Over the business cycle, investment spending ______ consumption spending.

1
Over the business cycle, investment spending
______ consumption spending.

• is inversely correlated with
• is more volatile than
• has about the same volatility as
• is less volatile than

2
Most economists believe that prices are

• flexible in the short run but many are sticky in
  the long run.
• flexible in the long run but many are sticky in
  the short run.
• sticky in both the short and long runs.
• flexible in both the short and long runs.

3
The vertical long-run aggregate supply curve
satisfies the classical dichotomy because the
natural rate of output does NOT depend on

• the labor supply.
• the supply of capital.
• the money supply.
• technology.

4
If the short-run aggregate supply curve is
horizontal, then a change in the money supply
will change ______ in the short run and change
______ in the long run.

• only output only prices
• only prices only output
• both prices and output only prices
• both prices and output both prices and output

5
Assume that the economy is initially at point A
with aggregate demand given by AD2. A shift in
the aggregate demand curve to AD0 could be the
result of either a(n) ______ in the money supply
or a(n) ______ in velocity.

• increase increase
• increase decrease
• decrease increase
• decrease decrease

6
In the IS-LM model, which two variables are
influenced by the interest rate?

• supply of nominal money balances and demand for
  real balances
• demand for real balances and government purchases
• supply of nominal money balances and investment
  spending
• demand for real money balances and investment
  spending

7
The equilibrium condition in the Keynesian-cross
analysis in a closed economy is

• income equals consumption plus investment plus
  government spending.
• planned expenditure equals consumption plus
  planned investment plus government spending.
• actual expenditure equals planned expenditure.
• actual saving equals actual investment.

8
In the Keynesian-cross model with a given MPC,
the government-expenditure multiplier ______ the
tax multiplier.

• is larger than
• equals
• is smaller than
• is the inverse of the

9
An increase in taxes shifts the IS curve, drawn
with income along the horizontal axis and the
interest rate along the vertical axis

• downward and to the left.
• upward and to the right.
• upward and to the left.
• downward and to the right.

10
A decrease in the price level, holding nominal
money supply constant, will shift the LM curve

• upward and to the right.
• downward and to the right.
• downward and to the left.
• upward and to the left.

11
In the Keynesian-cross analysis, if the
consumption function is given by C 100 0.6(Y
T), and planned investment is 100, G is 100,
and T is 100, then equilibrium Y is

• 350
• 400
• 600
• 750

12
Based on the graph, starting from equilibrium at
interest rate r1 and income Y1, a tax cut would
generate the new equilibrium combination of
interest rate and income

• r2, Y2
• r3, Y2
• r2, Y3
• r3, Y3

13
Based on the graph, starting from equilibrium at
interest rate r3 ,income Y2, IS1, and LM1, if
there is an increase in government spending that
shifts the IS curve to IS2, then in order to keep
the interest rate constant the Federal Reserve
should _____ the money supply shifting to _____.

• increase LM2
• decrease LM2
• increase LM3
• decrease LM3

14
Based on the graph, if the economy starts from a
short-term equilibrium at A, then the long-run
equilibrium will be at ____ with a _____ price
level.

• B higher
• B lower
• C higher
• C lower

15
A tax cut combined with tight money, as was the
case in the United States in the early 1980s,
should lead to a

• rise in the real interest rate and a fall in
  investment.
• fall in the real interest rate and a rise in
  investment.
• rise in both the real interest rate and
  investment.
• fall in both the real interest rate and
  investment.