Q&A Hero

Q: The recognition lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The data lag is A) the time it takes for policy makers to obtain data indicating what is happening in the economy. B) the time it takes for policy makers to be sure of what the data are signaling about the future course of the economy. C) the time it takes to pass legislation to implement a particular policy. D) the time it takes for policy makers to change policy instruments once they have decided on the new policy. E) the time it takes for the policy actually to have an impact on the economy.

Q: The existence of lags prevents the instantaneous adjustment of the economy to policies changing aggregate demand, thereby strengthening the case for A) supply-side policy. B) nonactivists. C) activists. D) demand-management policy.

Q: Nonactivists of policies contend that a policy of shifting the aggregate ________ curve will be costly because it produces ________ volatility in both the price level and output. A) supply; less B) supply; more C) demand; less D) demand; more

Q: If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government A) do nothing. B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Q: If aggregate output is below the natural rate level, activists of policies would recommend that the government A) do nothing. B) try to eliminate the high unemployment by attempting to shift the aggregate supply curve to the right. C) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the right. D) try to eliminate the high unemployment by attempting to shift the aggregate demand curve to the left.

Q: Activists of the policies believe that A) the self-correcting mechanism through wage and price adjustment is very slow. B) wages and prices are sticky. C) the government needs to pursue active policy to eliminate high unemployment when it develops. D) all of the above.

Q: Nonactivists of the policies believe that A) wages and prices are very flexible. B) the self-correcting mechanism is very rapid. C) government action is unnecessary. D) all of the above.

Q: Which of the following statements is correct? A) If most shocks to the economy are aggregate demand shocks or permanent aggregate supply shocks, then policy that stabilizes inflation will also stabilize economic activity, even in the short run. B) If temporary supply shocks are more common, then a central bank must choose between stabilizing inflation and stabilizing output in the short run. C) In the long run, there is no conflict between stabilizing inflation and economic activity in response to shocks. D) all of the above.

Q: When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then A) aggregate demand curve shifts rightward. B) output will be at its potential. C) inflation rate will be higher. D) all of the above. E) both A and B.

Q: When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to A) more stable economic activities. B) a large deviation of output from its potential. C) divine coincidence. D) both B and C.

Q: When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate output drops in the short run. B) output will return to potential output over time. C) aggregate output is stabilized. D) all of the above. E) both A and B.

Q: When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will be unchanged. E) both B and D.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate demand curve shifts leftward. B) output will be unchanged. C) output will be at its potential. D) all of the above. E) both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then A) aggregate demand curve shifts leftward. B) aggregate demand curve shifts rightward. C) output will be unchanged. D) both A and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be higher. B) output will be at its potential. C) output will be unchanged. D) inflation will be unchanged. E) both A and B.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be unchanged. D) inflation will be unchanged.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both B and C.

Q: When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both A and B.

Q: If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then A) potential output falls. B) the long-run aggregate supply curve shifts leftward. C) the short-run aggregate supply curve shifts upward. D) all of the above.

Q: When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will be unchanged. E) both B and D.

Q: When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then A) inflation will be lower. B) output will be at its potential. C) output will be lower. D) inflation will not change. E) both A and B.

Q: The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall A) shifted the aggregate demand curve to the right. B) shifted the aggregate demand curve to the left. C) shifted the aggregate supply curve to the right. D) shifted the aggregate supply curve to the left.

Q: Policy makers cannot achieve both price stability and economic activity stability when facing A) temporary supply shocks. B) permanent supply shocks. C) demand shocks. D) all of the above.

Q: 23.1 Response of Monetary Policy to Shocks

Q: The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages ________ to prevent real wages from ________. A) fall; rising B) fall; falling C) rise; falling D) rise; rising

Q: The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply decreases. A) easy; rise B) easy; fall C) tight; fall D) tight; rise

Q: The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply increases. A) easy; rise B) easy; fall C) tight; fall D) tight; rise

Q: As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.

Q: In the long run, following a combination of a negative demand shock and a temporary negative supply shock, A) both inflation and output return to the original long-run equilibrium values. B) inflation is permanently increased, while output returns to potential output. C) output returns to potential output, while inflation may be higher or lower than its initial value. D) inflation is permanently reduced, while output returns to potential output. E) None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is true of the Chinese experience? A) The worldwide decline in demand led to a collapse of Chinese exports. B) Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly. C) The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S. D) All of the above. E) None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is true of the United Kingdom's experience? A) The increase in the price of oil immediately shifted the AS curve to the left. B) The financial crisis did not take hold right away so the AD curve did not immediately shift. C) Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate. D) All of the above. E) None of the above.

Q: The price of a barrel of oil doubled between 2007 and the middle of 2008. To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued? A) The increase in the price of oil would have immediately shifted the AS curve to the right. B) The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right. C) Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run. D) All of the above. E) None of the above.

Q: Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.

Q: According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

Q: According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of A) increasing aggregate output, lowering unemployment, and raising inflation. B) decreasing aggregate output, raising unemployment, and raising inflation. C) increasing aggregate output, lowering unemployment, and lowering inflation. D) decreasing aggregate output, raising unemployment, and lowering inflation.

Q: According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of A) increasing aggregate output, lowering unemployment, and raising the inflation. B) decreasing aggregate output, raising unemployment, and raising the inflation. C) increasing aggregate output, raising unemployment, and raising the inflation. D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Q: According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of A) increasing aggregate output, lowering unemployment, and raising the inflation. B) decreasing aggregate output, lowering unemployment, and lowering the inflation. C) increasing aggregate output, raising unemployment, and raising the inflation. D) decreasing aggregate output, raising unemployment, and lowering the inflation.

Q: Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They" refers to proponents of A) the natural rate hypothesis. B) monetarism. C) the Phillips curve model. D) real business cycle theory.

Q: This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output. A) The natural rate hypothesis B) Hysteresis C) Real business cycle theory D) The Phillips curve model

Q: A theory of aggregate economic fluctuations called real business cycle theory holds that A) changes in the real money supply are the only demand shocks that affect the natural rate of output. B) aggregate demand shocks do affect the natural rate of output. C) aggregate supply shocks do affect the natural rate of output. D) changes in net exports are the only demand shocks that affect the natural rate of output.

Q: Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) no change; an increase B) no change; a decrease C) an increase; an increase D) a decrease; a decrease

Q: Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change

Q: A positive supply shock causes ________ to ________. A) aggregate demand; increase B) aggregate demand; decrease C) short-run aggregate supply; decrease D) short-run aggregate supply; increase

Q: A negative supply shock causes ________ to ________. A) aggregate demand; increase B) aggregate demand; decrease C) short-run aggregate supply; decrease D) short-run aggregate supply; increase

Q: A decrease in the availability of raw materials that increases the price level is called a ________ shock A) negative demand B) positive demand C) negative supply D) positive supply

Q: If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________. A) rises; leftward B) rises; rightward C) falls; leftward D) falls; rightward

Q: Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply. A) above; fall B) above; rise C) below; fall D) below; rise

Q: Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply. A) above; fall B) above; rise C) below; fall D) below; rise

Q: Everything else held constant, a decrease in the cost of production ________ aggregate ________. A) increases; demand B) decreases; demand C) increases; supply D) decreases; supply

Q: Everything else held constant, an increase in the cost of production ________ aggregate ________. A) increases; demand B) decreases; demand C) increases; supply D) decreases; supply

Q: Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.

Q: According to aggregate demand and supply analysis, the negative demand shock of 2000-2004 had the effect of A) increasing aggregate output, lowering unemployment, and raising inflation. B) decreasing aggregate output, raising unemployment, and raising inflation. C) increasing aggregate output, lowering unemployment, and lowering inflation. D) decreasing aggregate output, raising unemployment, and lowering inflation.

Q: Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) an increase; a decrease

Q: Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.) A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP the the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. A) an increase; an increase B) a decrease; a decrease C) no change; an increase D) no change; a decrease

Q: Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate and ________ in the inflation in the long run. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change

Q: Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the long run and ________ in inflation in the short run. A) an increase; an increase B) a decrease; a decrease C) no change; a decrease D) no change; no change

Q: Suppose the economy is producing at the natural rate of output. Assuming a fixed natural rate of output and everything else held constant, the development of a new, more productive technology will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run. A) an increase; an increase B) a decrease; a decrease C) a decrease; an increase D) no change; no change

Q: Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both inflation and output in the short-run, but in the long-run the only effect is a rise in inflation. A) a decrease; supply B) a decrease; demand C) an increase; supply D) an increase; demand

Q: The fact that an economy always returns to the natural rate level of output is known as A) the excess demand hypothesis. B) the price-adjustment mechanism. C) the self-correcting mechanism. D) the natural rate of unemployment.

Q: Which of the followings does not shift the short-run aggregate supply curve? A) supply shocks. B) persistent positive output gap. C) changes in expected inflation. D) an increase in output gap.

Q: The short-run aggregate supply curve shifts to the right when A) output gap is higher. B) output gap is lower. C) expected inflation is higher. D) expected inflation is lower.

Q: The long-run aggregate supply curve shifts to the right when there is A) an increase in the total amount of capital in the economy. B) an increase in the available technology. C) a decrease in the natural rate of unemployment.. D) A and B. E) A, B, and C.

Q: The long-run aggregate supply curve shifts to the right when there is A) a decrease in the total amount of capital in the economy. B) a decrease in the total amount of labor supplied in the economy. C) a decrease in the available technology. D) a decline in the natural rate of unemployment.

Q: Which of the following increases aggregate supply in the short-run, everything else held constant? A) An increase in the price of crude oil. B) A successful wage push by workers. C) Expectations of a higher inflation. D) A technological improvement that increases worker productivity.

Q: Everything else held constant, a change in workers' expectations about inflation will cause ________ to change. A) aggregate demand B) short-run aggregate supply C) the production function D) long-run aggregate supply

Q: Everything else held constant, if workers expect an increase in inflation, ________ aggregate supply ________. A) long-run; increases B) long-run; decreases C) short-run; decreases D) short-run; increases

Q: Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________. A) short-run; decreases B) short-run; increases C) long-run; increases D) long-run; decreases

Q: ________ flexible wages and prices imply that the short-run aggregate supply curve is ________. A) More; flatter B) Less; steeper C) less; vertical D) More; steeper