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Macroeconomics 10th Edition Parkin Test Bank
Macroeconomics 10th Edition Parkin Test Bank
Macroeconomics 10th Edition Parkin Test Bank
Test Bank
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1. Business cycles are:
A) regular and predictable.
B) irregular but predictable.
C) regular but unpredictable.
D) irregular and unpredictable.
6. 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
Page 1
7. The version of Okun's law studied in Chapter 10 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.
Page 2
12. Measures of average workweeks and of supplier deliveries (vendor
performance) are included in the index of leading indicators, because
shorter workweeks tend to indicate ______ future economic activity
and slower deliveries tend to indicate ______ future economic activity.
A) stronger; stronger
B) stronger; weaker
C) weaker; stronger
D) weaker; weaker
16. 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.
17. The aggregate demand curve is the ______ relationship between the
quantity of output demanded and the ______.
A) positive; money supply
B) negative; money supply
C) positive; price level
D) negative; price level
Page 3
18. If an aggregate demand curve is drawn with real GDP (Y) along the
horizontal axis and the price level (P) along the vertical axis, using the
quantity theory of money as a theory of aggregate demand, this curve
slopes ______ to the right and gets ______ as it moves farther to the
right.
A) downward; steeper
B) downward; flatter
C) upward; steeper
D) upward; flatter
20. Along an aggregate demand curve, which of the following are held
constant?
A) real output and prices
B) nominal output and velocity
C) the money supply and real output
D) the money supply and velocity
22. According to the quantity equation, if the velocity of money and the
supply of money are fixed, and the price level increases, then the
quantity of goods and services purchased:
A) increases.
B) decreases.
C) does not change.
D) may either increase or decrease.
Page 4
23. For a fixed money supply, the aggregate demand curve slopes
downward because at a lower price level, real money balances are
______, generating a ______ quantity of output demanded.
A) higher; greater
B) higher; smaller
C) lower; greater
D) lower; smaller
25. When an aggregate demand curve is drawn with real GDP (Y) along
the horizontal axis and the price level (P) along the vertical axis, if the
money supply is decreased, then the aggregate demand curve will
shift:
A) downward and to the left.
B) downward and to the right.
C) upward and to the left.
D) upward and to the right.
26. 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
27. The relationship between the quantity of goods and services supplied
and the price level is called:
A) aggregate demand.
B) aggregate supply.
C) aggregate investment.
D) aggregate production.
28. 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
Page 5
29. In the long run, the level of output is determined by the:
A) interaction of supply and demand.
B) money supply and the levels of government spending and taxation.
C) amounts of capital and labor and the available technology.
D) preferences of the public.
30. When a long-term aggregate supply curve is drawn with real GDP (Y)
along the horizontal axis and the price level (P) along the vertical axis,
this curve:
A) slopes upward and to the right.
B) slopes downward and to the right.
C) is horizontal.
D) is vertical.
31. The vertical long-run aggregate supply curve satisfies the classical
dichotomy because the natural rate of output does not depend on:
A) the labor supply.
B) the supply of capital.
C) the money supply.
D) technology.
34. If all prices are stuck at a predetermined level, then when a short-run
aggregate supply curve is drawn with real GDP (Y) along the
horizontal axis and the price level (P) along the vertical axis, this
curve:
A) is horizontal.
B) is vertical.
C) slopes upward and to the right.
D) slopes downward and to the right.
Page 6
35. If the short-run aggregate supply curve is horizontal, then changes in
aggregate demand affect:
A) level of output but not prices.
B) prices but not level of output.
C) both prices and level of output.
D) neither prices nor level of output.
39. If the short-run aggregate supply curve is horizontal and the long-run
aggregate supply curve is vertical, then a change in the money supply
will change ______ in the short run and change ______ in the long run.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output
Page 7
41. 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
42. If the short-run aggregate supply curve is horizontal and the Fed
increases the money supply, then:
A) output and employment will increase in the short run.
B) output and employment will decrease in the short run.
C) prices will increase in the short run.
D) prices will decrease in the short run.
43. Assume that the economy starts from long-run equilibrium. If the
Federal Reserve increases the money supply, then ______ increase(s)
in the short run, and ______ increase(s) in the long run.
A) prices; output
B) output; prices
C) output; output
D) prices; prices
Page 8
46. When the French money supply was reduced by 45 percent over a
period of seven months in 1724, the only values in the economy that
adjusted fully and instantaneously were:
A) prices in grain markets.
B) real wages.
C) foreign exchange rates.
D) interest rates.
50. Holding output, Y, fixed, a reduction in the demand for money is the
equivalent of a(n) _______ in velocity and will shift the aggregate
demand curve to the _____.
A) increase; right
B) increase; left
C) decrease; right
D) decrease; left
Page 9
52. Exhibit: Shift in Aggregate Demand
Page 10
54. 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.
56. An adverse supply shock ______ the short-run aggregate supply curve
______ the natural level of output.
A) raises; but cannot affect
B) raises; and may also lower
C) lowers; but cannot affect
D) lowers; and may also lower
Page 11
58. Exhibit: Supply Shock
In this graph, assume that the economy starts at point A, and there is a
favorable supply shock that does not last forever. In this situation,
point ______ represents short-run equilibrium, and point ______
represents long-run equilibrium.
A) B; C
B) B; A
C) E; D
D) E; A
Page 12
60. Exhibit: Supply Shock
Assume that the economy starts at point A, and there is a drought that
severely reduces agricultural output in the economy for just one year.
In this situation, point ______ represents the short-run equilibrium
immediately following the drought, and point ______ represents the
eventual long-run equilibrium.
A) B; C
B) B; A
C) E; D
D) D; A
Page 13
62. In the short run, a favorable supply shock causes:
A) both prices and output to rise.
B) prices to rise and output to fall.
C) prices to fall and output to rise.
D) both prices and output to fall.
64. The dilemma facing the Federal Reserve in the event that an
unfavorable supply shock moves the economy away from the natural
rate of output is that monetary policy can either return output to the
natural rate but with a ______ price level or allow the price level to
return to its original level but with a ______ level of output in the short
run.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher
65. If the Fed accommodates an adverse supply shock, output falls ______,
and prices rise ______.
A) less; more
B) less; less
C) more; less
D) more; more
Page 14
67. Starting from long-run equilibrium, if a drought pushes up food prices
throughout the economy, the Fed could move the economy more
rapidly back to full employment output by:
A) increasing the money supply, but at the cost of permanently
higher prices.
B) decreasing the money supply, but at the cost of permanently lower
prices.
C) increasing the money supply, which would restore the original
price level.
D) decreasing the money supply, which would restore the original
price level.
69. If the demand for money increases, but the Fed keeps the money
supply the same, then in the short run output will:
A) fall, and in the long run prices will remain unchanged.
B) remain unchanged, and in the long run prices will fall.
C) remain unchanged, and in the long run prices will remain
unchanged.
D) fall, and in the long run prices will fall.
70. If the Fed reduces the money supply by 5 percent and the quantity
theory of money is true, then output will fall 5 percent in the short
run, and:
A) prices will remain unchanged in the long run.
B) output will fall 5 percent in the long run.
C) prices will fall 5 percent in the long run.
D) output will remain unchanged in the long run.
71. Making use of Okun's law, if the Fed reduces the money supply 5
percent and the quantity theory of money is true, then the
unemployment rate will rise about:
A) 5 percent in both the short run and the long run.
B) 2.5 percent in both the short run and the long run.
C) 5 percent in the short run but will return to its natural rate in the
long run.
D) 2.5 percent in the short run but will return to its natural rate in the
long run.
Page 15
72. If the Fed reduces the money supply by 5 percent, then the real
interest rate will:
A) rise in both the short run and the long run.
B) rise in the short run but return to its original equilibrium level in
the long run.
C) rise in the short run but fall below its original equilibrium level in
the long run.
D) be unaffected in both the short run and the long run.
73. If Central Bank A cares only about keeping the price level stable and
Central Bank B cares only about keeping output at its natural level,
then in response to an exogenous decrease in the velocity of money:
A) both Central Bank A and Central Bank B should increase the
quantity of money.
B) Central Bank A should increase the quantity of money, whereas
Central Bank B should keep it stable.
C) Central Bank A should keep the quantity of money stable, whereas
Central Bank B should increase it.
D) both Central Bank A and Central Bank B should keep the quantity
of money stable.
74. If Central Bank A cares only about keeping the price level stable and
Central Bank B cares only about keeping output at its natural level,
then in response to an exogenous increase in the price of oil:
A) both Central Bank A and Central Bank B should increase the
quantity of money.
B) Central Bank A should increase the quantity of money, whereas
Central Bank B should keep it stable.
C) Central Bank A should decrease the quantity of money, whereas
Central Bank B should increase it.
D) both Central Bank A and Central Bank B should keep the quantity
of money stable.
Page 16
76. Assume that the long-run aggregate supply curve is vertical at Y =
3,000, while the short-run aggregate supply curve is horizontal at P =
1.0. The aggregate demand curve is Y = 3 ? M / P, and M = 1,000.
a. If the economy is initially in long-run equilibrium, what are the
values of P and Y?
b. Now suppose a supply shock moves the short-run aggregate
supply curve to P = 1.5. What are the new short-run P and Y?
c. If the aggregate demand curve and long-run aggregate supply
curve are unchanged, what are the long-run equilibrium P and Y
after the supply shock?
d. Suppose that after the supply shock the Fed wanted to hold output
at its long-run level. What level of M would be required? If this
level of M were maintained, what would be long-run equilibrium P
and Y?
77. The principal method the Federal Reserve uses to change the money
supply is open-market operations. Use the aggregate
demand朼 ggregate supply model to illustrate graphically the impact in
the short run and the long run of a Federal Reserve decision to
increase open-market purchases. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction the curves
shift; v. the short-run equilibrium values; and vi. the long-run
equilibrium values. State in words what happens to prices and output
in the short run and the long run.
79. Suppose that droughts in the Southeast and floods in the Midwest
substantially reduce food production in the United States. Use the
aggregate demand朼 ggregate supply model to illustrate graphically the
impact in the short run and the long run of this adverse supply shock.
Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium
values; iv. the direction the curves shift; v. the short-run equilibrium
values; and vi. the long-run equilibrium values. State in words what
happens to prices and output in the short run and the long run.
Page 17
80. Suppose that laws are passed banning labor unions and that resulting
lower labor costs are passed along to consumers in the form of lower
prices. Use the aggregate demand朼 ggregate supply model to
illustrate graphically the impact in the short run and the long run of
this favorable supply shock. Be sure to label: i. the axes; ii. the
curves; iii. the initial equilibrium values; iv. the direction the curves
shift; v. the short-run equilibrium values; and vi. the long-run
equilibrium values. State in words what happens to prices and output
in the short run and the long run.
81. Suppose you are an economist working for the Federal Reserve when
droughts in the Southeast and floods in the Midwest substantially
reduce food production in the United States. Use the aggregate
demand朼 ggregate supply model to illustrate graphically your policy
recommendation to accommodate this adverse supply shock, assuming
that your top priority is maintaining full employment in the economy.
Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium
values; iv. the direction the curves shift; and v. the terminal
equilibrium values. State in words what happens to prices and output
as a combined result of the supply shock and the recommended
Federal Reserve accommodation.
Page 18
84. A central bank reduces the money supply in an economy initially in
long-run equilibrium.
a. What will happen to output and prices in the short run?
b. What will happen to unemployment in the short run?
c. What will happen to output and prices in the long run?
85. An oil cartel effectively increases the price of oil by 100 percent,
leading to an adverse supply shock in both Country A and Country B.
Both countries were in long-run equilibrium at the same level of
output and prices at the time of the shock. The central bank of
Country A takes no stabilizing policy actions. After the short-run
impacts of the adverse supply shock become apparent, the central
bank of Country B increases the money supply to return the economy
to full employment.
a. Describe the short-run impact of the adverse supply shock on
prices and output in each country.
b. Compare the long-run impact of the adverse supply shock on
prices and output in each country.
87. You are given information about the following leading indicators. For
each indicator, explain whether the information suggests that a
recession or expansion should be expected in the future.
a. Average initial weekly claims for unemployment insurance rise.
b. New building permits issued increases.
c. The interest rate spread between the 10-year Treasury note and
the 3-month Treasury bill narrows.
d. The Index of Supplier Deliveries falls.
91. What is the difference between the short run and the long run?
Page 19
92. What is aggregate demand? Why is the aggregate demand curve
downward sloping?
93. Why is the aggregate supply curve vertical in the long run and
horizontal in the short run?
Page 20
Answer Key
1. D
2. C
3. A
4. B
5. C
6. A
7. A
8. B
9. C
10. D
11. B
12. C
13. B
14. D
15. A
16. C
17. D
18. B
19. D
20. D
21. A
22. B
23. A
24. C
25. A
26. C
27. B
28. C
29. C
30. D
31. C
32. D
33. C
34. A
35. A
36. B
37. D
38. B
39. B
40. C
41. C
42. A
43. B
44. D
45. C
46. C
47. A
48. B
Page 21
49. B
50. A
51. A
52. C
53. A
54. C
55. D
56. B
57. A
58. D
59. A
60. A
61. B
62. C
63. C
64. B
65. A
66. B
67. A
68. A
69. D
70. C
71. D
72. B
73. A
74. C
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.
86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
Page 22