econ chap 20

When the economy goes into a recession, real GDP ________ and unemployment ________.

• a. falls; rises

• b. falls; falls

  
  

• c. rises; rises

  
  

• d. rises; falls

Recessions occur _____________.

• a. regularly, about every 7 years

• b. regularly, about every 3 years

• c. irregularly

  
  

• d. regularly, about every 12 years

  
  

According to classical macroeconomic theory and monetary neutrality, changes in the money supply affect ___________.

• a. the unemployment rate

  
  

• b. real GDP

  
  

• c. the GDP deflator

• d. none of the answer choices are correct

Answer explanation

According to classical macroeconomic theory, changes in the money supply affect nominal variables but not real variables. As a result of this monetary neutrality, we were able to examine the determinants of real variables (real GDP, the real interest rate, and unemployment) without introducing nominal variables (the money supply and the price level).

Most economists believe that classical macroeconomic theory __________.

• 
  a. is valid only in the long run

• b. is valid only in the short run

  
  

• c. is always valid

• d. is never valid

  
  

Answer explanation

Most economists believe that classical theory describes the world in the long run but not in the short run.

In the short run, real and nominal variables are highly intertwined, and changes in the money supply can temporarily push real GDP away from its long-run trend.

In the model of aggregate demand and aggregate supply, the quantity of ________ is on the horizontal axis, and the ________ is on the vertical axis.

• a. output; price level

• b. money; interest rate

  
  

• c. money; price level

  
  

• d. output; interest rate

The aggregate-demand curve slopes downward because a fall in the price level causes ___________.

• a. real wealth to decrease

• b. the interest rate to decline

• c. the currency to appreciate

  
  

• d. all of the answer choices are correct

  
  

Answer explanation

A lower price level reduces the interest rate, encourages spending on investment goods, and increases the quantity of goods and services demanded.

Which of the following would shift the aggregate-demand curve to the left?

• a. A decline in the stock market

  
  

• b. An increase in taxes

• c. A decrease in government spending

• d. All of the answer choices are correct

  
  

Answer explanation

a. Stock market down → people feel poorer → consume less → AD shifts left.

b. When the government raises taxes, people cut back on their spending, and the aggregate-demand curve shifts to the left.

c. For example, suppose Congress decides to reduce purchases of new weapons systems. Because the quantity of goods and services demanded at any price level is lower, the aggregate-demand curve shifts to the left.

One reason the short-run aggregate-supply curve slopes upward is that a higher price level _________.

• a. reduces real wages if nominal wages are sticky

• b. reduces nominal wages if real wages are sticky

  
  

• c. raises real wages if nominal wages are sticky

  
  

• d. raises nominal wages if real wages are sticky

Answer explanation

• - nominal wages are based on expected prices and do not respond immediately when the actual price level turns out to be different from what was expected.

• - nominal wage/ real wage = price level

• -> unchanged nominal wage, higher price level => lower real wage

• - Lower real wages -> labor cheaper -> hire more workers -> increase production.

• Therefore, output rises when the price level rises, giving the SRAS its upward slope.

A change in which of the following would shift the short-run aggregate-supply curve but not the long-run aggregate-supply curve?

• a. The capital stock

  
  

• b. The expected price level

• 
  c. The labor force

  
  

• d. The state of technology

  
  

Answer explanation

• - shifts in the long-run aggregate-supply curve normally arise from changes in labor, capital, natural resources, or technological knowledge

A sudden increase in business pessimism shifts the aggregate-________ curve, leading to ________ output.

• a. demand; lower

• b. supply; higher

  
  

• 
  
  c. demand; higher

• d. supply; lower

  
  

Answer explanation

Households cut back on their spending and delay major purchases, and firms put off buying new equipment.