ECON 2123 Quiz 4

1.
When the current price level is equal to the expected price level, we know that
A. the unemployment rate is zero.
B. the goods market and financial markets are in equilibrium.
C. output is equal to the natural level of output.
D. the money market is in equilibrium.
E. none of these
2. In the aggregate demand relation, an increase in the price level causes output to
decrease because of its effect on:
A. government spending.
B. the money market and, subsequently, investment.
C. the nominal wage.
D. firms' markup over labor costs.
3. When the economy is operating at a point where output is greater than the
natural level of output, which of the following occurs?
A. the unemployment rate is less than the natural unemployment rate.
B. the price level is greater than the expected price level.
C. the price level will be higher next period than it is this period.
D. all of the above.
4. Based on your understanding of the AS/AD model, which of the following is an

INCORRECT statement about the short-run adjustment process for the
macroeconomy?
A. output in excess of the natural level leads to higher prices.
B. an increase in demand increases output.
C. an increase in output above the natural level leads to higher nominal
wages.
D. none of these
5. Assume the economy is initially operating at the natural level of output. Now
suppose that individuals decide to reduce their desire to save. We know with
certainty that which of the following will occur in the short run as a result of
decreased desire to save?
A. greater investment
B. less investment
C. an increase in the nominal wage
D. higher output and lower investment
6. Which of the following events will NOT cause an increase in the aggregate price
level?
A. an increase in unemployment benefits
B. an increase in the markup
C. an increase in Pe
D. a reduction in output
7. For this question, assume that the economy is initially operating at the natural
level of output. A monetary expansion will cause
A. no change in the real wage in the medium run.
B. an increase in investment in the medium run.
C. a reduction in the interest rate in the medium run.
D. no change in the nominal wage in the medium run.
level of output. A reduction in consumer confidence will cause
A. a reduction in the real wage in the medium run.
B. an increase in the interest rate in the medium run.
C. ambiguous effects on investment in the medium run.
D. none of these
9. As product markets become more competitive and the markup decreases, we

would expect which of the following to occur?
A. an increase in the aggregate price level and an increase in output in the
medium run.
B. an increase in the interest rate in the medium run.
C. no change in output in the medium run.
D. an increase in the real wage in the medium run.
10. Which of the following events will cause the largest rightward shift (as
measured horizontally) of the AD curve?
A. a tax increase
B. a 10% reduction in the aggregate price level
C. a 5% increase in the nominal money supply
D. a 10% reduction in the nominal wage
level of output. An increase in taxes will cause which of the following?
A. a reduction in output and no change in the aggregate price level in the
short run
B. a reduction in employment and no change in the nominal wage in the
short run
C. an increase in investment in the medium run
D. an increase in the aggregate price level, no change in output and no
change in the interest rate in the medium run
level of output. A simultaneous reduction in taxes and reduction in the money
supply will cause which of the following?
A. an increase in output and an increase in the aggregate price level in the
short run
B. a reduction in output and a reduction in the nominal wage in the short
run
C. a reduction in the interest rate in the medium run
D. a reduction in investment in the medium run
level of output. A fiscal contraction must cause:
A. a reduction in investment in the short run
B. no change in investment in the medium run
C. an increase in investment in the short run
D. none of the above
14. At the current level of output, suppose the actual price level is greater than the
price level that individuals expect (i.e., Pt > Pet). We know that:
A. output is currently below the natural level of output
B. the interest rate will tend to rise as the economy adjusts to this situation
C. the nominal wage will tend to decrease as individuals revise their
expectations of the price level
D. AS curve will tend to shift down over time
15. Answer this question using the AS/AD model presented in the textbook. Which
of the following would cause a reduction in the natural level of output in the
medium run?
A. a decrease in government spending.
B. a decrease in the money supply.
C. an increase in taxes.
D. none of the above.
16. Which of the following best defines the real exchange rate?
A. the price of foreign bonds in terms of domestic bonds
B. the price of foreign currency in terms of domestic currency
C. the price of domestic goods in terms of foreign goods
D. the price of domestic currency in terms of foreign currency
17. From the perspective of the United States, an increase in the nominal exchange
rate will cause which of the following?
A. the dollar becomes less expensive to foreigners
B. foreign goods are more expensive to Americans
C. foreign currency is more expensive to Americans
D. American goods are more expensive to foreigners
18. If the exchange rate between the dollar and the pound (the pound price of the
dollar) is currently 1.50, and is expected to be 1.35 in one year, then the
expected rate of
A. depreciation of the dollar is 10%
B. depreciation of the dollar is 15%
C. appreciation of the dollar is 10%
D. appreciation of the dollar is 15%
E. none of the above.
19. When E increases by 5%, we know that

A. a real appreciation will occur if P decreases by 5%.
B. a real depreciation will occur if P also increases by 5%.
C. a nominal appreciation will occur.
D. a nominal depreciation will occur.
20. Which of the following expressions represents the dollar price of foreign
currency?
A. EP*/P
B. EP/P*
C. 1/E
D. E

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4. Based on your understanding of the AS/AD model, which of the following is an

9. As product markets become more competitive and the markup decreases, we

19. When E increases by 5%, we know that

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