The vertical axis in the AD-AS model shows:

The economy's inflation rate

The horizontal axis in the AD-AS model shows:

The economy's real GDP growth rate

The economy's normal, long-run growth rate is shown in the AD-AS model as:

The vertical LRAS curve

The AD curve is:

A. The combination of inflation rates and real growth rates that add up to a constant amount

B. Horizontal at the economy's long-run inflation rate

C. The combination of money and velocity growth rates that add up to a constant amount

D. Vertical at the economy's long-run real GDP growth rate

A

The combination of inflation and real growth shown by the AD curve give:

A. The same level of money supply growth

B. The same level of inflation

C. The same level of nominal GDP growth

D. The same level of real GDP growth

C

The AD curve will shift when there is a change in:

A. The money growth rate or the velocity growth rate

B. The inflation rate or the money growth rate

C. The real growth rate or the inflation rate

D. The velocity growth rate or the real growth rate

A

If the AD curve shifts to the left as a result of a decrease in the money supply growth rate:

A. The economy will permanently depart from its long-run growth rate

B. The economy will temporarily depart from its long-run inflation rate

C. The economy will temporarily depart from its long-run growth rate

D. The economy will adjust immediately and never depart from its long-run growth rate

C

A decrease in the growth rate of the money supply causes a short-run departure from the long-run equilibrium because:

prices and wages are sticky

The position of the SRAS curve depends on:

The expected rate of inflation

Economic models like the AD-AS model tell us:

A. What to expect if we know what is happening

B. Exactly what is happening

C. How to determine which economic variables are changing

D. Nothing useful about the real world

A

The aggregate demand curve shows combinations of:

inflation and real GDP growth

What do the points on a particular AD curve have in common?

A. a specified rate of spending growth

B. a specified rate of inflation

C. a specified rate of money supply growth

D. a specified rate of real GDP growth

A

Suppose the growth rate of the money supply is 5% per year and the velocity of money is constant. In this case:

A. neither the inflation rate nor the real growth rate can exceed 5%

B. the sum of inflation and the real growth rate must be 5%

C. inflation and the real growth rate must both be 5%

D. the difference between inflation the real growth rate must be 5%

B

If the growth rate of the money supply were 4% and the growth rate of the velocity of money were 2%, then which of the following could be a point on the AD curve?

A. inflation = 6% and real growth = 6%

B. inflation = 4% and real growth = 4%

C. inflation = 2% and real growth = 2%

D. inflation = 3% and real growth = 3%

D

Another way to describe the growth rate of spending is:

the growth rate of nominal GDP

Which of the following is correct?

A. Nominal GDP growth + inflation = real GDP growth

B. nominal GDP growth + real GDP growth = inflation

C. nominal GDP growth = real GDP growth - inflation

D. nominal GDP growth = inflation + real GDP growth

D

An increase in the growth rate of nominal GDP would be displayed in our model as:

A. the AD curve becoming flatter

B. the AD curve becoming steeper

C. a parallel shift of the AD curve inward

D. a parallel shift of the AD curve outward

D

According to the AD model, a change in the growth rate of spending, or nominal GDP, can come from:

A. changes in the growth rate of the velocity of money or changes in the growth rate of real GDP

B. changes in the growth rate of the money supply or changes in the growth rate of the velocity of money

C. changes in interest rates or changes in the growth rate of the money supply

D. changes in the growth rate of real GDP or changes in inflation

B

The key to a country's economic growth is combing ___ with ___.

A. human and physical capital; ideas and good institutions

B. human capital; physical capital

C. legal institutions; cultural institutions

D. ideas; good institutions

A

Every economy has a(n) ___ given by the fundamental factors of growth.

A. actual inflation rate

B. actual growth rate

C. potential inflation rate

D. potential growth rate

D

Do any of the fundamental factors depend on the rate of inflation?

A. yes, but only in the long run

B. no, not even in the short run

C. yes, both in the short run and the long run

D. no, at least not in the long run

D

The LRAS curve shows:

A. the economy's actual growth rate whether things are going well or not

B. the economy's actual inflation rate whether things are going well or not

C. the economy's potential inflation rate if all is going well

D. the economy's potential growth rate if all is going well

D

The LRAS curve is:

A. a vertical line

B. a downward-sloping line

C. an upward-sloping line

D. a horizontal line

A

What other name describes the economy's long-run potential growth rate?

Solow growth rate

Real shocks to one area of the economy:

A. always become weaker as they spread to other areas of the economy

B. generally remain isolated to that area of the economy

C. can cause nominal shocks to other areas of the economy

D. can be amplified and transmitted to other areas of the economy

D

Wages that are "sticky":

A. are stuck where they are and fail to adjust downwards in a recession

B. have not changed, in real terms, for decades

C. are pegged to other variables, such as product prices

D. pull other prices up or down with them when they change

A

Sticky wages:

A. slow the process of reducing inflation

B. speed the recovery process after a recession

C. slow the recovery process after a recession

D. speed the process of reducing inflation

C

As a result of "money illusion," people:

A. tend to be more pleased with an increase in their real wage than by an increase in their nominal wage

B. tend to be more upset by a decrease in their real wage than by a decrease in their nominal wage

C. tend to be more upset by an increase in their nominal wage than by a decrease in their real wage

D. tend to be more upset by a decrease in their nominal wage than by a decrease in their real wage

D

Why don't firms want to cut nominal wages?

Because they don't want to decrease worker morale

Why is price inflation sometimes good in a recession?

A. price inflation makes it easier for real wages to fall

B. price inflation makes it harder for real wages to rise

C. price inflation makes it easier for real wages to rise

D. price inflation makes it harder for real wages to fall

A