Questions:
1. For this question, assume the central bank controls the interest rate and the economy is initially operating at the natural level of output. A reduction in taxes must cause:
a. an increase in investment in the medium run.
b. a reduction in investment in the short run.
c. no change in investment in the medium run.
d. an increase in investment in the short run.
e. none of the above
2. When the price level is equal to the expected price level, we know from our theory that:
a. everyone who wants a job is working.
b. the goods market is in equilibrium.
c. the unemployment rate is equal to the natural rate of unemployment.
d. both the price level and the expected price level are equal to one.
e. financial markets are in equilibrium.
3. When output is greater than the natural level:
a. the unemployment rate is greater than the natural unemployment rate.
b. the price level is greater than the expected price level.
c. the price level will be lower next period than this period.
d. all of the above
e. none of the above
4. Which of the following events will not change the composition of aggregate demand in the medium run?
a. an increase in government spending
b. an increase in taxes
c. an increase in the desire to save
d. a permanent reduction in consumer confidence
e. an increase in the price target set by the central bank
5. An increase in government spending will, in the medium run, cause no change in:
a. unemployment and price level.
b. the interest rate and unemployment.
c. the price level and the interest rate.
d. all of the above
e. none of the above
6. In the aggregate demand relation, a reduction in the price level causes output to increase because of its effect on:
a. government spending.
b. the interest rate.
c. the nominal wage.
d. firms' markup over labour costs.
e. the expected price level.
7. Suppose workers and firms expect the overall price level to increase by 4%. Given this information, we would expect that:
a. the nominal wage will increase by less than 4%.
b. the nominal wage will increase by exactly 4%.
c. the nominal wage will increase by more than 4%.
d. the real wage will increase by 4%.
8. For this question, assume that the economy is initially operating at the natural level of output. A simultaneous increase in government spending and reduction in the price target by the central bank will cause which of the following?
a. an increase in output and an increase in the aggregate price level in the short run
b. a reduction in output and a reduction in the nominal wage in the short run
c. a reduction in investment in the medium run
d. a reduction in the interest rate in the medium run
e. an increase in the aggregate price level, no change in output, and no change in the interest rate in the medium run
9. As product markets become less competitive and the markup rises, we would expect which of the following to occur?
a. no change in the real wage in the medium run
b. an increase in the aggregate price level as output increases
c. a reduction in the interest rate in the medium run
d. no change in output in the medium run
e. a reduction in the real wage in the medium run