Question 1

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

Accepted Answer

Most economists believe that classical theory is not a good descriptor of the world in either the short or the long run, as it does not account for many key economic factors such as imperfect competition and government interventions.

Question 2

Although wages,incomes,and interest rates are most often discussed in nominal terms,what matters most are their real values.

Accepted Answer

Nominal values do not account for inflation or changes in purchasing power, while real values do. Therefore, it is the real values of wages, incomes, and interest rates that have the greatest impact on people's lives and economic decisions.

Question 3

Most economist agree that money changes real GDP in both the short and long run.

Accepted Answer

Most economists agree that money changes real GDP in the short run due to price and wage stickiness, but in the long run, changes in the money supply only affect nominal variables like the price level, leaving real GDP unchanged according to the classical dichotomy.

Question 4

Recessions occur at irregular intervals and are almost impossible to predict with much accuracy.

Accepted Answer

Recessions are affected by various unpredictable factors such as natural disasters, political changes, and global economic conditions, making it challenging to predict when they will occur with certainty.

Question 5

A change in the money supply changes only nominal variables in the long run.

Accepted Answer

In the long run, changes in the money supply only affect nominal variables such as prices and wages, since real variables such as output and employment are determined by factors like technology and resources. This is known as the classical dichotomy. However, in the short run, changes in the money supply can affect both nominal and real variables due to sticky prices and wages.

Question 6

Because economists understand what things change GDP,they can predict recessions with a fair amount of accuracy.

Accepted Answer

While economists have tools to analyze economic indicators and forecast trends, predicting recessions with absolute accuracy is not always possible and can be influenced by various unpredictable events and factors.

Question 7

Like real GDP,investment fluctuates,but it fluctuates much less than real GDP.

Accepted Answer

Investment is actually more volatile than real GDP, meaning it fluctuates more, not less, in response to economic changes.

Question 8

The recessions associated with the business cycle come at regular intervals.

Accepted Answer

The intervals between recessions in the business cycle can vary, and are not always predictable or regular.

Question 9

Most macroeconomic variables that measure some type of income,spending,or production fluctuate closely together.

Accepted Answer

This is known as the macroeconomic identity or the national income accounting identity, which states that total output (Y) equals total income (I) which equals total spending (S). Therefore, fluctuations in one variable will typically affect the others as well.

Question 10

Other things the same,as the price level falls,the exchange rate rises.A rise in the exchange rate leads to a decrease in net exports.

Accepted Answer

The answer of Other things the same,as the price level...

Question 11

The logic of the exchange-rate effect begins with a change in the price level changing the interest rate.

Accepted Answer

A change in the price level can lead to changes in the demand for money and the supply of money in the economy, which can in turn affect the interest rate. This change in interest rate can then affect the exchange rate, as investors may shift funds between countries to take advantage of higher interest rates.

Question 12

When output rises,unemployment falls.

Accepted Answer

This is a common economic relationship known as the Phillips curve. As output increases, firms are more likely to hire additional workers, resulting in a decrease in unemployment.

Question 13

The aggregate-demand curve shows the quantity of domestic goods and services that households,firms,the government,and customers abroad want to buy at each price level.

Accepted Answer

The aggregate-demand curve represents the total amount of spending (consumption, investment, government spending, and net exports) on goods and services at different price levels.

Question 14

According to classical macroeconomic theory,changes in the money supply change nominal but not real variables.

Accepted Answer

Classical macroeconomic theory assumes that changes in the money supply only affect nominal variables (such as prices and wages) and not real variables (such as output and employment). This is because in the long run, changes in the money supply are assumed to only affect the price level and not real economic activity. However, this assumption has been challenged by modern macroeconomic theories, such as Keynesian and monetarist theories, which argue that monetary policy can have real effects on the economy in the short run.

Question 15

The explanations for the slopes of the aggregate demand and short-run aggregate supply curves are the same as the explanations for the slopes of demand and supply curves for specific goods and services.

Accepted Answer

The slopes of the aggregate demand and short-run aggregate supply curves are based on different economic principles than those for individual goods and services. Aggregate demand slopes downward due to the wealth effect, interest rate effect, and exchange rate effect, while the short-run aggregate supply curve slopes upward due to factors like wage rates, input prices, and productivity, which differ from the simple supply and demand dynamics of individual goods and services.

Question 16

The aggregate demand and aggregate supply model helps us to understand both short-run economic fluctuations and how the economy moves from the short to the long run.

Accepted Answer

The aggregate demand and aggregate supply model is a useful tool in understanding short-run economic fluctuations and how the economy transitions from short-run to long-run equilibrium. This is because the model allows us to analyze the different factors that impact both aggregate demand and supply, and how changes in these factors can shift the economy's equilibrium. By looking at the intersection of aggregate demand and supply in the short run and how it adjusts over time, we can gain insights into the workings of the economy at both the macro and micro levels.

Question 17

According to classical macroeconomic theory,changes in the money supply change real GDP but not the price level.

Accepted Answer

According to classical macroeconomic theory, changes in the money supply (assuming that velocity of money and potential output remain constant) only affect the price level and do not have a long-term impact on real GDP. This is known as the quantity theory of money.

Question 18

Other things the same,a decrease in the price level makes the interest rate decrease,which leads to a depreciation of the dollar in the market for foreign-currency exchange.

Accepted Answer

A decrease in the price level typically leads to a decrease in the demand for money, as people have less need to borrow or hold onto cash. This in turn leads to a lowering of interest rates as lenders compete for borrowers. A decrease in interest rates makes investments denominated in that currency less attractive, leading to a decrease in demand for that currency and a depreciation in its value on foreign exchange markets.

Question 19

An increase in the money supply causes output to rise in the long run.

Accepted Answer

In the long run, an increase in the money supply will lead to higher prices (inflation), but it will not affect the level of output. This is known as the long-run neutrality of money.

Question 20

A decrease in the price level makes consumers feel wealthier,so they purchase more.This logic helps explain why the aggregate demand curve slopes downward.

Accepted Answer

When the price level decreases, the purchasing power of consumers increases, making them feel wealthier. This increase in wealth leads them to purchase more goods and services, thereby increasing aggregate demand.

Quiz 20: Aggregate Demand and Aggregate Supply: Part B