1. Business cycles are:
A) regular and predictable.
B) irregular but predictable.
C) regular but unpredictable.
D) irregular and unpredictable.

2. Over the business cycle, investment spending ______ consumption spending.
A) is inversely correlated with
B) is more volatile than
C) has about the same volatility as
D) is less volatile than

3. Most economists believe that prices are:
A) flexible in the short run but many are sticky in the long run.
B) flexible in the long run but many are sticky in the short run.
C) sticky in both the short and long runs.
D) flexible in both the short and long runs.

4. A 5 percent reduction in the money supply will, according to most economists, reduce prices 5 percent:
A) in both the short and long runs.
B) in neither the short nor long run.
C) in the short run but lead to unemployment in the long run.
D) in the long run but lead to unemployment in the short run.

5. A difference between the economic long run and the short run is that:
A) the classical dichotomy holds in the short run but not in the long run.
B) monetary and fiscal policy affect output only in the long run.
C) demand can affect output and employment in the short run, whereas supply is the ruling force in the long run.
D) prices and wages are sticky in the long run only.

6. Along an aggregate demand curve, which of the following are held constant?
A) real output and prices
B) nominal output and velocity
C) the money supply and real output
D) the money supply and velocity

7. For a fixed money supply, the aggregate demand curve slopes downward because at a lower price level real money balances are ______ generating a ______ quantity of output demanded.
A) higher; greater
B) higher; smaller
C) lower; greater
D) lower; smaller

8. When the Federal Reserve reduces the money supply, at a given price level the amount of output demanded is ______ and the aggregate demand curve shifts ______.
A) greater; inward
B) greater; outward
C) lower; inward
D) lower; outward

9. Looking at the aggregate demand curve alone, one can tell ______ that will prevail in the economy.
A) the quantity of output and the price level
B) the quantity of output
C) the price level
D) neither the quantity of output nor the price level

10. In the long run, the level of output is determined by the:
A) interaction of supply and demand.
B) money supply and the levels of government spending and taxation.
C) amounts of capital and labor and the available technology.
D) preferences of the public.

11. If the long-run aggregate supply curve is vertical, then changes in aggregate demand affect:
A) neither prices nor level of output.
B) both prices and level of output.
C) level of output but not prices.
D) prices but not level of output.

12. The long-run aggregate supply curve is vertical at the level of output:
A) determined by aggregate demand.
B) at which unemployment is at its natural rate.
C) at which the inflation rate is zero.
D) at a predetermined price level.

13. If all prices are stuck at a predetermined level, then when a short-run aggregate supply curve is drawn with real GDP (Y) along the horizontal axis and the price level (P) along the vertical axis, this curve:
A) is horizontal.
B) is vertical.
C) slopes upward and to the right.
D) slopes downward and to the right.

14. In the aggregate demand-aggregate supply model, short-run equilibrium occurs at the combination of output and prices where:
A) aggregate demand equals long-run aggregate supply.
B) aggregate demand equals short-run aggregate supply.
C) aggregate demand equals short-run and long-run aggregate supply.
D) short-run aggregate supply equals long-run aggregate supply.

15. If the short-run aggregate supply curve is horizontal, then the:
A) classical dichotomy is satisfied.
B) money supply cannot affect prices in the short run.
C) money supply cannot affect output in the short run.
D) money supply is irrelevant in the short run.

16. 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.
A) only prices; only output
B) only output; only prices
C) both prices and output; only prices
D) both prices and output; both prices and output

17. Stabilization policy:
A) aims at keeping output and employment at their natural rates.
B) always succeeds in keeping output and employment at their natural rates.
C) is generally ineffective.
D) does more harm than good.

18. A supply shock does not occur when:
A) a drought destroys crops.
B) unions push wages up.
C) the Fed increases the money supply.
D) an oil cartel increases world oil prices.

19. In the short run, a favorable supply shock causes:
A) both prices and output to rise.
B) prices to rise and output to fall.
C) prices to fall and output to rise.
D) both prices and output to fall.

20. Stagflation occurs when prices ______ and output ______.
A) fall; falls
B) fall; increases
C) rise; falls
D) rise; increases

21. The dilemma facing the Federal Reserve in the event that an unfavorable supply shock moves the economy away from the natural rate of output is that monetary policy can either return output to the natural rate, but with a ______ price level, or allow the price level to return to its original level, but with a ______ level of output in the short run.
A) higher; higher
B) higher; lower
C) lower; lower
D) lower; higher

22. Starting from long-run equilibrium, without policy intervention, the long-run impact of an adverse supply shock is that prices will:
A) be permanently higher and output will be restored to the natural rate.
B) return to the old level and output will be restored to the natural rate.
C) be permanently higher and output will be permanently lower.
D) return to the old level, but output will be permanently lower.

23. If the demand for money increases, this will:
A) increase velocity.
B) decrease velocity.
C) have no effect on velocity.
D) cause the Fed to increase the money supply.

24. If the demand for money increases, but the Fed keeps the money supply the same, then in the short run output will:
A) fall and in the long run prices will remain unchanged.
B) remain unchanged and in the long run prices will fall.
C) remain unchanged and in the long run prices will remain unchanged.
D) fall and in the long run prices will fall.

25. If the Fed reduces the money supply by 5 percent and the quantity theory of money is true, then output will fall 5 percent in the short run and:
A) prices will remain unchanged in the long run.
B) output will fall 5 percent in the long run.
C) prices will fall 5 percent in the long run.
D) output will remain unchanged in the long run.

26. The natural level of output is:
A) affected by aggregate demand.
B) the level of output at which the unemployment rate is zero.
C) the level of output at which the unemployment rate is at its natural level.
D) permanent and unchangeable.

27. If a change in government regulations allows banks to start paying interest on checking accounts this will:
A) increase the demand for money.
B) decrease the demand for money.
C) have no effect on the demand for money.
D) increase the demand for currency but decrease the demand for checking accounts.