Question 1

Inflation inertia is the tendency for inflation to:

Accepted Answer

A) equal zero. 
B) change relatively slowly from year to year. 
C) decrease when the Fed increases interest rates. 
D) increase when the Fed decreases interest rates. 
A) equal zero. 
B) change relatively slowly from year to year. 
C) decrease when the Fed increases interest rates. 
D) increase when the Fed decreases interest rates.

Question 2

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the ______ curve to the right and generate ______.

Accepted Answer

A) aggregate demand; a recessionary output gap 
B) aggregate supply; a recessionary output gap 
C) aggregate demand; an expansionary output gap 
D) aggregate supply; an expansionary output gap 
A) aggregate demand; a recessionary output gap 
B) aggregate supply; a recessionary output gap 
C) aggregate demand; an expansionary output gap 
D) aggregate supply; an expansionary output gap

Question 3

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y3 and inflation rate 2. The economy is currently experiencing ______, and the correct monetary policy response to this situation, to return the economy to potential GDP, is to ______.

Accepted Answer

A) a recessionary gap; raise taxes 
B) an expansionary gap; cut taxes 
C) a recessionary gap; increase the money supply 
D) an expansionary gap; decrease the money supply 
A) a recessionary gap; raise taxes 
B) an expansionary gap; cut taxes 
C) a recessionary gap; increase the money supply 
D) an expansionary gap; decrease the money supply

Question 4

Refer to the figure below.Long-run equilibrium in this economy:

Accepted Answer

A) will be impossible to achieve. 
B) could occur if AD shifts upward to the right. 
C) could occur if AS shifts upward and to the left. 
D) will occur only if AD shifts downward to the left. 
A) will be impossible to achieve. 
B) could occur if AD shifts upward to the right. 
C) could occur if AS shifts upward and to the left. 
D) will occur only if AD shifts downward to the left.

Question 5

When actual output equals potential output, there is ______ output gap and the inflation rate will ____.

Accepted Answer

A) an expansionary; exceed the expected rate of inflation 
B) an expansionary; be lower than the expected rate of inflation 
C) no; be equal to the expected rate of inflation 
D) a recessionary; exceed the expected rate of inflation 
A) an expansionary; exceed the expected rate of inflation 
B) an expansionary; be lower than the expected rate of inflation 
C) no; be equal to the expected rate of inflation 
D) a recessionary; exceed the expected rate of inflation

Question 6

The fact that output gaps will not last indefinitely, but will be closed by rising or falling prices is the economy's:

Accepted Answer

A) short-run equilibrium property. 
B) self-correcting property. 
C) income-expenditure multiplier. 
D) long-run equilibrium property. 
A) short-run equilibrium property. 
B) self-correcting property. 
C) income-expenditure multiplier. 
D) long-run equilibrium property.

Question 7

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

Accepted Answer

A) large; high 
B) large; low 
C) small; low 
D) small; high 
A) large; high 
B) large; low 
C) small; low 
D) small; high

Question 8

The aggregate demand curve shows the relationship between planned spending and the:

Accepted Answer

A) nominal interest rate. 
B) real interest rate. 
C) unemployment rate. 
D) inflation rate. 
A) nominal interest rate. 
B) real interest rate. 
C) unemployment rate. 
D) inflation rate.

Question 9

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

Accepted Answer

A) higher; higher 
B) higher; lower 
C) lower; higher 
D) lower; lower 
A) higher; higher 
B) higher; lower 
C) lower; higher 
D) lower; lower

Question 10

Firms that face menu costs react to a sustained increase in demand by:

Accepted Answer

A) increasing output and then raising the price of their output. 
B) charging higher prices, without necessarily increasing the amount of output they are willing to sell. 
C) charging lower prices, while simultaneously increasing the amount of output they are willing to sell. 
D) increasing output and then reducing the price of their output. 
A) increasing output and then raising the price of their output. 
B) charging higher prices, without necessarily increasing the amount of output they are willing to sell. 
C) charging lower prices, while simultaneously increasing the amount of output they are willing to sell. 
D) increasing output and then reducing the price of their output.

Question 11

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

Accepted Answer

A) a negative demand shock. 
B) a positive inflation shock. 
C) an increase in taxes. 
D) a decrease in the money supply. 
A) a negative demand shock. 
B) a positive inflation shock. 
C) an increase in taxes. 
D) a decrease in the money supply.

Question 12

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y3 and inflation rate 2.The economy is currently experiencing ______, and the correct fiscal policy response to this situation, to return the economy to potential GDP, is to ______.

Accepted Answer

A) a recessionary gap; increase government spending 
B) an expansionary gap; decrease government spending 
C) a recessionary gap; increase taxes 
D) an expansionary gap; decrease taxes 
A) a recessionary gap; increase government spending 
B) an expansionary gap; decrease government spending 
C) a recessionary gap; increase taxes 
D) an expansionary gap; decrease taxes

Question 13

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.

Accepted Answer

A) planned consumption and investment; government spending 
B) planned consumption and investment; net exports 
C) net exports; planned consumption and investment 
D) net exports; government spending 
A) planned consumption and investment; government spending 
B) planned consumption and investment; net exports 
C) net exports; planned consumption and investment 
D) net exports; government spending

Question 14

If the interest rate in the U.S.falls, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will fall.

Accepted Answer

A) more; demand for 
B) more; supply of 
C) less; demand for 
D) less; supply of 
A) more; demand for 
B) more; supply of 
C) less; demand for 
D) less; supply of

Question 15

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Question 16

If the interest rate in the U.S.rises, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will rise.

Accepted Answer

A) more; demand for 
B) more; supply of 
C) less; demand for 
D) less; supply of 
A) more; demand for 
B) more; supply of 
C) less; demand for 
D) less; supply of

Question 17

A large decrease in oil prices is an example of:

Accepted Answer

A) a positive inflation shock. 
B) a negative inflation shock. 
C) inflation inertia. 
D) excessive aggregate spending. 
A) a positive inflation shock. 
B) a negative inflation shock. 
C) inflation inertia. 
D) excessive aggregate spending.

Question 18

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

Accepted Answer

A) recessionary; increase 
B) recessionary; decrease 
C) expansionary; decrease 
D) expansionary; increase 
A) recessionary; increase 
B) recessionary; decrease 
C) expansionary; decrease 
D) expansionary; increase

Question 19

The aggregate demand curve shifts when there are changes in:

Accepted Answer

A) the inflation rate. 
B) planned spending that are not caused by changes in output or the inflation rate. 
C) planned spending that are caused only by changes in output or the inflation rate. 
D) real GDP. 
A) the inflation rate. 
B) planned spending that are not caused by changes in output or the inflation rate. 
C) planned spending that are caused only by changes in output or the inflation rate. 
D) real GDP.

Question 20

The economy is in short-run equilibrium:

Accepted Answer

A) when the AD and AS curves intersect at potential output Y*. 
B) when the AD and AS curves intersect at a level of real GDP that is above or below Y*. 
C) when the AD and AS curves become vertical. 
D) at the peak of the business cycle. 
A) when the AD and AS curves intersect at potential output Y*. 
B) when the AD and AS curves intersect at a level of real GDP that is above or below Y*. 
C) when the AD and AS curves become vertical. 
D) at the peak of the business cycle.

Inflation inertia is the tendency for inflation to:

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the curve to the right and generate .

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y₃ and inflation rate _2. The economy is currently experiencing , and the correct monetary policy response to this situation, to return the economy to potential GDP, is to _.

Refer to the figure below.Long-run equilibrium in this economy:

When actual output equals potential output, there is __ output gap and the inflation rate will .

The fact that output gaps will not last indefinitely, but will be closed by rising or falling prices is the economy's:

Low expected inflation leads to increases in wages and costs and to actual inflation.

The aggregate demand curve shows the relationship between planned spending and the:

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with _ inflation and __ output.

Firms that face menu costs react to a sustained increase in demand by:

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y₃ and inflation rate ₂.The economy is currently experiencing , and the correct fiscal policy response to this situation, to return the economy to potential GDP, is to .

An increase in the interest rate directly affects , but also has an indirect effect on because of its effect on exchange rates.

If the interest rate in the U.S.falls, U.S.financial assets become attractive to buyers and the U.S.dollars will fall.

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) in the inflation rate, leading to a(n) in output.

If the interest rate in the U.S.rises, U.S.financial assets become attractive to buyers and the U.S.dollars will rise.

A large decrease in oil prices is an example of:

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _ gap and inflation will _.

The aggregate demand curve shifts when there are changes in:

The economy is in short-run equilibrium:

Thinking Like an Economist

Comparative Advantage

Spending, Income, and GDP

Inflation and the Price Level

Wages and Unemployment

Economic Growth

Saving, Capital Formation, and Financial Markets

Money, Prices, and the Financial System

Short-Term Economic Fluctuations

Spending, Output, and Fiscal Policy

Monetary Policy and the Federal Reserve

Macroeconomic Policy

Exchange Rates, International Trade, and Capital Flows

Filters

Exam 13: Aggregate Demand, Aggregate Supply, and Business Cycles

Inflation inertia is the tendency for inflation to:

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the ______ curve to the right and generate ______.

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y3 and inflation rate 2. The economy is currently experiencing ______, and the correct monetary policy response to this situation, to return the economy to potential GDP, is to ______.

Refer to the figure below.Long-run equilibrium in this economy:

When actual output equals potential output, there is ______ output gap and the inflation rate will ____.

The fact that output gaps will not last indefinitely, but will be closed by rising or falling prices is the economy's:

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

The aggregate demand curve shows the relationship between planned spending and the:

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

Firms that face menu costs react to a sustained increase in demand by:

Suppose the economy is currently operating at potential output; a recessionary gap may be caused by each of the following except:

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y3 and inflation rate 2.The economy is currently experiencing ______, and the correct fiscal policy response to this situation, to return the economy to potential GDP, is to ______.

An increase in the interest rate directly affects ______, but also has an indirect effect on ______ because of its effect on exchange rates.

If the interest rate in the U.S.falls, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will fall.

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) ______ in the inflation rate, leading to a(n) ______ in output.

If the interest rate in the U.S.rises, U.S.financial assets become ______ attractive to buyers and the ______ U.S.dollars will rise.

A large decrease in oil prices is an example of:

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _____ gap and inflation will _____.

The aggregate demand curve shifts when there are changes in:

The economy is in short-run equilibrium:

Thinking Like an Economist

Comparative Advantage

Spending, Income, and GDP

Inflation and the Price Level

Wages and Unemployment

Economic Growth

Saving, Capital Formation, and Financial Markets

Money, Prices, and the Financial System

Short-Term Economic Fluctuations

Spending, Output, and Fiscal Policy

Monetary Policy and the Federal Reserve

Macroeconomic Policy

Exchange Rates, International Trade, and Capital Flows

Filters

Starting from potential output, if firms become more optimistic and decide to increase their investment in new capital, then this will shift the curve to the right and generate .

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y₃ and inflation rate _2. The economy is currently experiencing , and the correct monetary policy response to this situation, to return the economy to potential GDP, is to _.

When actual output equals potential output, there is __ output gap and the inflation rate will .

Low expected inflation leads to increases in wages and costs and to actual inflation.

Starting from long-run equilibrium, a positive inflation shock results in a short-run equilibrium with _ inflation and __ output.

Refer to the figure below.Suppose the economy is in a short-run equilibrium at output Y₃ and inflation rate ₂.The economy is currently experiencing , and the correct fiscal policy response to this situation, to return the economy to potential GDP, is to .

An increase in the interest rate directly affects , but also has an indirect effect on because of its effect on exchange rates.

If the interest rate in the U.S.falls, U.S.financial assets become attractive to buyers and the U.S.dollars will fall.

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) in the inflation rate, leading to a(n) in output.

If the interest rate in the U.S.rises, U.S.financial assets become attractive to buyers and the U.S.dollars will rise.

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) _ gap and inflation will _.