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1. The classical dichotomy refers to the separation of
a.
prices and nominal interest rates.
b.
taxes and government spending.
c.
decisions made by the public and decisions made by the government.
d.
real and nominal variables.
2. The division of variables into real and nominal is a dichotomy assumed by
a.
classical economists.
b.
John Maynard Keynes.
c.
the wealth effect.
d.
short-run macroeconomic theory.
3. According to classical macroeconomic theory, changes in the money supply affect
a.
nominal variables and real variables.
b.
nominal variables, but not real variables.
c.
real variables, but not nominal variables.
d.
neither nominal nor real variables.
4. According to classical macroeconomic theory, changes in the money supply affect
a.
variables measured in terms of money and variables measured in terms of quantities or relative prices
b.
variables measured in terms of money but not variables measured in terms of quantities or relative prices
c.
variables measured in terms of quantities or relative prices, but not variables measured in terms of money
d.
neither variables measured in terms of money nor variables measured in terms of quantities or relative prices
5. According to classical macroeconomic theory, changes in the money supply affect
a.
real GDP and the price level.
b.
real GDP but not the price level.
c.
the price level, but not real GDP.
d.
neither the price level nor real GDP.
6. According to classical macroeconomic theory, changes in the money supply affect
a.
unemployment and the price level.
b.
unemployment but not the price level.
c.
the price level, but not unemployment.
d.
neither the price level nor unemployment.
7. According to the classical model, which of the following would double if the quantity of money doubled?
a.
prices but not nominal income
b.
nominal income but not prices
c.
both prices and nominal income
d.
neither prices nor nominal income
8. According to the classical model, an increase in the money supply causes
a.
output to increase in the long run.
b.
the unemployment rate to fall in the long run.
c.
prices to rise in the long run.
d.
interest rates to fall in the long run.
9. The saying “Money is a veil.” means that
a.
while nominal variables are the first thing we may observe about an economy, what’s important are the real
variables and the forces that determine them.
b.
money is the principal medium of exchange in most economies.
c.
the primary determinant of short-run economic fluctuations is not real variables, but rather changes in the
money supply.
d.
in the long run money is of no importance to the determination of either real or nominal variables.
10. If money is neutral, then changes in the quantity of money
a.
do not affect real output.
b.
affect both nominal and real output
c.
do not affect nominal output.
d.
affect neither nominal nor real output.
11. Microeconomic substitution is impossible for the economy as a whole because
a.
money is a veil.
b.
real GDP measures the total quantity of goods and services produced by all firms in all markets.
c.
the prices of some goods and services adjust sluggishly in response to changing economic conditions.
d.
a lower price level increases real wealth, which stimulates spending by consumers and vice-versa.
12. “Money is a veil” best describes the
a.
new-Keynesian view.
b.
Keynesian view.
c.
classical view.
d.
economy in the short run but not the long run.
13. Economic variables we are most interested in are
a.
real variables, but we usually observe nominal variables.
b.
nominal variables, but we usually observe real variables.
c.
real variables, which we usually observe.
d.
nominal variables, which we usually observe.
14. Most economists believe that the classical model is the appropriate model for analysis of the economy in the
a.
long run, because evidence indicates that money is not neutral in the long run.
b.
long run, because real and nominal variables are essentially determined separately in the long run.
c.
short run, because money is neutral in the short run.
d.
short run, because real and nominal variables are not highly intertwined in the short run.
15. The quantity of money has no real impact on things people really care about like whether or not they have a job. Most
economists would agree that this statement is appropriate concerning
a.
both the short run and the long run.
b.
the short run, but not the long run.
c.
the long run, but not the short run.
d.
neither the long run nor the short run.
16. Most economists believe that classical macroeconomic theory is a good description of the economy
a.
in neither the short nor long run.
b.
in the short run and in the long run.
c.
in the short run, but not in the long run.
d.
in the long run, but not in the short run.
17. Most economists believe that classical theory describes the world
a.
in the short run.
b.
in the long run.
c.
in both the short run and the long run.
d.
in neither the short run nor the long run.
18. Most economists believe that money neutrality
a.
does not hold in the short run.
b.
does not hold in the long run.
c.
does not hold in either the short run or long run.
d.
holds in the short run and the long run.
19. Most economists believe that in the short run
a.
real and nominal variables are determined independently and that money cannot move real GDP away from its
long-run trend.
b.
real and nominal variables are determined independently but that money can temporarily move real GDP away
from its long-run trend.
c.
real and nominal variables are highly intertwined but that money cannot move real GDP away from its long-
run trend.
d.
real and nominal variables are highly intertwined and that money can temporarily move real GDP away from
its long-run trend.
20. Most economists believe that in the long run, changes in the money supply
a.
affect nominal but not real variables. This view that money is ultimately neutral is consistent with classical
theory.
b.
affect nominal but not real variables. This view that money is ultimately neutral is inconsistent with classical
theory.
c.
affect real but not nominal variables. This view that money is ultimately neutral is consistent with classical
theory.
d.
affect real but not nominal variables. This view that money is ultimately neutral is inconsistent with classical
theory.
21. Classical economist David Hume observed that as the money supply expanded after gold discoveries it took some time
for prices to rise and in the meantime the economy enjoyed higher employment and production. This is inconsistent with
monetary neutrality because
a.
monetary neutrality would mean that neither prices nor production should have risen.
b.
monetary neutrality would mean that production should have risen, but prices should not have.
c.
monetary neutrality would mean the prices should have risen, but production should not have changed.
d.
monetary neutrality would mean that prices and production should both have fallen.
22. Classical economist David Hume observed that as the money supply expanded after gold discoveries
a.
prices and output both increased immediately.
b.
prices increased immediately while output remained unchanged.
c.
it took time for prices to rise; in the meantime output was lower.
d.
it took time for prices to rise; in the meantime output was higher.
23. Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most
economists would agree that this statement accurately describes
a.
both the short run and the long run.
b.
the short run, but not the long run.
c.
the long run, but not the short run.
d.
neither the long run nor the short run.
24. In order to understand how the economy works in the short run, we need to
a.
study the classical model.
b.
study a model in which real and nominal variables interact.
c.
understand that “money is a veil.”
d.
understand that money is neutral in the short run.
25. We depart from the assumptions of classical economics when we focus on the relationship between
a.
the quantity of output and the price level.
b.
the quantity of output and the unemployment rate.
c.
the price level and the inflation rate.
d.
inflation and the nominal interest rate.
26. The model of short-run economic fluctuations focuses on
a.
the price level and real GDP.
b.
productivity and economic growth.
c.
the neutrality of money and inflation.
d.
None of the above is correct.
27. When looking at a graph of aggregate demand, which of the following is correct?
a.
There are nominal variables on both the vertical and the horizontal axes.
b.
There are real variables on both the vertical and horizontal axes.
c.
The variable on the vertical axis is nominal; the variable on the horizontal axis is real
d.
The variable on the vertical axis is real; the variable on the horizontal axis is nominal
28. The average price level is measured by
a.
the price of oil.
b.
the rate of inflation.
c.
the nominal interest rate.
d.
the GDP deflator or the CPI.
29. The aggregate demand and aggregate supply graph has
a.
the price level on the horizontal axis. The price level can be measured by the GDP deflator.
b.
the price level on the horizontal axis. The price level can be measured by real GDP.
c.
the price level on the vertical axis. The price level can be measured by the GDP deflator.
d.
the price level on the vertical axis. The price level can be measured by GDP.
30. The aggregate demand and aggregate supply graph has
a.
quantity of output on the horizontal axis. Output can be measured by the GDP deflator.
b.
quantity of output on the horizontal axis. Output can be measured by real GDP.
c.
quantity of output on the vertical axis. Output can be measured by the GDP deflator.
d.
quantity of output on the vertical axis. Output can be measured by real GDP.
31. The variables on the vertical and horizontal axes of the aggregate demand and supply graph are
a.
the price level and real output.
b.
real output and employment.
c.
employment and the inflation rate.
d.
the value of money and the price level.
32. The aggregate-demand curve shows the
a.
quantity of labor and other inputs that firms want to buy at each price level.
b.
quantity of labor and other inputs that firms want to buy at each inflation rate.
c.
quantity of domestically produced goods and services that households want to buy at each price level.
d.
quantity of domestically produced goods and services that households, firms, the government, and customers
abroad want to buy at each price level.
33. The model of aggregate demand and aggregate supply explains the relationship between
a.
the price and quantity of a particular good.
b.
unemployment and output.
c.
wages and employment.
d.
real GDP and the price level.
34. Aggregate demand includes
a.
the quantity of goods and services the government, households, firms, and customers abroad want to buy.
b.
neither the quantity of goods and services the government, households, nor firms want to buy nor the quantity
of goods and services customers abroad want to buy.
c.
the quantity of goods and service the government wants to buy, but not the quantity of goods and services
households, firms, or customers abroad want to buy.
d.
the quantity of goods and services households and firms want to buy, but not the quantity of goods and
services the government wants to buy.
35. Aggregate demand includes
a.
only the quantity of goods and services households want to buy.
b.
only the quantity of goods and services households and firms want to buy.
c.
only the quantity of goods and services households, firms, and the government want to buy.
d.
the quantity of goods and services households, firms, the government, and customer abroad want to buy.
36. Which of the following would not be included in aggregate demand?
a.
an increase in firms’ inventories.
b.
purchases of goods by households.
c.
firms’ purchases of newly produced machinery.
d.
government’s tax collections.
37. The curve that shows the quantity of goods and services that firms produce and sell
a.
as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-demand curve.
b.
as it relates to the quantity of goods and services that buyers want to buy is called the aggregate-supply curve.
c.
as it relates to the overall price level is called the aggregate-demand curve.
d.
as it relates to the overall price level is called the aggregate-supply curve.
38. Which of the following adjust to bring aggregate supply and demand into balance?
a.
the price level and real output
b.
the real rate of interest and the money supply
c.
government expenditures and taxes
d.
the saving rate and net exports
39. Which of the following statements concerning the aggregate demand and aggregate supply model is correct?
a.
The aggregate demand and aggregate supply model is nothing more than a large version of the model of
market demand and supply.
b.
The price level and quantity of output adjust to bring aggregate demand and supply into balance.
c.
The aggregate supply curve shows the quantity of goods and services that households, firms, and the
government want to buy at each price.
d.
The aggregate demand shows the quantity of goods and services that firms are willing to produce at a given
price level.
40. The model of aggregate demand and aggregate supply
a.
is different from the model of supply and demand for a particular market, in that we cannot focus on the
substitution of resources between markets to explain aggregate relationships.
b.
is different from the model of supply and demand for a particular market, in that we have to separate real and
nominal variables in the aggregate model.
c.
is a straightforward extension of the model of supply and demand for a particular market, in which substitution
of resources between markets is highlighted.
d.
is a straightforward extension of the model of supply and demand for a particular market, in which the
interaction between real and nominal variables is highlighted.
41. The aggregate demand is described graphically as
a.
sloping downward.
b.
a vertical line.
c.
a horizontal line.
d.
sloping upward.
