Chapter12AggregateDemandandAggregateSupply131

Chapter12
AggregateDemandandAggregateSupply
.1

Multiple Choice Questions

1.

Onwhatdoeconomistsplacetheblameforthepersistentincreasesinthepricelevelthatbeganin
thelate1960s?
(a) ThegovernmentsdecisionnottoraisetaxestofinancetheVietnamwar
(b) Thedeeprecessionthatbeganin1969
(c) TheFederalReservesfailuretokeepinterestrateslow
(d) Theslowdowninproductivitygrowth

2.

Whicheventsmadetheinflationthatbeganinthelate1960sworse?
(a) Thelargetaxcutsoftheearly1970s
(b) Theoilsupplyshocksofthemid1970s
(c) Thelargeincreasesintheexchangevalueofthedollarintheearly1970s
(d) Thelargereductionsinthegovernmentspendinginthelate1970s

3.

Whatdoesstagflationmean?
(a) Risingoutputandfallingprices
(b) Fallingoutputandrisingprices
(c) Risingoutputandprices
(d) Fallingoutputandprices

4.

WhichofthefollowingisNOTincludedinaggregatedemand?
(a) Demandforgoodsandservicesforconsumption
(b) Investmentinbusinessplantandequipment

132HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

5.

(c) Netexports
(d) InvestmentinTreasurybonds
Whichofthefollowingexpressionsiscorrect?
(a)
(b)
(c)
(d)

YdCIGNX.
YdCIGNX.
YdCI(GT)NX.
YdCI(GT)NX.

6.

Theaggregatedemandcurveillustratestherelationshipbetween
(a) theaggregatedemandforgoodsandservicesandtherealinterestrate.
(b) theaggregatedemandforgoodsandservicesandthelevelofcurrentoutput.
(c) thelevelofcurrentoutputandtherealinterestrate.
(d) theaggregatedemandforgoodsandservicesandtheaggregatepricelevel.

7.

Thebestexplanationofwhytheaggregatedemandcurvehasanegativeslopeisthat
(a) atahigherpricelevelhouseholdscutbackontheirspendingongoodsandservices.
(b) atahigherpricelevelbusinessfirmswishtoproducemoregoodsandservices.
(c) ahigherpricelevelresultsinlowerrealbalancesandahigherrealinterestrate.
(d) ahigherpricelevelresultsinlessgovernmentspendingontransfers,suchasunemployment
insuranceandsocialsecuritypayments.

8.

Ariseintherealinterestratewillcausewhichofthecomponentsofaggregatedemandtodecline?
(a) OnlyC
(b) OnlyCandI
(c) OnlyC,I,andNX

Chapter12AggregateDemandandAggregateSupply133

(d) C,I,G,andNX
9.

10.

Everythingelsebeingconstant,alowerrealinterestrate
(a) increasesdesiredsavingandnetexports.
(b) decreasesdesiredsavingbutincreasesnetexports.
(c) increasesdesiredsavingandinvestment.
(d) increasesdesiredinvestmentbutdecreasesnetexports.
Adecreaseinthepricelevelwillleadto
(a) adecreaseintherealinterestrateandanincreaseinnetexports.
(b) anincreaseintherealinterestrateandanincreaseinnetexports.
(c) adecreaseintherealinterestrateandadecreaseinnetexports.
(d) anincreaseintherealinterestrateandadecreaseinnetexports.

11.

Anincreaseinthepricelevelreducesnetexportsbecause
(a) itleadsindirectlytoahigherexchangerate.
(b) itleadsindirectlytoalowerexchangerate.
(c) itleadsindirectlytoalowerrealinterestrate.
(d) itleadsdirectlytohigherrealmoneybalances.

12.

Pointsalongtheaggregatedemandcurverepresentcombinationsofthepricelevelandcurrent
outputforwhich
(a) themoneymarketandthegoodsmarketareinequilibrium,butthemarketfornonmoneyassets
maynotbe.
(b) thegoodsmarketandthemarketfornonmoneyassetsareinequilibrium,butthemoneymarket
maynotbe.
(c) themoneymarketandthemarketfornonmoneyassetsareinequilibrium,butthegoodsmarket
maynotbe.
(d) themoneymarket,themarketfornonmoneyassets,andthegoodsmarketmustallbein
equilibrium.

134HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

13.

Thesimultaneousequilibriumofthemoney,nonmoneyasset,andgoodsmarketsisknownas
(a) nominalGDP.
(b) potentialGDP.
(c) generalequilibrium.
(d) fullequilibrium.

14.

AshiftoftheADcurve
(a) totherightisconsideredexpansionary,andashifttotheleftisconsideredcontractionary.
(b) totheleftisconsideredexpansionary,andashifttotherightisconsideredcontractionary.
(c) totherightortotheleftisconsideredcontractionary.
(d) totherightortotheleftisconsideredexpansionary.
Expansionaryshiftsoftheaggregatedemandcurve
(a) canoriginateineithertheassetsmarketorthegoodsmarket.
(b) canoriginateintheassetsmarket,butnotthegoodsmarket.
(c) canoriginateinthegoodsmarket,butnottheassetsmarket.
(d) cannotoriginateineithertheassetsmarketorthegoodsmarket.

15.

16.

WhichofthefollowingwillNOTshifttheaggregatedemandcurvetotheright?
(a) Adeclineinthepricelevel
(b) Anincreaseingovernmentexpenditures
(c) Adeclineinmoneydemand
(d) Anincreaseinthemoneysupply

17.

Adeclineinmoneydemand

Chapter12AggregateDemandandAggregateSupply135

(a)
(b)
(c)
(d)

isexpansionarybecauseitresultsinadeclineintherealinterestrate.
isexpansionarybecauseitresultsinanincreaseinthenominalmoneysupply.
iscontractionarybecauseitresultsinadeclineintherealinterestrate.
iscontractionarybecauseitresultsinadeclineinthenominalmoneysupply.

18.

Whichofthefollowingwouldshifttheaggregatedemandcurvetotheleft?
(a) Anincreaseinthemoneysupply
(b) Acutinfederalincometaxes
(c) Anincreaseinmoneydemand
(d) Anincreaseinthepricelevel

19.

WhichofthefollowingwouldNOTshifttheaggregatedemandcurvetotheleft?
(a) Anincreaseinmoneydemand
(b) Acutinfederalgovernmentspending
(c) Anincreaseinthemoneysupply
(d) Adecreaseinconsumptionspending
Intheaggregatedemandaggregatesupplymodel,iftheFederalReservedecidestodecreasethe
nominalmoneysupply,
(a) currentoutputwillfall,butthepricelevelwillrise.
(b) currentoutputwillrise,butthepricelevelwillfall.
(c) currentoutputandthepricelevelwillbothrise.
(d) currentoutputandthepricelevelwillbothfall.

20.

21.

Intheaggregatedemandaggregatesupplymodel,ifentrepreneursbecomeconvincedthatfuture
profitabilityofcapitalhasincreased,
(a) currentoutputwillfall,butthepricelevelwillrise.

136HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

(b) currentoutputwillrise,butthepricelevelwillfall.
(c) currentoutputandthepricelevelwillbothrise.
(d) currentoutputandthepricelevelwillbothfall.
22.

AccordingtotheRicardianequivalenceproposition,
(a) savingequalsinvestmentonlyatfullemployment.
(b) adeclineinthedemandformoneyresultsinanequivalentincreaseinthedemandfor
nonmoneyassets.
(c) theincreaseincurrentincomefromataxcutisoffsetbyhighertaxesinthefuturetopayoffthe
debt.
(d) governmentspendingistheequivalentofinvestmentspending.

23.

TheRicardianequivalencepropositionwillnotholdif
(a) thegovernmentfinancesitsexpendituresbyborrowingratherthanbytaxing.
(b) thegovernmentfinancesitsexpendituresbytaxingratherthanbyborrowing.
(c) consumersfacerestrictionsontheamounttheycanborrow.
(d) consumersfinancetheirtaxpaymentsbyborrowing.

24.

IfthereisarecessioninEurope
(a) theaggregatedemandcurveintheUnitedStateswillshiftright.
(b) theaggregatedemandcurveintheUnitedStateswillshiftleft.
(c) theaggregatedemandcurveintheUnitedStateswillbecomesteeper.
(d) theaggregatedemandcurveintheUnitedStateswillbeunaffected.
Intheaggregatedemandaggregatesupplymodel,iffirmsexpectbusinessestaxestorise
(a) currentoutputwillfall,butthepricelevelwillrise.
(b) currentoutputwillrise,butthepricelevelwillfall.

25.

Chapter12AggregateDemandandAggregateSupply137

(c) currentoutputandthepricelevelwillbothrise.
(d) currentoutputandthepricelevelwillbothfall.
26.

Theaggregatesupplycurverepresentslevelsofoutputthatproducersarewillingtosellat
(a) eachleveloftherealinterestrate.
(b) eachlevelofrealGDP.
(c) eachpricelevel.
(d) eachinflationrate.

27.

Mosteconomistsbelievethatchangesinthepricelevelhave
(a) noeffectonthequantityofoutputsuppliedineithertheshortrunorthelongrun.
(b) aneffectonthequantityofoutputsuppliedintheshortrun,butnotinthelongrun.
(c) aneffectonthequantityofoutputsuppliedinthelongrun,butnotintheshortrun.
(d) aneffectonthequantityofoutputsuppliedinboththeshortrunandthelongrun.

28.

Mosteconomistsbelievethattheshortrunaggregatesupplycurve
(a) slopesdown.
(b) slopesup.
(c) isaverticalline.
(d) isahorizontalline.

29.

Mosteconomistsbelievethattheaggregatesupplycurveis
(a) upwardslopingintheshortrun,butverticalinthelongrun.
(b) upwardslopinginthelongrun,butverticalintheshortrun.
(c) upwardslopinginboththeshortrunandinthelongrun.

138HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

30.

(d) verticalinboththeshortrunandinthelongrun.
Thenewclassicalexplanationofaggregatesupplyintheshortrunbuildsonresearchby
(a) IrvingFisher.
(b) JohnMaynardKeynes.
(c) RobertLucas.
(d) RobertSolow.

31.

Thenewclassicalexplanationofaggregatesupplyisalsoknownas
(a) Monetarism.
(b) Keynesianism.
(c) themisperceptiontheory.
(d) theadaptiveexpectationstheory.

32.

Thekeyconceptinthenewclassicalapproachtotheaggregatesupplycurveis
(a) theimpactofimperfectinformationonbusinessdecisions.
(b) theimpactofchangesinthepricelevelonrealbalances.
(c) theinverserelationshipbetweentherealinterestrateanddesiredinvestmentspending.
(d) thecrowdingoutofinvestmentspendingbygovernmentspending.

33.

Thenewclassicalapproachtotheaggregatesupplycurveassumesthatbusinessesare
(a) betterinformedaboutthegeneralpricelevelthantheyareaboutpricesintheirownmarkets.
(b) betterinformedaboutpricesintheirownmarketsthantheyareaboutthegeneralpricelevel.
(c) equallywellinformedaboutpricesintheirownmarketsandthegeneralpricelevel.
(d) reluctanttoengageininvestmentspendingbecauseofalackofinformationconcerningfuture
prices.

Chapter12AggregateDemandandAggregateSupply139

34.

35.

Accordingtothenewclassicalapproachtotheaggregatesupplycurve,theaggregatesupplycurve
slopesupwardbecause
(a) increasesinthepricelevelresultinlowerrealbalances.
(b) highercurrentoutputresultsinhigherdesiredinvestment.
(c) higherpricesresultinhigherlevelsofspendingasconsumersattempttostayaheadofinflation.
(d) businesseshavedifficultyindistinguishingrelativepriceincreasesfromgeneralpriceincreases.
Whichofthefollowingisthecorrectexpressionforshortrunaggregatesupplyinthenewclassical
view?
(a)
(b)
(c)
(d)

Y *Ya(PPe )
YY *a(PPe )
Y *Ya(PPe )
YY *a(PPe )

36.

Whatdoesthecoefficientainthenewclassicalexpressionforshortrunaggregatesupplyrepresent?
(a) Thefullemploymentlevelofoutput
(b) Thepricelevelinthepreviousperiod
(c) Howmuchoutputrespondswhentheactualpriceleveldiffersfromtheexpectedpricelevel
(d) Howmuchthepricelevelrespondswhentheactuallevelofoutputdiffersfromthefull
employmentlevelofoutput

37.

Ifthecoefficientainthenewclassicalexpressionforshortrunaggregatesupplywereequaltozero,
(a) aggregateoutputwouldalwaysbeatitsfullemploymentlevel.
(b) theshortrunaggregatesupplycurvewouldslopedown.
(c) theshortrunaggregatesupplycurvewouldbeahorizontalline.
(d) aggregateoutputwouldonlydifferfromitsfullemploymentleveliftheactualpriceleveldid
notequaltheexpectedpricelevel.

38.

Accordingtothenewclassicalview,whentheactualpricelevelisgreaterthantheexpectedprice
level

140HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

(a)
(b)
(c)
(d)
39.

40.

aggregateoutputisabovethefullemploymentlevel.
aggregateoutputisbelowthefullemploymentlevel.
theaggregatesupplycurvewillslopedownward.
thecoefficientaisequaltozero.

Accordingtothenewclassicalview,aggregateoutputwilldifferfromfullemploymentoutput
(a) wheneversavingdoesnotequalinvestment.
(b) onlyiftheactualpriceleveldoesnotequaltheexpectedpricelevel.
(c) onlyifthefederalgovernment'sexpendituresaregreaterthanitstaxreceipts.
(d) wheneverimportsexceedexports.
Ifintheshortrunpricesdidnotrespondatalltochangesinaggregatedemand,theshortrun
aggregatesupplycurvewould
(a) bevertical.
(b) behorizontal.
(c) slopeup.
(d) slopedown.

41.

ThedifferencebetweentheKeynesianandnewKeynesianapproachestotheshortrunaggregate
supplycurveisthat
(a) Keynesiansassumedthattheshortrunaggregatesupplycurvewasverticalornearlyvertical,
whilenewKeynesiansassumethatitisnearlyhorizontal.
(b) Keynesiansfocusedonthedifferencebetweentheactualandexpectedpricelevels,whereas
newKeynesiansbelievethisdifferencetobeunimportant.
(c) Keynesiansbelievedthataggregatedemandwasmoreimportantthanaggregatesupply,whereas
newKeynesiansbelievethereverse.
(d) Keynesiansassumedthattheshortrunaggregatesupplycurvewashorizontalornearly
horizontal,whereasnewKeynesianshaveprovidedeconomicexplanationsforpricestickiness.

42.

AnimportantdifferencebetweenthenewclassicalandnewKeynesiansviewsisthatnewclassicals
(a) assumethatallfirmsarepricetakers,butnewKeynesiansassumethatsomefirmsareprice
setters.

Chapter12AggregateDemandandAggregateSupply141

(b) takeintoaccounttheexistenceoflongtermnominalwageandpricecontracts,butnew
Keynesiansdonotbelievetheyareimportant.
(c) focusontheimportanceofinvestmentspending,butnewKeynesiansbelievethatgovernment
spendingismoreimportant.
(d) believethattheaggregatesupplycurveishorizontal,evenintheshortrun,butnewKeynesians
believethattheaggregatesupplycurveslopesupwardintheshortrun.
43.

44.

Ifwagesandpricesinlongtermcontractswerefullyindexed,
(a) priceswouldbemorestickyintheshortrun.
(b) priceswouldbemorestickyinthelongrun.
(c) priceswouldbelessstickyintheshortrun.
(d) thestickinessofpriceswouldnotbeaffected.
Theexistenceofcostoflivingadjustmentsinmanywagecontracts
(a) assuresthatthesewagesfullyadjusttoaggregatenominaldisturbances.
(b) resultsinthesewagesbeingcompletelyrigid.
(c) doesnotresultinthesewagesfullyadjustingtoaggregatenominaldisturbances.
(d) isbeingphasedoutunderrecentfederallegislation.

45.

NewKeynesiansbelievethatanincreaseinthenominalmoneysupplywillresultin
(a) nochangeinthepricelevel.
(b) aproportionalincreaseinthepricelevel.
(c) alessthanproportionalincreaseinthepricelevel.
(d) afallinthepricelevel.

46.

Inwhichofthefollowingmarketsisaproducerlikelytobeapricetaker?
(a) Theapplemarket
(b) Theautomobilemarket

142HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

(c) Thesteelmarket
(d) Thecollegetextbookmarket
47.

Amonopolisticallycompetitivemarketdiffersfromaperfectlycompetitivemarketinthata
monopolisticallycompetitivemarkethas
(a) moresellers.
(b) productsthatareidentical.
(c) lessstickyprices.
(d) firmsthatarepricesetters.

48.

InthenewKeynesianviewamonopolisticallycompetitivefirmmayfailtoincreasethepriceofits
productasdemandincreasesbecause
(a) ifitdoessoitwillloseallofitscustomers.
(b) thecosttoitofchangingpricesmayexceedthebenefitofdoingso.
(c) pricesofmonopolisticallycompetitivefirmsareregulatedbythefederalgovernmentandmay
onlybechangedwithpermission.
(d) foramonopolisticallycompetitivefirmpriceisbelowmarginalcost.
InthenewKeynesianview,whichofthefollowingexpressionscorrectlystatestherelationship
betweenthepricethatanindividualfirmwithflexiblepriceschargesandtheaggregatepricelevel?

49.

(a)
(b)
(c)
(d)
50.

pPb(YY *)
Ppb(YY *)
pPb(YY *)
pPb(Y *Y)

InthenewKeynesianview,whichofthefollowingexpressionscorrectlystatestherelationship
betweenthepricethatanindividualfirmwithstickypriceschargesandtheaggregatepricelevel?
(a) pP eb(Y eY *e)
(b) P epb(Y eY *e)
(c) pP eb(Y eY *e)

Chapter12AggregateDemandandAggregateSupply143

(d) pP b(Y Y )
e

51.

*e

WhichofthefollowingisthecorrectnewKeynesianexpressionforthepricelevel?
(a)
(b)
(c)
(d)

PP eb[(1c)/c](YY *)
P ePb[(1c)/c](YY *)
PP eb[(1c)/c](YY *)
P ePb[(1c)/c](YY *)

52.

InthenewKeynesianexpressionforthepricelevel,crepresents
(a) thefractionoffirmsintheeconomywithstickyprices.
(b) themarginalpropensitytoconsume.
(c) theresponsivenessofthepriceleveltodifferencesbetweenactualaggregateoutputandfull
employmentaggregateoutput.
(d) theresponsivenessofaggregateoutputtothedifferencebetweentheactualpricelevelandthe
expectedpricelevel.

53.

InthenewKeynesianview,thelargertheproportionoffirmsintheeconomywithstickyprices,
(a) thesteepertheSRAScurvewillbe.
(b) theflattertheSRAScurvewillbe.
(c) thegreatertheincreaseinthepricelevelforagivenshiftintheADcurve.
(d) thelesseffectiveisfiscalpolicyinincreasingoutput.
Whichofthefollowingstatementsiscorrect?
(a) Newclassicalsbelievethattheaggregatesupplycurveisverticalintheshortrun.
(b) NewKeynesiansbelievethattheaggregatesupplycurveisverticalintheshortrun.
(c) NewKeynesiansbelievethattheaggregatesupplycurveslopesupwardinthelongrun.
(d) Newclassicalsbelievethattheaggregatesupplycurveslopesupwardintheshortrun.

54.

144HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

55.

Whichofthefollowingstatementsiscorrect?
(a) Newclassicalsbelievethattheaggregatesupplycurveisaverticallineinboththeshortrunand
thelongrun.
(b) BothnewclassicalsandnewKeynesiansbelievethattheaggregatesupplycurveisverticalin
thelongrun.
(c) NewKeynesiansbelievethattheaggregatesupplycurveisverticalintheshortrunbutnotin
thelongrun.
(d) NewKeynesiansbelievethattheaggregatesupplycurveslopesupwardinthelongrun.

56.

WhichofthefollowingwillNOTshifttheshortrunaggregatesupplyfunction?
(a) Changesinlaborcosts
(b) Changesinthecostsofnonlaborinputs
(c) Changesinthepricelevel
(d) Changesintheexpectedpricelevel

57.

Whenoutputexceedsitsfullemploymentlevel,
(a) theshortrunaggregatesupplyfunctionshiftsup.
(b) wagesfall.
(c) theshortrunaggregatesupplyfunctionshiftsdown.
(d) aggregatesupplyexceedsaggregatedemand.

58.

Whenoutputisbelowitsfullemploymentlevel,theshortrunaggregatesupplywillshiftdownand
totherightbecause
(a) theexpectedpricelevelwillbebelowtheactualpricelevel.
(b) workerswageswilldecline.
(c) pricesofnonlaborinputswillrise.
(d) workerswageswillrise.
WhichofthefollowingisNOTanexampleofasupplyshock?

59.

Chapter12AggregateDemandandAggregateSupply145

(a)
(b)
(c)
(d)

AdroughtintheMidwest
Adeclineinnaturalgaspricesfollowingdiscoveryofnewfields
Theintroductionofanewlineofcomputercontrolledmachinetoolsinmanufacturing
Asubstantialincreaseinfederalgovernmentspendingonmedicare

60.

Anincreaseinoilpriceswillshifttheshortrunaggregatesupplycurve
(a) upandtotheleft,causingthelevelofcurrentoutputtofall.
(b) upandtotheleft,causingthelevelofcurrentoutputtorise.
(c) downandtotheright,causingthelevelofcurrentoutputtorise.
(d) downandtotheright,causingthelevelofcurrentoutputtofall.

61.

Anincreaseintheexpectedpricelevel
(a) shiftstheshortrunaggregatesupplycurveupandtotheleft.
(b) shiftstheshortrunaggregatesupplycurvedownandtotheright.
(c) hasnoeffectontheshortrunaggregatesupplycurve.
(d) resultsinamovementalongtheshortrunaggregatesupplycurve,ratherthanashiftinthe
shortrunaggregatesupplycurve.

62.

Anincreaseinthepricelevel
(a) shiftstheshortrunaggregatesupplycurveupandtotheleft.
(b) shiftstheshortrunaggregatesupplycurvedownandtotheright.
(c) shiftsthelongrunaggregatesupplycurvetotheleft.
(d) resultsinamovementalongtheshortrunaggregatesupplycurve,ratherthanashiftinthe
shortrunaggregatesupplycurve.

63.

Whichofthefollowingwouldcausethelongrunaggregatesupplycurvetoshift?
(a) Anincreaseinthepricelevel

146HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

64.

(b) Adecreaseintheexpectedpricelevel
(c) Anincreaseinlaborproductivity
(d) Anautonomousincreaseinconsumptionspending
ThePolishexperienceindicatesthat
(a) theaggregatesupplycurveisvertical,evenintheshortrun.
(b) changesintheexpectedpriceleveldonotaffectaggregatesupply.
(c) thetransitionfromacentrallyplannedtoamarketeconomycanresultinanupwardshiftinthe
shortrunaggregatesupplycurve.
(d) increasesinthefactorproductivitywillshiftthelongrunaggregatesupplycurvetotheleft.

65.

Between1992and1999,Polandexperienced
(a) strongeconomicgrowth,butincreasinginflation.
(b) weakeconomicgrowth,butfallinginflation.
(c) strongeconomicgrowthandfallinginflation.
(d) weakeconomicgrowthandincreasinginflation.

66.

Whichofthefollowingismostlikelytohaveanimpactonthegrowthofproductivity?
(a) Adecreaseinthepricelevel
(b) Anincreaseingovernmentregulationofworkplacesafety
(c) Anincreaseinthelaborsupply
(d) Adecreaseinrealmoneybalances

67.

Ifoilpricesfallatthesametimethatthefederalgovernmentincreasesitsspending,intheshortrun
(a) aggregateoutputandthepricelevelwillbothincrease.
(b) aggregateoutputwillincrease,butthepricelevelwillfall.

Chapter12AggregateDemandandAggregateSupply147

(c) aggregateoutputandthepricelevelwillbothfall.
(d) aggregateoutputwillincrease,butthepricelevelmayeitherincreaseordecrease.
68.

69.

Iftheexpectedpricelevelincreasesatthesametimethatthefederalgovernmentcutstaxes,inthe
shortrun
(a) aggregateoutputandthepricelevelwillbothincrease.
(b) aggregateoutputwillincrease,butthepricelevelwillfall.
(c) aggregateoutputandthepricelevelwillbothfall.
(d) thepricelevelwillincrease,butaggregateoutputmayeitherincreaseordecrease.
Iflaborcostsriseatthesametimethatthefederalgovernmentdecreasesitsspending,intheshort
run
(a) aggregateoutputandthepricelevelwillbothincrease.
(b) aggregateoutputwillincrease,butthepricelevelwillfall.
(c) aggregateoutputandthepricelevelwillbothfall.
(d) aggregateoutputwillfall,butthepricelevelmayeitherincreaseordecrease.

70.

Iftheeconomyisinitiallyatequilibriumandanunexpecteddeclineinaggregatedemandtakes
place,intheshortrunaggregateoutputwill
(a) fallinthenewclassicalview,butnotinthenewKeynesianview.
(b) fallinthenewKeynesianview,butnotinthenewclassicalview.
(c) fallinboththenewKeynesianandnewclassicalviews.
(d) remainatfullemploymentinboththenewclassicalandnewKeynesianviews.

71.

Economistsgenerallyagreethatinthelongrunchangesinaggregatedemandaffect
(a) aggregateoutputbutnotthepricelevel.
(b) thepricelevelbutnotaggregateoutput.
(c) boththepricelevelandaggregateoutput.

148HubbardMoney,theFinancialSystem,andtheEconomy,FifthEdition

(d) neitherthepricelevelnoraggregateoutput.
72.

Monetaryneutralityreferstothefactthatchangesinthemoneysupply
(a) affectoutputmoreinthelongrunthanintheshortrun.
(b) havenoeffectonoutputinthelongrun.
(c) affectonlyoutputinthelongrun.
(d) haveagreatereffectonpricesintheshortrunthaninthelongrun.

73.

Thehypothesisthatlargenegativeshiftsinaggregatedemandreducethefullemploymentlevelof
outputisknownas
(a) therealbalanceeffect.
(b) theperverseemploymentsyndrome.
(c) therealbusinesscycleeffect.
(d) hysteresis.
SomeeconomistsarguethatpersistentlyhighunemploymentratesinmanyEuropeancountriesin
theearly1980sresultedfrom
(a) themovementtoacommoncurrency.
(b) thesharpdeclineinoilprices.
(c) lowinflationrates.
(d) hysteresis.

74.

75.

RealbusinesscycleanalysisdiffersfromboththenewclassicalandthenewKeynesiananalysesin
holdingthat
(a) theaggregatesupplycurveisvertical,evenintheshortrun.
(b) changesinaggregatedemandcanaffectoutputinthelongrun.
(c) moneyisneutralinthelongrun,butnottheshortrun.
(d) pricesarestickyintheshortrun.

Chapter12AggregateDemandandAggregateSupply149

76.

TheFederalReservepursuedanexpansionarymonetarypolicyduring1964inorderto
(a) pulltheUnitedStatesoutofadeeprecession.
(b) counteracttheeffectsofadeepcutinfederalincometaxes.
(c) keepinterestratesfromrising.
(d) bringdowntheinflationrate.

77.

Duringtheyearsfrom1964to1969,inflationincreasedintheUnitedStates
(a) whentheADcurveshiftedupandtotheright,eventhoughtheSRAScurveremainedstable.
(b) whentheSRAScurveshiftedupandtotheleft,eventhoughtheADcurveremainedstable.
(c) whentheADcurveshiftedupandtotherightandtheSRAScurveshiftedupandtotheleft.
(d) despitetheADandSRAScurvesremainingstable.

78.

79.

Theresultofthesupplyshocksof19731974wasto
(a) reduceaggregateoutputandraisethepricelevel.
(b) reducethepricelevelandraiseaggregateoutput.
(c) reducebothaggregateoutputandthepricelevel.
(d) raisebothaggregateoutputandthepricelevel.
Adecreaseinthewillingnessorabilityofbankstolendhasasignificantimpactontheeconomy
because
(a) itcausestheshortrunaggregatesupplycurvetoshifttotheleft.
(b) itcausestheshortrunaggregatesupplycurvetoshifttotheright.
(c) someborrowersfrombanksareunabletoborrowfromnonmoneymarkets.
(d) bankprofitsdeclineandemploymentinthebankingsectorcontracts.

.2

Essay Questions

1.

Inthespringof2001PresidentGeorgeW.Bushproposedasubstantialtaxcut,whenheargued
wouldincreaseaggregatedemand.IftheRicardianequivalencepropositionholds,isPresident
Bushsanalysiscorrect?WhymighttheRicardianequivalencepropositionnothold?

2.

SupposethatinitiallyU.S.householdsaresavingonlyasmallfractionoftheirincomes,because
theyarerelyingonrapidincreaseinstockpricestoincreasetheirwealth.Ifstockpricesdeclineand
householdsdecidetoincreasetheirsavingrate,whatwillbeimpactonoutputinthenewKeynesian
view?Besuretodistinguishtheshortrunfromthelongrun.

3.

Supposethatmanyhouseholdslooktothestockmarkettogaugehowtheeconomyislikelyto
performinthefuture.Whenstockpricesarerising,thenhouseholdswillbeoptimisticaboutthe
futurestateoftheeconomyandwillincreasetheirspendingonhousesandconsumerdurables,such
ascarsandfurniture.Whenstockpricesarefalling,thenhouseholdswillbepessimisticaboutthe
futureandwillcutbackontheirspending.Ifthisviewofthelinkbetweenstockpricesand
householdspendingiscorrect,thenwhatwillbetheeffectofadeclineinstockpricesonoutputin
thenewKeynesianview?Besuretodistinguishtheshortrunfromthelongrun.

4.

Analyzethefollowingstatement:Iknowthefactthatpriceshavestartedtoriserapidlyseemslike
badnews,butatleastpricesstartingtogoupmeansthatoutputmustbestartingtogoupaswell.