Chapter 19: Q1. (page 405)
If prices are sticky and the number of dollars of gross investment unexpectedly increases, the _________ curve will shift _________.
a. AD; right
b. AD; left
c. AS; right
d. AS; left
The correct option is (c): AS; right.
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Suppose that the money supply is \(1 trillion and money velocity is 4. Then the equation of exchange would predict nominal GDP to be:
a. \)1 trillion.
b. \(4 trillion.
c. \)5 trillion.
d. $8 trillion
Suppose that the money supply and the nominal GDP for a hypothetical economy are \(96 billion and \)336 billion, respectively. What is the velocity of money? How will households and businesses react if the central bank reduces the money supply by $20 billion? By how much will nominal GDP have to fall to restore equilibrium, according to the monetarist perspective?
If the money supply fell by 10 per cent, a monetarist would expect nominal GDP to __________.
a. rise
b. fall
c. stay the same
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 a long-lasting recession.
c. Changes in the money supply M increase PQ; 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.
Briefly describe the difference between a so-called real business cycle and a more traditional “spending” business cycle.
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