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Exam 10: Introduction to Economic Fluctuations

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Question 1

Multiple Choice

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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:

A) both Central Bank A and Central Bank B should increase the quantity of money.
B) Central Bank A should increase the quantity of money, whereas Central Bank B should keep it stable.
C) Central Bank A should keep the quantity of money stable, whereas Central Bank B should increase it.
D) both Central Bank A and Central Bank B should keep the quantity of money stable.

E) A) and B)
F) All of the above

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Question 2

Multiple Choice

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

A) positive; money supply
B) negative; money supply
C) positive; price level
D) negative; price level

E) B) and C)
F) B) and D)

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D

Question 3

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Assume that the long-run aggregate supply curve is vertical at Y = 3,000, while the short-run aggregate supply curve is horizontal at P = 1.0. The aggregate demand curve is Y = 3 × M / P, and M = 1,000. a.If the economy is initially in long-run equilibrium, what are the values of P and Y? b.Now suppose a supply shock moves the short-run aggregate supply curve to P = 1.5. What are the new short-run P and Y? c.If the aggregate demand curve and long-run aggregate supply curve are unchanged, what are the long-run equilibriumPandYafter the supply shock? d.Suppose that after the supply shock the Bank of Canada wanted to hold output at its long-run level. What level of M would be required? If this level of M were maintained, what would be long-run equilibrium P and Y?

Suppose that laws are passed banning labour unions and that resulting lower labour costs are passed along to consumers in the form of lower prices. Use the aggregate demand-aggregate supply model to illustrate graphically the impact in the short run and the long run of this favourable supply shock. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. State in words what happens to prices and output in the short run and the long run.

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 _____.

Monetary neutrality is a characteristic of the aggregate demand-aggregate supply model in:

In the aggregate demand-aggregate supply model, long-run equilibrium occurs at the combination of output and prices where:

Explain the meaning of monetary neutrality and illustrate graphically that there is monetary neutrality in the long run in the aggregate demand-aggregate supply model. Be sure to label: i. the axes; ii. the curves; iii. the initial equilibrium values; iv. the direction the curves shift; v. the short-run equilibrium values; and vi. the long-run equilibrium values. Explain in words what your graph illustrates.

A short-run aggregate supply curve shows fixed _____, and a long-run aggregate supply curve shows fixed _____.

The relationship between the quantity of goods and services supplied and the price level is called:

Holding output, Y, fixed, a reduction in the demand for money is the equivalent of a(n) _____ in velocity and will shift the aggregate demand curve to the _____.

A supply shock does not occur when:

The dilemma facing the Bank of Canada in the event that an unfavourable 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.

The natural level of output is:

The economic response to the overnight reduction in the French money supply by 20 percent in 1724:

Starting from long-run equilibrium, if a drought pushes up food prices throughout the economy, the Bank of Canada could move the economy more rapidly back to full employment output by:

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:

Assuming velocity is constant, the aggregate demand curve tells us possible:

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:

Why is the aggregate supply curve vertical in the long run and horizontal in the short run?