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.