SectionA

Question 1

Over the business cycle, investment spending \_\_\_\_\_\_ consumption spending. 
is more volatile than
is less volatile than
is inversely correlated with
has about the same volatility as

Answer 1

Is more volatile than

Question 2

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P.

higher; higher
lower; higher
higher; lower
lower; lower

Answer 2

higher;lower

Question 3

The version of Okun’s law studied in Chapter 10 assumes that with no change in unemployment, real GDP normally grows by 3 percent over a year. If the unemployment rate fell by 1 percentage point over a year, Okun’s law predicts that real GDP would:

decrease by 1 percent.
decrease by 2 percent.
increase by 4 percent.
increase by 5 percent.

Answer 3

increase by 5%

Question 4

Suppose real GDP has been growing at 3 percent per year. Between last year and this year, the unemployment rate rose by 2 percentage points. This would suggest that real GDP growth: 
increased by 1 percent.
decreased by 1 percent.
decreased by 2 percent.
decreased by 3 percent.

Answer 4

decreased by 1%

Question 5

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant:

demand for real balances per unit of output.
short-run aggregate supply curve.
long-run aggregate supply curve.
price level in the short run.

Answer 5

demand for real balances per unit of output

Question 6

The aggregate demand curve tells us possible:

combinations of P and Y for a given value of M.
combinations of M and P for a given value of Y.
results if the Federal Reserve reduces the money supply.
combinations of M and Y for a given value of P.

Answer 6

combinations of P and Y for a given value of M.

Question 7

Okun’s law is about the ______ relationship between real GDP and the ______.

negative; unemployment rate
positive; unemployment rate
positive; inflation rate
negative; inflation rate

Answer 7

negative; unemployment rate

Question 8

The long run refers to a period:
during which capital and labor are sometimes not fully employed.
of decades.
during which output deviates from the full-employment level.
during which prices are flexible.

Answer 8

during which prices are flexible

Question 9

The full-employment level of output (Y-bar) is:
affected by aggregate demand.
the level of output at which the unemployment rate is at its natural level.
permanent and unchangeable.
the level of output at which the unemployment rate is zero.

Answer 9

the level of output at which unemployment rate is at its full level.

Question 10

A difference between the economic long run and the short run is that:

the classical dichotomy holds in the short run but not in the long run.
prices and wages are sticky in the long run only.
monetary and fiscal policy affect output only in the long run.
demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.

Answer 10

demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.