Test Bank (chapter 07) - Macroeconomics, 6e (Blanchard╱Johnson).doc

Macroeconomics, 6e (Blanchard/Johnson)Chapter 7: Putting All Markets Together. The AS-AD Model7.1 Multiple Choice Questions1) In the aggregate supply relation, the current price level depends uponA) expected price level.B) monetary policy.C) fiscal policy.D) consumer confidence.E) all of the aboveAnswer: ADiff: 22) Based on the aggregate supply relation, an increase in current output will causeA) a shift of the aggregate supply curve.B) an increase in the current price level.C) a change in the expected price level this year.D) an increase in the expected price level and an upward shift of the AS curve.E) an increase in the markup over labor costs.Answer: BDiff: 23) Which of the following will cause the aggregate supply curve to shift down?A) an increase in firms markup over labor costsB) an increase in the expected price levelC) an increase in unemployment benefitsD) all of the aboveE) none of the aboveAnswer: EDiff: 24) When the current price level is equal to the expected price level, we know thatA) the unemployment rate is zero.B) the goods market and financial markets are in equilibrium.C) the output is equal to the natural level of output.D) the money market is in equilibrium.E) none of the aboveAnswer: CDiff: 25) When the economy is operating at a point where output is greater than the natural level of output, which of the following occurs?A) the unemployment rate is less than the natural unemployment rate.B) the price level is greater than the expected price level.C) the price level will be higher next period than it is this period.D) all of the aboveE) none of the aboveAnswer: DDiff: 26) In the aggregate demand relation, an increase in the price level causes output to decrease because of its effect onA) government spending.B) the money market and, subsequently, investment.C) the nominal wage.D) firms markup over labor costs.E) the expected price level.Answer: BDiff: 17) The aggregate demand curve will shift to the right when which of the following occurs? A) a reduction in the money supplyB) a reduction in consumer confidenceC) a rise in the price levelD) a reduction in taxesE) a decrease in the price levelAnswer: DDiff: 28) Based on your understanding of the AS/AD model, which of the following is an INCORRECT statement about the short-run adjustment process for the macroeconomy?A) output in excess of the natural level leads to higher prices.B) a reduction in employment leads to lower prices.C) an increase in demand increases output.D) an increase in output above the natural level leads to higher nominal wages.E) none of the aboveAnswer: EDiff: 29) Which of the following represents a short-run effect of a monetary expansion?A) an increase in outputB) a reduction in the interest rateC) an increase in the price levelD) all of the aboveE) none of the aboveAnswer: DDiff: 210) Suppose a central bank implements a monetary contraction. Which of the following would we expect to occur in the short run? A) a reduction in the nominal wageB) the AD curve to shift to the rightC) the price setting curve to shift downD) the wage setting curve to shift upwardE) the wage setting curve to shift downwardAnswer: ADiff: 211) Suppose a central bank implements a monetary contraction. Which of the following would we expect to occur in the medium run? A) a decline in outputB) an increase in the interest rateC) a decrease in the nominal wageD) all of the aboveE) none of the aboveAnswer: CDiff: 212) Assume the economy is initially operating at the natural level of output. Which of the following events will initially cause a shift of the aggregate supply curve?A) an increase in the money supplyB) an increase in government spendingC) an increase in consumer confidenceD) all of the aboveE) none of the aboveAnswer: EDiff: 213) Which of the following would increase the short-run output effects of a monetary expansion?A) an increase in the marginal propensity to consumeB) an increase in the interest rate sensitivity of investmentC) the IS curve is very flatD) all of the aboveE) none of the aboveAnswer: DDiff: 314) The neutrality of money is consistent with which of the following statements?A) changes in the money supply will not affect employment in the short run.B) changes in the money supply will not affect employment in the medium.C) changes in the money supply will not affect the price level in the short runD) changes in the money supply will not affect the price level in the medium runAnswer: CDiff: 115) Results obtained from the Taylor model suggest that it takes roughly how long for the effects of money to become neutral?A) one monthB) three monthsC) one yearD) four yearsE) ten yearsAnswer: DDiff: 216) Results obtained from the Taylor model suggest that the output effects of a change in the money supply are greatest after approximately how long?A) one monthB) one quarterC) three quartersD) four yearsE) ten yearsAnswer: CDiff: 217) Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for an increase in government spending. This increase in government spending will, in the short run, cause an increase inA) the interest rate.B) the price level.C) the nominal wage.D) all of the aboveE) none of the aboveAnswer: DDiff: 218) Assume the economy is initially operating at the natural level of output. Now suppose a budget is passed that calls for an increase in government spending. This increase in government spending will, in the medium run, have NO effect on which of the following?A) employmentB) the interest rateC) the price levelD) all of the aboveE) none of the aboveAnswer: ADiff: 219) Assume the economy is initially operating at the natural level of output. Which of the following events will NOT change the composition of output (i.e., the percentage of GDP composed of consumption, investment, . etc.) in the medium run?A) a reduction in government spendingB) a cut in taxesC) a reduction in the desire to saveD) an increase in consumer confidenceE) an increase in the money supplyAnswer: EDiff: 220) Assume the economy is initially operating at the natural level of output. Now suppose that individuals decide to reduce their desire to save. We know with certainty that which of the following will occur in the short run as a result of decreased desire to save?A) greater investmentB) less investmentC) an increase in the nominal wageD) higher output and lower investmentE) no change in the economy at allAnswer: CDiff: 321) Assume the economy is initially operating at the natural level of output. Suppose that individuals decide to decrease their saving. We know that this decreased desire to save will be neutral inA) the short run, but not the medium run.B) the medium run, but not the long run.C) neither the medium run nor the short run.D) both the short run and the medium run.E) none of the aboveAnswer: CDiff: 222) From 1970 to the mid-1990s, the relative price of crude petroleumA) steadily increased.B) steadily decreased.C) increased dramatically, then decreased dramatically.D) decreased dramatically, then increased dramatically.E) remained more or less the same.Answer: CDiff: 223) In the short run, a reduction in the price of oil will causeA) a reduction in output.B) an increase in the price level.C) a reduction in the interest rate.D) all of the aboveE) none of the aboveAnswer: CDiff: 224) An increase in the price of oil will cause which of the following in the medium run?A) no change in the level of outputB) no change in the price levelC) an increase in the unemployment rateD) a reduction in the interest rateE) none of the aboveAnswer: CDiff: 225) Answer this question using the AS/AD model presented in the textbook. Which of the following would cause a reduction in the natural level of output in the medium run?A) a decrease in government spendingB) a decrease in the money supplyC) an increase in taxesD) both A and CE) none of the aboveAnswer: EDiff: 226) The aggregate demand (AD) curve presented in the textbook has its particular shape because of which of the following explanations? A) an increase in the money supply (M) will cause a reduction in the interest rate, an increase in investment, and an increase in output .B) an increase in the aggregate price level (P) will cause an increase in the interest rate and a reduction in output.C) an increase in P will cause a reduction in the real wage, an increase in employment, and an increase in output.D) as P decreases in a closed economy, goods and services become relatively cheaper and individuals respond by increasing the quantity demanded of goods and services.Answer: BDiff: 227) The short-run aggregate supply curve (AS) presented in the textbook has its particular shape because of which of the following explanations?A) a reduction in the aggregate price level will cause a reduction in the interest rate and an increase in output.B) an increase in the aggregate price level causes an increase in nominal money demand and an increase in the interest rate.C) a drop in the nominal wage causes an increase in the amount of output that firms are willing to produce.D) a reduction in output causes a reduction in employment, an increase in unemployment, a reduction in the nominal wage and a reduction in the price level.Answer: DDiff: 228) Which of the following events will NOT cause an increase in the aggregate price level?A) an increase in unemployment benefitsB) an increase in the markupC) an increase in PeD) a reduction in outputE) none of the aboveAnswer: DDiff: 229) Which of the following events will cause an increase in the aggregate price level?A) an increase in the unemployment benefitsB) a reduction in the markupC) a reduction in PeD) an increase in the unemployment rateE) none of the aboveAnswer: ADiff: 230) If u Pe.B) P Pe.C) P = Pe.D) Y Yn.Answer: ADiff: 231) If Y Pe.B) P Pe.C) P = Pe.D) u Pet). We know thatA) output is currently below the natural level of output.B) the interest rate will tend to rise as the economy adjusts to this situation.C) the nominal wage will tend to decrease as individuals revise their expectations of the price level.D) the AS curve will tend to shift down over time.E) none of the aboveAnswer: ADiff: 233) A reduction in the aggregate price level will causeA) an increase in the interest rate and a leftward shift in the IS curve.B) a downward shift in the LM curve and a reduction in the interest rate.C) a reduction in investment and a reduction in output .D) an ambiguous effect on investment.Answer: BDiff: 234) Which of the following events will cause the largest rightward shift (as measured horizontally) of the AD curve?A) a tax increaseB) a 15% reduction in the aggregate price levelC) a 10% increase in the nominal money supplyD) a 15% reduction in the nominal wageE) none of the aboveAnswer: CDiff: 135) For this question, assume that the economy is initially operating at the natural level of output. An increase in taxes will cause which of the following?A) a reduction in output and no change in the aggregate price level in the short runB) a reduction in employment and no change in the nominal wage in the short runC) an increase in investment in the medium runD) an increase in the aggregate price level, no change in output and no change in the interest rate in the medium run Answer: CDiff: 236) For this question, assume that the economy is initially operating at the natural level of output. An increase in the price of oil will cause which of the following in the medium run?A) a reduction in the interest rate B) a reduction in output and an increase in the aggregate price levelC) a reduction in output and a reduction in the interest rateD) a reduction in unemployment, an increase in the nominal wage and an increase in the aggregate price levelE) a reduction in the aggregate price level and no change in outputAnswer: BDiff: 237) For this question, assume that the economy is initially operating at the natural level of output. A reduction in consumer confidence will causeA) an increase in the real wage in the medium run.B) a reduction in the real wage in the medium run.C) no change in the real wage in the medium run.D) ambiguous effects on the real wage in the medium run.Answer: CDiff: 238) For this question, assume that the economy is initially operating at the natural level of output. A reduction in taxes will causeA) an increase in the real wage in the medium run.B) a reduction in the real wage in the medium run.C) no change in the nominal wage in the medium run.D) ambiguous effects on the real wage in the medium run.E) none of the aboveAnswer: EDiff: 239) For this question, assume that the economy is initially operating at the natural level of output. An increase in unemployment benefits will causeA) an increase in the real wage in the medium run.B) a reduction in the real wage in the medium run.C) no change in the real wage in the medium run.D) ambiguous effects on the real wage in the medium run.Answer: CDiff: 240) For this question, assume that the economy is initially operating at the natural level of output. A monetary expansion will causeA) no change in the real wage in the medium run.B) an increase in investment in the medium run.C) a reduction in the interest rate in the medium run.D) no change in the nominal wage in the medium run.Answer: ADiff: 241) For this question, assume that the economy is initially operating at the natural level of output. A one- time 5% reduction in the nominal money supply will causeA) a 5% reduction in the price level in the medium run.B) a 5% increase in the interest rate (i) in the medium run.C) a 5% reduction in the real money supply in the medium run.D) all of the aboveAnswer: ADiff: 242) For this question, assume that the economy is initially operating at the natural level of output. A fiscal contraction must causeA) 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 aboveAnswer: EDiff: 243) Results obtained from the Taylor model suggest that the effects of changes in the nominal money supply are neutral afterA) 2 years.B) 4 years.C) 6 years.D) 8 years.Answer: BDiff: 144) For this question, assume that the economy is initially operating at the natural level of output. A reduction in consumer confidence will causeA) an increase in investment in the short run.B) a reduction in the real wage in the medium run.C) an increase in the interest rate in the medium run.D) ambiguous effects on investment in the medium run.E) none of the aboveAnswer: EDiff: 245) For this question, assume that the economy is initially operating at the natural level of output. A simultaneous reduction in taxes and reduction in the money supply will cause which of the following?A) an increase in output and an increase in the aggregate price level in the short runB) a reduction in output and a reduction in the nominal wage in the short runC) a reduction in investment in the medium runD) a reduction in the interest rate in the medium runE) an increase in the aggregate price level, no change in output, and no change in the interest rate in the medium runAnswer: CDiff: 346) An increase in the price of oil will tend to cause which of the following?A) an increase in the natural rate of unemploymentB) an increase in the price levelC) an increase in the interest rateD) all of the aboveAnswer: DDiff: 247) A reduction in the price of oil will tend to cause which of the following?A) no change in the real wage in the medium runB) an increase in the aggregate price level as output increasesC) an increase in investment in the medium runD) no change in the interest rate in the medium runAnswer: CDiff: 248) As product markets become more competitive and the markup decreases, 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 and an increase in output in the medium run.C) an increase in the interest rate in the medium run.D) no change in output in the medium run.E) an increase in the real wage in the medium run.Answer: EDiff: 249) Suppose the minimum wage decreases. Given this event, we would expect which of the following to occur?A) a reduction in the price level and an increase in output in the medium runB) an increase in the aggregate price level as output increasesC) an increase in the interest rate in the medium runD) none of the aboveAnswer: ADiff: 250) When the economy is operating at a point where output is less than the natural level of output, which of the following occurs?A) the unemployment rate is greater than the natural unemployment rate.B) the price level is less than the expected price level.C) the price level will be lower next period than it is this period.D) all of the aboveE)