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Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) Suppose the central bank implements expansionary monetary policy. Which of the following will 1)
occur in the short run?
A) An increase in output.
B) A decrease in unemployment.
C) An increase in the price level.
D) A decrease in the interest rate.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

2) In the aggregate supply relation, the current price level depends in the medium run upon: 2)
A) fiscal policy.
B) business confidence.
C) consumer confidence.
D) monetary policy.
E) the expected price level.
Answer: E
Explanation: A)
B)
C)
D)
E)

3) Suppose the economy is operating at a point where output is less than the natural level of output. 3)
Which of the following statements is correct given this information?
A) The employment rate is greater than the natural employment rate.
B) The price level will be higher next period than this period.
C) The price level is less than the expected price level.
D) Workers will revise upwards price expectations.
E) The unemployment rate is less than the natural unemployment rate.
Answer: C
Explanation: A)
B)
C)
D)
E)

1
4) At the current level of output, suppose the actual price level is greater than the price level that 4)
individuals expect. We know that:
A) any subsequent decrease in the aggregate price level will cause an increase in the real money
supply and a rightward shift in the aggregate demand curve.
B) output is currently less than the natural level of output.
C) the interest rate will tend to rise as the economy adjusts to this situation.
D) the AS curve will tend to shift down over time.
E) the nominal wage will tend to decrease as individuals revise their expectations of the price
level.
Answer: C
Explanation: A)
B)
C)
D)
E)

5) If u > un, we know with certainty that: 5)

A) P = Pe. B) Y > Y n. C) Y = Y n. D) P > Pe. E) P < Pe.
Answer: E
Explanation: A)
B)
C)
D)
E)

6) The aggregate demand curve has its particular shape because of which of the following 6)
explanations?
A) A decrease in the aggregate price level will cause an increase in the real wage, a decrease in
employment, and a decrease in output.
B) A decrease in the aggregate price level will cause a decrease in the interest rate and an
increase in output.
C) As the aggregate price level increases, goods and services become relatively more expensive
and individuals respond by decreasing the quantity demanded of goods and services.
D) An increase in the money supply will cause an increase in the interest rate, a decrease in
investment, and a decrease in output.
E) An increase in the aggregate price level prompts the government to decrease government
spending in the hope of bringing down prices.
Answer: B
Explanation: A)
B)
C)
D)
E)

2
 7) Results obtained from the Taylor model suggest that the output effects of a change in the money 7)
supply are greatest after approximately how long?
A) Three quarters.
B) Two years.
C) Five years.
D) One quarter.
E) One month.
Answer: A
Explanation: A)
B)
C)
D)
E)

8) Suppose the minimum wage decreases. Given this event, we would expect which of the following 8)
to occur?
A) A decrease in the interest rate in the medium run.
B) No change in the real wage in the medium run.
C) A decrease in the aggregate price level and an increase in output in the short run.
D) A decrease in the natural rate of unemployment.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

9) In the aggregate supply relation, an increase in current output causes: 9)

A) an increase in the expected price level and an upward shift of the AS curve.
B) a shift of the aggregate supply curve.
C) a change in the expected price level this year.
D) an increase in the current price level.
E) an increase in the markup over labour costs.
Answer: D
Explanation: A)
B)
C)
D)
E)

10) If Y > Y n, we know with certainty that: 10)

A) P = Pe. B) P < Pe. C) u > un. D) P > Pe. E) u = un,.
Answer: D
Explanation: A)
B)
C)
D)
E)

3
11) Assume that the economy is initially operating at the natural level of output. An increase in the 11)
price of oil will cause which of the following in the medium run?
A) An increase in output and a decrease in the interest rate.
B) A decrease in unemployment, an increase in the nominal wage and an increase in the
aggregate price level.
C) An increase in the interest rate.
D) An increase in the aggregate price level and no change in output.
E) A decrease in output and an increase in the aggregate price level.
Answer: C
Explanation: A)
B)
C)
D)
E)

12) Assume the economy is initially operating at the natural level of output. Now suppose a budget is 12)
passed that calls for a tax cut. This fiscal expansion will, in the short run, cause an increase in:
A) the output level.
B) the price level.
C) the interest rate.
D) the nominal wage.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

13) Assume that the economy is initially operating at the natural level of output. An increase in the 13)
minimum wage will cause:
A) an increase in the nominal wage in the medium run.
B) no change in the real wage in the medium run.
C) an increase in the real wage in the medium run.
D) a decrease in the real wage in the medium run.
E) a decrease in the nominal wage in the medium run.
Answer: B
Explanation: A)
B)
C)
D)
E)

4
14) Which of the following will cause the aggregate demand curve to shift to the right? 14)
A) A decrease in taxes.
B) A decrease in the money supply.
C) A decrease in consumer confidence.
D) A decrease in the price level.
E) An increase in the price level.
Answer: A
Explanation: A)
B)
C)
D)
E)

15) Suppose that the current price level is equal to the expected price level. Given this information, we 15)
know with certainty that:
A) the unemployment rate is equal to the natural rate of unemployment.
B) only the goods market is in equilibrium.
C) the goods market and financial markets are in equilibrium.
D) the unemployment rate is zero.
E) both the price level and the expected price level are equal to one.
Answer: A
Explanation: A)
B)
C)
D)
E)

16) Assume that the economy is initially operating at the natural level of output. When the central bank 16)
controls the interest rate, an increase in the price target will cause:
A) a decrease in the interest rate in the medium run.
B) an increase in investment in the medium run.
C) an increase in consumption in the medium run.
D) no change in the nominal wage in the medium run.
E) no change in the real wage in the medium run.
Answer: E
Explanation: A)
B)
C)
D)
E)

5
17) For this question, assume that the economy is initially operating at the natural level of output. A 17)
fiscal contraction must cause:
A) an increase in investment in the short run.
B) a decrease in investment in the short run.
C) no change in investment in the medium run.
D) no change in investment in the short run.
E) an increase in investment in the medium run.
Answer: E
Explanation: A)
B)
C)
D)
E)

18) Assume the economy is initially operating at the natural level of output. Suppose that individuals 18)
decide to increase their saving. We know that this increased desire to save will be "neutral" in:
A) both the short run and the medium run.
B) the short run, but not the medium run.
C) the medium run and the long run.
D) neither the medium run nor the short run.
E) the medium run, but not the long run.
Answer: D
Explanation: A)
B)
C)
D)
E)

19) Results obtained from the Taylor model suggest that it takes roughly how long for the effects of 19)
money to become neutral?
A) Ten years.
B) Three months.
C) One year.
D) One month.
E) Four years.
Answer: E
Explanation: A)
B)
C)
D)
E)

6
20) Assume that the economy is initially operating at the natural level of output. A decrease in 20)
consumer confidence will cause:
A) an increase in investment in the short run.
B) a decrease in investment in the short run.
C) an increase in the interest rate in the medium run.
D) an increase in investment in the medium run.
E) a decrease in the real wage in the medium run.
Answer: D
Explanation: A)
B)
C)
D)
E)

21) The aggregate demand curve has its particular shape because of which of the following 21)
explanations?
A) A decrease in the aggregate price level will cause an increase in the interest rate and an
increase in output.
B) An increase in the aggregate price level prompts the government to decrease government
spending in the hope of bringing down prices.
C) An increase in the money supply will cause a decrease in the interest rate, an increase in
investment, and an increase in output.
D) As the aggregate price level increases, goods and services become relatively more expensive
and individuals respond by decreasing the quantity demanded of goods and services.
E) A decrease in the aggregate price level will cause an increase in the real wage, a decrease in
employment, and a decrease in output.
Answer: C
Explanation: A)
B)
C)
D)
E)

22) Assume the economy is initially operating at the natural level of output. Now suppose a budget is 22)
passed that calls for a decrease in government spending. This fiscal contraction will, in the medium
run, have no effect on which of the following?
A) Output and the interest rate.
B) The price level and the interest rate.
C) Output and consumption.
D) Unemployment and investment.
E) The interest rate and unemployment.
Answer: C
Explanation: A)
B)
C)
D)
E)

7
23) In the aggregate demand relation, an increase in the price level causes output to decrease because 23)
of its effect on:
A) government spending.
B) firms' markup over labour costs.
C) the interest rate.
D) the expected price level.
E) the nominal wage.
Answer: C
Explanation: A)
B)
C)
D)
E)

24) Assume the economy is initially operating at the natural level of output. Now suppose a budget is 24)
passed that calls for a tax cut. This fiscal expansion will, in the medium run, have no effect on
which of the following?
A) Output and the interest rate.
B) The interest rate and unemployment.
C) The price level and the interest rate.
D) Unemployment and the price level.
E) Output and investment.
Answer: D
Explanation: A)
B)
C)
D)
E)

25) Assume that the economy is initially operating at the natural level of output. When the central bank 25)
raises the price target, the subsequent one-time 20% increase in the nominal money supply will
cause:
A) a 20% increase in the interest rate in the medium run.
B) a 20% increase in output in the medium run.
C) a 20% increase in the real wage in the medium run.
D) a 20% increase in the price level in the medium run.
E) a 20% increase in the real money supply in the medium run.
Answer: D
Explanation: A)
B)
C)
D)
E)

8
26) Which of the following represents the medium-run effects of an increase in the price of oil? 26)
A) No change in the level of output.
B) No change in employment.
C) No change in the price level.
D) No change in the interest rate.
E) A decrease in the interest rate.
Answer: C
Explanation: A)
B)
C)
D)
E)

27) At the current level of output, suppose the actual price level is less than the price level that 27)
individuals expect. We know that:
A) any subsequent increase in the aggregate price level will cause a decrease in the real money
supply and a leftward shift in the aggregate demand curve.
B) the AS curve will tend to shift down over time.
C) output is currently greater than the natural level of output.
D) the nominal wage will tend to increase as individuals revise their expectations of the price
level.
E) the interest rate will tend to rise as the economy adjusts to this situation.
Answer: B
Explanation: A)
B)
C)
D)
E)

28) When the central bank controls the interest rate, a rise in the price target will, in the short run, 28)
cause:
A) the wage setting curve to shift upward.
B) the wage setting curve to shift downward.
C) an increase in the nominal wage.
D) the AD curve to shift leftward.
E) the price setting curve to shift down.
Answer: C
Explanation: A)
B)
C)
D)
E)

9
29) Assume the economy is initially operating at the natural level of output. Now suppose that 29)
individuals decide to increase their desire to save. We know with certainty which of the following
will occur in the short run as a result of the increased desire to save?
A) Higher investment.
B) An increase in the nominal wage.
C) No change in the economy at all.
D) A decrease in the nominal wage.
E) Lower investment.
Answer: D
Explanation: A)
B)
C)
D)
E)

30) Assume the economy is initially operating at the natural level of output. Which of the following 30)
events will not change the composition of output in the medium run?
A) A decrease in taxes.
B) An increase in government spending.
C) An increase in consumer confidence.
D) An increase in the price target set by the central bank.
E) A decrease in firm confidence.
Answer: D
Explanation: A)
B)
C)
D)
E)

31) Which of the following represents the short-run effects of an increase in the price of oil? 31)
A) An increase in the interest rate.
B) A decrease in output.
C) An increase in the price level.
D) An increase in unemployment.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

10
32) The aggregate supply curve has its particular shape because of which of the following 32)
explanations?
A) An increase in the nominal wage causes a decrease in the amount of output that firms are
willing to produce.
B) An increase in the aggregate price level will cause an increase in the interest rate and a
decrease in output.
C) An increase in output causes an increase in employment, a decrease in unemployment, an
increase in the nominal wage and an increase in the price level.
D) A decrease in output causes a decrease in employment, a decrease in unemployment, an
increase in the nominal wage and an increase in the price level.
E) A decrease in the aggregate price level causes a decrease in nominal money demand and a
decrease in the interest rate.
Answer: C
Explanation: A)
B)
C)
D)
E)

33) Which of the following events will not cause a decrease in the aggregate price level? 33)
A) A decrease in markup.
B) A decrease in output.
C) A decrease in unemployment benefits.
D) A decrease in unemployment.
E) A decrease in expected prices.
Answer: D
Explanation: A)
B)
C)
D)
E)

34) Which of the following represents the medium-run effect of an increase in the price target? 34)
A) An increase in the price level.
B) An increase in the real money supply.
C) An increase in the real wage.
D) An increase in output.
E) An increase in the interest rate.
Answer: A
Explanation: A)
B)
C)
D)
E)

11
35) Assume that the economy is initially operating at the natural level of output. A simultaneous 35)
increase in taxes and a decrease in the price target by the central bank will cause which of the
following?
A) A reduction in investment in the medium run.
B) An increase in the aggregate price level, no change in output, and no change in the interest
rate in the medium run.
C) An increase in output and an increase in the aggregate price level in the short run.
D) A reduction in the interest rate in the medium run.
E) A decrease in output and a decrease in the nominal wage in the short run.
Answer: E
Explanation: A)
B)
C)
D)
E)

36) A decrease in the price of oil will tend to cause which of the following? 36)
A) An increase in the aggregate price level as output increases.
B) No change in the interest rate in the medium run.
C) No change in the real wage in the medium run.
D) An increase in investment in the medium run.
E) An increase in the natural rate of unemployment.
Answer: D
Explanation: A)
B)
C)
D)
E)

37) Assume the economy is initially operating at the natural level of output. Which of the following 37)
events will initially cause a shift of the aggregate supply curve?
A) An increase in the price target.
B) A decrease in the money supply.
C) An increase in the minimum wage.
D) An increase in government spending.
E) An increase in taxes.
Answer: C
Explanation: A)
B)
C)
D)
E)

12
38) Based on your understanding of the AS-AD model, which of the following is an incorrect 38)
statement about the short-run adjustment process for the macroeconomy?
A) A decrease in output decreases employment.
B) Output in excess of the natural level leads to higher prices.
C) An increase in demand increases output.
D) An increase in unemployment leads to higher prices.
E) A decrease in output below the natural level leads to lower nominal wages.
Answer: D
Explanation: A)
B)
C)
D)
E)

39) Assume that the economy is initially operating at the natural level of output. An increase in 39)
government spending will cause:
A) an increase in the real wage in the medium run.
B) no change in the real wage in the medium run.
C) a decrease in the real wage in the medium run.
D) an increase in the nominal wage in the medium run.
E) a decrease in the nominal wage in the medium run.
Answer: B
Explanation: A)
B)
C)
D)
E)

40) Using the AS-AD model, which of the following would cause an increase in the natural level of 40)
output in the medium run?
A) An increase in the money supply.
B) An increase in government spending.
C) A decrease in the oil price.
D) An increase in the price target.
E) A decrease in consumer confidence.
Answer: C
Explanation: A)
B)
C)
D)
E)

13
41) An increase in the aggregate price level will cause: 41)
A) a decrease in the interest rate and a rightward shift in the IS curve.
B) a decrease in the interest rate and a downward shift in the LM curve.
C) an increase in the interest rate and a leftward shift in the IS curve.
D) an increase in investment and an increase in output.
E) an increase in the interest rate and an upward shift in the LM curve.
Answer: E
Explanation: A)
B)
C)
D)
E)

42) Assume that the economy is initially operating at the natural level of output. An increase in taxes 42)
will cause which of the following?
A) A decrease in employment and no change in the nominal wage in the short run.
B) A decrease in output and no change in the aggregate price level in the short run.
C) An increase in the aggregate price level, no change in output and no change in the interest
rate in the medium run.
D) An increase in the interest rate and investment in the medium run.
E) An increase in investment in the medium run.
Answer: E
Explanation: A)
B)
C)
D)
E)

43) The neutrality of money is consistent with which of the following statements? 43)
A) Changes in the money supply will not affect wages in the medium run.
B) Changes in the money supply will not affect employment in the short run.
C) Changes in the money supply will not affect employment in the medium run.
D) Changes in the money supply will not affect the price level in the short run.
E) Changes in the money supply will not affect the price level in the medium run.
Answer: C
Explanation: A)
B)
C)
D)
E)

44) Results obtained from the Taylor model suggest that the effects of changes in the nominal money 44)
supply are neutral after:
A) 2 years. B) 4 years. C) 10 years. D) 6 years. E) 8 years.
Answer: B
Explanation: A)
B)
C)
D)
E)

14
45) Which of the following events will cause the largest rightward shift (as measured horizontally) of 45)
the AD curve?
A) A 15% decrease in the aggregate price level.
B) A 15% decrease in the nominal wage.
C) A tax increase.
D) A 15% increase in the nominal money supply.
E) A decrease in government spending.
Answer: D
Explanation: A)
B)
C)
D)
E)

46) Which of the following would increase the short-run output effects of a monetary expansion? 46)
A) A decrease in the marginal propensity to save.
B) The slope of the IS curve is very flat.
C) An increase in the marginal propensity to consume.
D) An increase in the interest rate sensitivity of investment.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

47) As product markets become less competitive and the markup rises, we would expect which of the 47)
following to occur?
A) A decrease in the interest rate in the medium run.
B) An increase in the aggregate price level as output increases.
C) A decrease in the real wage in the medium run.
D) No change in the real wage in the medium run.
E) No change in output in the medium run.
Answer: C
Explanation: A)
B)
C)
D)
E)

15
48) Assume that the economy is initially operating at the natural level of output. An increase in firm 48)
confidence will cause:
A) no change in the real wage in the medium run.
B) an increase in the nominal wage in the medium run.
C) a decrease in the real wage in the medium run.
D) an increase in the real wage in the medium run.
E) a decrease in the nominal wage in the medium run.
Answer: A
Explanation: A)
B)
C)
D)
E)

49) At the current level of output, suppose the actual price level is less than the price level that 49)
individuals expect. We know that:
A) the AS curve will tend to shift up over time.
B) output is currently less than the natural level of output.
C) the interest rate will tend to rise as the economy adjusts to this situation.
D) the nominal wage will tend to increase as individuals revise their expectations of the price
level.
E) any subsequent decrease in the aggregate price level will cause an increase in the real money
supply and a rightward shift in the aggregate demand curve.
Answer: B
Explanation: A)
B)
C)
D)
E)

50) Which of the following events will cause an increase in the aggregate price level? 50)
A) An increase in unemployment benefits.
B) An increase in the unemployment rate.
C) A decrease in expected prices.
D) A decrease in markup.
E) A decrease in output.
Answer: A
Explanation: A)
B)
C)
D)
E)

16
51) Assume the economy is initially operating at the natural level of output. Now suppose a budget is 51)
passed that calls for a decrease in government spending. This fiscal contraction will, in the short
run, cause a decrease in:
A) the output level.
B) the price level.
C) the nominal wage.
D) the interest rate.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

52) The aggregate supply curve will shift downward when which of the following occurs? 52)
A) A decrease in firm's markup over labour costs.
B) A decrease in the expected price level.
C) A decrease in the level of employment protection.
D) A decrease in unemployment benefits.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

53) An increase in the price of oil will tend to cause which of the following in the short run? 53)
A) An increase in the interest rate.
B) An increase in the natural rate of unemployment.
C) A decrease in output.
D) An increase in the price level.
E) All of the above.
Answer: E
Explanation: A)
B)
C)
D)
E)

17
 54) Which of the following events would cause a shift in the aggregate supply curve in the short run? 54)
A) An increase in the money supply.
B) A decrease in government spending.
C) A decrease in consumer confidence.
D) An increase in taxes.
E) An increase in the markup.
Answer: E
Explanation: A)
B)
C)
D)
E)

55) From the mid-1990s to the end of 2008, the real oil price: 55)
A) steadily increased.
B) steadily decreased.
C) decreased dramatically, then increased dramatically.
D) remained more or less the same.
E) increased dramatically, then decreased dramatically.
Answer: A
Explanation: A)
B)
C)
D)
E)

ESSAY. Write your answer in the space provided or on a separate sheet of paper.

56) Explain what is meant by the neutrality of money.

Answer: The neutrality of money refers to the medium-run effects of changes in the nominal money supply.
Specifically, changes in the nominal money supply have no medium-run effects on any real variables. In
the medium run, only nominal variables, e.g., the nominal wage and the price level, change as a result of
changes in the nominal money supply (note here that the interest rate is essentially the same as the real interest
rate given zero inflation). Because changes in the nominal money supply have no effects on real variables in
the medium run, money is said to be neutral.

18
57) Based on your understanding of the AS-AD model and the IS-LM model, graphically illustrate and explain
what effect a tax increase will have on the economy. In your graphs, clearly illustrate the short-run and
medium-run equilibria.
Answer: A tax increase causes a decrease in consumption and a leftward shift in both the IS and AD curves. As
demand and production decrease, firms reduce employment. This causes a rise in unemployment and a
decrease in the nominal wage. As the nominal wage decreases, firms' costs fall and they lower prices.
Expectations of prices in turn become lower and this continually shifts the AS curve downwards. As
prices fall, the central bank lowers the interest rate according to the interest rate rule. Since the central
bank has not changed its price target, the central bank realises in the medium run that they must lower
the natural rate of interest to avoid prices falling further away from the (unchanged) price target. This
will bring back the AD to its original position so that the economy returns to the equilibrium point with
the same natural level of output and price target. In the medium run, the composition of the output is
different as investment is higher to offset the initial contractionary effect of the tax increase, and the
natural interest rate is permanently lower. In the IS-LM model, following the initial leftward shift in the
IS curve as a result of the tax increase, LM curve continues to shift down as the central bank cuts the
interest rate. This process continues when the price level returns to the price target and output returns to
the natural level of output.

58) Suppose the economy is operating at a point where output is greater than the natural level of output. Given this
information, is the actual price level equal to the expected price level at the current level of output?
Answer: When output is operating at the natural level, Y = Y n, we know that the actual and expected price level
are equal, P = Pe. When output exceeds the natural level of output, Y > Y n, we know that the price level
must have risen above the expected price level, P > Pe. This is because when Y > Yn, current
unemployment is below the natural rate of unemployment, u < un. This puts upward pressure on the
nominal wage and therefore prices would rise above its current expected level.

59) Based on your understanding of the AS-AD model and the IS-LM model, graphically illustrate and explain
what effect an increase in the minimum wage will have on the economy. In your graph, clearly illustrate the
short-run and medium-run equilibria. Also include in your answer an explanation of the effects of this change
in minimum wage on the labour market and the equilibrium real wage.
Answer: The increase in the minimum wage is represented by a rightward shift in the WS curve. This also causes
the natural rate of unemployment to increase and the natural levels of employment and output to
decrease. In the AS-AD graph, the AS curve shifts up and prices rise in the short run. As actual prices
rise, the central bank raises the interest rate as indicated by the interest rate rule which leads to decreases
in investment. Demand decreases and firms decrease production. In the medium run, given that current
output is higher than its natural level, prices are above its expected level, workers revise upwards
expectations and the AS curve shifts further up. The adjustment process continues until the central bank
realises, in the medium run, the need to raise the natural interest rate to lower actual prices back to the
price target. The AD curve therefore shifts left quickly to arrive at a new medium-run equilibrium point
with the same price target and a lower natural level of output. In the medium run, the real wage stays the
same, the natural rate of unemployment is higher, the interest rate is higher, and output lower. In the
IS-LM model, the LM curve continues to shift upward as the central bank raises the interest rate. This
process continues until the price level equals the price target and output reaches the new level of natural
output.

19
60) When output exceeds the natural level of output, explain what adjustments will occur in the labour market and
discuss what effect they will have on output and the price level.
Answer: When output exceeds the natural level of output, Y > Y n, we know that the price level must have risen
above the expected price level, P > Pe. This is because when Y > Yn, current unemployment is below the
natural rate of unemployment, u < un. This puts upward pressure on the nominal wage and therefore
prices would rise above its current expected level. At some point, wage setters realise that the actual price
level has increased and would adjust their price expectations upward. When this occurs, the nominal
wage becomes higher and firms face higher costs. When this occurs, the aggregate price level will rise. As
prices rise, the central bank raises the interest rate as indicated by the interest rate rule, which leads to
falls in real money supply. As the interest rate increases, investment, demand, and output decrease.

61) Explain what the aggregate demand curve represents and why it is downward sloping. Give explanations about
the aggregate demand curve under each of the two possible assumptions about the central bank's conduct of
monetary policy: (1) that the central bank controls the nominal money supply; (2) that the central bank controls
the interest rate and has a price target.
Answer: The aggregate demand (AD) curve captures the effects of the price level on output. Alternatively, the AD
curve represents the combinations of prices (P) and output (Y) that maintain equilibrium in the goods
and financial markets. In (1), as P falls, the real money supply increases causing a decrease in the interest
rate. The fall in the interest rate causes an increase in investment, an increase in demand, and an increase
in production. So, the fall in P causes an increase in Y and the AD curve is downward sloping. In (2), as P
falls, the interest rate rule states that the central bank should lower the interest rate. The central bank
proceeds to conduct open market purchases of bonds to expand the money supply in order to lower the
interest rate. The fall in the interest rate causes an increase in investment, an increase in demand, and an
increase in production. So, the fall in P causes an increase in Y and the AD curve is downward sloping.

62) Explain what effect an increase in the price target has on the aggregate demand curve.
Answer: An increase in the price target, as dictated by the interest rate rule, calls for the interest rate to fall. The
central bank conducts open market purchases of bonds to increase the money supply, which causes the
LM curve to shift down and the interest rate to fall. As the interest rate falls, investment and demand will
increase. Firms will respond to the increase in demand by expanding production. Therefore, the increase
in the price target will lead to a rightward shift in the AD curve.

63) Analysis of the macroeconomic effects of changes in the money supply indicates that money is "neutral" in the
medium run. Suppose there is an increase in government spending. Will this fiscal policy action also be neutral
in the medium run? Explain.
Answer: Changes in government spending or taxes are not neutral in the medium run. Despite the fact that output
returns to its original level, two other real variables are affected by fiscal policy in the medium run: the
(real) interest rate and investment. Specifically in the case of an increase in government spending, the
interest rate will be higher leading to lower investment in the medium run. So, changes in government
spending, while causing some real variables to return to their original levels, also lead to changes in some
other real variables.

64) Explain what the aggregate supply curve represents and why it is upward sloping.
Answer: The AS curve illustrates the effects of output on the price level and is derived from the behaviour of
wages and prices as determined by wage-setting and price-setting behaviour. An increase in output
requires firms to increase employment. An increase in employment causes a decrease in the
unemployment rate. As the unemployment rate decreases, workers have more bargaining power so the
nominal wage will rise. The increase in the nominal wage will cause an increase in firms' costs. As firms'
costs rise, they will increase the prices as determined by price-setting behaviour. So, an increase in
output leads to an increase in prices.

20
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The Project Gutenberg eBook of Ginevra
 This ebook is for the use of anyone anywhere in the United
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Title: Ginevra
or, The old oak chest, a Christmas story

Author: Susan E. Wallace

Contributor: Thomas Haynes Bayly

Samuel Rogers

Illustrator: Lew Wallace

Release date: January 2, 2024 [eBook #72586]

Language: English

Original publication: United States: The H. W. Hagemann

Publishing Company, 1886

Credits: Charlene Taylor and the Online Distributed

Proofreading Team at https://www.pgdp.net (This file
was produced from images generously made available
by The Internet Archive/American Libraries.)

*** START OF THE PROJECT GUTENBERG EBOOK GINEVRA ***

 Transcriber’s Note
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clicking them and selecting an option to view them separately,
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 GINEVRA
OR

THE OLD OAK CHEST

A CHRISTMAS STORY
BY

SUSAN E. WALLACE
WITH ILLUSTRATIONS BY

General LEW WALLACE

——❖——
NEW YORK
THE H. W. HAGEMANN PUBLISHING COMPANY
114 Fifth Avenue
1894
 Copyright, 1886,
By WORTHINGTON CO.
 TO

MY BELOVED NIECES,

WHOSE INTEREST IN THIS STORY

SUGGESTED TO THEIR AUNT

THE IDEA OF
TELLING IT TO OTHER CHILDREN.

S. E. W.
Crawfordsville, Indiana,
Christmas, 1886.
 HRISTMAS stories are usually merry; and in this happy
time, with its shining presents, its good things to eat and
to drink, its music, lights, and visitors, all should be gay.
But mine must be a sad story, because, being a true one,
I cannot change it—one of the saddest of the thousands told since
that first Christmas Eve when the traveling star from the East stood
still in the midnight above the holy hill of Bethlehem. At Modena you
may see the portrait of the lady I tell of; in Florence—rich and
glorious city—you will learn her history; and at Abbotsford they show
the bridal-chest where Death lay waiting in the dark to claim her as
his own.
 GINEVRA;
OR,

T H E O L D O A K C H E S T.

“’Tis an old tale and often told.”—Scott.

 CHAPTER I.
ANY years ago there lived in an ancient castle in England
a proud Baron, who had one child, Ginevra, a little girl
named for her mother, who died the night her baby was
born.
The servants used to say the Baroness had led a wretched life;
that her lord was harsh and stern at home, as he was fierce and
cruel in war; but this I do not truly know. He dearly loved his little
daughter, and hours at a time would carry her in his arms and walk
up and down the hall before the blazing fires in winter. It was a fair
sight to see the Baron with the baby, in her long white dress, lying on
his shoulder, her light hair against his rough beard, or to see him
dandle her in his hand, hard almost as the steel gloves he wore to
battle, as if she were no more than a feather’s weight.
The castle was gloomy and strong, with towers guarded by
sentinels, and was enclosed by a high wall of stone, beyond which
was a deep moat filled with water, that could be crossed by only one
drawbridge.
Once, when there was war in the land, the King called on all
good men for help; and the Baron, ready for battle, gathered his
people in the courtyard to hear his last orders. He held up his sword,
dinted by many a blow in bloody fight, showed the cross on its hilt,
and spoke in a loud voice:
“Swear by this blessed sign, whatever befall, you will defend
Lady Ginevra to the death!”
And every man lifted his right hand, knelt where he stood, and
swore by the Holy Cross he would defend the Lady Ginevra to the
death. He then mounted his coal-black steed, took the baby from her
nurse, and lifted her in sight of all the crowd. She clapped her hands
and laughed to see the flashing armor and flags embroidered with
red roses, and the air rung with the shout: “Long live the Lady
Ginevra!”

A fortune-teller had said Ginevra was doomed to sorrow; and

this made the Baron watch her with anxious care. There was one
soldier whose only duty was to guard his young mistress. Said the
Baron to him: “Keep her always in sight, Ban. While thou wearest
that scar on thy brow, I will remember thou hast saved my life. Some
day thou mayest save hers. She is the last of my name and house,
and if evil come upon her, my heart will break. Thou art my truest
follower, Ban. Whatever else fail, never lose sight of Lady Ginevra.”
“I will die ere a hair of her head suffer,” said the old retainer,
stoutly. “A soldier’s scars are his honors, and I will be proud to wear
one for my Lady’s sake.”
So Ban, with spear and sword, was always in sight of his young
mistress; and at night he lay in the corridor, outside her chamber
door, his spear against the wall, so that no one could go out or in
without waking him.
The Baron fought well for king and country, and at Christmas
rode home on his coal-black steed. Then there was a mighty feast in
the great hall, and, for two days and nights, whoever chose could eat
and drink of the best.
The ladies’ hall was wreathed with evergreens; red berries of
holly shone bright on the old oak wall, and from the center of the
ceiling hung a heavy branch of mistletoe; and every one who passed
under it was sure to be caught and kissed. Plates were laid for a
hundred guests, and there were oxen roasted whole, and huge pies
of venison; and all night long was heard the sound of harp and horn,
and tread of dancers, dancing in tune. Oh! it was a rousing
Christmas, and little Ginevra was the soul and life of it all!
There were few books in those days, and instead of reading, she
was taught to embroider with silks, to play on the lute, and to sing.
She was so gentle and gracious, even the bees, the birds, and the
swans on the lake, knew her, and everything that knew her loved
her. So watched, and so beloved, fifteen years Ginevra grew,—

“Fair as a star when only one

Is shining in the sky.”

And the fame of her beauty spread far and wide.

 A tranquil life she lived, rarely going beyond the castle, yet loved
by many who had children of their own, but who freely spoke of
Ginevra as best and dearest where all were near and dear.
“Why, my darling,” said the Baron, “why does everybody love my
child?”
“I do not know,” she answered, with a thoughtful, puzzled look.
“Perhaps,” she added shyly, “it is because I love everybody.”
“That much nearer heaven than I,” said the father, gazing into
the picture-like face, with the mild look which never came into his
own except for her. “The angels in heaven can do no more.”
Her fresh, light rooms, the only cheerful ones in the dismal stone
pile, opened out on a broad balcony, filled with plants; fluttering
leaves, speckled shadows, sweet-smelling flowers, through which
the sun at setting poured his last, last rays, as lingering through the
late twilight to kiss her pure forehead once more. The blessed
sunlight! You might think some of its brightness was tangled in the
golden head which glanced among the flowers, and that their
sweetness had passed into her soul.
It was the Baron’s study to smooth from her path every care and
trial, and to temper every wind that blew past her. The walls round
the courtyard below the balcony were so high it was sheltered from
the coldest blasts, so that birds sang in the bare, leafless thickets of
shrubbery as though it were always spring; and all the year round it
was a delightful playground.
In summer, with her little maid, Geta, she used to play hide and
seek in the alleys of the rose garden, where the roses were all red—
the Baron would not have a white one among them—and as the
quick color came and went in her face, he would say:
“My child, the roses are ever at war in thy cheek.”
“Yes, father; but thou sayest the red always wins.”
“So it does, dear heart, and so it shall. No white leaf for us! The
red rose forever! When I miss it from thy face the sweetness of my
life is gone; and thou must wear one for me ever in thy hair.”
 Near the castle wall was a dark forest, of which awful tales were
told; how it was full of robber caves, and dens, and dim paths
leading into snares and pitfalls, and among roaring wild beasts that
were forever seeking what they might devour.
The sentinel on the bridge said he would rather fight the infidel
all day than venture into the forest after sundown. Close to its edge,
in the shade of giant oaks, was a fountain of marble, with water
playing night and day, cold as ice, clear as glass. And here, one
summer afternoon, Ginevra strayed with Geta. Her feet scarcely bent
the daisies in her path; the breeze tossed her flossy locks, where the
red rose shone like a jewel; and, as old Ban stalked behind her, like
a tall black shadow, he thought he had never seen his Lady so
lovely.
When they reached the fountain, Geta tried to tune the lute, but
could not play till Ginevra brought the silver strings together; and, as
she touched its chords, a fierce stag-hound sprang out of the forest
so suddenly, she dropped the lute and screamed for fear.
Quick as lightning, Ban was before her, and in another moment
would have split the dog’s skull, but a voice shouted:
“Stay! Stay! He will not harm any one!”
Ban stood still, but lowered not his lance. Presently, a youth,
mounted on a milk-white steed, rode up, called the hound to his feet,
gave his horse’s bridle to a page, who followed on a red roan, and
then he knelt before Ginevra and quieted her fears.
I do not know how it came to pass, but these four were soon
talking as if they had been friends all their days, and there was
nothing in the wide world but their own innocent young hearts. They
tried their fortune by dropping bay-leaves in the water. Then they sat
on mossy roots, and Ginevra sang of the lady who was heartbroken
and drowned herself in the fountain for her own true love; and how
her spirit rises and floats in the air above it, like a mist at evening.
“Thy song is too sad, Lady,” said the youth. “Let me have the
lute.”
 With a free hand, he struck the strings, and sang of King Arthur
and his bold knights, and of the daring deeds they did, whose like
England has never seen since his time; no, nor never will, till Arthur
comes again. Then he turned his eyes—steel-blue eyes, flashing like
a sword-blade—toward Ginevra, and sang of love in such strain she
thought the fountain stopped its splashing and the trees bent their
heads to listen. When the last echo of his voice died away, Ban
spoke out, and said:
“My Lady, an’ it please you, my lord, the Baron has forbidden us
to stay outside the wall after nightfall.”
“But, Ban, he knows thou art between me and danger. Still, the
forest’s shades grow dark, and I see thou art right. The sun is nearly
set.”
Then the youth whispered something in her ear, and Ginevra,
blushing brightly, said:
“Never, never!”
“Give me a favor to wear—the rose from thy hair, sweet lady. I,
too, belong to the house and banner of the red.”
She loosed it from her shining tresses; he kissed the flower, put
it in his bosom, and said:
“I would not give one of the least of these leaves for the King’s
crown.”
Lightly he sprung to the saddle, without so much as touching his
horse’s neck, lifted his plumed cap, and, followed by the page, on
the red roan, dashed away into the forest. Ginevra and Geta
watched them disappear among the black shadows, and then turned
and sighed, they knew not why.
The Baron met them outside the castle gate.
“Where hast thou been, my child?” he asked.
“By Edith’s fountain, father.”
“And didst thou drop thy rose in it?”
 “No; I gave it to a youth who begged it,” she answered, blushing.
“Ha! And thou hast brought back two,” he said, “and they are
both for me, my summer child.”
And he kissed her on each cheek.
The color ran up to her forehead, and as she stood in the rosy
sunset, with downcast eyes, in the bloom and glow of youth so
beautiful, the old Baron’s heart yearned toward his daughter. He
gathered her in his arms, and said:
“I will carry thee home, little one. Thou art my Rose of the World;
for there is none on earth like thee. As we go, thou shalt tell me of
this youth. Did he ride a milk-white steed?”
“Yes; a high, proud one; not a single black hair on him; its mane
swam the wind, and its trappings were of scarlet and gold.”
“A goodly youth, with spurs; was he not?”
“Yes; his hair was black as the wing of the night raven. He had a
noble air, and oh! an eye that takes your breath!”
“And his page, Ginevra?”
“A comely little page, but nothing like his master.”
Here Geta made as if she would speak; her mistress went on:
“But nothing like his master, who carried a bow, a quiver of
arrows, and a silver bugle-horn.”
“It is young Lord Lovel!” He was silent a moment. “How old art
thou, my daughter?”
“Sixteen, come Christmas.”
Then the Baron fell into a muse, and walked on, carrying her all
the way.
After supper he sat beside her in the hall, playing idly with her
hand, that was soft as the down on the dove’s breast; and at last he
said:
 “Sweet child, tell me, dost thou know aught of love—young love,
I mean, not father’s love?”
“I have sung it in song, and heard it in story,” she answered
timidly.
“Listen, then. Lord Lovel is thy betrothed. Thou wert promised to
him in the cradle; but we fathers have kept the secret, and let true
love find its own, as it is certain to do, and has done to-day. On thy
sixteenth birthday we will have the betrothal feast. Now go to sleep
and dreams that maidens often have ere they reach thy age.”
Ginevra’s chamber was a lofty room, with curtained bed so high
it could be reached only by steps. Geta slept in a cot beside her.
They usually fell asleep at dark, and awoke at daybreak, but that
night there was no slumber in their eyelids, and the tall clock on the
stairs struck midnight ere they ceased to talk of the winsome young
lord, and his gallant little page, Alfred.
Turning on the stone floor in the corridor outside, Ban heard the
murmur of voices under the door, and the shrewd soldier smiled in
the dark, and winked his one eye, as he said to himself:
“That arrow was double-headed. It’s all over with my Lady and
that forward little Geta.”