581 What distinction did Zimbabwe achieve in June 2008 582 583 per day It was the first African nation to become a democracy Incorrect It ended apartheid Incorrect It had the world s highest inflation rate True Answer Correct It had the world s highest unemployment rate Incorrect During hyperinflation in Germany in 1922 1923 prices rose at 0 1 Incorrect 16 True Answer Correct 50 Incorrect 100 Incorrect Workers in country A have cost of living adjustments COLAs which adjust wages to offset the effect of inflation in their wage contracts and workers in country B do NOT When the central banks of countries A and B increase the money supply prices in country A increase faster than prices in country B True Answer Correct prices in country B increase faster than prices in country A Incorrect prices in countries A and B will change at the same rate Incorrect COLAs have no effect on the speed of price changes Incorrect 584 Inflation doesn t reduce purchasing power if prices of essential products such as food and gasoline don t increase too much Incorrect nominal wages rise at the same rate as prices True Answer Correct it remains under 10 per year Incorrect the Federal Reserve increases the money supply enough to offset it Incorrect 585 In the classical model it is thought that the long run and short run aggregate supply curves are both upward sloping Incorrect aggregate supply curve is vertical and the short run aggregate supply curve is upward sloping Incorrect and short run aggregate supply curves are both vertical True Answer Correct aggregate supply curve is upward sloping and the short run aggregate supply curve is vertical Incorrect The notion that the real quantity of money is always at its long run equilibrium level is associated with the of the price level classical model True Answer Correct Keynesian model Incorrect monetarist model Incorrect the modern view Incorrect 586 587 Figure AD AS Model Reference Ref 31 1 Figure AD AS Model Refer to the information in the figure Suppose the economy is at YE with a price level of P1 Which of the following would represent the new long run equilibrium position if the aggregate demand curve shifted to the right from AD1 to AD2 as a result of an increase in the money supply YE and P2 Incorrect YE and P1 588 589 590 591 Incorrect Y1 and P2 Incorrect YE and P3 True Answer Correct Which of the following is the BEST explanation for an upward sloping short run aggregate supply curve Prices are perfectly flexible Incorrect Wages are perfectly flexible Incorrect Wages and prices of some goods are sticky in the short run True Answer Correct Wages and prices of some goods are flexible in the short run but sticky in the long run Incorrect Assume that workers and businesses are sensitized to inflation and are quick to raise wages and prices in response to changes in the money supply This implies that if inflation is and there are adjustments of wages and prices of intermediate goods high quick True Answer Correct low quick Incorrect high slow Incorrect low slow Incorrect The classical model of the price level is most likely to be a good approximation of reality during periods of recession Incorrect expansion Incorrect low inflation Incorrect high inflation True Answer Correct The classical model of the price level is associated with John Maynard Keynes Incorrect economists who followed Keynes s work Incorrect economists who came before Adam Smith Incorrect economists who came after Adam Smith but before Keynes True Answer Correct 592 593 In the short run in periods of low inflation an increase in aggregate demand from a position of full employment leads to higher prices and higher unemployment Incorrect higher prices and higher output True Answer Correct lower prices and higher output Incorrect lower prices and higher unemployment Incorrect In the long run an increase in aggregate demand from a position of full employment leads to higher prices and higher output Incorrect higher prices and the same output True Answer Correct higher output and lower prices Incorrect higher output and higher unemployment Incorrect 594 Figure Classical Model of the Price Level Reference Ref 31 2 Figure Classical Model of the Price Level Refer to the information in the figure If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2 according to this classical model real GDP would not change True Answer Correct increase from YE to Y1 Incorrect increase from Y1 to YE Incorrect establish a new potential output Incorrect Figure Classical Model of the Price Level 595 Reference Ref 31 2 Figure Classical Model of the Price Level Refer to the information in the figure If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2 according to this classical model the price level will not change Incorrect increase from P1 to P2 Incorrect increase from P1 to P3 True Answer Correct decrease from P1 to P2 Incorrect 596 Figure Classical Model of the Price Level Reference Ref 31 2 Figure Classical Model of the Price Level Refer to the information in the figure If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2 according to this classical model the SRAS would not change since in the classical model the SRAS and LRAS are both vertical at potential output Incorrect decrease from SRAS1 to SRAS2 True Answer Correct increase from SRAS2 to SRAS1 Incorrect increase from SRAS1 to SRAS2 Incorrect 597 Figure Classical Model of the Price Level Reference Ref 31 2 Figure Classical Model of the Price Level Refer to the information in the figure If the central bank increases the money supply such that aggregate demand shifts from AD1 to AD2 according to this classical model the equilibrium point would not change Incorrect immediately move from E1 to E2 Incorrect immediately move from E2 to E1 Incorrect immediately move from E1 to E3 True Answer Correct During periods of low inflation the short run aggregate supply curve is vertical Incorrect horizontal Incorrect upward sloping True Answer Correct downward sloping Incorrect During periods of high inflation the short run aggregate supply curve is vertical True Answer Correct horizontal Incorrect upward sloping Incorrect downward sloping Incorrect In the long run any given percentage increase in the money supply decreases real GDP Incorrect leads to an equal percentage increase in the overall price level True Answer Correct 598 599 600
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