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Copyright?2009PearsonEducation,Inc.PublishingasPrenticeHall.

CHAPTER7.PUTTINGALLMARKETSTOGETHER.THEAS-ADMODEL.

MULTIPLECHOICEQUESTIONS

1.Intheaggregatesupplyrelation,thecurrentpriceleveldependsupon:

a.expectedpricelevel.

b.monetarypolicy.

c.fiscalpolicy.

d.consumerconfidence.

e.alloftheabove.

2.Basedontheaggregatesupplyrelation,anincreaseincurrentoutputwillcause:

a.ashiftoftheaggregatesupplycurve.

b.anincreaseinthecurrentpricelevel.

c.achangeintheexpectedpricelevelthisyear.

d.anincreaseintheexpectedpricelevelandanupwardshiftoftheAScurve.

e.anincreaseinthemarkupoverlaborcosts.

3.Whichofthefollowingwillcausetheaggregatesupplycurvetoshiftdown?

a.anincreaseinfirms'markupoverlaborcosts.

b.anincreaseintheexpectedpricelevel.

c.anincreaseinunemploymentbenefits.

d.alloftheabove.

e.noneoftheabove.

4.Whenthecurrentpricelevelisequaltotheexpectedpricelevel,weknowthat:

a.theunemploymentrateiszero.

b.thegoodsmarketandfinancialmarketsareinequilibrium.

c.theoutputisequaltothenaturallevelofoutput.

d.themoneymarketisinequilibrium.

e.noneoftheabove.

5.Whentheeconomyisoperatingatapointwhereoutputisgreaterthanthenaturallevelofoutput,whichofthefollowingoccurs?

a.theunemploymentrateislessthanthenaturalunemploymentrate.

b.thepricelevelisgreaterthantheexpectedpricelevel.

c.thepricelevelwillbehighernextperiodthanitisthisperiod.

d.alloftheabove.

e.noneoftheabove.

6.Intheaggregatedemandrelation,anincreaseinthepricelevelcausesoutputtodecreasebecauseofitseffecton:

ernmentspending.

b.themoneymarketand,subsequently,investment.

c.thenominalwage.

d.firms'markupoverlaborcosts.

e.theexpectedpricelevel.

7.Theaggregatedemandcurvewillshifttotherightwhenwhichofthefollowingoccurs?

a.areductioninthemoneysupply.

b.areductioninconsumerconfidence.

c.ariseinthepricelevel.

d.areductionintaxes.

e.adecreaseinthepricelevel.

8.BasedonyourunderstandingoftheAS/ADmodel,whichofthefollowingisanINCORRECTstatementabouttheshort-runadjustmentprocessforthemacroeconomy?

a.Outputinexcessofthenaturallevelleadstohigherprices.

b.Areductioninemploymentleadstolowerprices.

c.Anincreaseindemandincreasesoutput.

d.Anincreaseinoutputabovethenaturallevelleadstohighernominalwages.

e.noneoftheabove

9.Whichofthefollowingrepresentsashort-runeffectofamonetaryexpansion?

a.anincreaseinoutput.

b.areductionintheinterestrate.

c.anincreaseinthepricelevel.

d.alloftheabove.

e.noneoftheabove.

10.Supposeacentralbankimplementsamonetarycontraction.Whichofthefollowingwouldweexpecttooccurintheshortrun?

a.areductioninthenominalwage.

b.theADcurvetoshifttotheright.

c.thepricesettingcurvetoshiftdown.

d.thewagesettingcurvetoshiftupward.

e.thewagesettingcurvetoshiftdownward.

11.Supposeacentralbankimplementsamonetarycontraction.Whichofthefollowingwouldweexpecttooccurinthemediumrun?

a.adeclineinoutput.

b.anincreaseintheinterestrate.

c.adecreaseinthenominalwage.

d.alloftheabove.

e.noneoftheabove.

12.Assumetheeconomyisinitiallyoperatingatthenaturallevelofoutput.Whichofthefollowingeventswillinitiallycauseashiftoftheaggregatesupplycurve?

a.anincreaseinthemoneysupply.

b.anincreaseingovernmentspending.

c.anincreaseinconsumerconfidence.

d.alloftheabove.

e.noneoftheabove.

13.Whichofthefollowingwouldincreasetheshort-runoutputeffectsofamonetaryexpansion?

a.anincreaseinthemarginalpropensitytoconsume.

b.anincreaseintheinterestratesensitivityofinvestment

c.TheIScurveisveryflat.

d.alloftheabove.

e.noneoftheabove.

14.Theneutralityofmoneyisconsistentwithwhichofthefollowingstatements?

a.changesinthemoneysupplywillnotaffectemploymentintheshortrun.

b.changesinthemoneysupplywillnotaffectemploymentinthemedium.

c.changesinthemoneysupplywillnotaffectthepricelevelintheshortrun

d.changesinthemoneysupplywillnotaffectthepricelevelinthemediumrun

15.ResultsobtainedfromtheTaylormodelsuggestthatittakesroughlyhowlongfortheeffectsofmoneytobecomeneutral?

a.onemonth.

b.threemonths.

c.oneyear.

d.fouryears.

e.tenyears.

16.ResultsobtainedfromtheTaylormodelsuggestthattheoutputeffectsofachangeinthemoneysupplyaregreatestafterapproximatelyhowlong?

a.onemonth.

b.onequarter.

c.threequarters.

d.fouryears.

e.tenyears.

17.Assumetheeconomyisinitiallyoperatingatthenaturallevelofoutput.Nowsupposeabudgetispassedthatcallsforanincreaseingovernmentspending.Thisincreaseingovernmentspendingwill,intheshortrun,causeanincreasein

a.theinterestrate.

b.thepricelevel.

c.thenominalwage.

d.alloftheabove.

e.noneoftheabove.

18.Assumetheeconomyisinitiallyoperatingatthenaturallevelofoutput.Nowsupposeabudgetispassedthatcallsforanincreaseingovernmentspending.Thisincreaseingovernmentspendingwill,inthemediumrun,haveNOeffectonwhichofthefollowing?

a.employment.

b.theinterestrate.

c.thepricelevel.

d.alloftheabove.

e.noneoftheabove.

19.Assumetheeconomyisinitiallyoperatingatthenaturallevelofoutput.WhichofthefollowingeventswillNOTchangethecompositionofoutput(i.e.,thepercentageofGDPcomposedofconsumption,investment,...etc.)inthemediumrun?

a.Areductioningovernmentspending.

b.Acutintaxes.

c.Areductioninthedesiretosave.

d.Anincreaseinconsumerconfidence.

e.Anincreaseinthemoneysupply.

20.Assumetheeconomyisinitiallyoperatingatthenaturallevelofoutput.Nowsupposethatindividualsdecidetoreducetheirdesiretosave.Weknowwithcertaintythatwhichofthefollowingwilloccurintheshortrunasaresultofdecreaseddesiretosave?

a.greaterinvestment.

b.lessinvestment.

c.anincreaseinthenominalwage.

d.higheroutputandlowerinvestment.

e.nochangeintheeconomyatall.

21.Assumetheeconomyisinitiallyoperatingatthenaturallevelofoutput.Supposethatindividualsdecidetodecreasetheirsaving.Weknowthatthisdecreaseddesiretosavewillbe"neutral"in:

a.theshortrun,butnotthemediumrun.

b.themediumrun,butnotthelongrun.

c.neitherthemediumrunnortheshortrun.

d.boththeshortrunandthemediumrun.

e.noneoftheabove.

22.From1970tothemid-1990s,therelativepriceofcrudepetroleum

a.steadilyincreased.

b.steadilydecreased.

c.increaseddramatically,thendecreaseddramatically.

d.decreaseddramatically,thenincreaseddramatically.

e.remainedmoreorlessthesame.

23.Intheshortrun,areductioninthepriceofoilwillcause:

a.areductioninoutput.

b.anincreaseinthepricelevel.

c.areductionintheinterestrate.

d.alloftheabove.

e.noneoftheabove.

24.Anincreaseinthepriceofoilwillcausewhichofthefollowinginthemediumrun?

a.nochangeinthelevelofoutput.

b.nochangeinthepricelevel.

c.anincreaseintheunemploymentrate.

d.areductionintheinterestrate.

e.noneoftheabove.

25.AnswerthisquestionusingtheAS/ADmodelpresentedinthetextbook.Whichofthefollowingwouldcauseareductioninthenaturallevelofoutputinthemediumrun?

a.adecreaseingovernmentspending.

b.adecreaseinthemoneysupply.

c.anincreaseintaxes.

d.bothaandc.

e.noneoftheabove.

26.Theaggregatedemand(AD)curvepresentedinthetextbookhasitsparticularshapebecauseofwhichof thefollowingexplanations?

a.anincreaseinthemoneysupply(M)willcauseareductionintheinterestrate,anincreaseininvestment,andanincreaseinoutput

b.anincreaseintheaggregatepricelevel(P)willcauseanincreaseintheinterestrateandareductioninoutput

c.anincreaseinPwillcauseareductionintherealwage,anincreaseinemployment,andanincreaseinoutput

d.asPdecreasesinaclosedeconomy,goodsandservicesbecomerelativelycheaperandindividualsrespondbyincreasingthequantitydemandedofgoodsandservices

27.Theshort-runaggregatesupplycurve(AS)presentedinthetextbookhasitsparticularshapebecauseofwhichofthefollowingexplanations?

a.areductionintheaggregatepricelevelwillcauseareductionintheinterestrateandanincreaseinoutput

b.anincreaseintheaggregatepricelevelcausesanincreaseinnominalmoneydemandandanincreaseintheinterestrate

c.adropinthenominalwagecausesanincreaseintheamountofoutputthatfirmsarewillingtoproduce

d.areductioninoutputcausesareductioninemployment,anincreaseinunemployment,areductioninthenominalwageandareductioninthepricelevel

28.WhichofthefollowingeventswillNOTcauseanincreaseintheaggregatepricelevel?

a.anincreaseinunemploymentbenefits

b.anincreaseinthemarkup

c.anincreaseinPe

d.areductioninoutput

e.noneoftheabove

29.Whichofthefollowingeventswillcauseanincreaseintheaggregatepricelevel?

a.anincreaseintheunemploymentbenefits

b.areductioninthemarkup

c.areductioninPe

d.anincreaseintheunemploymentrate

e.noneoftheabove

30.Ifu<un,weknowwithcertaintythat:

a.P>Pe

b.P<Pe

c.P=Pe

d.Y<Yn

31.IfY<Yn,weknowwithcertaintythat:

a.P>Pe

b.P<Pe

c.P=Pe

d.u<un

32.Atthecurrentlevelofoutput,supposetheactualpricelevelisgreaterthanthepricelevelthatindividuals expect(i.e.,Pt>Pet).Weknowthat:

a.outputiscurrentlybelowthenaturallevelofoutput

b.theinterestratewilltendtoriseastheeconomyadjuststothissituation

c.thenominalwagewilltendtodecreaseasindividualsrevisetheirexpectationsofthepricelevel

d.theAScurvewilltendtoshiftdownovertime

e.noneoftheabove

33.Areductionintheaggregatepricelevelwillcause:

a.anincreaseintheinterestrateandaleftwardshiftintheIScurve

b.adownwardshiftintheLMcurveandareductionintheinterestrate

c.areductionininvestmentandareductioninoutput

d.anambiguouseffectoninvestment

34.Whichofthefollowingeventswillcausethelargestrightwardshift(asmeasuredhorizontally)oftheADcurve?

a.ataxincrease

b.a15%reductionintheaggregatepricelevel

c.a10%increaseinthenominalmoneysupply

d.a15%reductioninthenominalwage

e.noneoftheabove

35.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.An increaseintaxeswillcausewhichofthefollowing?

a.areductioninoutputandnochangeintheaggregatepricelevelintheshortrun

b.areductioninemploymentandnochangeinthenominalwageintheshortrun

c.anincreaseininvestmentinthemediumrun

d.anincreaseintheaggregatepricelevel,nochangeinoutputandnochangeintheinterestrateinthemediumrun

36.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.An increaseinthepriceofoilwillcausewhichofthefollowinginthemediumrun?

a.areductionintheinterestrate

b.areductioninoutputandanincreaseintheaggregatepricelevel

c.areductioninoutputandareductionintheinterestrate

d.areductioninunemployment,anincreaseinthenominalwageandanincreaseintheaggregatepricelevel

e.areductionintheaggregatepricelevelandnochangeinoutput

37.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.A reductioninconsumerconfidencewillcause:

a.anincreaseintherealwageinthemediumrun

b.areductionintherealwageinthemediumrun

c.nochangeintherealwageinthemediumrun

d.ambiguouseffectsontherealwageinthemediumrun

38.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.A reductionintaxeswillcause:

a.anincreaseintherealwageinthemediumrun

b.areductionintherealwageinthemediumrun

c.nochangeinthenominalwageinthemediumrun

d.ambiguouseffectsontherealwageinthemediumrun

e.noneoftheabove

39.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.An increaseinunemploymentbenefitswillcause:

a.anincreaseintherealwageinthemediumrun

b.areductionintherealwageinthemediumrun

c.nochangeintherealwageinthemediumrun

d.ambiguouseffectsontherealwageinthemediumrun

40.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.A monetaryexpansionwillcause:

a.nochangeintherealwageinthemediumrun

b.anincreaseininvestmentinthemediumrun

c.areductionintheinterestrateinthemediumrun

d.nochangeinthenominalwageinthemediumrun

41.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.Aone- time5%reductioninthenominalmoneysupplywillcause:

a.a5%reductioninthepricelevelinthemediumrun

b.a5%increaseintheinterestrate(i)inthemediumrun

c.a5%reductionintherealmoneysupplyinthemediumrun

d.alloftheabove

42.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.Afiscal contractionmustcause:

a.anincreaseininvestmentinthemediumrun

b.areductionininvestmentintheshortrun

c.nochangeininvestmentinthemediumrun

d.anincreaseininvestmentintheshortrun

e.noneoftheabove

43.ResultsobtainedfromtheTaylormodelsuggestthattheeffectsofchangesinthenominalmoneysupply areneutralafter:

a.2years

b.4years

c.6years

d.8years

44.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.A reductioninconsumerconfidencewillcause:

a.anincreaseininvestmentintheshortrun

b.areductionintherealwageinthemediumrun

c.anincreaseintheinterestrateinthemediumrun

d.ambiguouseffectsoninvestmentinthemediumrun

e.noneoftheabove

45.Forthisquestion,assumethattheeconomyisinitiallyoperatingatthenaturallevelofoutput.A simultaneousreductionintaxesandreductioninthemoneysupplywillcausewhichofthefollowing?

a.anincreaseinoutputandanincreaseintheaggregatepricelevelintheshortrun

b.areductioninoutputandareductioninthenominalwageintheshortrun

c.areductionininvestmentinthemediumrun

d.areductionintheinterestrateinthemediumrun

e.anincreaseintheaggregatepricelevel,nochangeinoutput,andnochangeintheinterestrateinthemediumrun

46.Anincreaseinthepriceofoilwilltendtocausewhichofthefollowing?

a.anincreaseinthenaturalrateofunemployment

b.anincreaseinthepricelevel

c.anincreaseintheinterestrate

d.alloftheabove

47.Areductioninthepriceofoilwilltendtocausewhichofthefollowing?

a.nochangeintherealwageinthemediumrun

b.anincreaseintheaggregatepricelevelasoutputincreases

c.anincreaseininvestmentinthemediumrun

d.nochangeintheinterestrateinthemediumrun

48.Asproductmarketsbecomemorecompetitiveandthemarkupdecreases,wewouldexpectwhichofthe followingtooccur?

a.nochangeintherealwageinthemediumrun

b.anincreaseintheaggregatepricelevelandanincreaseinoutputinthemediumrun

c.anincreaseintheinterestrateinthemediumrun

d.nochangeinoutputinthemediumrun

e.anincreaseintherealwageinthemediumrun

49.Supposetheminimumwagedecreases.Giventhisevent,wewouldexpectwhichofthefollowingto occur?

a.areductioninthepricelevelandanincreaseinoutputinthemediumrun

b.anincreaseintheaggregatepricelevelasoutputincreases

c.anincreaseintheinterestrateinthemediumrun

d.noneoftheabove

ESSAYQUESTIONS

1.Explainwhattheaggregatesupplycurverepresentsandwhyitisupwardsloping.

2.Explainwhattheaggregatedemandcurverepresentsandwhyitisdownwardsloping.

3.Explainwhateffectareductioninthemoneysupplyhasontheaggregatedemandcurve.

4.Explainhowareductionineachofthefollowingvariablesaffectstheaggregatepricelevel(P):(1)theexpectedpricelevel;(2)employment;(3)themarkup;and(4)unemploymentbenefits.

5.Supposetheeconomyisoperatingatapointwhereoutputisgreaterthanthenaturallevelofoutput.Giventhisinformation,istheactualpricelevelequaltotheexpectedpricelevelatthecurrentlevelofoutput?Explain.

6.Supposetheeconomyisoperatingatapointwhereoutputislessthanthenaturallevelofoutput.Giventhisinformation,istheactualpricelevelequaltotheexpectedpricelevelat