Chapter 10

Question 1

Business cycles are:

1. regular and predictable.
2. irregular but predictable.
3. regular but unpredictable.
4. irregular and unpredictable.

Answer 1

4

Question 2

Short-run fluctuations in output and employment are called:

1. sectoral shifts.
2. the classical dichotomy.
3. business cycles.
4. productivity slowdowns.

Answer 2

3

Question 3

Recessions typically, but not always, include at least ______ consecutive quarters of declining real GDP.

1. two
2. four
3. six
4. eight

Answer 3

1

Question 4

Over the business cycle, investment spending ______ consumption spending.

1. is inversely correlated with
2. is more volatile than
3. has about the same volatility as
4. is less volatile than

Answer 4

2

Question 5

When GDP growth declines, investment spending typically ______ and consumption spending typically ______.

1. increases; increases
2. increases; decreases
3. decreases; decreases
4. decreases; increases

Answer 5

3

Question 6

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

1. negative; unemployment rate
2. negative; inflation rate
3. positive; unemployment rate
4. positive; inflation rate

Answer 6

1

Question 7

The statistical relationship between changes in real GDP and changes in the unemployment rate is called:

1. the Phillips curve.
2. the Solow residual.
3. the Fisher effect.
4. Okun’s law.

Answer 7

4

Question 8

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 rose by 2 percentage points over a year, Okun’s law predicts that real GDP would:

1. decrease by 1 percent.
2. decrease by 2 percent.
3. decrease by 3 percent.
4. increase by 1 percent.

Answer 8

1

Question 9

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:

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

Answer 9

4

Question 10

Long-run growth in real GDP is determined primarily by ______, while short-run movements in real GDP are associated with ______.

1. variations in labor-market utilization; technological progress
2. technological progress; variations in labor-market utilization
3. money supply growth rates; changes in velocity
4. changes in velocity; money supply growth rates

Answer 10

2

Question 11

Leading economic indicators are:

1. the most popular economic statistics.
2. data that are used to construct the consumer price index and the unemployment rate.
3. variables that tend to fluctuate in advance of the overall economy.
4. standardized statistics compiled by the National Bureau of Economic Research.

Answer 11

3

Question 12

A decline in the Index of Supplier Deliveries is typically an indicator of a future _____ in economic production, and a narrowing of the interest rate spread between the 10-year Treasury note and 3-month Treasury bill is typically an indicator of a future _____ in economic production.

1. increase; slowdown
2. increase; increase
3. slowdown; increase
4. slowdown; slowdown

Answer 12

4

Question 13

The index of leading indicators compiled by the Conference Board includes 10 data series that are used to forecast economic activity about ______ in advance.

1. one month
2. six to nine months
3. one to two years
4. five to ten years

Answer 13

2

Question 14

Measures of average workweeks and of supplier deliveries (vendor performance) are included in the index of leading indicators, because shorter workweeks tend to indicate ______ future economic activity and slower deliveries tend to indicate ______ future economic activity.

1. stronger; stronger
2. stronger; weaker
3. weaker; stronger
4. weaker; weaker

Answer 14

3

Question 15

Most economists believe that prices are:

1. flexible in the short run but many are sticky in the long run.
2. flexible in the long run but many are sticky in the short run.
3. sticky in both the short and long runs.
4. flexible in both the short and long runs.

Answer 15

2

Question 16

Most economists believe that the classical dichotomy:

1. holds approximately in both the short run and the long run.
2. holds approximately in the long run but not at all in the short run.
3. holds approximately in the short run but not at all in the long run.
4. does not hold even approximately in either the long run or the short run.

Answer 16

2

Question 17

A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:

1. in both the short and long runs.
2. in neither the short nor long run.
3. in the short run but lead to unemployment in the long run.
4. in the long run but lead to unemployment in the short run.

Answer 17

4

Question 18

Monetary neutrality, the irrelevance of the money supply in determining values of _____ variables, is generally thought to be a property of the economy in the long run.

1. real
2. nominal
3. real and nominal
4. neither real nor nominal

Answer 18

1

Question 19

Alan Blinder’s survey of firms found that the typical firm adjusts its prices:

1. more than once a week.
2. about once a month.
3. once or twice a year.
4. less than once a year.

Answer 19

3

Question 20

Alan Blinder’s survey of firms found that the theory of price stickiness accepted by the most firms was:

1. menu costs.
2. coordination failure.
3. nominal contracts.
4. procyclical elasticity.

Answer 20

2

Question 21

All of the following are suggested by the results of Alan Blinder’s survey of firms except:

1. there is only one theory of price stickiness.
2. coordinating wage and price setting could improve welfare.
3. reasons for price stickiness vary by industry.
4. activist monetary policy can be used to cure recessions.

Answer 21

1

Question 22

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

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

Answer 22

3

Question 23

The aggregate demand curve is the ______ relationship between the quantity of output demanded and the ______.

1. positive; money supply
2. negative; money supply
3. positive; price level
4. negative; price level

Answer 23

4

Question 24

The relationship between the quantity of output demanded and the aggregate price level is called:

1. aggregate demand.
2. aggregate supply.
3. aggregate output.
4. aggregate consumption.

Answer 24

1

Question 25

If an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, using the quantity theory of money as a theory of aggregate demand, this curve slopes ______ to the right and gets ______ as it moves farther to the right. 1. downward; steeper 2. downward; flatter 3. upward; steeper 4. upward; flatter

Answer 25

2

Question 26

The assumption of constant velocity in the quantity equation is the equivalent of the assumption of a constant: 1. short-run aggregate supply curve. 2. long-run aggregate supply curve. 3. price level in the short run. 4. demand for real balances per unit of output.

Answer 26

4

Question 27

Along an aggregate demand curve, which of the following are held constant? 1. real output and prices 2. nominal output and velocity 3. the money supply and real output 4. the money supply and velocity

Answer 27

4

Question 28

According to the quantity theory of money, if output is higher, ______ real balances are required, and for fixed M this means ______ P. 1. higher; lower 2. lower; higher 3. higher; higher 4. lower; lower

Answer 28

1

Question 29

According to the quantity equation, if the velocity of money and the supply of money are fixed, and the price level increases, then the quantity of goods and services purchased: 1. increases. 2. decreases. 3. does not change. 4. may either increase or decrease.

Answer 29

2

Question 30

For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are \_\_\_\_\_\_, generating a ______ quantity of output demanded. 1. higher; greater 2. higher; smaller 3. lower; greater 4. lower; smaller

Answer 30

1

Question 31

The aggregate demand curve tells us possible: 1. combinations of M and Y for a given value of P. 2. combinations of M and P for a given value of Y. 3. combinations of P and Y for a given value of M. 4. results if the Federal Reserve reduces the money supply.

Answer 31

3

Question 32

When an aggregate demand curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, if the money supply is decreased, then the aggregate demand curve will shift: 1. downward and to the left. 2. downward and to the right. 3. upward and to the left. 4. upward and to the right.

Answer 32

1

Question 33

When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is \_\_\_\_\_\_ and the aggregate demand curve shifts \_\_\_\_\_\_. 1. greater; inward 2. greater; outward 3. lower; inward 4. lower; outward

Answer 33

3

Question 34

When the Federal Reserve increases the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts \_\_\_\_\_\_. 1. greater; inward 2. greater; outward 3. lower; inward 4. lower; outward

Answer 34

2

Question 35

Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy. 1. the quantity of output and the price level 2. the quantity of output 3. the price level 4. neither the quantity of output nor the price level

Answer 35

4

Question 36

The relationship between the quantity of goods and services supplied and the price level is called: 1. aggregate demand. 2. aggregate supply. 3. aggregate investment. 4. aggregate production.

Answer 36

2

Question 37

Aggregate supply is the relationship between the quantity of goods and services supplied and the: 1. money supply. 2. unemployment rate. 3. interest rate. 4. price level.

Answer 37

4

Question 38

A short-run aggregate supply curve shows fixed \_\_\_\_\_\_, and a long-run aggregate supply curve shows fixed \_\_\_\_\_\_. 1. output; output 2. prices; prices 3. prices; output 4. output; prices

Answer 38

3

Question 39

In the long run, the level of output is determined by the: 1. interaction of supply and demand. 2. money supply and the levels of government spending and taxation. 3. amounts of capital and labor and the available technology. 4. preferences of the public.

Answer 39

3

Question 40

When a long-term aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: 1. slopes upward and to the right. 2. slopes downward and to the right. 3. is horizontal. 4. is vertical.

Answer 40

4

Question 41

The vertical long-run aggregate supply curve satisfies the classical dichotomy because the natural rate of output does not depend on: 1. the labor supply. 2. the supply of capital. 3. the money supply. 4. technology.

Answer 41

3

Question 42

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect: 1. neither prices nor level of output. 2. both prices and level of output. 3. level of output but not prices. 4. prices but not level of output.

Answer 42

4

Question 43

The natural level of output is: 1. affected by aggregate demand. 2. the level of output at which the unemployment rate is zero. 3. the level of output at which the unemployment rate is at its natural level. 4. permanent and unchangeable.

Answer 43

3

Question 44

The long-run aggregate supply curve is vertical at the level of output: 1. determined by aggregate demand. 2. at which unemployment is at its natural rate. 3. at which the inflation rate is zero. 4. at a predetermined price level.

Answer 44

2

Question 45

If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve: 1. is horizontal. 2. is vertical. 3. slopes upward and to the right. 4. slopes downward and to the right.

Answer 45

1

Question 46

The price level decreases and output increases in the transition from the short run to the long run when the short-run equilibrium is _____ the natural rate of output in the short run. 1. above 2. below 3. equal to 4. either above or below

Answer 46

2

Question 47

If the short-run aggregate supply curve is horizontal, then changes in aggregate demand affect: 1. level of output but not prices. 2. prices but not level of output. 3. both prices and level of output. 4. neither prices nor level of output.

Answer 47

1

Question 48

In the aggregate demand–aggregate supply model, short-run equilibrium occurs at the combination of output and prices where: 1. aggregate demand equals long-run aggregate supply. 2. aggregate demand equals short-run aggregate supply. 3. aggregate demand equals short-run and long-run aggregate supply. 4. short-run aggregate supply equals long-run aggregate supply.

Answer 48

2

Question 49

If the short-run aggregate supply curve is horizontal, then the: 1. classical dichotomy is satisfied. 2. money supply cannot affect prices in the short run. 3. money supply cannot affect output in the short run. 4. money supply is irrelevant in the short run.

Answer 49

2

Question 50

The short-run aggregate supply curve is horizontal at: 1. a level of output determined by aggregate demand. 2. the natural level of output. 3. the level of output at which the economy's resources are fully employed. 4. a fixed price level.

Answer 50

4

Question 51

The short run refers to a period: 1. of several days. 2. during which prices are sticky and unemployment may occur. 3. during which capital and labor are fully employed. 4. during which there are no fluctuations.

Answer 51

2

Question 52

The long run refers to a period: 1. of decades. 2. during which capital and labor are sometimes not fully employed. 3. during which prices are flexible. 4. during which output deviates from the full-employment level.

Answer 52

3

Question 53

If the short-run aggregate supply curve is horizontal and the long-run aggregate supply curve is vertical, then a change in the money supply will change ______ in the short run and change ______ in the long run. 1. only prices; only output 2. only output; only prices 3. both prices and output; only prices 4. both prices and output; both prices and output

Answer 53

2

Question 54

In the aggregate demand–aggregate supply model, long-run equilibrium occurs at the combination of output and prices where: 1. aggregate demand is greater than long-run aggregate supply. 2. aggregate demand equals short-run aggregate supply. 3. aggregate demand equals short-run and long-run aggregate supply. 4. short-run aggregate supply equals long-run aggregate supply.

Answer 54

3

Question 55

If a short-run equilibrium occurs at a level of output above the natural rate, then in the transition to the long run prices will ______ and output will \_\_\_\_\_\_. 1. increase; increase 2. decrease; decrease 3. increase; decrease 4. decrease; increase

Answer 55

3

Question 56

If a short-run equilibrium occurs at a level of output below the natural rate, then in the transition to the long run prices will ______ and output will \_\_\_\_\_\_. 1. increase; increase 2. decrease; decrease 3. increase; decrease 4. decrease; increase

Answer 56

4

Question 57

If the short-run aggregate supply curve is horizontal and the Fed increases the money supply, then: 1. output and employment will increase in the short run. 2. output and employment will decrease in the short run. 3. prices will increase in the short run. 4. prices will decrease in the short run.

Answer 57

1

Question 58

Assume that the economy starts from long-run equilibrium. If the Federal Reserve increases the money supply, then ______ increase(s) in the short run and ______ increase(s) in the long run. 1. prices; output 2. output; prices 3. output; output 4. prices; prices

Answer 58

2

Question 59

Assume that the economy begins in long-run equilibrium. Then the Fed reduces the money supply. In the short run \_\_\_\_\_\_, whereas in the long run prices ______ and output returns to its original level. 1. output decreases and prices are unchanged; rise 2. output decreases and prices are unchanged; fall 3. output and prices both decrease; rise 4. output and prices both decrease; fall

Answer 59

2

Question 60

Monetary neutrality is a characteristic of the aggregate demand–aggregate supply model in: 1. both the short run and the long run. 2. in neither the short run nor the long run. 3. in the short run, but not in the long run. 4. in the long run, but not in the short run.

Answer 60

4

Question 61

The economic response to the overnight reduction in the French money supply by 20 percent in 1724, 1. confirmed the neutrality of money because no real variables were affected by this nominal change. 2. confirmed the quantity theory by leading to an immediate 20 percent reduction in the price level. 3. confirmed that money is not neutral in the short run because both output and prices dropped. 4. contradicted Okun's law because decreases in output were not associated with increases in unemployment.

Answer 61

3

Question 62

When the French money supply was reduced by 45 percent over a period of seven months in 1724, the only values in the economy that adjusted fully and instantaneously were: 1. prices in grain markets. 2. real wages. 3. foreign exchange rates. 4. interest rates.

Answer 62

3

Question 63

Stabilization policy refers to policy actions aimed at: 1. reducing the severity of short-run economic fluctuations. 2. equalizing incomes of households in the economy. 3. maintaining constant shares of output going to labor and capital. 4. preventing increases in the poverty rate.

Answer 63

1

Question 64

Which of the following is an example of a demand shock? 1. a large oil-price increase 2. the introduction and greater availability of credit cards 3. a drought that destroys agricultural crops 4. unions obtain a substantial wage increase

Answer 64

2

Question 65

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines) and no action is taken by the government: 1. prices will rise in both the short run and the long run. 2. output will rise in both the short run and the long run. 3. prices will rise in the short run and output will rise in the long run. 4. output will rise in the short run and prices will rise in the long run.

Answer 65

4

Question 66

If the short-run aggregate supply curve is horizontal, and, if each member of the general public chooses to hold a larger fraction of his or her income as cash balances, then: 1. output and employment will increase in the short run. 2. output and employment will decrease in the short run. 3. prices will increase in the short run. 4. prices will decrease in the short run.

Answer 66

2

Question 67

A reduction in the demand for money is the equivalent of a(n) _______ in velocity and will shift the aggregate demand curve to the \_\_\_\_\_. 1. increase; right 2. increase; left 3. decrease; right 4. decrease; left

Answer 67

1

Question 68

Starting from long-run equilibrium, if the velocity of money increases (due to, for example, the invention of automatic teller machines), the Fed might be able to stabilize output by: 1. decreasing the money supply. 2. increasing the money supply. 3. decreasing the price level. 4. increasing the price level.

Answer 68

1

Question 69

In this graph, initially the economy is at point E, with price P₀ and output **_Y_**. Aggregate demand is given by curve **AD₀**, and **SRAS** and **LRAS** represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by **AD₁**. The economy moves first to point ______ and then, in the long run, to point \_\_\_\_\_\_. 1. A; D 2. D; A 3. C; B 4. B; C

Answer 69

3

Question 70

In this graph, initially the economy is at point E, with the price **P₀** and output Y. Aggregate demand is given by curve **AD₀**, and **SRAS** and **LRAS** represent, respectively, short-run and long-run aggregate supply. Now assume that the aggregate demand curve shifts so that it is represented by **AD₂**. The economy moves first to point ______ and then, in the long run, to point \_\_\_\_\_\_. 1. A; D 2. D; A 3. A; B 4. B; A

Answer 70

1

Question 71

Assume that the economy is initially at point A with aggregate demand given by AD₂. A shift in the aggregate demand curve to AD₀ could be the result of either a(n) ______ in the money supply or a(n) ______ in velocity. 1. increase; increase 2. increase; decrease 3. decrease; increase 4. decrease; decrease

Answer 71

1

Question 72

Starting from long-run equilibrium, an increase in aggregate demand increases ______ in the short run, but only increases ______ in the long run. 1. output; prices 2. prices; output 3. short-run aggregate supply; long-run aggregate supply 4. the money supply; the natural rate of output

Answer 72

1

Question 73

A supply shock does not occur when: 1. a drought destroys crops. 2. unions push wages up. 3. the Fed increases the money supply. 4. an oil cartel increases world oil prices.

Answer 73

3

Question 74

A favorable supply shock occurs when: 1. environmental protection laws raise costs of production. 2. the Fed increases the money supply. 3. unions push wages up. 4. an oil cartel breaks up and oil prices fall.

Answer 74

4

Question 75

An adverse supply shock ______ the short-run aggregate supply curve ______ the natural level of output. 1. raises; but cannot affect 2. raises; and may also lower 3. lowers; but cannot affect 4. lowers; and may also lower

Answer 75

2

Question 76

If the short-run aggregate supply curve is horizontal, an increase in union aggressiveness that pushes wages and prices up will result in ______ prices and ______ output in the short run. 1. higher; lower 2. lower; higher 3. higher; higher 4. lower; lower

Answer 76

1

Question 77

In this graph, assume that the economy starts at point A and there is a favorable supply shock that does not last forever. In this situation, point ______ represents short-run equilibrium and point ______ represents long-run equilibrium. 1. B; C 2. B; A 3. E; D 4. E; A

Answer 77

4

Question 78

Assume that the economy is at point B. With no further shocks or policy moves, the economy in the long run will be at point: 1. A. 2. B. 3. C. 4. D.

Answer 78

1

Question 79

Assume that the economy is at point E. With no further shocks or policy moves, the economy in the long run will be at point: 1. A. 2. B. 3. C. 4. D.

Answer 79

1

Question 80

Assume that the economy starts at point A and there is a drought that severely reduces agricultural output in the economy for just one year. In this situation, point ______ represents the short-run equilibrium immediately following the drought and point ______ represents the eventual long-run equilibrium. 1. B; C 2. B; A 3. E; D 4. D; A

Answer 80

2

Question 81

In the short run, a favorable supply shock causes: 1. both prices and output to rise. 2. prices to rise and output to fall. 3. prices to fall and output to rise. 4. both prices and output to fall.

Answer 81

3

Question 82

In the short run an adverse supply shock causes: 1. both prices and output to rise. 2. prices to rise and output to fall. 3. prices to fall and output to rise. 4. both prices and output to fall.

Answer 82

2

Question 83

Stagflation occurs when prices ______ and output \_\_\_\_\_\_. 1. fall; falls 2. fall; increases 3. rise; falls 4. rise; increases

Answer 83

3

Question 84

The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run. 1. higher; higher 2. higher; lower 3. lower; lower 4. lower; higher

Answer 84

2

Question 85

If the Fed accommodates an adverse supply shock, output falls ______ and prices rise \_\_\_\_\_\_. 1. less; more 2. less; less 3. more; less 4. more; more

Answer 85

1

Question 86

Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will: 1. be permanently higher and output will be restored to the natural rate. 2. return to the old level and output will be restored to the natural rate. 3. be permanently higher and output will be permanently lower. 4. return to the old level, but output will be permanently lower.

Answer 86

2

Question 87

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Fed could move the economy more rapidly back to full employment output by: 1. increasing the money supply, but at the cost of permanently higher prices. 2. decreasing the money supply, but at the cost of permanently lower prices. 3. increasing the money supply, which would restore the original price level. 4. decreasing the money supply, which would restore the original price level.

Answer 87

1

Question 88

On two occasions in the 1970s: 1. world oil prices rose rapidly, inflation was high, and the unemployment rate was high. 2. world oil prices rose rapidly, inflation was moderate, and the unemployment rate was high. 3. world oil prices rose rapidly, inflation was high, and the unemployment rate was moderate. 4. world oil prices rose rapidly, but the Fed used monetary policy to curb inflation.

Answer 88

1

Question 89

In the mid-1980s, oil prices \_\_\_\_\_\_, inflation was \_\_\_\_\_\_, and the unemployment rate \_\_\_\_\_\_. 1. rose rapidly; high; rose 2. rose slowly; moderate; high 3. fell; low; declined 4. fell; low; rose

Answer 89

3

Question 90

If a change in government regulations allows banks to start paying interest on checking accounts, this will: 1. increase the demand for money. 2. decrease the demand for money. 3. have no effect on the demand for money. 4. increase the demand for currency but decrease the demand for checking accounts.

Answer 90

1

Question 91

If the demand for money increases, this will: 1. increase velocity. 2. decrease velocity. 3. have no effect on velocity. 4. cause the Fed to increase the money supply.

Answer 91

2

Question 92

If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will: 1. fall and in the long run prices will remain unchanged. 2. remain unchanged and in the long run prices will fall. 3. remain unchanged and in the long run prices will remain unchanged. 4. fall and in the long run prices will fall.

Answer 92

4

Question 93

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then: 1. every point on the aggregate demand curve moves 5 percent to the left. 2. every point on the aggregate demand curve moves up 5 percent. 3. the aggregate demand curve moves down and to the left, but it is impossible to determine exactly by how much. 4. the aggregate demand curve moves up and to the right, but it is impossible to determine exactly by how much.

Answer 93

1

Question 94

If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and: 1. prices will remain unchanged in the long run. 2. output will fall 5 percent in the long run. 3. prices will fall 5 percent in the long run. 4. output will remain unchanged in the long run.

Answer 94

3

Question 95

Making use of Okun's law, it may be computed that if the Fed reduces the money supply 5 percent and the quantity theory of money is true, then the unemployment rate will rise about: 1. 5 percent in both the short run and the long run. 2. 2.5 percent in both the short run and the long run. 3. 5 percent in the short run but will return to its natural rate in the long run. 4. 2.5 percent in the short run but will return to its natural rate in the long run.

Answer 95

4

Question 96

If the Fed reduces the money supply by 5 percent, then the real interest rate will: 1. rise in both the short run and the long run. 2. rise in the short run but return to its original equilibrium level in the long run. 3. rise in the short run but will fall below its original equilibrium level in the long run. 4. be unaffected in both the short run and the long run.

Answer 96

2

Question 97

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous decrease in the velocity of money: 1. both Central Bank A and Central Bank B should increase the quantity of money. 2. Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. 3. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. 4. both Central Bank A and Central Bank B should keep the quantity of money stable.

Answer 97

1

Question 98

If Central Bank A cares only about keeping the price level stable and Central Bank B cares only about keeping output at its natural level, then in response to an exogenous increase in the price of oil: 1. both Central Bank A and Central Bank B should increase the quantity of money. 2. Central Bank A should increase the quantity of money whereas Central Bank B should keep it stable. 3. Central Bank A should keep the quantity of money stable whereas Central Bank B should increase it. 4. both Central Bank A and Central Bank B should keep the quantity of money stable.

Answer 98

3