Q&A Hero

Q: Most economists believe that changes in the price level have A) no effect on the quantity of output supplied in either the short run or the long run. B) an effect on the quantity of output supplied in the short run, but not in the long run. C) an effect on the quantity of output supplied in the long run, but not in the short run. D) an effect on the quantity of output supplied in both the short run and the long run.

Q: The aggregate supply curve represents levels of output that producers are willing to sell at A) each level of the real interest rate. B) each level of real GDP. C) each price level. D) each inflation rate.

Q: How does an increase in interest rates affect net exports?

Q: How does an increase in the price level lead to a higher interest rate?

Q: Why is the short-term nominal interest rate the opportunity cost of holding money?

Q: How does an increase in the price level result in higher interest rates? A) It increases the real money supply. B) It decreases the real money supply. C) It increases the real money demand. D) It decreases the real money demand.

Q: How does an increase in the short-term interest rate affect peoples' desire to hold real money balances? A) People will hold more money to compensate for the higher interest rate. B) People will hold more money in anticipation of higher inflation. C) People will hold less money since they would be sacrificing more interest by holding money. D) People will hold less money since it is not worth as much.

Q: The opportunity cost of holding money is measured by: A) short-term nominal interest rate B) short-term real interest rate C) long-term nominal interest rate D) long-term real interest rate

Q: An increase in all of the following will increase aggregate demand EXCEPT A) investment. B) savings. C) exports. D) government spending.

Q: If there is a decrease in foreign demand for U.S. goods due to a recession in Europe A) the U.S. aggregate demand will shift right. B) the U.S. aggregate demand will shift left. C) the U.S. aggregate demand will not be affected. D) the U.S. aggregate demand will become steeper.

Q: If there is a decrease in the expected future profitability of capital, A) the aggregate demand curve will shift right. B) the aggregate demand curve will shift left. C) the aggregate demand curve will become steeper. D) the aggregate demand curve will be unaffected.

Q: Which of the following would NOT shift the aggregate demand curve to the left? A) an increase in money demand B) a cut in federal government spending C) a reduction in federal income taxes D) a decrease in consumption spending

Q: Which of the following would shift the aggregate demand curve to the left? A) an increase in the money supply B) a cut in federal income taxes C) an expected decrease in future income D) an increase in the price level

Q: Which of the following will NOT shift the aggregate demand curve to the right? A) a decline in the price level B) an increase in government expenditures C) an increase in investment D) an increase in the money supply

Q: A shift of the AD curve A) to the right is considered expansionary, and a shift to the left is considered contractionary. B) to the left is considered expansionary, and a shift to the right is considered contractionary. C) to the right or to the left is considered contractionary. D) to the right or to the left is considered expansionary.

Q: An increase in the price level reduces net exports because A) it leads indirectly to a higher exchange rate. B) it leads indirectly to a lower exchange rate. C) it leads indirectly to a lower real interest rate. D) it leads directly to higher real money balances.

Q: A decrease in the price level will lead to A) a decrease in the real interest rate and an increase in net exports. B) an increase in the real interest rate and an increase in net exports. C) a decrease in the real interest rate and a decrease in net exports. D) an increase in the real interest rate and a decrease in net exports.

Q: Everything else being constant, a lower real interest rate A) increases desired saving and net exports. B) decreases desired saving but increases net exports. C) increases desired saving and investment. D) increases desired investment but decreases net exports.

Q: A rise in the real interest rate will cause which of the components of aggregate demand to decline? A) Only C B) Only C and I C) Only C, I, and NX D) C, I, G, and NX

Q: The best explanation of why the aggregate demand curve has a negative slope is that A) at a higher price level households cut back on their spending on goods and services. B) at a higher price level business firms wish to produce more goods and services. C) a higher price level results in lower real balances and a higher real interest rate. D) a higher price level results in less government spending on transfers, such as unemployment insurance and social security payments.

Q: The aggregate demand curve illustrates the relationship between A) the aggregate expenditure for goods and services, and the real interest rate. B) the aggregate expenditure for goods and services, and the level of current output. C) the level of current output and the real interest rate. D) the aggregate expenditure for goods and services, and the price level.

Q: Which of the following expressions is correct? A) AE = C + I + G - NX. B) AE = C + I + G + NX. C) AE = C + I + (G - T) + NX. D) AE = C + I + (G - T) - NX.

Q: Which of the following is NOT included in aggregate demand? A) Demand for goods and services for consumption B) Investment in business plant and equipment C) Net exports D) Investment in Treasury bonds

Q: According to some economists, what contributed to the unusual uncertainty that adversely affected aggregate supply during the recovery following the recession of 2007-2009?

Q: Explain why some economists claim that the persistence of high unemployment rates during the recovery from the recession of 2007—2009 is evidence of "hysteresis."

Q: All of the following have been proposed as reasons for an unusually high level of uncertainty following the financial crisis of 2007-2009 EXCEPT: A) the severity of the financial crisis B) concerns of small businesses regarding how the Affordable Care Act would affect the cost of hiring workers C) concerns by households and firms regarding potential tax increases and spending cuts scheduled to take place in January 2013 D) the Fed indicating that it would withdraw stimulus as soon as there was any evidence of economic recovery

Q: All of the following have been proposed as explaining the limited effectiveness of monetary policy during and after the Financial Crisis of 2007-2009 EXCEPT: A) recessions accompanied by financial crises tend to be severe B) a high level of uncertainty due in part to government policy C) the reluctance of the Fed to implement nonconventional policies D) structural changes as important sectors of the economy were deeply affected by the financial crisis

Q: According to Robert Gordon, what led to the decline in unemployment in the 1940s? A) structural barriers to expanding output and employment disappeared once a sufficiently large increase in aggregate demand had taken place B) decline in unionization of the workforce C) President Truman moving away from the policies implemented by President Roosevelt D) the strengthening of property rights following the end of the New Deal

Q: Which of the following was NOT cited as contributing to unusual uncertainty having an adverse effect on aggregate supply? A) the possibility that Congress may let the 2001, 2003 tax cuts to expire B) the Fed's limited use of monetary policy in fighting the recession C) the severity of the financial crisis D) concern that the Affordable Care Act would increase the cost of hiring workers

Q: Economists who are skeptical of hysteresis in Europe during the 1980s and 1990s cite all of the following as reasons for persistently high unemployment in Europe EXCEPT A) generous unemployment benefits. B) restrictions on firms' ability to hire and fire workers. C) the existence of an ongoing recession. D) high tax rates.

Q: An argument in support of hysteresis is A) companies may be reluctant to hire workers until AD increases. B) prices are sticky in the short run. C) the skills of unemployed workers may deteriorate making it more difficult to find a job. D) overlapping wage contracts.

Q: Which of the following is NOT a reason for the weak recovery following the 2007-2009 recession? A) Recessions started by financial crises are almost always severe. B) The decline in the automobile industry appeared to be structural. C) The collapse of the housing market was long lived. D) The recession was caused by a decline in short-run aggregate supply.

Q: In comparing the views of economists on stabilization policy in the 1960s with the current views of economists on stabilization policy, one can say A) few economists in the 1960s favored stabilization policy, while most economists currently favor stabilization policy. B) economists' views on stabilization policy have changed very little since the 1960s. C) fewer economists currently believe it is possible to use stabilization policy to fine-tune the economy than in the 1960s. D) almost no economists in the currently believe stabilization policy should be used.

Q: An expansionary monetary policy that successfully counteracts a recession has the side effect of A) lower investment spending than if no action had been taken. B) a larger government deficit than if no action had been taken. C) a higher price level than if no action had been taken. D) lower output than if no action had been taken.

Q: Which of the following statements concerning stabilization policy is correct? A) Increasing government spending during an economic boom would be an example of a stabilization policy. B) Increasing taxes during a recession would be an example of a stabilization policy. C) New Keynesian economists are skeptical of the value of stabilization policies. D) Increasing the money supply during a recession is an example of a stabilization policy.

Q: Stabilization policy refers to attempts to A) shift the AD curve to smooth short-run fluctuations in output. B) shift the SRAS curve to smooth short-run fluctuations in output. C) shift the AD curve to keep the price level as low as possible. D) shift the SRAS curve to keep the nominal interest rate as low as possible.

Q: Why are many economists skeptical of the Fed's ability to fine tune the economy? A) Monetary policy only affects output in the long run. B) Lags in policy make it difficult to properly time policy. C) Fiscal policy can be implemented more quickly than monetary policy. D) Monetary policy does not have any effect on output.

Q: Analyze the following statement: "I know the fact that prices have started to rise rapidly seems like bad news, but at least prices starting to go up means that output must be starting to go up as well."

Q: Suppose that many households look to the stock market to gauge how the economy is likely to perform in the future. When stock prices are rising, then households will be optimistic about the future state of the economy and will increase their spending on houses and consumer durables, such as cars and furniture. When stock prices are falling, then households will be pessimistic about the future and will cut back on their spending. If this view of the link between stock prices and household spending is correct, then what will be the effect of a decline in stock prices on output in the new Keynesian view? Be sure to distinguish the short run from the long run.

Q: Suppose that initially U.S. households are saving only a small fraction of their incomes because they are relying on rapid increase in stock prices to increase their wealth. If stock prices decline and households decide to increase their saving rate, what will be impact on output in the new Keynesian view? Be sure to distinguish the short run from the long run.

Q: Which of the following most accurately describes the behavior of the U.S. economy during the 2001 recession? A) Aggregate demand fell as business investment declined while aggregate supply rose as a result of continued productivity growth. B) Aggregate demand fell primarily as a result of reduced consumption while aggregate supply increased due to continued growth in productivity. C) Aggregate demand fell due to a reduction in business investment while aggregate supply declined due to a reduction in productivity. D) Aggregate demand fell due to the bursting of the housing bubble while aggregate supply fell due to slower productivity growth.

Q: The proposition of monetary neutrality states that changes in the money supply have: A) no impact on output in the short run B) no impact on output in the long run C) no impact on the price level in the short run D) no impact on the price level in the long run

Q: The automatic mechanism can best be described as: A) the process of the economy adjusting back to potential GDP without any action taken by the government B) the result of monetary policy implemented by the Fed restoring full employment C) how fiscal policy is used to return the economy to its potential D) using rule-based policies to stabilize the economy

Q: The result of the supply shocks of 1973-1974 was to A) reduce aggregate output and raise the price level. B) reduce the price level and raise aggregate output. C) reduce both aggregate output and the price level. D) raise both aggregate output and the price level.

Q: During the years from 1964 to 1969, inflation increased in the United States A) when the AD curve shifted up and to the right, even though the SRAS curve remained stable. B) when the SRAS curve shifted up and to the left, even though the AD curve remained stable. C) when the AD curve shifted up and to the right and the SRAS curve shifted up and to the left. D) despite the AD and SRAS curves remaining stable.

Q: The Federal Reserve pursued an expansionary monetary policy during 1964 in order to A) pull the United States out of a deep recession. B) counteract the effects of a deep cut in federal income taxes. C) keep interest rates from rising. D) bring down the inflation rate.

Q: In the long run, one-time increases or decreases in the nominal money supply affect A) real output, but not the price level. B) the price level, but not real output. C) both real output and the price level. D) neither real output nor the price level.

Q: In the long run, the key reason that money is neutral is that A) the federal budget is balanced. B) prices are flexible. C) business cycles have become much milder. D) the nominal interest rate must equal the real interest rate.

Q: When economists state that money is neutral in the long run, they mean that in the long run, A) fluctuations in the money supply are equally likely to lead to recessions as to expansions. B) changes in the money supply have the same impact on the rich as they do on the poor. C) the level of output is independent of the nominal money supply. D) the price level is independent of the nominal money supply.

Q: Monetary neutrality refers to the fact that changes in the money supply A) affect output more in the long run than in the short run. B) have no effect on output in the long run. C) affect only output in the long run. D) have a greater effect on prices in the short run than in the long run.

Q: According to AD-AS model, the primary long-run effect of increases in the money supply is A) higher price level. B) higher GDP. C) lower price level. D) lower GDP.

Q: According to the aggregate demand-aggregate supply model, what is the short-run impact of a reduction in the money supply by the Fed? A) Current output will fall, but the price level will rise. B) Current output will rise, but the price level will fall. C) Current output and the price level will both rise. D) Current output and the price level will both fall.

Q: Economists generally agree that in the long run changes in aggregate demand affect A) aggregate output but not the price level. B) the price level but not aggregate output. C) both the price level and aggregate output. D) neither the price level nor aggregate output.

Q: If the economy is initially at equilibrium and an unexpected decline in aggregate demand takes place, in the short run aggregate output will A) fall in the new classical view, but not in the new Keynesian view. B) fall in the new Keynesian view, but not in the new classical view. C) fall in both the new Keynesian and new classical views. D) remain at full employment in both the new classical and new Keynesian views.

Q: If labor costs rise at the same time that the federal government decreases its purchases, in the short run A) aggregate output and the price level will both increase. B) aggregate output will increase, but the price level will fall. C) aggregate output and the price level will both fall. D) aggregate output will fall, but the price level may either increase or decrease.

Q: If the expected price level increases at the same time that the federal government cuts taxes, in the short run A) aggregate output and the price level will both increase. B) aggregate output will increase, but the price level will fall. C) aggregate output and the price level will both fall. D) the price level will increase, but aggregate output may either increase or decrease.

Q: If oil prices fall at the same time that the federal government increases its purchases, in the short run A) aggregate output and the price level will both increase. B) aggregate output will increase, but the price level will fall. C) aggregate output and the price level will both fall. D) aggregate output will increase, but the price level may either increase or decrease.

Q: When output is below its full-employment level, the short-run aggregate supply will shift down and to the right because A) the expected price level will be below the actual price level. B) workers' wages will decline. C) prices of nonlabor inputs will rise. D) workers' wages will rise.

Q: When output exceeds its full-employment level, A) the short-run aggregate supply function shifts up. B) wages fall. C) the short-run aggregate supply function shifts down. D) aggregate supply exceeds aggregate demand.

Q: In the aggregate demand-aggregate supply model, if entrepreneurs become convinced that future profitability of capital has increased, A) current output will fall, but the price level will rise. B) current output will rise, but the price level will fall. C) current output and the price level will both rise. D) current output and the price level will both fall.

Q: What are the principal sources of change in productivity growth?

Q: Explain what happens to the short-run aggregate supply curve when output exceeds its potential.

Q: According to New Keynesians, why can firms increase output in the short run in response to higher prices?

Q: How do new Keynesians use menu costs to help explain price stickiness in the short run?

Q: How do New Keynesians use the existence of long-term nominal contracts to help explain the failure of prices to adjust in the short run?

Q: According to the New Classical theory, why may output differ from its full-employment level in the short run?

Q: Make use of the misperceptions theory to explain why the short-run aggregate supply curve is upward sloping.

Q: Which of the following is NOT an example of a supply shock? A) a drought in the Midwest B) a decline in natural gas prices following discovery of new fields C) the introduction of a new line of computer-controlled machine tools in manufacturing D) a substantial increase in federal government spending on Medicare

Q: Which of the following is most likely to have an impact on the growth of productivity? A) a decrease in the price level B) a decrease in real money balances C) an increase in the labor supply D) improvements in worker training

Q: Productivity growth occurs when: A) there are more inputs B) firms can produce more output per unit of input C) more output is produced D) employees work extra hours

Q: Some economists have predicted that recent developments in energy production in the United States are estimated to result in all of the following EXCEPT: A) millions of new jobs B) the United States having the lowest energy costs of any country in the industrialized world C) a substantial increase in GDP over time D) significant increases in pollution

Q: Which of the following would cause the long-run aggregate supply curve to shift? A) an increase in the price level B) a decrease in the expected price level C) an increase in labor productivity D) an autonomous increase in consumption spending

Q: An increase in the price level A) shifts the short-run aggregate supply curve up and to the left. B) shifts the short-run aggregate supply curve down and to the right. C) shifts the long-run aggregate supply curve to the left. D) results in a movement along the short-run aggregate supply curve, rather than a shift in the short-run aggregate supply curve.

Q: An increase in the expected price level A) shifts the short-run aggregate supply curve up and to the left. B) shifts the short-run aggregate supply curve down and to the right. C) has no effect on the short-run aggregate supply curve. D) results in a movement along the short-run aggregate supply curve, rather than a shift in the short-run aggregate supply curve.

Q: An increase in oil prices will A) shift the short-run aggregate supply curve up and to the left. B) shift the short-run aggregate supply curve down and to the right. C) cause a movement along the short-run aggregate supply curve. D) not affect the short-run aggregate supply curve.

Q: Which of the following will NOT shift the short-run aggregate supply function? A) changes in labor costs B) changes in the costs of nonlabor inputs C) changes in the price level D) changes in the expected price level

Q: Which of the following statements is correct? A) New classicals believe that the aggregate supply curve is a vertical line in both the short run and the long run. B) Both new classicals and new Keynesians believe that the aggregate supply curve is vertical in the long run. C) New Keynesians believe that the aggregate supply curve is vertical in the short run but not in the long run. D) New Keynesians believe that the aggregate supply curve slopes upward in the long run.

Q: Which of the following statements is correct? A) New classicals believe that the aggregate supply curve is vertical in the short run. B) New Keynesians believe that the aggregate supply curve is vertical in the short run. C) New Keynesians believe that the aggregate supply curve slopes upward in the long run. D) New classicals believe that the aggregate supply curve slopes upward in the short run.

Q: In the new Keynesian view, the larger the proportion of firms in the economy with sticky prices, A) the steeper the SRAS curve will be. B) the flatter the SRAS curve will be. C) the greater the increase in the price level for a given shift in the AD curve. D) the less effective is fiscal policy in increasing output.

Q: In the new Keynesian view a monopolistically competitive firm may fail to increase the price of its product as demand increases because A) if it does so it will lose all of its customers. B) the cost to it of changing prices may exceed the benefit of doing so. C) prices of monopolistically competitive firms are regulated by the federal government and may only be changed with permission. D) for a monopolistically competitive firm, price is below marginal cost.