Question

15. According to classical macroeconomic theory, changes in the money supply affect
    1. nominal variables and real variables.
    2. nominal variables, but not real variables.
    3. real variables, but not nominal variables.
    4. neither nominal nor real variables.

16. The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected,
    1. production is more profitable and employment rises.
    2. production is more profitable and employment falls.
    3. production is less profitable and employment rises.
    4. production is less profitable and employment falls.
17. For a number of years Canada and many European countries have had higher average unemployment rates than the United States. This suggests that these countries
    1. have higher average inflation rates than the United States.
    2. have long-run Phillips curves to the right of the United States’.
    3. may have less generous unemployment compensation or lower minimum wages.
    4. All of the above are consistent with the evidence on unemployment rates.

18. During 1999 and 2000 the Federal Open Market Committee of the Federal Reserve System in the U.S. noted that productivity increases had caused aggregate supply to shift to the right. Other things the same, this should have
    1. shifted the short-run Phillips curve to the left. So, by increasing the money supply the Fed could have reduced unemployment further while returning inflation to its former level.
    2. shifted the short-run Phillips curve to the left. So, by increasing the money supply the Fed could have reduced unemployment further only by raising the inflation rate above its former level.
    3. shifted the short-run Phillips curve to the right. So, by increasing the money supply the Fed could have reduced unemployment further while returning inflation to its former level.
    4. None of the above is correct.

19. Real and nominal variables are highly intertwined, and changes in the money supply change real GDP. Most economists would agree that this statement accurately describes

a.      both the short run and the long run.

b.      the short run, but not the long run.

c.      the long run, but not the short run.

d.      neither the long run nor the short run.

Answer 1

1) According to classical macroeconomic theory, changes in the money supply affect nominal variables, but not real variables. It is referred to as neutrality of money which states that money is neutral in its effects and affect only nominal variables. Hence the answer is option (b).

2) The sticky-wage theory of the short-run aggregate supply curve says that when the price level rises more than expected, production is more profitable and employment rises. The rise in price level above the expected level induces firms to produce more to get better revenue. Hence the answer is option (a).