Question 1

Studying alternative theories of how people form expectations is particularly relevant to monetary policy because

Accepted Answer

A)  if people fully expect inflation to occur, the effects of monetary policy are more widespread. 
B)  monetary policy can only have real effects on the economy if people fully expect inflation. 
C)  unexpected inflation cause prices to be flexible. 
D)  the effects of expected inflation are completely different from the effects of unexpected inflation. 
E)  expected inflation causes prices to become sticky. 
A)  if people fully expect inflation to occur, the effects of monetary policy are more widespread. 
B)  monetary policy can only have real effects on the economy if people fully expect inflation. 
C)  unexpected inflation cause prices to be flexible. 
D)  the effects of expected inflation are completely different from the effects of unexpected inflation. 
E)  expected inflation causes prices to become sticky.

Question 2

Starting at macroeconomic equilibrium at full employment, show the effects of contractionary monetary policy in the long run using an aggregate demand-aggregate supply AD-AS) model and discuss.

Accepted Answer

As shown on the following AD-AS model:

Question 3

Holding all else constant, in the short run, an increase in the money supply can cause an)

Accepted Answer

A)  increase in unemployment. 
B)  lower rate of inflation. 
C)  decrease in the price level. 
D)  decrease in real gross domestic product GDP). 
E)  increase in real gross domestic product GDP). 
A)  increase in unemployment. 
B)  lower rate of inflation. 
C)  decrease in the price level. 
D)  decrease in real gross domestic product GDP). 
E)  increase in real gross domestic product GDP).

Question 4

Refer to the following figure to answer the next  questions.
  
-According to the figure, if the economy started at full-employment output, expansionary monetary policy would cause real gross domestic product (GDP) to ________ in the short run.

Accepted Answer

A)  increase from Y1 to Y2 
B)  increase from Y1 to Y3 
C)  decrease from Y2 to Y1 
D)  decrease from Y3 to Y2 
E)  increase from Y2 to Y3 
A)  increase from Y1 to Y2 
B)  increase from Y1 to Y3 
C)  decrease from Y2 to Y1 
D)  decrease from Y3 to Y2 
E)  increase from Y2 to Y3

Question 5

Explain the difference between adaptive expectations theory and rational expectations theory.

Accepted Answer

Adaptive expectations theory and rationa

Question 6

What happens if aggregate demand increases simultaneously with a decrease in short-run aggregate supply, due to anticipated expansionary monetary policy?

Accepted Answer

A)  The price level remains constant, and real gross domestic product GDP) decreases. 
B)  The price level increases, and real gross domestic product GDP) increases. 
C)  The price level increases, and real gross domestic product GDP) decreases. 
D)  The price level decreases, and real gross domestic product GDP) remains constant. 
E)  The price level increases, and real gross domestic product GDP) remains constant. 
A)  The price level remains constant, and real gross domestic product GDP) decreases. 
B)  The price level increases, and real gross domestic product GDP) increases. 
C)  The price level increases, and real gross domestic product GDP) decreases. 
D)  The price level decreases, and real gross domestic product GDP) remains constant. 
E)  The price level increases, and real gross domestic product GDP) remains constant.

Question 7

In 1968, Friedman and Phelps predicted that high inflation

Accepted Answer

A)  would not always deliver low unemployment. 
B)  is inversely related to low unemployment. 
C)  is directly correlated with low unemployment. 
D)  guarantees low unemployment. 
E)  and low unemployment are mutually exclusive. 
A)  would not always deliver low unemployment. 
B)  is inversely related to low unemployment. 
C)  is directly correlated with low unemployment. 
D)  guarantees low unemployment. 
E)  and low unemployment are mutually exclusive.

Question 8

The traditional short-run Phillips curve has ________ on the x axis and ________ on the y axis.

Accepted Answer

A)  unemployment; inflation 
B)  inflation; unemployment 
C)  real gross domestic product GDP); price level 
D)  price level; real gross domestic product GDP) 
E)  real gross domestic product GDP); inflation 
A)  unemployment; inflation 
B)  inflation; unemployment 
C)  real gross domestic product GDP); price level 
D)  price level; real gross domestic product GDP) 
E)  real gross domestic product GDP); inflation

Question 9

Consider a hypothetical economy in which policy makers have never used inflation to try to stimulate the economy. Let's say that inflation is 0 percent and market participants expect 0 percent inflation going forward. In addition, the natural rate of unemployment is 6 percent.
a. Draw a diagram representing the short- and long-run Phillips curves with expected inflation and actual inflation on the y axis and the unemployment rate on the x axis.
b. Show what happens in the short run if the central bank of this economy decides to enact policy that raises the inflation rate to 3 percent.
c. Because the inflation rate is 3 percent, market participants expect a 3 percent inflation rate. Show what impact this has on the short-run Phillips curve.
d. Discuss how this demonstrates the long-run Phillips curve.

Accepted Answer

a.
 @#IMG-DLM& b. @#IMG-DLM& c.
 @#IMG-DLM& d. As you can see, when ex

Question 10

Expansionary monetary policy can have immediate real short-run effects; initially, no prices have adjusted. But as prices adjust in the long run, the real impact of monetary policy

Accepted Answer

A)  is multiplied. 
B)  is negative. 
C)  is cut in half. 
D)  dissipates completely. 
E)  is unknown. 
A)  is multiplied. 
B)  is negative. 
C)  is cut in half. 
D)  dissipates completely. 
E)  is unknown.

Question 11

One explanation as to why monetary policy did not have the intended effects on the economy during the Great Recession is that

Accepted Answer

A)  part of the recession was caused by a rightward shift in aggregate supply. 
B)  monetary policy is ineffective in the short run. 
C)  the monetary policy conducted during the Great Recession was mostly unexpected. 
D)  part of the recession was caused by a leftward shift in aggregate supply. 
E)  focus was on fiscal policy during the Great Recession. 
A)  part of the recession was caused by a rightward shift in aggregate supply. 
B)  monetary policy is ineffective in the short run. 
C)  the monetary policy conducted during the Great Recession was mostly unexpected. 
D)  part of the recession was caused by a leftward shift in aggregate supply. 
E)  focus was on fiscal policy during the Great Recession.

Question 12

Answer the following questions using an aggregate demand-aggregate supply model when appropriate.
a. Use an aggregate demand-aggregate supply model to represent an economy at long-run equilibrium.
b. Show what happens on your model when aggregate demand increases.
c. Is the economy you modeled in an expansion or recession now?
d. Continuing with the economy you are building, what type of monetary policy would you suggest be taken by the Federal Reserve?
e. What will your suggested policy do to your aggregate demand-aggregate supply model in the short run?

Accepted Answer

a. @#IMG-DLM& b. @#IMG-DLM& c. Because Y₁ @#IMG-DLM& Y*, this economy

Question 13

Holding all else constant, in the short run, a decrease in the money supply can cause an)

Accepted Answer

A)  decrease in unemployment. 
B)  high rate of inflation. 
C)  increase in the price level. 
D)  decrease in real gross domestic product GDP). 
E)  increase in real gross domestic product GDP). 
A)  decrease in unemployment. 
B)  high rate of inflation. 
C)  increase in the price level. 
D)  decrease in real gross domestic product GDP). 
E)  increase in real gross domestic product GDP).

Question 14

________ indicates a short-run inverse relationship between inflation and unemployment rates.

Accepted Answer

A)  Stagflation 
B)  Adaptive expectations theory 
C)  The Phillips curve 
D)  Monetary neutrality 
E)  Rational expectations theory 
A)  Stagflation 
B)  Adaptive expectations theory 
C)  The Phillips curve 
D)  Monetary neutrality 
E)  Rational expectations theory

Question 15

If the interest rate on a loan is higher than the expected return from an investment,

Accepted Answer

A)  a rational firm will take out a loan for the investment. 
B)  the Federal Reserve will conduct contractionary monetary policy. 
C)  a rational firm will not take out a loan for the investment. 
D)  the Federal Reserve will conduct expansionary monetary policy. 
E)  the government will conduct expansionary fiscal policy. 
A)  a rational firm will take out a loan for the investment. 
B)  the Federal Reserve will conduct contractionary monetary policy. 
C)  a rational firm will not take out a loan for the investment. 
D)  the Federal Reserve will conduct expansionary monetary policy. 
E)  the government will conduct expansionary fiscal policy.

Question 16

When aggregate supply shifts cause the economy to enter a recession similar to the Great Recession, explain why monetary policy is much less likely to restore the economy to its prerecession conditions than if the recession was caused solely by a decrease in aggregate demand.

Accepted Answer

When the cause of a recession is due in

Question 17

Before the 1960s, monetary policy in the United States was strictly

Accepted Answer

A)  passive. 
B)  activist. 
C)  based on expectations. 
D)  expansionary. 
E)  adaptive. 
A)  passive. 
B)  activist. 
C)  based on expectations. 
D)  expansionary. 
E)  adaptive.

Question 18

When supply shifts cause a downturn in the economy,

Accepted Answer

A)  monetary policy is more likely to restore the economy to its prerecession conditions. 
B)  inflation is not a concern. 
C)  the natural rate of unemployment decreases. 
D)  monetary policy can have no effect on the economy, even in the short run. 
E)  monetary policy is much less likely to restore the economy to its prerecession conditions. 
A)  monetary policy is more likely to restore the economy to its prerecession conditions. 
B)  inflation is not a concern. 
C)  the natural rate of unemployment decreases. 
D)  monetary policy can have no effect on the economy, even in the short run. 
E)  monetary policy is much less likely to restore the economy to its prerecession conditions.

Question 19

The combination of high unemployment rates and high inflation is called

Accepted Answer

A)  disinflation. 
B)  deflation. 
C)  monetary neutrality. 
D)  stagflation. 
E)  adaptive inflation. 
A)  disinflation. 
B)  deflation. 
C)  monetary neutrality. 
D)  stagflation. 
E)  adaptive inflation.

Question 20

How are the long-run Phillips curve and the natural rate of unemployment related?

Accepted Answer

The long-run Phillips curve shows that t

Studying alternative theories of how people form expectations is particularly relevant to monetary policy because

Starting at macroeconomic equilibrium at full employment, show the effects of contractionary monetary policy in the long run using an aggregate demand-aggregate supply AD-AS) model and discuss.

Holding all else constant, in the short run, an increase in the money supply can cause an)

Refer to the following figure to answer the next questions. -According to the figure, if the economy started at full-employment output, expansionary monetary policy would cause real gross domestic product (GDP) to ________ in the short run.

Explain the difference between adaptive expectations theory and rational expectations theory.

What happens if aggregate demand increases simultaneously with a decrease in short-run aggregate supply, due to anticipated expansionary monetary policy?

In 1968, Friedman and Phelps predicted that high inflation

The traditional short-run Phillips curve has on the x axis and on the y axis.

Expansionary monetary policy can have immediate real short-run effects; initially, no prices have adjusted. But as prices adjust in the long run, the real impact of monetary policy

One explanation as to why monetary policy did not have the intended effects on the economy during the Great Recession is that

Holding all else constant, in the short run, a decrease in the money supply can cause an)

________ indicates a short-run inverse relationship between inflation and unemployment rates.

If the interest rate on a loan is higher than the expected return from an investment,

When aggregate supply shifts cause the economy to enter a recession similar to the Great Recession, explain why monetary policy is much less likely to restore the economy to its prerecession conditions than if the recession was caused solely by a decrease in aggregate demand.

Before the 1960s, monetary policy in the United States was strictly

When supply shifts cause a downturn in the economy,

The combination of high unemployment rates and high inflation is called

How are the long-run Phillips curve and the natural rate of unemployment related?

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Market Outcomes and Tax Incidence

Price Controls

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

The Price Level and Inflation

Savings, Interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

International Trade

International Finance

Filters

Exam 18: Monetary Policy Learning Objectives

Studying alternative theories of how people form expectations is particularly relevant to monetary policy because

Starting at macroeconomic equilibrium at full employment, show the effects of contractionary monetary policy in the long run using an aggregate demand-aggregate supply AD-AS) model and discuss.

Holding all else constant, in the short run, an increase in the money supply can cause an)

Refer to the following figure to answer the next questions. -According to the figure, if the economy started at full-employment output, expansionary monetary policy would cause real gross domestic product (GDP) to ________ in the short run.

Explain the difference between adaptive expectations theory and rational expectations theory.

What happens if aggregate demand increases simultaneously with a decrease in short-run aggregate supply, due to anticipated expansionary monetary policy?

In 1968, Friedman and Phelps predicted that high inflation

The traditional short-run Phillips curve has ________ on the x axis and ________ on the y axis.

Expansionary monetary policy can have immediate real short-run effects; initially, no prices have adjusted. But as prices adjust in the long run, the real impact of monetary policy

One explanation as to why monetary policy did not have the intended effects on the economy during the Great Recession is that

Holding all else constant, in the short run, a decrease in the money supply can cause an)

________ indicates a short-run inverse relationship between inflation and unemployment rates.

If the interest rate on a loan is higher than the expected return from an investment,

When aggregate supply shifts cause the economy to enter a recession similar to the Great Recession, explain why monetary policy is much less likely to restore the economy to its prerecession conditions than if the recession was caused solely by a decrease in aggregate demand.

Before the 1960s, monetary policy in the United States was strictly

When supply shifts cause a downturn in the economy,

The combination of high unemployment rates and high inflation is called

How are the long-run Phillips curve and the natural rate of unemployment related?

Five Foundations of Economics

Model Building and Gains From Trade

The Market at Work: Supply and Demand

Market Outcomes and Tax Incidence

Price Controls

Introduction to Macroeconomics and Gross Domestic Product

Unemployment

The Price Level and Inflation

Savings, Interest Rates, and the Market for Loanable Funds

Financial Markets and Securities

Economic Growth and the Wealth of Nations

Growth Theory

The Aggregate Demandaggregate Supply Model

The Great Recession, the Great Depression, and Great Macroeconomic Debates

Federal Budgets: the Tools of Fiscal Policy

Fiscal Policy

Money and the Federal Reserve

International Trade

International Finance

Filters

The traditional short-run Phillips curve has on the x axis and on the y axis.