Assignment 3

ASSIGNMENT 3

DUE : NEXT MEETING ON APRIL 18, 2012 (WEDNESDAY)

You need to submit a hard copy of the completed assignment in class. Later assignments are not accepted. Multiple Choice Questions (Please write your answers in the following form: Ans: 1. x 2. x 3. x 4. x 5. x 6. x 7. x 8. x 9. x 10. x. 11. x 12. x 13. x 14. x 15. x 16. x 17. x 18. x 19. x 20. x. You do not need to copy the questions.) This Assignment has 20 multiple choice questions only and no longer questions.

1. Assuming the economy is starting at the natural rate of output and everything else held constant, the effect of ________ in aggregate ________ is a rise in both the price level and output in the short-run, but in the long-run the only effect is a rise in the price level. A) a decrease; supply B) a decrease; demand C) an increase; supply D) an increase; demand 2. This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output. A) The natural rate hypothesis B) Hysteresis C) Real business cycle theory D) The Phillips curve model 3. According to aggregate demand and supply analysis, the rising oil prices coupled with the subprime financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________. A) increase; increase B) increase; decrease C) decrease; increase D) decrease; decrease

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4. Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply. A) above; fall B) above; rise C) below; fall D) below; rise 5. When Keynesians argue that "correlation does not necessarily imply causation," they are probably criticizing A) structural-model evidence. B) reduced-form evidence. C) indirect-model evidence. D) black-box evidence. 6. In response to the early Keynesians, monetarists contended that A) monetary policy during the Great Depression was not easy. B) bank failures during the Great Depression were not the cause of the decline in the money supply. C) evidence from the Great Depression demonstrated the ineffectiveness of monetary policy. D) there is a weak link between interest rates and investment spending. 7. If the aggregate price level adjusts slowly over time, then an expansionary monetary policy lowers A) only the short-term nominal interest rate. B) only the short-term real interest rate. C) both the short-term nominal and real interest rates. D) the short-term nominal, the short-term real, and the long-term real interest rates. 8. During the Great Depression, Tobin's q A) rose dramatically, as did real interest rates. B) fell to unprecedentedly low levels. C) stayed fairly constant, in contrast to most other economic measures. D) rose only slightly, in spite of Hoover's attempts to prop it up.

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9. An expansionary monetary policy raises firms' cash flows by ________ interest rates. A) lowering real B) lowering nominal C) raising real D) raising nominal 10. In the late 1990s and early 2000s, the Japanese economy has experienced A) easy monetary policy as indicated by falling nominal interest rates. B) easy monetary policy as indicated by short-term interest rates near zero. C) tight monetary policy as indicated by falling asset prices. D) tight monetary policy as indicated by short-term interest rates near zero. 11. According to aggregate demand and supply analysis of inflation and with everything else held constant, a continually increasing money supply causes A) aggregate demand to increase along a stationary aggregate supply curve, leading to continually increasing aggregate output and prices. B) aggregate supply to decrease along a stationary aggregate demand curve, leading to continually contracting aggregate output and prices. C) aggregate demand to increase continually as aggregate supply decreases continually, leading to higher and higher price levels. D) aggregate demand to decrease continually as aggregate supply increases continually, leading to higher and higher price levels. 12. Suppose that the economy is at the natural rate of output. In the absence of accommodating policy and everything else held constant, the net result of a negative supply shock is that A) the economy returns to full employment at the initial price level. B) the economy returns to full employment at a higher price level. C) the economy returns to full employment at a lower price level. D) aggregate output increases above the natural rate level, but only temporarily.

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13. This method of financing government spending is frequently called printing money because highpowered money (the monetary base) is created in the process. A) Financing government spending with taxes. B) The finance of government spending through a Treasury sale of bonds that are then purchased by the Fed. C) Financing government spending by selling bonds to the public, which pays for the bonds with currency. D) Financing government spending by selling bonds to the public, which pays for the bonds with checks. 14. Although the U.S. has a well-developed government bond market and has experienced relatively small budget deficits relative to GDP, deficits can be inflationary if A) deficits put upward pressure on interest rates, and the Fed attempts to keep interest rates from rising. B) deficits put upward pressure on interest rates, and fiscal authorities raise taxes in an attempt to keep interest rates from rising. C) the Fed refuses to purchase government bonds. D) the world's supply of gold expands because of new gold discoveries. 15. Advocates of discretionary policy usually view ________ policy as having a shorter effectiveness lag than ________ policy, but there is substantial uncertainty about how long this lag is. A) fiscal; incomes B) fiscal; monetary C) monetary; incomes D) monetary; fiscal 16. In the new classical macroeconomic model developed by Lucas and Sargent, an anticipated monetary expansion will A) increase aggregate output. B) reduce aggregate output. C) have no effect on aggregate output. D) increase aggregate output and the aggregate price level.

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17. The short-run response to an anticipated expansionary policy in the new classical model includes ________ in the price level and ________ in aggregate output. A) an increase; an increase B) an increase; no change C) no change; an increase D) no change; no change 18. The similarity between advocates of nondiscretionary policies and the new classical economists is that both believe that A) only unanticipated policies can affect aggregate output and employment. B) only anticipated policies can affect aggregate output and employment. C) discretionary policies may be destabilizing. D) discretionary policies will be ineffective in changing aggregate output and employment. 19. Rigidities that diminish wage and price flexibility such as long-term contracts suggest that an increase in the expected price level A) might not translate into complete adjustment of wages and prices. B) might cause aggregate demand to decrease. C) might cause aggregate supply to increase. D) will have no effect on the short-run aggregate supply curve. 20. It may be necessary to cut the deficit as part of a credible anti-inflationary policy because the public knows that large deficits A) are inflationary by themselves in the long run. B) create inefficiencies. C) put pressure on the Fed to expand the money supply to keep interest rates from rising. D) put pressure on the Fed to contract the money supply to prevent employment from rising.

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