Question 1

Any point along the aggregate demand curve represents

Accepted Answer

A) a possible equilibrium combination of potential GDP and inflation. 
B) the inflation rate at any point in time. 
C) an equilibrium combination of real GDP and inflation. 
D) a possible equilibrium combination of real GDP and inflation. 
E) an equilibrium combination of potential GDP and inflation. 
A) a possible equilibrium combination of potential GDP and inflation. 
B) the inflation rate at any point in time. 
C) an equilibrium combination of real GDP and inflation. 
D) a possible equilibrium combination of real GDP and inflation. 
E) an equilibrium combination of potential GDP and inflation. D

Question 2

When inflation rises, the Fed normally lowers interest rates (through a more than proportional decrease in the nominal interest rate).

Accepted Answer

A) True 
 B)False  False

Question 3

Exhibit 24-3  
-If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3, what will happen to net exports?

Accepted Answer

A) The effect on net exports is ambiguous. 
B) Net exports will increase. 
C) Net exports will decrease. 
D) Net exports will not be affected. 
E) None of these 
A) The effect on net exports is ambiguous. 
B) Net exports will increase. 
C) Net exports will decrease. 
D) Net exports will not be affected. 
E) None of these A

Question 4

The inflation adjustment line is a flat line showing the level of inflation in the economy at a given point in time.

Accepted Answer

A) True 
 B)False

Question 5

In order for the Fed to respond correctly to changes in the inflation rate, the slope of the monetary policy rule line (showing the relationship between the inflation rate and the real interest rate) must be

Accepted Answer

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

Question 6

Historically, there has been a positive correlation between changes in the rate of inflation and the percentage difference between real and potential GDP.

Accepted Answer

A) True 
 B)False

Question 7

Which of the following is probably the most sensitive to changes in real interest rates?

Accepted Answer

A) Government purchases 
B) Exports 
C) Consumption 
D) Imports 
E) Investment 
A) Government purchases 
B) Exports 
C) Consumption 
D) Imports 
E) Investment

Question 8

Suppose inflation has been increasing in Europe, and as a result, the central bank has increased interest rates. Explain what, if any, effect this will have on U.S. net exports.

Accepted Answer

If interest rates are relatively higher

Question 9

Wage setting

Accepted Answer

A) is based only on wages expected to be paid elsewhere. 
B) depends on both expected inflation and relative wages. 
C) occurs without regard to inflation or wages being paid by other firms. 
D) is based only on expected inflation. 
E) is based only on the previous period's wages. 
A) is based only on wages expected to be paid elsewhere. 
B) depends on both expected inflation and relative wages. 
C) occurs without regard to inflation or wages being paid by other firms. 
D) is based only on expected inflation. 
E) is based only on the previous period's wages.

Question 10

If the target inflation rate is 3 percent and the actual rate of inflation falls below the target rate,

Accepted Answer

A) the AD curve will shift to the left. 
B) the AD curve will shift to the right. 
C) there will be an upward movement along the AD curve. 
D) there will be a downward movement along the AD curve. 
E) the AD will not shift, nor will there be a movement along the AD curve. 
A) the AD curve will shift to the left. 
B) the AD curve will shift to the right. 
C) there will be an upward movement along the AD curve. 
D) there will be a downward movement along the AD curve. 
E) the AD will not shift, nor will there be a movement along the AD curve.

Question 11

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 12

State which of the following changes causes the aggregate demand curve to shift and which is a movement along it.

Accepted Answer

The answer of State which of the following changes causes...

Question 13

Because of various shocks to the economy, the central bank cannot control the inflation rate perfectly, particularly in the short run.

Accepted Answer

A) True 
 B)False

Question 14

During an economic boom, the rate of inflation

Accepted Answer

A) and the percentage deviation of real GDP from potential GDP are both increasing. 
B) and the percentage deviation of real GDP from potential GDP are both decreasing. 
C) is increasing, and the percentage deviation of real GDP from potential GDP is decreasing. 
D) is decreasing, and the percentage deviation of real GDP from potential GDP is increasing. 
E) is constant, and the percentage deviation of real GDP from potential GDP is increasing. 
A) and the percentage deviation of real GDP from potential GDP are both increasing. 
B) and the percentage deviation of real GDP from potential GDP are both decreasing. 
C) is increasing, and the percentage deviation of real GDP from potential GDP is decreasing. 
D) is decreasing, and the percentage deviation of real GDP from potential GDP is increasing. 
E) is constant, and the percentage deviation of real GDP from potential GDP is increasing.

Question 15

When the Fed wants to raise nominal interest rates, it

Accepted Answer

A) increases bank reserves. 
B) orders all banks to increase interest rates. 
C) recommends that Congress raise the federal funds rate. 
D) recommends that Congress conduct open market operations. 
E) sells government bonds. 
A) increases bank reserves. 
B) orders all banks to increase interest rates. 
C) recommends that Congress raise the federal funds rate. 
D) recommends that Congress conduct open market operations. 
E) sells government bonds.

Question 16

Suppose the current rate of inflation is 4 percent. However, if real and potential GDP are to be equal, inflation will need to be at 2 percent. Show, using the AD curve and the IA line, where real GDP is relative to potential GDP under these circumstances.

Accepted Answer

As shown in the figure below,

Question 17

The following table gives a numerical example of the inflation adjustment line in the year 2017.

Accepted Answer

The answer of The following table gives a numerical example...

Question 18

Which of the following best explains the slope of the AD curve?

Accepted Answer

A) A change in inflation causes the real interest rate to change, which results in a change in spending. 
B) A change in potential GDP causes the rate of inflation to change, which leads to a change in the real interest rate. 
C) A change in the real interest rate causes the rate of inflation to change, which results in potential GDP changing. 
D) A change in real GDP causes potential GDP to change, which results in the rate of inflation changing. 
E) A change in inflation causes spending to change, which causes a change in the real interest rate. 
A) A change in inflation causes the real interest rate to change, which results in a change in spending. 
B) A change in potential GDP causes the rate of inflation to change, which leads to a change in the real interest rate. 
C) A change in the real interest rate causes the rate of inflation to change, which results in potential GDP changing. 
D) A change in real GDP causes potential GDP to change, which results in the rate of inflation changing. 
E) A change in inflation causes spending to change, which causes a change in the real interest rate.

Question 19

Exhibit 24-4  
-If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-4,

Accepted Answer

A) the AD curve will shift to the right. 
B) there will be a downward movement along the AD curve. 
C) the AD curve will shift to the left. 
D) there will be an upward movement along the AD curve. 
E) there will be no change since the real rate of interest does not change. 
A) the AD curve will shift to the right. 
B) there will be a downward movement along the AD curve. 
C) the AD curve will shift to the left. 
D) there will be an upward movement along the AD curve. 
E) there will be no change since the real rate of interest does not change.

Question 20

Of the Fed, the Bank of England, and the Reserve Bank of New Zealand, which of the following statements is true?

Accepted Answer

A) Only the Fed does not have an explicit inflation target. 
B) None of these three central banks have an explicit inflation target. 
C) All of these three central banks have an explicit inflation target. 
D) Only the Reserve Bank of New Zealand does not have an explicit inflation target. 
E) Only the Bank of England does not have an explicit inflation target. 
A) Only the Fed does not have an explicit inflation target. 
B) None of these three central banks have an explicit inflation target. 
C) All of these three central banks have an explicit inflation target. 
D) Only the Reserve Bank of New Zealand does not have an explicit inflation target. 
E) Only the Bank of England does not have an explicit inflation target.

Exam 24: The Economic Fluctuations Model

Any point along the aggregate demand curve represents

When inflation rises, the Fed normally lowers interest rates (through a more than proportional decrease in the nominal interest rate).

Exhibit 24-3 -If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3, what will happen to net exports?

The inflation adjustment line is a flat line showing the level of inflation in the economy at a given point in time.

In order for the Fed to respond correctly to changes in the inflation rate, the slope of the monetary policy rule line (showing the relationship between the inflation rate and the real interest rate) must be

Historically, there has been a positive correlation between changes in the rate of inflation and the percentage difference between real and potential GDP.

Which of the following is probably the most sensitive to changes in real interest rates?

Suppose inflation has been increasing in Europe, and as a result, the central bank has increased interest rates. Explain what, if any, effect this will have on U.S. net exports.

Wage setting

If the target inflation rate is 3 percent and the actual rate of inflation falls below the target rate,

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

State which of the following changes causes the aggregate demand curve to shift and which is a movement along it.

Because of various shocks to the economy, the central bank cannot control the inflation rate perfectly, particularly in the short run.

During an economic boom, the rate of inflation

When the Fed wants to raise nominal interest rates, it

Suppose the current rate of inflation is 4 percent. However, if real and potential GDP are to be equal, inflation will need to be at 2 percent. Show, using the AD curve and the IA line, where real GDP is relative to potential GDP under these circumstances.

The following table gives a numerical example of the inflation adjustment line in the year 2017.

Which of the following best explains the slope of the AD curve?

Exhibit 24-4 -If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-4,

Of the Fed, the Bank of England, and the Reserve Bank of New Zealand, which of the following statements is true?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

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

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

Filters