Question 1

Which of the following best explains what will happen in the short run if government purchases increase?

Accepted Answer

A)  Real GDP, consumption, and investment will increase. 
B)  Potential GDP will increase. 
C)  Real GDP and consumption will increase. 
D)  Real GDP will increase. 
E)  All of these 
A)  Real GDP, consumption, and investment will increase. 
B)  Potential GDP will increase. 
C)  Real GDP and consumption will increase. 
D)  Real GDP will increase. 
E)  All of these C

Question 2

Ceteris paribus, a rise in U.S. interest rates will cause exports to increase.

Accepted Answer

A) True 
 B)False  False

Question 3

The IA line will move down if

Accepted Answer

A)  potential GDP decreases. 
B)  real GDP falls below potential GDP. 
C)  real GDP increases relative to potential GDP. 
D)  real GDP equals potential GDP. 
E)  the rate of inflation increases. 
A)  potential GDP decreases. 
B)  real GDP falls below potential GDP. 
C)  real GDP increases relative to potential GDP. 
D)  real GDP equals potential GDP. 
E)  the rate of inflation increases. B

Question 4

Exhibit 24-1  
-According to the data in Exhibit 24-1, the percentage deviation of real GDP from potential GDP in 1976 was

Accepted Answer

A)  1.7 percent. 
B)  -5.8 percent. 
C)  2.7 percent. 
D)  -4.9 percent. 
E)  -1.7 percent. 
A)  1.7 percent. 
B)  -5.8 percent. 
C)  2.7 percent. 
D)  -4.9 percent. 
E)  -1.7 percent.

Question 5

The market interest rate the Fed focuses on is the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 6

Which of the following would cause the AD curve to shift to the left?

Accepted Answer

A)  A decrease in the real rate of interest 
B)  A decrease in the rate of inflation 
C)  An increase in government purchases 
D)  A decision by the Fed to decrease the nominal interest rate 
E)  None of these 
A)  A decrease in the real rate of interest 
B)  A decrease in the rate of inflation 
C)  An increase in government purchases 
D)  A decision by the Fed to decrease the nominal interest rate 
E)  None of these

Question 7

Since inflation tends to rise when the percentage deviation of real GDP from potential GDP is positive, the aggregate demand curve must be upward-sloping.

Accepted Answer

A) True 
 B)False

Question 8

When the Fed raises interest rates, it expects

Accepted Answer

A)  a decrease in potential GDP. 
B)  a decrease in the growth rate of real GDP. 
C)  an increase in the growth rate of real GDP. 
D)  an increase in potential GDP. 
E)  no change in either potential or real GDP. 
A)  a decrease in potential GDP. 
B)  a decrease in the growth rate of real GDP. 
C)  an increase in the growth rate of real GDP. 
D)  an increase in potential GDP. 
E)  no change in either potential or real GDP.

Question 9

The aggregate demand curve shows the relationship between

Accepted Answer

A)  real GDP and interest rates. 
B)  spending and the price level. 
C)  real GDP and inflation. 
D)  interest rates and inflation. 
E)  spending and interest rates. 
A)  real GDP and interest rates. 
B)  spending and the price level. 
C)  real GDP and inflation. 
D)  interest rates and inflation. 
E)  spending and interest rates.

Question 10

Expectations of steady inflation and staggered wage and price setting are two reasons why

Accepted Answer

A)  the IA line is usually upward-sloping. 
B)  inflation is highly variable during the short run. 
C)  inflation does not change very much in the short run. 
D)  inflation changes immediately after a change in real GDP. 
E)  the IA line is usually downward-sloping. 
A)  the IA line is usually upward-sloping. 
B)  inflation is highly variable during the short run. 
C)  inflation does not change very much in the short run. 
D)  inflation changes immediately after a change in real GDP. 
E)  the IA line is usually downward-sloping.

Question 11

Suppose an economy existed in which investment, net exports, and consumption were not sensitive to changes in interest rates. For this economy, the AD curve would

Accepted Answer

A)  have a slope less than 1 but greater than zero. 
B)  be horizontal. 
C)  have a negative slope. 
D)  be vertical. 
E)  have a slope equal to 1. 
A)  have a slope less than 1 but greater than zero. 
B)  be horizontal. 
C)  have a negative slope. 
D)  be vertical. 
E)  have a slope equal to 1.

Question 12

The flat inflation adjustment line reflects the idea that

Accepted Answer

A)  inflation occurs only when real GDP exceeds potential GDP. 
B)  prices usually remain constant. 
C)  current prices and wages do not depend on what has happened in the past. 
D)  prices and wages are as likely to decline as they are to increase. 
E)  inflation is partly due to inertia. 
A)  inflation occurs only when real GDP exceeds potential GDP. 
B)  prices usually remain constant. 
C)  current prices and wages do not depend on what has happened in the past. 
D)  prices and wages are as likely to decline as they are to increase. 
E)  inflation is partly due to inertia.

Question 13

Suppose the central bank decides to switch from policy rule A to policy rule B as shown in the table below. Use the analysis presented in the text to explain what will happen to the AD curve.

Accepted Answer

As a result of the switch in the policy

Question 14

If, for any given rate of inflation, the real rate of interest declines, the AD curve will shift to the left.

Accepted Answer

A) True 
 B)False

Question 15

The slope of the monetary policy rule line when the nominal interest rate is measured on the vertical axis is

Accepted Answer

A)  less than 1. 
B)  zero. 
C)  greater than 1. 
D)  equal to 1. 
E)  equal to -1. 
A)  less than 1. 
B)  zero. 
C)  greater than 1. 
D)  equal to 1. 
E)  equal to -1.

Question 16

When the rate of inflation is low and stable, the real and nominal interest rates are not very different.

Accepted Answer

A) True 
 B)False

Question 17

When interest rates decrease,

Accepted Answer

A)  investment will decrease, and consumption and net exports will increase, causing expenditures to increase. 
B)  government purchases will increase to offset the decline in consumption, investment, and net exports. 
C)  investment and consumption will increase, and net exports will decrease, causing expenditures to increase. 
D)  investment will decrease. 
E)  investment, consumption, and net exports will increase, causing expenditures to increase. 
A)  investment will decrease, and consumption and net exports will increase, causing expenditures to increase. 
B)  government purchases will increase to offset the decline in consumption, investment, and net exports. 
C)  investment and consumption will increase, and net exports will decrease, causing expenditures to increase. 
D)  investment will decrease. 
E)  investment, consumption, and net exports will increase, causing expenditures to increase.

Question 18

The inflation adjustment line is used to

Accepted Answer

A)  describe how the government adjusts fiscal policy to influence prices and wages in the economy. 
B)  describe the Fed's target inflation rate. 
C)  describe how the Fed adjusts interest rates to control inflation. 
D)  describe how firms and workers act to set prices and wages in the economy. 
E)  explain the instability of price adjustments. 
A)  describe how the government adjusts fiscal policy to influence prices and wages in the economy. 
B)  describe the Fed's target inflation rate. 
C)  describe how the Fed adjusts interest rates to control inflation. 
D)  describe how firms and workers act to set prices and wages in the economy. 
E)  explain the instability of price adjustments.

Question 19

The Fed considers what is happening to the inflation rate only when deciding whether to change the target federal funds rate.

Accepted Answer

A) True 
 B)False

Question 20

There is an inverse relationship between real GDP and inflation because

Accepted Answer

A)  an increase in inflation leads to a higher interest rate, which leads to an increase in real GDP. 
B)  an increase in inflation leads to a higher interest rate, which leads to a decrease in potential GDP that causes real GDP to decline. 
C)  an increase in inflation leads to a higher interest rate, which leads to a decrease in real GDP. 
D)  an increase in inflation leads to a lower interest rate, which leads to a decrease in real GDP. 
E)  a decrease in inflation leads to a higher interest rate, which leads to a decrease in real GDP. 
A)  an increase in inflation leads to a higher interest rate, which leads to an increase in real GDP. 
B)  an increase in inflation leads to a higher interest rate, which leads to a decrease in potential GDP that causes real GDP to decline. 
C)  an increase in inflation leads to a higher interest rate, which leads to a decrease in real GDP. 
D)  an increase in inflation leads to a lower interest rate, which leads to a decrease in real GDP. 
E)  a decrease in inflation leads to a higher interest rate, which leads to a decrease in real GDP.

Exam 12: The Economic Fluctuations Model

Which of the following best explains what will happen in the short run if government purchases increase?

Ceteris paribus, a rise in U.S. interest rates will cause exports to increase.

The IA line will move down if

Exhibit 24-1 -According to the data in Exhibit 24-1, the percentage deviation of real GDP from potential GDP in 1976 was

The market interest rate the Fed focuses on is the federal funds rate.

Which of the following would cause the AD curve to shift to the left?

Since inflation tends to rise when the percentage deviation of real GDP from potential GDP is positive, the aggregate demand curve must be upward-sloping.

When the Fed raises interest rates, it expects

The aggregate demand curve shows the relationship between

Expectations of steady inflation and staggered wage and price setting are two reasons why

Suppose an economy existed in which investment, net exports, and consumption were not sensitive to changes in interest rates. For this economy, the AD curve would

The flat inflation adjustment line reflects the idea that

Suppose the central bank decides to switch from policy rule A to policy rule B as shown in the table below. Use the analysis presented in the text to explain what will happen to the AD curve.

If, for any given rate of inflation, the real rate of interest declines, the AD curve will shift to the left.

The slope of the monetary policy rule line when the nominal interest rate is measured on the vertical axis is

When the rate of inflation is low and stable, the real and nominal interest rates are not very different.

When interest rates decrease,

The inflation adjustment line is used to

The Fed considers what is happening to the inflation rate only when deciding whether to change the target federal funds rate.

There is an inverse relationship between real GDP and inflation because

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

Using 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