Exam 13: Using the Economic Fluctuations Model

Which of the following is the most appropriate explanation of a price shock?

When the Volcker disinflation began,

The most recent recession of the United States occurred

Monetary policy designed to reduce the rate of inflation in the early 1980s resulted in a recession.

Suppose there is a sharp decline in oil prices. According to the theory of economic fluctuations,

A price shock occurs when

If the Fed thinks inflation is too high, it will

Exhibit 25-2 -According to Exhibit 25-2, which point best represents where the U.S. economy was in mid-2007?

During the early 1980s the Federal Reserve increased the target rate of inflation.

Suppose, for some hypothetical economy, an electric storm causes 90 percent of the CPU chips in the economy to become useless. Trace out the macroeconomic consequence of this phenomenon. Does this event result in stagflation? Why?

According to the spending allocation model, what happens if there is an increase in the share of GDP allocated to government purchases? What happens to the other spending shares? According to the economic fluctuations model, what happens if there is an increase in government purchases as a share of GDP? What happens to the other spending shares? Are the two models the same? What additional insight does the economic fluctuations model introduce?

Suppose the income tax rate increases. What will happen to consumption, investment, and net exports in the short run and the long run? Explain your results, using a diagram with the aggregate demand curve and the inflation adjustment line.

Suppose the economy is initially at point A in the diagram below, and oil prices suddenly fall. Which point best depicts where the economy will end up in the short run?

A major that resulted in the leftward shift of the aggregate demand curve in late 2008 was

If the Fed is worried about inflation and raises interest rates, then in the short run

The short-run effect of an increase in government purchases is

A fall in the overall price level is called

A single factor caused the 2008-09 recession.

If government purchases decline, during the medium run consumption will be below its baseline level while net exports and investment will be above their baseline levels.

Suppose the target rate of inflation is 3 percent and real GDP equals potential GDP. Now, suppose a major oil-producing country decides to increase the supply of oil in order to discipline the other members of the oil-producing cartel. There is a sharp decline in the price of oil, and, in turn, the rate of inflation falls to 2 percent in the short run. The Fed views this decline in inflation as temporary and expects the price adjustment line to shift back up to 3 percent next year, which it does. (A)Where will real GDP be in the short run? If the Fed follows its usual policy rule, how will the economy adjust back to potential? (B)Now, suppose the Fed is sure this is a temporary decline in the inflation rate. Therefore, it decides not to follow its typical policy rule, but instead maintains the interest rate at the level it was at prior to the shock. What happens to real GDP? Why? What will the long-run adjustment be in this case?