Quiz 2 (Wed., November 9, 2011) Interm Macro, Fall 2011 (220:321 Section 11) Instructor: J.

Park Rutgers University Name: __________________________ Date: _____________ 1. Most economists believe that prices are: A) flexible in the short run but many are sticky in the long run. B) flexible in the long run but many are sticky in the short run. C) sticky in both the short and long runs. D) flexible in both the short and long runs. 2. Okun's law is the ______ relationship between real GDP and the ______. A) negative; unemployment rate B) negative; inflation rate C) positive; unemployment rate D) positive; inflation rate 3. According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. A) higher; lower B) lower; higher C) higher; higher D) lower; lower 4. A short-run aggregate supply curve shows fixed ______, and a long-run aggregate supply curve shows fixed ______. A) output; output B) prices; prices C) prices; output D) output; prices 5. When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______. A) greater; inward B) greater; outward C) lower; inward D) lower; outward

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6. The natural level of output is: A) affected by aggregate demand. B) the level of output at which the unemployment rate is zero. C) the level of output at which the unemployment rate is at its natural level. D) permanent and unchangeable. 7. If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run, prices will ______ and output will ______. A) increase; increase B) decrease; decrease C) increase; decrease D) decrease; increase 8. Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run ______, whereas in the long run, prices ______ and output returns to its original level. A) output decreases and prices are unchanged; rise B) output decreases and prices are unchanged; fall C) output and prices both decrease; rise D) output and prices both decrease; fall 9. A supply shock does not occur when: A) a drought destroys crops. B) unions push wages up. C) the Fed increases the money supply. D) an oil cartel increases world oil prices. 10. Stagflation occurs when prices ______ and output ______. A) fall; falls B) fall; increases C) rise; falls D) rise; increases 11. A difference between the economic long run and the short run is that: A) the classical dichotomy holds in the short run but not in the long run. B) monetary and fiscal policy affect output only in the long run. C) demand can affect output and employment in the short run, whereas supply is the ruling force in the long run. D) prices and wages are sticky in the long run only.

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12. The version of Okun's law studied in Chapter 9 assumes that, with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate rose by 2 percentage points over a year, Okun's law predicts that real GDP would: A) decrease by 1 percent. B) decrease by 2 percent. C) decrease by 3 percent. D) increase by 1 percent. 13. A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent: A) in both the short and long runs. B) in neither the short nor long run. C) in the short run but lead to unemployment in the long run. D) in the long run but lead to unemployment in the short run. 14. Over the business cycle, investment spending ______ consumption spending. A) is inversely correlated with B) is more volatile than C) has about the same volatility as D) is less volatile than 15. For the purposes of the Keynesian cross, planned expenditure consists of: A) planned investment. B) planned government spending. C) planned investment and government spending. D) planned investment, government spending, and consumption expenditures. 16. In the Keynesian-cross model, actual expenditures differ from planned expenditures by the amount of: A) liquidity preference. B) the government-purchases multiplier. C) unplanned inventory investment. D) real money balances.

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17. The equilibrium condition in the Keynesian-cross analysis in a closed economy is: A) income equals consumption plus investment plus government spending. B) planned expenditure equals consumption plus planned investment plus government spending. C) actual expenditure equals planned expenditure. D) actual saving equals actual investment. 18. In the Keynesian-cross model, fiscal policy has a multiplied effect on income because fiscal policy: A) increases the amount of money in the economy. B) changes income, which changes consumption, which further changes income. C) is government spending and, therefore, more powerful than private spending. D) changes the interest rate. 19. In the Keynesian-cross model, if taxes are reduced by 250, then the equilibrium level of income: A) increases by 250. B) increases by more than 250. C) decreases by 250. D) increases, but by less than 250. 20. In the Keynesian-cross model, a decrease in the interest rate ______ planned investment spending and ______ the equilibrium level of income. A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases

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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 20. B A A C C C C B C C C A D B D C C B B A

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