Chapter 15

Question 1

The long-run aggregate supply curve is vertical because

Answer 1

at any given price level, firms in the long run are producing all that they can, given the amount of labor, capital, and technology available to them in the economy.

Question 2

Liquidity trap

Answer 2

A situation in which nominal interest rates are so low, they can no longer fall

Question 3

Political business cycle

Answer 3

the effects on the economy of using monetary or fiscal policy to stimulate the economy before an election to improve reelection prospects

Question 4

1. The economics of the long run is:

Answer 4

b. classical economics.

Question 5

3. In the long run:

Answer 5

b. the economy operates at full employment.

Question 6

4. If GDP is above potential output, the economy is in a:

Answer 6

a. boom and prices and wages will tend to increase.

Question 7

5. If the unemployment rate is above the natural rate, then GDP is:

Answer 7

a. below potential output.

Question 8

6. Suppose the unemployment rate is below the natural rate. We would expect
   to see:

Answer 8

d. GDP above potential output, rising wages, and rising prices.

Question 9

Suppose that an economy has been experiencing 3% annual inflation. If
output is less than full employment, prices will generally rise at:

Answer 9

c. a rate less than 3%.

Question 10

10. The classical aggregate supply curve is vertical because:

Answer 10

in the long run, prices are flexible but output is equal to potential
output.

Question 11

16. If GDP is above potential output, then we expect to see:

Answer 11

increasing wages cause the Keynesian aggregate supply curve to shift
up.

Question 12

Economists who believe that adjustment to the long-run equilibrium
happens quickly suggest that the government:

Answer 12

c. avoid economic stabilization policies.

Question 13

GDP for the nation of Economia is currently below potential output. If
the adjustment to the long-run equilibrium occurs slowly, the government
of Economia is likely to pursue a policy of:

Answer 13

a. increasing government spending to increase aggregate demand.

Question 14

20. A decrease in the price level causes:

Answer 14

a. a decrease in the demand for money.

Question 15

Suppose that the unemployment rate is above the natural rate. We would
expect

Answer 15

c. prices to fall, money demand to fall, interest rates to fall, and
total demand to rise.

Question 16

23. The Federal Reserve can use monetary policy to:

Answer 16

b. change output in the short run, but not the long run.

Question 17

24. In the long-run, an increase in the money supply:

Answer 17

d. has no effect on interest rates, investment or output.

Question 18

25. Investment is “crowded out” by an increase in government spending
    because:

Answer 18

a. an increase in government spending causes output and prices to rise,
which in turn causes interest rates to rise.