2 November

Problem Set Chapter 13
Question 1Correct2 points out of 3 Flag question

Question text
If spending growth is 6% and inflation is also 6%, this means that:
Select one:
a. real GDP did not increase.

b. economic growth was 12%.
c. more money is chasing an increased number of goods.
d. a positive supply shock occurred.
Feedback
The correct answer is: real GDP did not increase.
Correct
Marks for this submission: 3/3. Accounting for previous tries, this gives 2/3.
Question text
Deflation can cause the economy's aggregate demand curve to shift
inward because debt contracts are:
Select one:
a. adjusted for inflation.
b. not adjusted for inflation.

c. adjusted for changes in the interest rate.
d. not adjusted for changes in the interest rate.
Feedback
The correct answer is: not adjusted for inflation.
Correct
Question text
Which of the following would cause the AD curve to shift to the right?
Select one:
a. a decrease in consumer confidence
b. a decrease in the inflation rate
c. an increase in consumer wealth

d. an increase in the short-run aggregate supply curve
Feedback
The correct answer is: an increase in consumer wealth
Correct
Question text
According to the quantity theory of money, if both the growth rate of
the money supply and the velocity of money are fixed, then a higher
inflation rate means:
Select one:
a. a higher real growth rate.
b. no change in the real growth rate.
c. a lower real growth rate.
d. a higher or lower real growth rate, depending on the specific
growth rate of the money supply.
Feedback
The correct answer is: a lower real growth rate.
Correct
Question text
A negative shock to the long-run aggregate supply curve will cause:
Select one:
a. both real growth and inflation to fall.
b. both real growth and inflation to rise.
c. real growth to fall, but the inflation rate will rise.
d. real growth to rise, but the inflation rate will fall.

Feedback
The correct answer is: real growth to fall, but the inflation rate will rise.
Correct
Question text
An aggregate demand shock is a:
Select one:
a. slow and expected shift in spending.
b. slow and unexpected shift in spending.
c. rapid and expected shift in spending.
d. rapid and unexpected shift in spending.

Feedback
The correct answer is: rapid and unexpected shift in spending.
Correct
Question text
Why have oil shocks become less economically important for the
United States in recent years?
Select one:
a. American oil producers increased production of oil inside the
United States.
b. Negative oil shocks have been tempered by other positive
productivity shocks.
c. New pipelines allow more oil to be imported.
d. Pipelines increased the distribution of oil within the United States.
Feedback
The correct answer is: Negative oil shocks have been tempered by other
positive productivity shocks.
Correct
Marks for this submission: 3/3.
Question text
If an earthquake strikes, destroying a large number of factories, the
long-run aggregate supply curve will move:
Select one:
a. to the left.
b. to the right.
c. up.
d. down.
Feedback
The correct answer is: to the left.
Correct
Question text
A major hurricane hitting the East Coast of the United States is an
example of a:
Select one:
a. real shock.
b. geographic distress.
c. GDP deflator.
d. productivity neutralizing event.
Feedback
The correct answer is: real shock.
Correct
Question text
If wages are not as flexible as prices in the AD-AS model, an
increase in money growth will lead to:
Select one:
a. an increase in inflation and a rise in real long-run GDP growth.
b. an increase in inflation, but no rise in real short-run GDP growth.
c. an increase in inflation and in the profits of firms.
d. no change in inflation, but a fall in the profits of firms.

Feedback
The correct answer is: an increase in inflation and in the profits of firms.
Correct
Question text
In response to a negative oil price shock, real GDP growth:
Select one:
a. rises and never returns to its initial level.
b. falls and never returns to its initial level.
c. first rises and then falls back to its initial level.
d. first falls and then rises back to its initial level.
Feedback
The correct answer is: first falls and then rises back to its initial level.
Correct
Question text
Politicians and especially the general public worry about recessions
because of:
Select one:
a. high interest rates.
b. high inflation.
c. high unemployment.
d. lower wages.
Feedback
The correct answer is: high unemployment.
Correct
Question text
A reduction in the supply of oil is a real shock because it:
Select one:
a. makes gasoline more expensive for consumers.
b. raises the profits of oil producers.
c. makes labor and capital less productive.

d. reduces the amount of oil consumption.
Feedback
The correct answer is: makes labor and capital less productive.
Correct
Question text
If a productive new technology arrives, the long-run aggregate supply
curve will move:
Select one:
a. to the left.
b. to the right.
c. up.
d. down.
Feedback
The correct answer is: to the right.
Correct
Question text
The aggregate demand curve shows all the combinations of _____
that are consistent with a specified rate of spending growth.
Select one:
a. employment rates and price levels
b. inflation and real GDP growth rates

c. nominal GDP and real GDP
d. money velocity and money supply
Feedback
The correct answer is: inflation and real GDP growth rates
Correct
Question text
In the basic model with an AD and LRAS curve only, if spending
growth is 7% and the Solow growth rate rises from 0% to 3%, then
inflation will:
Select one:
a. decrease from 7% to 4%.

b. increase from 4% to 7%.
c. decrease from 10% to 3%.
d. increase from 3% to 10%.
Feedback
The correct answer is: decrease from 7% to 4%.
Correct
Question text
The “long run” is a period of time:
Select one:
a. long enough that prices and wages are sticky.
b. long enough that prices and wages are fully flexible.
c. longer than 1 year.
d. longer than 3 years.
Feedback
The correct answer is: long enough that prices and wages are fully flexible.
Correct
Question text
Sticky wages and prices are incorporated in the AD-AS model by the:
Select one:
a. long-run aggregate supply curve.
b. short-run aggregate supply curve.

c. aggregate demand curve.
d. both the aggregate demand and short-run aggregate supply
curves.
Feedback
The correct answer is: short-run aggregate supply curve.
Correct
Question text
The aggregate demand curve shows the relationship between the:
Select one:
a. growth rate of real output and the inflation rate.
b. inflation rate and the growth rate of the money supply.

c. growth rate of real output and the growth rate of the money supply.
d. growth rate of consumption and the inflation rate.
Feedback
The correct answer is: growth rate of real output and the inflation rate.
Correct
Question text
The long-run aggregate supply curve is represented by a vertical line
at the Solow growth rate because:
Select one:
a. growth depends on the rate of inflation in the long run.
b. there is an underlying assumption of long-run money neutrality.
c. growth is affected by changes in the money supply in the long run.

d. growth is not affected by the factors of production.
Feedback
The correct answer is: there is an underlying assumption of long-run
money neutrality.
Correct

Question text
If spending growth is 3% and real GDP growth is 2%, what is the
inflation rate?
Select one:
a. 3%
b. 5%
c. 1%
d. 2%
Feedback
The correct answer is: 1%
Correct
Question text
The cost a business faces when changing prices in response to an
economic shock is called:
Select one:
a. the velocity of money cost.
b. the inflation choice expenditure cost.
c. a menu cost.
d. the sticky price dilemma cost.
Feedback
The correct answer is: a menu cost.
Correct
Question text
An unexpected increase in export growth is a:
Select one:
a. shock that is always matched by an equal decrease in import
growth.
b. positive AD shock.
c. negative AD shock.
d. factor that has no impact on AD in the short run.
Feedback
The correct answer is: positive AD shock.
Correct
Question text
Using a graph of the AD and long-run aggregate supply curves, the
Internet revolution of the 1990s caused:
Select one:
a. both real growth and inflation to increase.
b. both real growth and inflation to decrease.
c. real growth to increase and inflation to decrease.
d. real growth to decrease and inflation to increase.

Feedback
The correct answer is: real growth to increase and inflation to decrease.
Correct
Question text
Which of the following is a negative real shock that occurred during
the Great Depression?
Select one:
a. The Smoot-Hawley tariffs led to a decrease in net exports.
b. Bank failures led to a decrease in the money supply.
c. Widespread bank failures led to a reduction in the productivity of
financial intermediation.
d. A stock market crash decreased consumer wealth.
Feedback
The correct answer is: Widespread bank failures led to a reduction in the
productivity of financial intermediation.
Correct
Question text
Which of the following would shift the long-run aggregate supply
curve to the right?
Select one:
a. a decrease in the rate of inflation
b. the invention of a new computer chip that makes assembly
production twice as fast

c. a severe drought that decreases crop production and as a result
raises prices
d. an increase in the growth rate of spending
Feedback
The correct answer is: the invention of a new computer chip that makes
assembly production twice as fast
Correct
Question text
If prices are perfectly flexible, the economy will always be growing:
Select one:
a. at its potential rate.
b. above its potential rate.
c. below its potential rate.
d. near its potential rate.
Feedback
The correct answer is: at its potential rate.
Correct
Question text
Prices are especially sticky in the:
Select one:
a. upward direction.
b. downward direction.
c. leftward direction.
d. rightward direction.
Feedback
The correct answer is: downward direction.
Correct
Question text
Which of the following would cause the aggregate demand curve to
shift to the right?
Select one:
a. an increase in the growth rate of output
b. a decrease in the inflation rate
c. a decrease in the velocity of money
d. an increase in the growth rate of the money supply
Feedback
The correct answer is: an increase in the growth rate of the money supply
Correct
Question text
An increase in inflation will cause the long-run aggregate supply
curve to:
Select one:
a. shift inward.
b. shift outward.
c. not shift at all.

d. shift randomly.
Feedback
The correct answer is: not shift at all.
Correct
Question text
A real shock is any shock that increases or decreases the growth rate
of:
Select one:
a. nominal GDP.
b. real GDP.
c. potential GDP.
d. prices.
Feedback
The correct answer is: potential GDP.
Correct
Question text
In the AD-AS model, changes in the growth rates of C, I, G, and NX
are interpreted as changes in:
Select one:
a. money supply.
b. velocity growth.
c. price levels.
d. money supply growth.
Feedback
The correct answer is: velocity growth.
Correct
Question text
Which of the following is an example of a shock that shifts the long-
run aggregate supply curve to the right?
Select one:
a. bad weather
b. an increase in government spending
c. a decrease in government regulation

d. a sudden increase in oil prices
Feedback
The correct answer is: a decrease in government regulation
Correct
Question text
The primary purpose of the AD-AS model is to explain:
Select one:
a. the steady-state output.
b. trends in output.
c. business fluctuations.
d. long-term economic growth.
Feedback
The correct answer is: business fluctuations.
Correct
Question text
If the growth rate of the money supply in an economy is 5%, the
growth rate of output is 2%, and the velocity of money is constant,
what will the inflation rate in this economy be?
Select one:
a. 2%
b. 3%
c. 5%
d. 7%
Feedback
Correct
Question text
A positive real shock causes the aggregate demand curve to:
Select one:
a. shift outward.
b. shift inward.

d. shift outward and become flatter.
Feedback
The correct answer is: not shift at all.
Correct
Question text
Which of the following describes the process through which a major
decline in the stock market leads to a change in aggregate demand?
Select one:
a. Banking panics lead to the removal of deposit insurance and a
negative AD shock.
b. Increases in net exports generate a negative AD shock.
c. Reductions in consumer wealth produce a negative AD shock.
d. A stock market bubble bursts, and this leads to a negative supply
shock.
Feedback
The correct answer is: Reductions in consumer wealth produce a negative
AD shock.
Correct
Question text
The term “business fluctuations” refers to:
Select one:
a. the different stages of a product cycle.
b. changes in the prices of goods and services over time.
c. movement in real GDP around its long-term trend.
d. the trend in real GDP over a long period of time.

Feedback
The correct answer is: movement in real GDP around its long-term trend.
Correct
Question text
If stock prices go up and people feel richer, aggregate demand will:
Select one:
a. increase.
b. decrease.
c. stay the same because there have been no changes to the
underlying assets.
d. be unpredictable.
Feedback
The correct answer is: increase.
Correct
Question text
The short-run aggregate supply curve shows the _____ relationship
between the inflation rate and real growth during the period when
prices and wages are _____.
Select one:
a. positive; flexible
b. positive; sticky
c. negative; flexible
d. negative; sticky
Feedback
The correct answer is: positive; sticky
Correct

Question text
If spending grows by 3% while real growth is 1% and velocity is
stable, then prices will be _____ at a rate of _____ according to the
aggregate demand curve.
Select one:
a. falling; 3%
b. falling; 2%
c. rising; 3%
d. rising; 2%
Feedback
The correct answer is: rising; 2%
Correct
Question text
The AD-AS model consists of the:
Select one:
a. aggregate demand (AD) curve only.
b. short-run aggregate supply (SRAS) curve only.
c. long-run aggregate supply (LRAS) curve only.
d. AD, SRAS, and LRAS curves.
Feedback
The correct answer is: AD, SRAS, and LRAS curves.
Correct
Question text
The Solow growth rate is the economy's:
Select one:
a. actual growth rate.
b. potential growth rate.

c. expansionary growth rate.
d. recessionary growth rate.
Feedback
The correct answer is: potential growth rate.
Correct
Question text
The average annual rate of growth of real GDP in the United States
has fluctuated around ____ for the last 60 years.
Select one:
a. 1.2%
b. 3.2%
c. 5%
d. –1%
Feedback
The correct answer is: 3.2%
Correct
Question text
An unexpected increase in money growth leads to increased inflation
in:
Select one:
a. the short run only.
b. the long run only.
c. both the short run and the long run.

d. neither the short run nor the long run.
Feedback
The correct answer is: both the short run and the long run.
Correct
Question text
By approximately how much did investment fall between 1929 and
1933?
Select one:
a. 25%
b. 40%
c. 50%
d. 75%
Feedback
Correct
Question text
The aggregate demand curve is a straight line with a slope of _____.
Select one:
a. 0
b. 1
c. –1
d. –10
Feedback
The correct answer is: –1
Correct
Question text
The unemployment rate is expected to _____ during a recession.
Select one:
a. decrease
b. remain the same
c. increase
d. change indeterminately
Feedback
The correct answer is: increase
Correct
Question text
growth is 10% and the Solow growth rate falls from 5% to 3%, then
inflation will:
Select one:
b. increase from 5% to 7%.
c. decrease from 13% to 8%.
Feedback
The correct answer is: increase from 5% to 7%.
Correct
Question text
What portion of GDP does agriculture in the United States currently
generate?
Select one:
a. around 1%
b. 10%
c. 20%
d. over 40%
Feedback
The correct answer is: around 1%
Correct
Question text
Holding everything else constant, an increase in the growth rate of
the money supply will cause the aggregate demand curve to:
Select one:
a. shift inward.
b. shift outward.
d. shift randomly.
Feedback
The correct answer is: shift outward.
Correct
Question text
A significant, widespread decline in real income and employment is
called:
Select one:
a. a recession.
b. a boom.
c. an aggregate demand fluctuation.
d. a business fluctuation.
Feedback
The correct answer is: a recession.
Correct
Question text
Which of the following combinations would be on an aggregate
demand curve with a spending growth rate of 6%?
Select one:
a. inflation rate of 3%, real growth rate of 6%
b. inflation rate of 6%, real growth rate of 3%
c. inflation rate of 2%, real growth rate of 8%
d. inflation rate of 8%, real growth rate of –2%

Feedback
The correct answer is: inflation rate of 8%, real growth rate of –2%
Correct
Question text
The first major event of the Great Depression was:
Select one:
a. a series of bank failures.
b. a fall in investment spending.
c. a stock market crash.
d. the Smoot-Hartley tariffs.
Feedback
The correct answer is: a stock market crash.
Correct
Question text
What type of shock could be responsible for an increase in growth
and a decrease in the inflation rate?
Select one:
a. a positive real shock

b. a positive demand shock
c. a negative real shock
d. a negative demand shock
Feedback
The correct answer is: a positive real shock
Correct
Question text
A decrease in oil prices is an example of a _____ productivity shock.
Select one:
a. negative
b. positive
c. neutral
d. deflationary
Feedback
The correct answer is: positive
Correct
Question text
If spending grows by 3%, real GDP grows by 5%, and velocity is
stable, then prices will be _____ at a rate of _____ according to the
Select one:
a. falling; 3%
b. falling; 2%
c. rising; 3%
d. rising; 2%
Feedback
The correct answer is: falling; 2%
Correct
Question text
An increase in the rate of spending growth must flow into either
higher inflation or:
Select one:
a. higher deflation.
b. lower inflation.
c. higher growth.
d. lower growth.
Feedback
The correct answer is: higher growth.
Correct
Question text
An unexpected increase in money growth leads to increased real
GDP growth in:
Select one:
Feedback
The correct answer is: the short run only.
Correct
Question text
The short-run aggregate supply curve is upward-sloping because:
Select one:
a. in the short run, an increase in spending leads to an increase in
output.
b. wages increase with an increase in output in the short run.
c. wages and prices are sticky in the short run.
d. an increase in spending only leads to an increase in prices.

Feedback
The correct answer is: wages and prices are sticky in the short run.
Correct

Question text
The aggregate demand curve shows all the combinations of _____
and _____ that are consistent with a specified rate of _____.
Select one:
a. prices; real GDP; spending
b. prices; GNP; money supply
c. inflation; nominal growth; money supply
d. inflation; real GDP growth; spending growth
Feedback
The correct answer is: inflation; real GDP growth; spending growth
Correct
Question text
An unexpected outward shift of the economy's AD curve will cause
real GDP growth to increase in:
Select one:
Feedback
The correct answer is: the short run only.
Correct
Question text
A negative real shock causes:
Select one:
a. a lower inflation rate and a lower real growth rate.
b. a lower inflation rate and a higher real growth rate.
c. a higher inflation rate and a lower real growth rate.
d. a higher inflation rate and a higher real growth rate.

Feedback
The correct answer is: a higher inflation rate and a lower real growth rate.
Correct
Question text
The aggregate demand curve is:
Select one:
a. upward sloping.
b. downward sloping.
c. a vertical line.
d. a horizontal line.
Feedback
The correct answer is: downward sloping.
Correct
Question text
Which of the following scenarios could result in a recession?
Select one:
a. Aggregate demand decreases, and wages are flexible.
b. Aggregate demand decreases, and wages are sticky.
c. Aggregate demand increases, and wages are flexible.

d. Aggregate demand increases, and wages are sticky.
Feedback
The correct answer is: Aggregate demand decreases, and wages are
sticky.
Correct
Question text
Which of the following would result from a positive productivity
shock?
Select one:
a. an increase in the rate of inflation
b. a shift to the right of the aggregate demand curve
c. a shift to the left of the long-run aggregate supply curve
d. an increase in the economy's long-run potential growth rate
Feedback
The correct answer is: an increase in the economy's long-run potential
growth rate
Correct
Question text
The Solow growth rate is the rate of economic growth that would
occur given:
Select one:
a. flexible prices and the existing real factors of production.
b. flexible prices and the expected real factors of production.
c. sticky prices and the existing real factors of production.
d. sticky prices and the expected real factors of production.
Feedback
The correct answer is: flexible prices and the existing real factors of
production.
Correct
Question text
During the Internet revolution in the late 1990s, a positive real shock
shifted the long-run aggregate supply curve to the right, which led to:
Select one:
a. a decrease in both real growth rate and the inflation rate.
b. an increase in both real growth rate and the inflation rate.
c. a decrease in real growth rate and increase in the inflation rate.
d. an increase in real growth rate and decrease in the inflation rate.
Feedback
The correct answer is: an increase in real growth rate and decrease in the
inflation rate.
Correct
Question text
Since 1980, shocks to rainfall are becoming less economically
important for India's GDP. Which of the following explains why this is
the case?
Select one:
a. Agriculture is becoming a smaller part of India's GDP.
b. India no longer produces agricultural items but has shifted all those
resources to producing Bollywood movies.
c. Rainfall patterns have changed, causing fewer disruptions.
d. India learned to grow crops without water.
Feedback
The correct answer is: Agriculture is becoming a smaller part of India's
GDP.
Correct
Question text
Other things held constant, an increase in the velocity of money will
cause the aggregate demand curve to:
Select one:
a. shift inward.
b. shift outward.
d. shift randomly.
Feedback
The correct answer is: shift outward.
Correct
Question text
The AD-AS model is most useful for explaining what causes:
Select one:
a. the economy's long-run growth rate.
b. inflation.
c. stock market fluctuations.
d. fluctuations in GDP growth around its trend rate.
Feedback
The correct answer is: fluctuations in GDP growth around its trend rate.
Correct
Question text
The Smoot-Hawley Tariff of 1930 raised tariff rates on tens of
thousands of imported goods, and the results were that:
Select one:
a. exports rose but imports fell, thereby increasing aggregate
demand.
b. imports rose but exports fell, thereby reducing aggregate demand.
c. both exports and imports rose, thereby increasing aggregate
demand.
d. both exports and productivity fell, thereby reducing aggregate
demand and aggregate supply.

Feedback
The correct answer is: both exports and productivity fell, thereby reducing
aggregate demand and aggregate supply.
Correct
Question text
A real shock causes:
Select one:
a. a shift of the aggregate demand curve.
b. a shift of both the long-run aggregate supply curve and the
c. a shift of the long-run aggregate supply curve.
d. a movement along the long-run aggregate supply curve.
Feedback
The correct answer is: a shift of the long-run aggregate supply curve.
Correct
Question text
Which of the following causes the AD curve to shift left?
Select one:
a. a tax cut
b. increased consumer confidence
c. increased import growth

d. an increase in business investment
Feedback
The correct answer is: increased import growth
Correct
Question text
We would expect a negative real shock, such as a severe
countrywide drought, to result in:
Select one:
a. a decrease in the inflation rate and an increase in the growth rate
of output.
b. a decrease in the inflation rate and a decrease in the growth rate of
output.
c. an increase in the inflation rate and an increase in the growth rate
of output.
d. an increase in the inflation rate and a decrease in the growth rate
of output.
Feedback
The correct answer is: an increase in the inflation rate and a decrease in
the growth rate of output.
Correct
Question text
From an initial equilibrium in the AD-AS model, an unexpected
increase in money supply growth will cause inflation:
Select one:
a. and real growth to increase in the short run.
b. to increase and real growth to decrease in the short run.
c. to increase and real growth to remain unchanged in the short run.
d. and real growth to remain unchanged.
Feedback
The correct answer is: and real growth to increase in the short run.
Correct
Question text
The long-run aggregate supply curve is:
Select one:
a. upward sloping.
b. downward sloping.
c. a vertical line.
d. a horizontal line.
Feedback
The correct answer is: a vertical line.
Correct
Question text
All the combinations of inflation and real growth consistent with a
specific rate of spending growth is called the:
Select one:
a. aggregate demand curve.

b. short-run aggregate supply curve.
c. long-run aggregate supply curve.
d. endowment curve.
Feedback
The correct answer is: aggregate demand curve.
Correct
Question text
A negative real shock leads to:
Select one:
a. an increase in the inflation rate but a decrease in the real GDP
growth rate.
b. an increase in both the inflation rate and the real GDP growth rate.
c. a decrease in the inflation rate but an increase in the real GDP
growth rate.
d. a decrease in both the inflation rate and the real GDP growth rate.
Feedback
The correct answer is: an increase in the inflation rate but a decrease in
the real GDP growth rate.
Correct
Question text
The position of the long-run aggregate supply curve shows the
economy's:
Select one:
a. potential growth rate given by the real factors of production.
b. long-run inflation rate.

c. expected inflation rate.
d. rate of money growth plus velocity growth.
Feedback
The correct answer is: potential growth rate given by the real factors of
production.
Correct
Problem Set Chapter 14

Question text
Intertemporal substitution is:
Select one:
a. the cost of shifting workers from declining sectors of the economy
to the growing sectors.
b. the tendency for economic activities to be coordinated at common
points in time.
c. the allocation of consumption, work, and leisure across time to
maximize well-being.
d. a reduction in the value of collateral.
Feedback
The correct answer is: the allocation of consumption, work, and leisure
across time to maximize well-being.
Correct
Question text
Suppose that Kristi is unsure about what to do with her life. Should
she go to graduate school now or wait until she decides what she
wants to do?
Select one:
a. She should go now.
b. She should wait until she decides.

c. It doesn't matter.
d. Each choice is equally valid.
Feedback
The correct answer is: She should wait until she decides.
Correct
Question text
Because of intertemporal substitution, the supply of labor is likely to:
Select one:
a. decrease when the economy grows more rapidly.
b. increase when the economy grows more rapidly.
c. remain constant regardless of how fast the economy grows.

d. become unpredictable when a shock occurs in an economy.
Feedback
The correct answer is: increase when the economy grows more rapidly.
Correct
Question text
The equity in your home refers to the market value of your:
Select one:
a. home.
b. home minus the price you paid.
c. home minus the amount you still owe on your mortgage.
d. home plus the cost of any improvements made.
Feedback
The correct answer is: home minus the amount you still owe on your
mortgage.
Correct
Question text
When there is high uncertainty, investors are more likely to hold off
on potential investment projects that:
Select one:
a. are irreversible.
b. are reversible.
c. have many substitutes.
d. have low adjustment costs.
Feedback
The correct answer is: are irreversible.
Correct
Question text
Because of intertemporal substitution, a negative shock to aggregate
demand could result in:
Select one:
a. a shift of the LRAS curve to the right.
b. a shift of the LRAS curve to the left.

c. an upward movement along the LRAS curve.
d. a downward movement along the LRAS curve.
Feedback
The correct answer is: a shift of the LRAS curve to the left.
Correct
Question text
A negative shock reduces capital investments because:
Select one:
a. capital investments involve sunk costs.

b. investments are always very speculative.
c. capital investments are easily reversible.
d. investors react only to capital investments that bring high returns.
Feedback
The correct answer is: capital investments involve sunk costs.
Correct
Question text
Which of the following is NOT a transmission mechanism?
Select one:
a. intertemporal substitution
b. irreversible investments
c. time bunching
d. shifts in LRAS
Feedback
The correct answer is: shifts in LRAS
Correct
Question text
Uncertainty tends to keep resources:
Select one:
a. in more productive uses.
b. in less productive uses.

c. fully employed.
d. moving from country to country.
Feedback
The correct answer is: in less productive uses.
Correct
Question text
Which of the following is the best example of intertemporal
substitution?
Select one:
a. Timmy opens a lemonade stand on the weekends when he's not in
school to earn money for a new bike.
b. Sam works overtime to earn extra money.
c. Mary studies an extra 3 hours the night before her economics final
exam.
d. Sarah decides to stay home from work today because she is
feeling ill.
Feedback
The correct answer is: Mary studies an extra 3 hours the night before her
economics final exam.
Correct
Question text
During an economic boom, the employment-to-population ratio rises
because:
Select one:
a. inflation tends to rise at that time.
b. the opportunity cost of leisure increases.

c. fewer people are available to work.
d. real wages tend to fall at that time.
Feedback
The correct answer is: the opportunity cost of leisure increases.
Correct
Question text
Which of the following are people NOT more likely to do during a
recession?
Select one:
a. retire
b. shrink business operations
c. focus on homemaking
d. drop out of school

Feedback
The correct answer is: drop out of school
Correct
Question text
Labor supply tends to:
Select one:
a. remain constant during recessions.
b. remain constant during booms.
c. increase during recessions.
d. increase during booms.

Feedback
The correct answer is: increase during booms.
Correct
Question text
If it takes people more time to make employment decisions, then a
given negative economic shock will cause a decline in economic
growth:
Select one:
a. smaller in size and shorter in duration.
b. larger in size but shorter in duration.
c. smaller in size but longer in duration.
d. larger in size and longer in duration.
Feedback
The correct answer is: larger in size and longer in duration.
Correct
Question text
The allocation of consumption, work, and leisure across time to
maximize well-being is called:
Select one:
a. intertemporal substitution.
b. labor adjustment cost.
c. time bunching
d. collateral damage.
Feedback
The correct answer is: intertemporal substitution.
Correct
Question text
If investors are less certain about the economic outlook, they will:
Select one:
a. reduce capital investments that are less irreversible.
b. reduce capital investments that are more irreversible.
c. raise capital investments that are less irreversible.

d. raise capital investments that are more irreversible.
Feedback
The correct answer is: reduce capital investments that are more
irreversible.
Correct
Question text
Tom works as an editor for a textbook company and devotes some of
his time to his dream of writing a novel. Will he devote more time to
writing the novel when the textbook company is busy and pays him
overtime or when work is slow and no overtime pay is available?
Select one:
a. when work is busy
b. when work is slow

c. equal amounts of time under both conditions
d. He will never actually write it as long as he works with the textbook
publishing company.
Feedback
The correct answer is: when work is slow
Correct
Question text
For a given economic shock, more irreversible investments in an
economy will:
Select one:
a. moderate the effect of the shock on the economy.
b. amplify the effect of the shock on the economy.
c. make the transmission mechanism for the shock longer.

d. make the transmission mechanism for the shock shorter.
Feedback
The correct answer is: amplify the effect of the shock on the economy.
Correct
Question text
If drought reduces farm output, farmers will probably:
Select one:
a. work harder to try to make up for the lost output.
b. work less hard and devote less capital to their fields.
c. work the same amount as they normally do.
d. celebrate.
Feedback
The correct answer is: work less hard and devote less capital to their
fields.
Correct
Question text
Labor adjustment costs lead to:
Select one:
b. time bunching.
c. higher unemployment.
d. higher employment.
Feedback
The correct answer is: higher unemployment.
Correct
Question text
People engage in intertemporal substitution because they:
Select one:
a. wish to reduce the overall number of hours they work.
b. seek to maximize their well-being.

c. are irrational.
d. always prefer leisure to work.
Feedback
The correct answer is: seek to maximize their well-being.
Correct
Question text
For a given negative economic shock, an economy with higher labor
adjustment costs will have a:
Select one:
a. higher economic growth rate.
b. smaller effect on employment.
c. higher unemployment rate.

d. shorter recession.
Feedback
The correct answer is: higher unemployment rate.
Correct
Question text
Intertemporal substitution tends to magnify:
Select one:
a. negative shocks only.
b. positive shocks only.
c. both negative and positive shocks.

d. neither negative nor positive shocks.
Feedback
The correct answer is: both negative and positive shocks.
Correct
Question text
_____ have high value only under specific conditions.
Select one:
a. Intertemporal reserves
b. Permanent assets
c. Irreversible investments
d. High-growth prices
Feedback
The correct answer is: Irreversible investments
Correct

Question text
Collateral damage occurs more frequently during:
Select one:
a. expansions when real assets need to be redeployed.
b. recessions when discouraged workers neglect the capital stock.
c. expansions when capital stock becomes outdated and useless.
d. recessions when capital stock loses value through market forces.
Feedback
The correct answer is: recessions when capital stock loses value through
market forces.
Correct
Question text
The supply of labor:
Select one:
a. increases during a boom and decreases during a recession.
b. decreases during a boom and increases during a recession.

c. increases during booms and recessions alike.
d. decreases during booms and recessions alike.
Feedback
The correct answer is: increases during a boom and decreases during a
recession.
Correct
Question text
A laid-off autoworker does not immediately seek employment in a
rapidly growing computer industry because:
Select one:
a. he is irrational, not considering the benefits of searching for a new
job.
b. changing a career is a costly decision.
c. being unemployed is always the best decision for a person after a
layoff.
d. there are benefits to being rationally ignorant.
Feedback
The correct answer is: changing a career is a costly decision.
Correct
Question text
Losing a job that pays especially well can result in a long period of
unemployment because:
Select one:
a. it may take the worker a while to come to terms with the fact that
he will be forced to take a pay cut.

b. high-paying jobs are easy to find.
c. workers are always purely rational in their employment decisions.
d. there are no adjustment costs for high-salary workers.
Feedback
The correct answer is: it may take the worker a while to come to terms with
the fact that he will be forced to take a pay cut.
Correct
Question text
Historical data on India's rainfall amounts and real GDP growth show
that:
Select one:
a. economic fluctuations are negatively correlated with real shocks.
b. economic fluctuations are positively correlated with real shocks.
c. economic fluctuations have no correlation with any shocks.

d. real shocks affect only long-term economic growth, but not short-
run economic fluctuations.
Feedback
The correct answer is: economic fluctuations are positively correlated with
real shocks.
Correct
Question text
When GDP is growing faster than trend, the employment-to-
population ratio tends to grow:
Select one:
a. faster than trend.
b. more slowly than trend.
c. at its trend level.
d. unpredictably.
Feedback
The correct answer is: faster than trend.
Correct
Question text
The condition of time bunching implies that:
Select one:
a. people tend to work and invest primarily when other people do.
b. people tend to go against what other people do.

c. the decisions of some people always offset the effects of other
people's decisions.
d. it takes a long time for people to make decisions.
Feedback
The correct answer is: people tend to work and invest primarily when other
people do.
Correct
Question text
Collateral shocks:
Select one:
a. force banks to hold more of their assets as cash.
b. typically shift employment from one industry to another.
c. force people to sell their homes.
d. slow the adjustment of the economy to business cycle fluctuations.
Feedback
The correct answer is: slow the adjustment of the economy to business
cycle fluctuations.
Correct
Question text
A capital investment is more irreversible if it involves a high:
Select one:
a. sunk cost.
b. labor cost.
c. maintenance cost.
d. depreciation rate.
Feedback
The correct answer is: sunk cost.
Correct
Question text
The fact that employment tends to be relatively high during the
Christmas season and low during January is an example of:
Select one:
b. labor adjustment costs.
c. time bunching.
d. irreversible investments.
Feedback
The correct answer is: time bunching.
Correct
Question text
Which of the following explains why intertemporal substitution
magnifies a negative economic shock?
Select one:
a. When things go bad, the return to work and investing fall, and often
people work less and invest less.
b. When things go well, workers will tend to be less productive and
invest less.
c. When things go bad, people often work more and harder to
maintain their return to work.
d. When things go well, the return to work and investing rise, and
often people work less and invest less.
Feedback
The correct answer is: When things go bad, the return to work and
investing fall, and often people work less and invest less.
Correct
Question text
Adam is unemployed and can try to find another job as a bank teller,
or he can go back to school for 2 years and become a nurse. Nursing
jobs are easy to find and nurses are better paid than bank tellers.
Why must he think carefully before making this career change?
Select one:
a. Bank tellers are a dying profession.
b. He doesn't like his current career.
c. Student loans are easy to secure.
d. Nursing school is an irreversible investment.
Feedback
The correct answer is: Nursing school is an irreversible investment.
Correct
Part 5 Exam
Question 1Incorrect0.0 points out of 2.0 Flag question

Question text
According to the AD/AS model, a sudden decrease in business
confidence would cause what to happen in the short run?
Select one:
a. the real growth rate to increase and the inflation rate to fall
b. the real growth rate to decrease and the inflation rate to rise
c. the real growth rate to decrease and the inflation rate to fall
d. the real growth rate to increase and the inflation rate to rise
Feedback
The correct answer is: the real growth rate to decrease and the inflation
rate to fall
Question 2Correct2.0 points out of 2.0 Flag question
Question text
A country in South America is experiencing high inflation, around
15% annually, and high unemployment, around 25%. According to
the AD/AS model, which of the following is most likely to explain this
outcome?
Select one:
a. A positive aggregate demand shock
b. A negative aggregate demand shock
c. A positive real shock
d. A negative real shock

Feedback
The correct answer is: A negative real shock
Question text
The term business fluctuations refers to:
Select one:
a. changes in the prices of goods and services over time.
b. changes in real GDP around its long-term trend.
c. the trend in real GDP over a long period of time.
d. the different stages of a product cycle.

Feedback
The correct answer is: changes in real GDP around its long-term trend.
Question text
Refer to the AD/AS graph 5 above. It shows an AD curve consistent

with a spending growth of 12%. Assume the Solow growth rate is 5%.
What does the model predict for the inflation rate when the economy
is growing at the Solow rate?
Select one:
a. 0%
b. 3%
c. 4%
d. 7%
Feedback
Question text
The argument that money is neutral in the long run means that an
increase in the money supply can:
Select one:
a. increase real GDP permanently.
b. increase real GDP only temporarily.

c. decrease real GDP permanently.
d. decrease real GDP only temporarily.
Feedback
The correct answer is: increase real GDP only temporarily.
Question text
Refer to Graph IV. Beginning at point A in the accompanying

diagram, can you say what is the short-run growth rate in this
economy after a positive money shock?
Select one:
a. 1.2%
b. 2%
c. 3%
d. 6%
Feedback
Question text
A change in aggregate demand will cause a change in the growth
rate of the economy in the short run if:
Select one:
a. people decide to work in the social interest instead of their self
interest
b. the change in AD is unexpected or prices are sticky
c. the change in AD is expected and prices are flexible

d. the government holds interest rates constant
Feedback
The correct answer is: the change in AD is unexpected or prices are sticky
Question text
Refer to Graph II. According to this dynamic aggregate demand

model, the Solow growth rate is:
Select one:
a. 8%.
b. 4%.
c. 3%.
d. 12%.
Feedback
The correct answer is: 4%.
Question text
A real shock is any shock that increases or decreases the growth rate
of:
Select one:
a. potential GDP.
b. investment spending.
c. exports.
d. consumer spending.
Feedback
The correct answer is: potential GDP.
Question text
In terms of economic fluctuations, a real shock is one that:
Select one:
a. changes a nation's level of total spending
b. changes a nations potential growth rate

c. changes the current leader/president
d. changes the amount of money supply in circulating in a nation
Feedback
The correct answer is: changes a nations potential growth rate
Question text
Using the AD-Solow growth curve model, the internet revolution of
the 1990s caused:
Select one:
a. both real growth and inflation to increase.
b. real growth to increase and inflation to decrease.
c. real growth to decrease and inflation to increase.
d. both real growth and inflation to decrease.

Feedback
The correct answer is: real growth to increase and inflation to decrease.
Question text
In the Dynamic AD/AS model, The Solow growth rate is the
economy's:
Select one:
a. actual growth rate.
b. expansionary growth rate.
c. recessionary growth rate.
d. potential growth rate.

Feedback
The correct answer is: potential growth rate.
Question text
A major hurricane hitting the East Coast of the United States is an
example of a:
Select one:
a. real shock.
b. productivity neutralizing event.
c. geographic distress.
d. GDP deflator.
Feedback
The correct answer is: real shock.
Question text
Refer to the AD/AS graph 1. It shows an economy at a long run

equilibrium with real growth = 3% and inflation = 4%. After the short
run fluctuation, what will be the outcome in the long run? (assume the
increase in AD is due to an increase in money growth)
Select one:
a. Inflation will fall back to the original expected inflation of 4% and
real growth will remain at 5%
b. Inflation will increase to 7% and real growth returns to the Solow
rate of 3%
c. The Solow growth rate will become 5% and the inflation rate will
remain at 5%
d. Inflation will increase to 7% and real growth will increase to 10%
Feedback
The correct answer is: Inflation will increase to 7% and real growth returns
to the Solow rate of 3%
Question text
Refer to the AD/AS graph 1. It shows an economy at a long run
equilibrium with real growth = 3% and inflation = 4%. Assuming the
prices are sticky in the short run, what will be the short run outcome
of an unexpected increase in AD from AD 1 to AD 2?
Select one:
a. Inflation will increase to 5% and real growth will increase to 5%
b. Inflation will increase to 7% and real growth will not change

c. Inflation will increase to 7% and real growth will increase to 5%
d. Inflation will stay at 4% and real growth will increase to 6%
Feedback
The correct answer is: Inflation will increase to 5% and real growth will
increase to 5%
Question text
According to the AD/AS model, an increase in the growth of the
money supply will:
Select one:
a. Decrease the Solow growth rate
b. Increase Aggregate Demand

c. Decrease Aggregate Demand
d. Increase the Solow growth rate
Feedback
The correct answer is: Increase Aggregate Demand
Question text
According to macroeconomics theory, in the short run:
Select one:
a. there is no relationship between the inflation rate and real GDP
growth rate
b. there is a negative relationship between the inflation rate and real
GDP growth rate

c. real GDP growth will reach a maximum when the inflation rate is
zero.
d. there is a positive relationship between the inflation rate and real
GDP growth rate
Feedback
The correct answer is: there is a positive relationship between the inflation
rate and real GDP growth rate
Question text
Refer to Graph III. From point X in the accompanying dynamic

aggregate demand model, a negative real shock will cause the
economy to move to point:
Select one:
a. Z.
b. W.
c. Y.
d. X.
Feedback
The correct answer is: Y.
Question text
Which of the following best describes a recession?
Select one:
a. A situation where the level of real GDP growth is positive, but
slower than normal.
b. A widespread contraction in economic activity visible in many
variables including real GDP, real income, and employment.
c. Any time the unemployment rate is above 8%.
d. When the economy experiences high inflation.

Feedback
The correct answer is: A widespread contraction in economic activity
visible in many variables including real GDP, real income, and
employment.
Question text
Consider the short run and the long run time frames used in
macroeconomics. The definition of the short run is
Select one:
a. The time period before the economy has fully adjusted to an
unexpected change in aggregate demand

b. The time period when inflation is positive
c. The time period when the labor force participation rate is fixed
d. The time period when supply of money is fixed
Feedback
The correct answer is: The time period before the economy has fully
adjusted to an unexpected change in aggregate demand
Question text
An aggregate demand shock is a:
Select one:
a. rapid and unexpected shift in spending.

b. slow and unexpected shift in spending.
c. rapid and expected shift in spending.
d. slow and expected shift in spending.
Feedback
The correct answer is: rapid and unexpected shift in spending.
Question text
During the Internet revolution in the late 1990s, a positive real shock
shifted the long-run aggregate supply curve to the right, which led to:
Select one:
a. an increase in both real growth rate and the inflation rate.
b. a decrease in real growth rate and increase in the inflation rate.
c. a decrease in both real growth rate and the inflation rate.
d. an increase in real growth rate and decrease in the inflation rate.
Feedback
The correct answer is: an increase in real growth rate and decrease in the
inflation rate.
Question text
A negative real shock causes:
Select one:
a. a lower inflation rate and a lower real growth rate.
b. a lower inflation rate and a higher real growth rate.
c. a higher inflation rate and a higher real growth rate.
d. a higher inflation rate and a lower real growth rate.
Feedback
The correct answer is: a higher inflation rate and a lower real growth rate.
Question text
During a recession:
Select one:
a. land, labor, and capital are not fully utilized.

b. labor is not fully utilized.
c. capital is not fully utilized.
d. land is not fully utilized.
Feedback
The correct answer is: land, labor, and capital are not fully utilized.
Question text
growth is 7% and the Solow growth rate rises from 0% to 3%, then
inflation will:
Select one:
b. decrease from 7% to 4%.
c. increase from 4% to 7%.
Feedback
The correct answer is: decrease from 7% to 4%.
Question text
If drought reduces farm output, farmers will probably:
Select one:
a. work harder to try to make up for the lost output.
b. work the same amount as they normally do.
c. work less hard and devote less capital to their fields.
d. celebrate.
Feedback
The correct answer is: work less hard and devote less capital to their
fields.
Question text
Historical data on India's rainfall amounts and real GDP growth show
that:
Select one:
a. economic fluctuations are positively correlated with real shocks.
b. real shocks affect only long-term economic growth, but not short-
run economic fluctuations.
c. economic fluctuations have no correlation with any shocks.
d. economic fluctuations are negatively correlated with real shocks.
Feedback
The correct answer is: economic fluctuations are positively correlated with
real shocks.
Question text
Labor adjustment costs tend to be higher when:
Select one:
a. the unemployment rate is low.

b. moving costs are low.
c. the declining industries are unionized.
d. market wages rise.
Feedback
The correct answer is: the declining industries are unionized.
Question text
Uncertainty tends to amplify business cycles because:
Select one:
a. many investments are irreversible with large sunk costs; thus
investors decrease investment during bad times and wait until they
are more certain about the future direction of the economy.
b. investment tends to correlate with prices and therefore both prices
and investment tend to rise during booms and decrease during
recessions.
c. resource providers have less demand for their materials during
recessions and thus less certain sales expectations.
d. fewer people tend to go to college during recessions because of
the uncertainty in the job market and thus lower education leads to
lower productivity.
Feedback
The correct answer is: many investments are irreversible with large sunk
costs; thus investors decrease investment during bad times and wait until
they are more certain about the future direction of the economy.
Question text
Suppose that Kristi is unsure about what to do with her life. Should
she go to graduate school now or wait until she decides what she
wants to do?
Select one:
a. It doesn't matter.
b. Each choice is equally valid.
c. She should wait until she decides.
d. She should go now.
Feedback
The correct answer is: She should wait until she decides.

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Problem Set Chapter 13

Question 1Correct2 points out of 3 Flag question

a. real GDP did not increase.

b. not adjusted for inflation.

c. an increase in consumer wealth

d. real growth to rise, but the inflation rate will fall.

d. rapid and unexpected shift in spending.

d. no change in inflation, but a fall in the profits of firms.

c. makes labor and capital less productive.

b. inflation and real GDP growth rates

a. decrease from 7% to 4%.

b. short-run aggregate supply curve.

b. inflation rate and the growth rate of the money supply.

c. growth is affected by changes in the money supply in the long run.

Question 1Correct1 points out of 3 Flag question

d. real growth to decrease and inflation to increase.

production twice as fast

c. not shift at all.

c. a decrease in government regulation

c. not shift at all.

d. the trend in real GDP over a long period of time.

Question 1Correct3 points out of 3 Flag question

b. potential growth rate.

c. both the short run and the long run.

d. inflation rate of 8%, real growth rate of –2%

a. a positive real shock

d. an increase in spending only leads to an increase in prices.

Question 1Correct3 points out of 3 Flag question

d. a higher inflation rate and a higher real growth rate.

c. Aggregate demand increases, and wages are flexible.

demand and aggregate supply.

c. increased import growth

a. aggregate demand curve.

b. long-run inflation rate.

Problem Set Chapter 14

Question 1Correct3 points out of 3 Flag question

b. She should wait until she decides.

c. remain constant regardless of how fast the economy grows.

b. a shift of the LRAS curve to the left.

a. capital investments involve sunk costs.

b. in less productive uses.

b. the opportunity cost of leisure increases.

d. drop out of school

d. increase during booms.

c. raise capital investments that are less irreversible.

b. when work is slow

c. make the transmission mechanism for the shock longer.

b. seek to maximize their well-being.

c. higher unemployment rate.

c. both negative and positive shocks.

Question 1Correct3 points out of 3 Flag question

b. decreases during a boom and increases during a recession.

he will be forced to take a pay cut.

c. economic fluctuations have no correlation with any shocks.

b. people tend to go against what other people do.

Question 1Incorrect0.0 points out of 2.0 Flag question

d. A negative real shock

d. the different stages of a product cycle.

Refer to the AD/AS graph 5 above. It shows an AD curve consistent

b. increase real GDP only temporarily.

Refer to Graph IV. Beginning at point A in the accompanying

c. the change in AD is expected and prices are flexible