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The vertical LRAS implies that


A) the long run supply is not affected by the price level.
B) the price elasticity of supply is zero.
C) in the long run firms supply the full-employment level of output.
D) all of the above.

E) A) and B)
F) A) and C)

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The long-run aggregate supply curve


A) is vertical.
B) slopes upward.
C) is horizontal.
D) slopes downward.

E) B) and C)
F) None of the above

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You have just read that Australia has suffered a drought, destroying its wheat crop for this year. The effect of this adverse supply shock on Australia would probably be


A) an increase in prices and an increase in real interest rates.
B) an increase in prices, an increase in nominal interest rates, but a decrease in real interest rates.
C) a decrease in prices and an decrease in real interest rates.
D) a decrease in prices, a decrease in nominal interest rates, but an increase in real interest rates.

E) A) and D)
F) B) and C)

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Draw a saving-investment diagram to show how each of the following changes shift the IS curve. a. Future income declines. b. The future marginal productivity of capital declines. c. Government purchases increase temporarily. d. The effective corporate tax rate declines.

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a. IS shifts down.
b...

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An increase in expected inflation causes the real interest rate to ________ and output to ________ in the short run, before prices adjust to restore equilibrium.


A) rise; rise
B) rise; fall
C) fall; rise
D) fall; fall

E) None of the above
F) B) and C)

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When SRAS is horizontal, it implies that


A) the price level is fixed.
B) firms can supply whatever level of output is demanded.
C) the price elasticity of SRAS is infinite.
D) all of the above

E) A) and C)
F) C) and D)

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The aggregate demand curve shows


A) the demand for goods depending on the relative price of goods compared to financial assets.
B) the amount of output that can be obtained given the current production function in the economy.
C) the relation between the aggregate quantity of goods demanded and the price level.
D) the relation between the real interest rate and output when the goods market clears.

E) A) and B)
F) A) and C)

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An adverse supply shock that is permanent shifts which curve in addition to the curves shifted by one that is temporary?


A) the LM curve
B) the IS curve
C) the FE line
D) the labour demand curve

E) C) and D)
F) None of the above

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For each of the following changes, what happens to the real interest rate and output in the very short run, before the price level has adjusted to restore general equilibrium? a. Wealth declines. b. Money supply declines. c. The future marginal productivity of capital declines. d. Expected inflation rises. e. Future income rises.

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a. The IS curve shifts down, so r falls ...

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A change that increases real money demand relative to the real money supply causes


A) the LM curve to shift down.
B) the LM curve to shift up.
C) the IS curve to shift down.
D) the IS curve to shift up.

E) B) and D)
F) A) and C)

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Suppose the intersection of the IS and LM curves is to the right of the FE line. An increase in the price level would most likely eliminate a disequilibrium among the asset, labour, and goods markets by


A) shifting the LM curve up.
B) shifting the IS curve up.
C) shifting the IS curve down.
D) shifting the FE curve to the left.

E) All of the above
F) A) and B)

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Which of the following changes shifts the AD curve to the left?


A) a decline in the nominal money supply
B) a decrease in income taxes
C) a decrease in the risk on nonmonetary assets
D) an increase in the future marginal productivity of capital

E) None of the above
F) A) and B)

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Suppose the intersection of the IS and LM curves is to the right of the FE line. What would most likely eliminate a disequilibrium among the asset, labour, and goods markets?


A) a rise in the price level, shifting the LM curve up
B) a fall in the price level, shifting the LM curve down
C) a rise in the price level, shifting the IS curve up
D) a fall in the price level, shifting the IS curve down

E) All of the above
F) B) and D)

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The FE line is vertical because the level of output at full employment doesn't depend on the


A) real wage rate.
B) level of employment.
C) marginal product of labour.
D) real interest rate.

E) B) and C)
F) A) and C)

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Suppose the economy is initially in long-run equilibrium. For each of the shocks listed below, explain the short-run effects on output and the price level. a. A stock market crash reduces consumers' wealth. b. Businesses decide to hold larger inventories. c. The government cuts defense spending. d. Foreign countries buy more Canadian goods.

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a. Output declines and the price level i...

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What adjusts to restore general equilibrium after a shock to the economy?


A) the LM curve
B) the IS curve
C) the FE line
D) the labour supply curve

E) A) and B)
F) None of the above

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Which market adjusts the most quickly in response to shocks to the economy?


A) the asset market
B) the labour market
C) the goods market
D) The asset, labour, and goods markets adjust at about the same speed to eliminate a disequilibrium in the macroeconomy.

E) A) and B)
F) A) and C)

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The IS curve shows the combinations of output and the real interest rate for which


A) the goods market is in equilibrium.
B) the labour market is in equilibrium.
C) the financial asset market is in equilibrium.
D) an increase in output will cause the market-clearing interest rate to be bid up.

E) C) and D)
F) All of the above

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For each of the following changes, which equilibrium curve (IS, LM, or FE) is shifted? Draw the change in the underlying demand or supply curves (for example, money demand and supply for the LM curve) and show how the equilibrium curve changes. a. Expected inflation increases. b. The future marginal productivity of capital increases. c. Labour supply decreases. d. Future income declines. e. There's a temporary beneficial supply shock. f. The nominal interest rate on money rises.

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a. LM shifts down.
b. IS shift...

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Which of the following changes shifts the SRAS curve up?


A) a decrease in the labour force
B) a decrease in the money supply
C) an increase in government purchases
D) an increase in firms' costs

E) B) and C)
F) A) and D)

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