- run aggregate supply. 
C)  a second decrease in aggregate demand. 
D)  an increase in aggregate demand.

Question 15

Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions:
-Which of the following most likely caused the low short- term interest rates in 2008?

Accepted Answer

A)  The recession caused by the financial crisis forced the Fed to raise the interest rates. 
B)  The inflation caused by the financial crisis forced the Fed to raise the interest rates. 
C)  The recession caused by the financial crisis forced the Fed to lower the interest rates. 
D)  The inflation caused by the financial crisis forced the Fed to lower the interest rates.

Question 16

When the economy is producing above full employment, the unemployment rate is below the natural rate. This makes it more difficult for:

Accepted Answer

A)  firms to hire workers, causing the wages to rise. 
B)  workers to find jobs, causing the wages to rise. 
C)  firms to hire workers, causing the wages to drop. 
D)  workers to quit jobs, causing the wages to drop.

Question 17

Which of the following sequence of events occurs in response to an expansionary fiscal policy?

Accepted Answer

A)  Real GDP increases, causing money demand to increase, causing interest rates to increase and investment to decrease. 
B)  Real GDP decreases, causing the demand for money to increase, causing interest rates to increase and investment to increase. 
C)  Real GDP increases, causing money demand to increase, causing interest rates to decrease and investment to increase. 
D)  Real GDP increases, causing money demand to decrease, causing the interest rate to decrease and investment to increase.

Question 18

Monetary neutrality implies that an increase in the money supply will:

Accepted Answer

A)  increase the price level. 
B)  increase real interest rates. 
C)  lower real GDP. 
D)  lower the unemployment rate.

Question 19

What does the Say's Law imply about the possibility of an economy in a recession or a boom?

Accepted Answer

The answer of What does the Say's Law imply about...

Question 20

Suppose the economy is initially operating at the potential level of output. Graphically illustrate and explain what effect a one- time increase in government spending will have on output and the price level in the short run and in the long run.

Accepted Answer

The answer of Suppose the economy is initially operating at...

Exam 15: Modern Macroeconomics: From the Short Run to the Long Run

Recall Application 3, "Increasing Health-Care Expenditures and Crowding Out," to answer the following questions: -According to the application, as individuals increase spending on health- care:

According to Say's law:

If the economy is producing at a level above full employment, wages will have to fall until equilibrium is restored.

In the long run, the level of output:

Fiscal policy affects the real interest rate through its impact on:

When the unemployment rate is greater than the natural rate, wages and prices will fall eventually.

Classical economists assumed:

Monetary neutrality implies that a decrease in the money supply will:

Keynes and Friedman disagreed on the speed of adjustment of nominal wages to changes in prices.

Figure 15.3 -Refer to Figure 15.3. At full employment equilibrium, investment would decrease from $15 billion to $10 billion if:

When the economy is in a liquidity trap, the adjustment process without active policy:

Classical economists believed that:

Recall Application 2, "Elections, Political Parties, and Voter Expectations," to answer the following questions: -According to the application, which political party puts more emphasis on fighting inflation?

In the long run, without government intervention, the economy responds to a decrease in aggregate demand with:

Recall Application 1, "Avoiding a Liquidity Trap," to answer the following questions: -Which of the following most likely caused the low short- term interest rates in 2008?

When the economy is producing above full employment, the unemployment rate is below the natural rate. This makes it more difficult for:

Which of the following sequence of events occurs in response to an expansionary fiscal policy?

Monetary neutrality implies that an increase in the money supply will:

What does the Say's Law imply about the possibility of an economy in a recession or a boom?

Suppose the economy is initially operating at the potential level of output. Graphically illustrate and explain what effect a one- time increase in government spending will have on output and the price level in the short run and in the long run.