Questions:
1. A favorable supply shock will cause:
a. unemployment to rise and the short-run Phillips curve to shift right.
b. unemployment to rise and the short-run Phillips curve to shift left.
c. unemployment to fall and the short-run Phillips curve to shift right.
d. unemployment to fall and the short-run Phillips curve to shift left.
2. The wealth effect, interest-rate effect, and exchange-rate effect are all explanations for:
a. the slope of short-run aggregate supply.
b. the slope of long-run aggregate supply.
c. the slope of the aggregate-demand curve.
d. everything that makes the aggregate-demand curve shift.
3. Other things the same, an increase in the amount of capital firms wish to purchase would initially shift:
a. aggregate demand right.
b. aggregate demand left.
c. aggregate supply right.
d. aggregate supply left.
4. Which of the following would cause stagflation?
a. Rising government expenditures
b. Rising oil prices
c. A falling money supply
d. Technical progress
5. Depending on the size of the multiplier and crowding-out effects, the rightward shift in aggregate demand from a tax cut could be larger or smaller than the tax cut.
a. True
b. False
6. Which of the following is upward sloping?
a. Both the long-run Phillips curve and the long-run aggregate supply curve
b. Neither the long-run Phillips curve nor the long-run aggregate supply curve
c. The long-run Phillips curve, but not the long-run aggregate supply curve
d. The short-run Phillips curve, but not the long-run aggregate supply curve
7. Most economists believe that classical theory describes the world in the short run but not in the long run.
a. True
b. False
8. The multiplier for this economy is:
a. 2.86
b. 2.98
c. 4.00
d. 5.00
9. A shift of the money-demand curve from MD2 to MD1 is consistent with which of the following sets of events?
a. The government reduces government spending, resulting in a decrease in people's incomes.
b. The Federal Reserve increases the supply of money, which decreases the interest rate.
c. All of the choices apply.
10. In the short run, an increase in the money supply causes interest rates to:
a. increase and aggregate demand to shift right.
b. increase and aggregate demand to shift left.
c. decrease and aggregate demand to shift right.
d. decrease and aggregate demand to shift left.
11. The theory of liquidity preference was developed by Irving Fisher.
a. True
b. False
12. If the marginal propensity to consume is 6/7, then the multiplier is 7.
a. True
b. False
13. Aggregate demand includes:
a. only the quantity of goods and services households want to buy.
b. only the quantity of goods and services households and firms want to buy.
c. only the quantity of goods and services households, firms, and the government want to buy.
d. the quantity of goods and services households, firms, the government, and customer abroad want to buy.
14. If speculators bid up the value of the U.S. dollar in the market for foreign exchange, then:
a. U.S. goods become more expensive relative to foreign goods, so aggregate demand shifts right.
b. U.S. goods become less expensive relative to foreign goods, so aggregate demand shifts right.
c. U.S. goods become more expensive relative to foreign goods, so aggregate demand shifts left.
d. U.S. goods become less expensive relative to foreign goods, so aggregate demand shifts left.
15. The sticky-wage theory of the short-run aggregate supply curve states that when the price level rises more than expected:
a. production is more profitable and employment rises.
b. production is more profitable and employment falls.
c. production is less profitable and employment rises.
d. production is less profitable and employment falls.
16. An adverse supply shock shifts the short-run Phillips curve right and the short-run aggregate-supply curve left.
a. True
b. False
17. According to the Phillips curve, unemployment and inflation are inversely related in:
a. the short run and the long run.
b. the short run, but not the long run.
c. the long run, but not the short run.
d. neither the long run nor the short run.
18. If the Fed announced a policy to reduce inflation and people found it credible, the short-run Phillips curve would shift:
a. right and the sacrifice ratio would fall.
b. right and the sacrifice ratio would rise.
c. left and the sacrifice ratio would fall.
d. left and the sacrifice ratio would rise.
19. During World War II, government expenditures increased almost five-fold and output almost doubled.
a. True
b. False
20. Suppose the multiplier is 5 and the government increases its purchases by $10 billion. Also, suppose the AD curve would shift from AD1 to AD2 if there were no crowding out; the AD curve actually shifts from AD1 to AD3 with crowding out. Additionally, suppose the horizontal distance between the curves AD1 and AD3 is $20 billion. The extent of crowding out, for any particular level of the price level, is:
a. the horizontal distance between the curves MD1 and MD2.
b. $40 billion.
c. $30 billion.
d. $20 billion.