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Economics, 7/e

David Begg, Birkbeck College, University of London
Rudiger Dornbusch
Stanley Fischer

Aggregate supply, prices and the adjustment to shocks

Self-test Questions

Select the radio button corresponding to your choice of answer for each question, and then click on "Submit Answers" to find out how many you answered correctly.


1	The classical model of macroeconomics assumes

		A)	wages and prices are sticky
		B)	wages and prices are flexible
		C)	the economy may operate below full capacity
		D)	the economy is always at full capacity
		E)	a and c
		F)	b and d

2	The MDS indicates that __________ inflation is associated with ___________ output

		A)	higher, lower
		B)	higher, higher
		C)	lower, lower
		D)	zero, zero

3	If a person thinks they are better off after a 10% wage increase, and all prices have risen 10%, then they are experiencing ___________

		A)	inflation
		B)	a supply shock
		C)	crowding out
		D)	money illusion

4	In the classical model, potential output can not be increased by

		A)	monetary growth
		B)	better technology
		C)	more capital
		D)	higher labour supply

5	The equilibrium inflation rate is determined by the intersection of __________ and _________

		A)	demand, supply
		B)	IS, LM
		C)	MDS. AS
		D)	Labour demand, labour supply

6	At the intersection of MDS and AS equilibrium is achieved in

		A)	the goods market
		B)	the money market
		C)	the labour market
		D)	all of the above

7	The Keynesian model is a good guide to _________ behaviour and the classical model describes behaviour in _____________

		A)	long run, short run
		B)	flexible, imperfect markets
		C)	short-term, long run
		D)	long run, imperfect markets

8	Expansionary fiscal policy in the classical model will cause aggregate demand to ________ potential output

		A)	exceed
		B)	fall below
		C)	fluctuate around
		D)	remain equal to

9	In the event of an increase in the international price of oil that encouraged the central bank to accept lower real interest rates, inflation would most likely __________

		A)	fall
		B)	increase
		C)	remain the same
		D)	fluctuate

10	In the classical model the AS schedule is vertical

		A)	TRUE
		B)	FALSE

11	Fiscal expansion in the classical model can increase real output

		A)	TRUE
		B)	FALSE

12	Temporary supply shocks alter potential output

		A)	TRUE
		B)	FALSE

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