Exam 13: Using the Economic Fluctuations Model

Suppose the central bank lowers its target inflation rate from 3 percent to 1.5 percent. Use the aggregate demand/inflation curve and the price adjustment line to show the short-run, medium-run, and long-run effects of this policy change. Assume the economy is initially at the point of long-run equilibrium.

A fall in the overall price level is called

A price shock is typically caused by a change in

Over the past 25 years, price shocks have occurred due to sharp changes in

If exports permanently decline, we would expect, in the medium run,

A price shock causes the AD curve to shift.

If a shock to aggregate demand occurs, the period of the initial change in real GDP is called

Recent economic fluctuations in the U.S. economy are best explained by

Graphically show the difference between what is meant by a growth slowdown as opposed to a recession.

If the Fed raises interest rates because it believes inflation is too high, this may cause a recession.

The tendency of prices to adjust over time is shown by an upward movement along the IA line.

Suppose government purchases have decreased. Which of the following is true?

In the economic fluctuations model, the so-called short run normally refers to

The figure below shows the effect of a 2011 increase in government purchases on the hypothetical path of real GDP compared to the path of potential GDP (the baseline) between 2011 and 2016. $\text { Billions of } 2011 \text { Doll }$ Potential GDP $\text { Real GDP }$ (A) Using the $A D$ cirve and $L A$ line anglysis, expleng what is accurting between 2011 ant $2012 .$ (B) Using the $A D$ curve and $A A$ line analysis, exglain what is accurring between 2012 ant 2014 . (C) Using the $A D$ curve and $L A$ line malysis, exglanin what is accuring between 2014 and 2016

Compared to the baseline, the short-run effect of a monetary policy change to lower inflation is for

A decrease in government purchases causes the interest-sensitive components of aggregate expenditure to increase in the short run.

Exhibit 25-3 Inflation (percent) Real GDP (billions of dollars) 4.5 6,700 3.5 6,800 2.5 6,900 1.5 7,000 5 7,100 -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 wril real GDP be in the shart run? If the Fed follows its usual palicy rue, haw will the economy adjust back to potential? (B) Naw, suppose the Fedi is sure this is a temporary decline in the intlation rate. Therefare, it Aecides not to follow its typical policy rule, but instead maintans the interest rate at the level it was at prior to the shock. What happens ta real GDp? Why? What will the lang-run adyustment be in this ca5e?

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?

Why do net exports increase when government purchases decline?

If the price of salt quadruples, will this cause a price shock? Explain.