Question 1

What occurs during a negative demand shock?

Accepted Answer

During a negative demand shock, there is a decrease in aggregate demand, leading to a reduction in both output and the price level as businesses produce less and lower prices to stimulate demand.

Question 2

Use the following to answer questions
Figure: Shifts in Aggregate Demand 
-(Figure: Shifts in Aggregate Demand)Starting at the equilibrium point b,if imports increase or consumer demand decreases,the demand curve will shift to _____,thus _____ the price level and _____ real output.

Accepted Answer

An increase in imports or a decrease in consumer demand will shift the aggregate demand curve to the left (AD2), leading to a decrease in both the price level and real output.

Question 3

Negative demand shocks to the economy can come from:

Accepted Answer

Negative demand shocks refer to decreases in consumer demand. Hence, option A - reductions in consumer demand is the correct answer. The other options, such as increases in investment, increases in government spending or reductions in imports, would actually have a positive effect on demand and hence cannot be the correct answer for this question.

Question 4

In the long run,changes in the money supply will NOT change output according to:

Accepted Answer

Classical economists and monetarists believe that in the long run, changes in the money supply will not change output. This is because they believe that the economy will always adjust to its full employment level, regardless of the money supply.

Question 5

Monetary policy is LEAST effective in reversing:

Accepted Answer

Monetary policy is least effective in reversing an adverse supply shock because it is caused by factors such as natural disasters, geopolitical events or sudden changes in supply capacity that cannot be resolved with changes in interest rates or money supply. In contrast, monetary policy can be effective in addressing demand-pull inflation, decreasing private spending, and rapid growth in consumption expenditures by either increasing interest rates to reduce spending or injecting more money into the economy to stimulate growth.

Question 6

Which of the following is considered a supply shock?

Accepted Answer

A supply shock is an unexpected event that affects the availability of inputs or factors of production. An increase in input costs, such as a sudden rise in the price of oil or labor, can constrain the supply of goods and services, leading to higher prices and lower output. Options A, B, and D do not represent supply shocks, but rather changes in demand or trade patterns.

Question 7

Which economists believe that fiscal policy is ineffective,while monetary policy is effective?

Accepted Answer

Monetarists believe that changes in the money supply will have a greater impact on the economy than changes in government spending and taxes (fiscal policy). They argue that fiscal policy is often too slow to respond to economic changes and can be subject to political influence, while monetary policy can be implemented quickly and independently by the central bank.

Question 8

Most economists think the Fed should target:

Accepted Answer

Most economists believe that the long-run goal of the Federal Reserve should be to maintain price stability. This means keeping inflation low and stable, which promotes economic growth and stability in the long term. While other goals such as supporting employment and stabilizing financial markets are important, price stability is considered the most important long-term objective.

Question 9

According to the monetarists:

Accepted Answer

Monetarists believe in the long-run neutrality of money, which means that changes in the money supply will only affect nominal variables (like prices) and not real variables (like output) in the long run. They also believe that the economy will eventually move to its full employment output level in the long run, but this may take some time in the short run as prices and wages adjust to changes in the money supply.

Question 10

Monetarists and classical economists agree that:

Accepted Answer

Both monetarists and classical economists believe in the self-stabilizing nature of the economy in the long run. They argue that market forces will eventually correct any imbalances without the need for government intervention.

Question 11

A negative supply shock causes output to _________ and the price level to _______.

Accepted Answer

A negative supply shock, such as a natural disaster or increase in oil prices, causes a decrease in the availability or cost of inputs for production, resulting in a decrease in output. This decrease in output leads to a decrease in supply, causing a shift to the left in the aggregate supply curve. As a result, the price level increases, causing inflation, which is represented by a upward shift in the aggregate demand curve. Therefore, the correct answer is D, decrease in output and increase in the price level.

Question 12

Which economists believe that changes in the money supply lead only to price changes?

Accepted Answer

Classical economists believe that changes in the money supply lead only to price changes.

Question 13

Milton Friedman and Anna Schwartz are most famous for:

Accepted Answer

Milton Friedman and Anna Schwartz are best known for their work in monetary theory, specifically for their book "A Monetary History of the United States" which analyzed the causes and effects of the Great Depression and argued that the Federal Reserve's monetary policy mistakes were the main cause of the economic downturn.

Question 14

A major war in the Middle East cuts off the supply of oil to the United States,causing a recession and inflation.With the tools of monetary policy,the Federal Reserve:

Accepted Answer

The Federal Reserve can use monetary policy tools to address either recession or inflation, but not both simultaneously. Expansionary policy can combat recession, while contractionary policy can address inflation.

Question 15

According to the monetarist theory:

Accepted Answer

The answer of According to the monetarist theory:
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Question 16

Which economists believe the economy will always self-adjust,so that intervention is unnecessary?

Accepted Answer

Classical economists believe in the concept of laissez-faire, which argues that the economy will automatically self-correct and achieve equilibrium without the need for government intervention. They believe that the market will always adjust to clear any imbalances, and any attempts to influence the market through policies like fiscal or monetary policy will be ineffective or lead to unintended consequences.

Question 17

John has $100,000 in annual income but does not own his house or a car.Bob has $100,000 in annual income and owns two houses and four cars.Which theorist would predict that John spends a different proportion of his current income than Bob?

Accepted Answer

Milton Friedman's Permanent Income Hypothesis suggests that people spend money based on their expected long-term average income rather than their current income. Since Bob has more assets, he might perceive a higher permanent income, leading to different spending behavior compared to John.

Question 18

Which economists believe that fiscal policy is effective,while monetary policy may be ineffective?

Accepted Answer

Keynesians believe that fiscal policy, such as government spending and taxation, can be effective in stimulating economic growth and reducing unemployment, while monetary policy, such as adjusting interest rates, may be less effective in achieving these goals. Monetarists, classical economists, and Fisherites tend to place greater emphasis on the role of monetary policy in controlling inflation and stabilizing the economy.

Question 19

(Figure: Shifts in SRAS and AD)  Starting at equilibrium point d,if the cost of inputs rises,the short-run equilibrium will move to point _____,and thus real output will _____ and the price level will _____.

Accepted Answer

When the cost of inputs rises, the SRAS curve shifts leftward, causing a decrease in real output and an increase in the price level. The new equilibrium point will be at point b, where the AD curve intersects the new SRAS curve.

Question 20

Use the following to answer questions
Figure: Shifts in Aggregate Demand 
-(Figure: Shifts in Aggregate Demand)Starting at the equilibrium point b,if investment or exports increase,the demand curve will shift to _____,thus _____ the price level and _____ real output.

Accepted Answer

An increase in investment or exports will shift the aggregate demand curve to the right (AD1), increasing both the price level and real output.

Quiz 13: Monetary Policy

What occurs during a negative demand shock?

Use the following to answer questions Figure: Shifts in Aggregate Demand -(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b,if imports increase or consumer demand decreases,the demand curve will shift to ___,thus _ the price level and ___ real output.

Negative demand shocks to the economy can come from:

In the long run,changes in the money supply will NOT change output according to:

Monetary policy is LEAST effective in reversing:

Which of the following is considered a supply shock?

Which economists believe that fiscal policy is ineffective,while monetary policy is effective?

Most economists think the Fed should target:

According to the monetarists:

Monetarists and classical economists agree that:

A negative supply shock causes output to ___ and the price level to _.

Which economists believe that changes in the money supply lead only to price changes?

Milton Friedman and Anna Schwartz are most famous for:

A major war in the Middle East cuts off the supply of oil to the United States,causing a recession and inflation.With the tools of monetary policy,the Federal Reserve:

According to the monetarist theory:

Which economists believe the economy will always self-adjust,so that intervention is unnecessary?

John has $100,000 in annual income but does not own his house or a car.Bob has $100,000 in annual income and owns two houses and four cars.Which theorist would predict that John spends a different proportion of his current income than Bob?

Which economists believe that fiscal policy is effective,while monetary policy may be ineffective?

(Figure: Shifts in SRAS and AD) Starting at equilibrium point d,if the cost of inputs rises,the short-run equilibrium will move to point ___,and thus real output will _ and the price level will ___.

Use the following to answer questions Figure: Shifts in Aggregate Demand -(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b,if investment or exports increase,the demand curve will shift to ___,thus _ the price level and ___ real output.

Quiz 13: Monetary Policy

What occurs during a negative demand shock?

Use the following to answer questions Figure: Shifts in Aggregate Demand -(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b,if imports increase or consumer demand decreases,the demand curve will shift to _____,thus _____ the price level and _____ real output.

Negative demand shocks to the economy can come from:

In the long run,changes in the money supply will NOT change output according to:

Monetary policy is LEAST effective in reversing:

Which of the following is considered a supply shock?

Which economists believe that fiscal policy is ineffective,while monetary policy is effective?

Most economists think the Fed should target:

According to the monetarists:

Monetarists and classical economists agree that:

A negative supply shock causes output to _________ and the price level to _______.

Which economists believe that changes in the money supply lead only to price changes?

Milton Friedman and Anna Schwartz are most famous for:

A major war in the Middle East cuts off the supply of oil to the United States,causing a recession and inflation.With the tools of monetary policy,the Federal Reserve:

According to the monetarist theory:

Which economists believe the economy will always self-adjust,so that intervention is unnecessary?

John has $100,000 in annual income but does not own his house or a car.Bob has $100,000 in annual income and owns two houses and four cars.Which theorist would predict that John spends a different proportion of his current income than Bob?

Which economists believe that fiscal policy is effective,while monetary policy may be ineffective?

(Figure: Shifts in SRAS and AD) Starting at equilibrium point d,if the cost of inputs rises,the short-run equilibrium will move to point _____,and thus real output will _____ and the price level will _____.

Use the following to answer questions Figure: Shifts in Aggregate Demand -(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b,if investment or exports increase,the demand curve will shift to _____,thus _____ the price level and _____ real output.

Use the following to answer questions Figure: Shifts in Aggregate Demand -(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b,if imports increase or consumer demand decreases,the demand curve will shift to ___,thus _ the price level and ___ real output.

A negative supply shock causes output to ___ and the price level to _.

(Figure: Shifts in SRAS and AD) Starting at equilibrium point d,if the cost of inputs rises,the short-run equilibrium will move to point ___,and thus real output will _ and the price level will ___.

Use the following to answer questions Figure: Shifts in Aggregate Demand -(Figure: Shifts in Aggregate Demand) Starting at the equilibrium point b,if investment or exports increase,the demand curve will shift to ___,thus _ the price level and ___ real output.