Chapter 12 & 13

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.

real

Most economists believe that prices are:

flexible in the long run but many are sticky in the short run.

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.

higher; greater

Along an aggregate demand curve, which of the following are held constant?

the money supply and velocity

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:

downward and to the left.

If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:

prices but not level of output.

The short run refers to a period:

during which prices are sticky and cyclical unemployment may occur.

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

the long run but not in the short run.

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.

only output; only prices

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.

output; prices

In this graph, initially the economy is at point E, with price P₀ and output Ȳ 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 ______.

C; B

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:

A (moves back and up)

If the Fed accommodates an adverse supply shock, output falls ______, and prices rise ______.

less; more

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:

increasing the money supply, but at the cost of permanently higher prices.

Over the business cycle, investment spending ______ consumption spending.

is more volatile than

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

decreases; decreases

An increase in taxes shifts the IS curve:

downward and to the left.

In this graph, if firms are producing at level Y₃, then inventories will ______, inducing firms to ______ production.

rise; decrease

In the Keynesian-cross model with a given MPC >0, the government-expenditure multiplier ______ the tax multiplier.

is larger than

An explanation for the slope of the IS curve is that as the interest rate increases, the quantity of investment ______, and this shifts the expenditure function ______, thereby decreasing income.

decreases; downward

The IS curve plots the relationship between the interest rate and ______ that arises in the market for ______.

national income; goods and services

In the Keynesian-cross model, if taxes are reduced by 100, then planned expenditures ______ for any given level of income.

increase but by less than 100

Based on the Keynesian model, one reason to support government spending increases over tax cuts as measures to increase output is that:

the government-spending multiplier is larger than the tax multiplier.

In the liquidity preference model, what adjusts to move the money market to equilibrium following a change in the money supply?

the interest rate

The theory of liquidity preference states that the quantity of real money balances demanded is:

negatively related to the interest rate and positively related to income.

If the interest rate is above the equilibrium value, the:

supply of real balances exceeds the demand.

Based on the graph, if the interest rate is r₃, then people will ______ bonds, and the interest rate will ______.

sell; rise

A decrease in the real money supply, other things being equal, will shift the LM curve:

upward and to the left.

The interest rate determines ______ in the goods market and money ______ in the money market.

investment spending; demand