Problem 1
If prices are sticky and the number of dollars of gross investment unexpectedly increases, the _____ curve will shift _____. a. \(A D ;\) right. b. AD; left. c. AS; right. d. AS; left.
Problem 3
Suppose that the money supply is \(\$ 1\) trillion and money velocity is \(4 .\) Then the equation of exchange would predict nominal GDP to be: b. \$4 trillion. c. \(\$ 5\) trillion. d. \(\$ 8\) trillion.
Problem 4
If the money supply fell by 10 percent, a monetarist would expect nominal GDP to _____. a. Rise. b. Fall. c. Stay the same.
Problem 5
An economy is producing at full employment when AD unexpectedly shifts to the left. A new classical economist would assume that as the economy adjusted back to producing at full employment, the price level would _____. a. Increase. b. Decrease. c. Stay the same.
Problem 6
Use an AD-AS graph to demonstrate and explain the pricelevel and real-output outcome of an anticipated decline in aggregate demand, as viewed by RET economists. (Assume that the economy initially is operating at its full- employment level of output.) Then demonstrate and explain on the same graph the outcome as viewed by mainstream economists.
Problem 7
Place "MON," "RET," or "MAIN" beside the statements that most closely reflect monetarist, rational expectations, or mainstream views, respectively: a. Anticipated changes in aggregate demand affect only the price level; they have no effect on real output. b. Downward wage inflexibility means that declines in aggregate demand can cause long-lasting recession. c. Changes in the money supply \(M\) increase \(P Q\); at first only \(Q\) rises, because nominal wages are fixed, but once workers adapt their expectations to new realities, \(P\) rises and \(Q\) returns to its former level. d. Fiscal and monetary policies smooth out the business cycle. e. The Fed should increase the money supply at a fixed annual rate.
