Question 1

In the late 1960s and 1970s inflation decreased around the world.

Accepted Answer

A) True 
 B)False

Question 2

Disinflation refers to a situation in which the overall price level falls.

Accepted Answer

A) True 
 B)False

Question 3

The long-run effect of a decrease in government purchases is represented by a rightward shift of the aggregate demand curve as interest rates decline and spending increases.

Accepted Answer

A) True 
 B)False

Question 4

Suppose the economy is initially at point A in the diagram below, and there is a sudden increase in oil prices that the central bank believes is only temporary. Which point best depicts where the economy will end up in the short run?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D 
E)  E 
A)  A 
B)  B 
C)  C 
D)  D 
E)  E

Question 5

Discuss the difference in the short-run and long-run effects of a decrease in government purchases and a monetary policy change designed to lower inflation. Comment specifically on the four components of aggregate demand, interest rates, and inflation.

Accepted Answer

If government purchases decrease, the AD

Question 6

Suppose the GDP deflator is 100 in 2009 and 101 in 2010.
(A)Suppose the economy is at potential GDP in 2009 and 2010. What is the rate of inflation in 2010?
(B)Suppose instead that real GDP is above potential GDP in 2010. How is the adjustment back to potential made in this situation?

Accepted Answer

(A)The rate of inflation in 2010 is 1 pe

Question 7

Exhibit 25-3  
-PART I Use the data from Exhibit 25-3 to graph the aggregate demand curve:
(A)Suppose the current inflation rate is 3.5 percent and potential GDP is $6,900 billion. Draw the inflation adjustment line. What is the current deviation of real GDP from potential?
(B)In the long run, what will the inflation rate be if there is no change in economic policy? Explain how this adjustment will take place.

PART II
Suppose that after the long-run adjustment back to potential, the Fed changes its policy rule so the inflation target is 3.5 percent and potential GDP remains at $6,900 billion. Use the data to show the shift in the aggregate demand/inflation curve.
(A)What type of monetary policy is the Fed undertaking?
(B)How does the Fed accomplish this goal? What is the response of investment and net exports?
(C)In the short run, what is the deviation from potential GDP?
(D)How will the inflation adjustment line adjust in the medium and long run? Explain how this occurs.

Accepted Answer

PART I
(A)The gap between real and poten

Question 8

Suppose, for a certain economy, real and potential GDP are initially equal. Then government purchases permanently increase. Compared to the baseline, we would expect to see, in the long run,

Accepted Answer

A)  an increase in consumption, a decrease in net exports, and no change in investment. 
B)  no change in consumption, investment, or net exports. 
C)  no change in consumption and a decrease in both net exports and investment. 
D)  a decrease in the sum of consumption, investment, and net exports. 
E)  an increase in consumption, a decrease in investment, and a decrease in net exports. 
A)  an increase in consumption, a decrease in net exports, and no change in investment. 
B)  no change in consumption, investment, or net exports. 
C)  no change in consumption and a decrease in both net exports and investment. 
D)  a decrease in the sum of consumption, investment, and net exports. 
E)  an increase in consumption, a decrease in investment, and a decrease in net exports.

Question 9

If exports increase, investment and consumption will be lower in the long run.

Accepted Answer

A) True 
 B)False

Question 10

Suppose the relationship between real GDP and inflation is depicted as shown in the table below. Assume that real and potential GDP are equal to each other at $5,400 billion. Suppose government purchases decline by $100 billion and the slope of the aggregate expenditure line is 0.5.   (A)Explain how the AD curve is affected by this change. In the short run, what will real GDP and the rate of inflation be?
(B)Using the AD and IA curves, show what will happen in the medium run. Be sure to give an economic explanation for what is happening.
(C)Using the AD and IA curves, show what will happen in the long run.

Accepted Answer

(A)The AD curve will shift to the left.

Question 11

Why do net exports increase when government purchases decline?

Accepted Answer

The fall in income reduces imp

Question 12

Exhibit 25-1  
-Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the short run as a result of the change in spending?

Accepted Answer

A)  F 
B)  D 
C)  B 
D)  E 
E)  C 
A)  F 
B)  D 
C)  B 
D)  E 
E)  C

Question 13

By definition, real GDP can never be above potential GDP.

Accepted Answer

A) True 
 B)False

Question 14

If there is a sharp increase in oil prices, in the short run

Accepted Answer

A)  consumption and investment will fall. 
B)  consumption will fall, investment will increase, and net exports will fall. 
C)  consumption, investment, and net exports will stay constant. 
D)  consumption will fall while investment and net exports will stay constant. 
E)  consumption will fall, net exports will increase, and investment will stay constant. 
A)  consumption and investment will fall. 
B)  consumption will fall, investment will increase, and net exports will fall. 
C)  consumption, investment, and net exports will stay constant. 
D)  consumption will fall while investment and net exports will stay constant. 
E)  consumption will fall, net exports will increase, and investment will stay constant.

Question 15

Price shocks are always accompanied by a shift in potential GDP.

Accepted Answer

A) True 
 B)False

Question 16

Explain why the Fed would ever pursue a policy to cause reinflation.

Accepted Answer

It seems unlikely the Fed would willingl

Question 17

The short run is usually

Accepted Answer

A)  less than half a year. 
B)  one to three years. 
C)  two to three years. 
D)  one year. 
E)  four to five years. 
A)  less than half a year. 
B)  one to three years. 
C)  two to three years. 
D)  one year. 
E)  four to five years.

Question 18

The long-run interest rate effect of decreased government purchases is that

Accepted Answer

A)  consumption is lower, and investment is higher. 
B)  consumption and net exports are the same, and investment is higher. 
C)  investment is higher. 
D)  consumption, investment, and net exports are all higher. 
E)  consumption and net exports are higher. 
A)  consumption is lower, and investment is higher. 
B)  consumption and net exports are the same, and investment is higher. 
C)  investment is higher. 
D)  consumption, investment, and net exports are all higher. 
E)  consumption and net exports are higher.

Question 19

Real business cycle theories emphasize price shocks.

Accepted Answer

A) True 
 B)False

Question 20

Why is the Great Depression, even though it occurred over 70 years ago, a valid topic in macroeconomics?

What explanations are offered as to what caused the Great Depression?

What caused the end of the Great Depression?

Accepted Answer

Over one-third of the nation's income wa

Exam 13: Using the Economic Fluctuations Model

In the late 1960s and 1970s inflation decreased around the world.

Disinflation refers to a situation in which the overall price level falls.

The long-run effect of a decrease in government purchases is represented by a rightward shift of the aggregate demand curve as interest rates decline and spending increases.

Suppose the economy is initially at point A in the diagram below, and there is a sudden increase in oil prices that the central bank believes is only temporary. Which point best depicts where the economy will end up in the short run?

Discuss the difference in the short-run and long-run effects of a decrease in government purchases and a monetary policy change designed to lower inflation. Comment specifically on the four components of aggregate demand, interest rates, and inflation.

Suppose the GDP deflator is 100 in 2009 and 101 in 2010. (A)Suppose the economy is at potential GDP in 2009 and 2010. What is the rate of inflation in 2010? (B)Suppose instead that real GDP is above potential GDP in 2010. How is the adjustment back to potential made in this situation?

Suppose, for a certain economy, real and potential GDP are initially equal. Then government purchases permanently increase. Compared to the baseline, we would expect to see, in the long run,

If exports increase, investment and consumption will be lower in the long run.

Why do net exports increase when government purchases decline?

Exhibit 25-1 -Suppose the economy is initially at point A in Exhibit 25-1. If government purchases increase, which point best depicts where the economy will be in the short run as a result of the change in spending?

By definition, real GDP can never be above potential GDP.

If there is a sharp increase in oil prices, in the short run

Price shocks are always accompanied by a shift in potential GDP.

Explain why the Fed would ever pursue a policy to cause reinflation.

The short run is usually

The long-run interest rate effect of decreased government purchases is that

Real business cycle theories emphasize price shocks.

Why is the Great Depression, even though it occurred over 70 years ago, a valid topic in macroeconomics? What explanations are offered as to what caused the Great Depression? What caused the end of the Great Depression?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors, Price Ceilings, and Elasticity

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

The Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Capital and Financial Markets

Economic Growth and Globalization

International Trade

International Finance

Reading, Understanding, and Creating Graphs

the Miracle of Compound Growth

Present Discounted Value

Deriving the Growth Accounting Formula

Filters