Exam 13: Inflation, Output and Economic Policy

Consider a very small economy with a potential output of £10 billion. The actual output is £7 billion while the inflation level is 4 per cent. Which of the following can definitely be concluded if the long- run aggregate supply curve shifts to £9.5 billion?

According to the quantity theory of money, inflation is inversely related to money supply and the velocity of circulation of money.

With the discovery of oil or gas in a country, the _____.

The natural rate of unemployment varies with the level of inflation in the economy.

While inflation reduces real values, deflation increases real values.

Inflation targeting in the face of adverse supply shocks is likely to cause:

Which of the following is true of an economy in the long run?

In the short run, prices and wages do not affect output in an economy.

Active fiscal and monetary policy is required to move an economy back to equilibrium when:

What is meant by leverage?

In the long run, real wages are held constant through nominal wage increases being kept in line with inflation.

Consider an economy that is operating at the intersection of the short-run and long run Phillips curves. The level of unemployment is 2.5 per cent while the level of inflation is 4 per cent. At this point, if speculation about oil price hikes increase inflationary expectations in this economy, which of the following must happen?

The long-run Phillips curve suggests that:

Which of the following is likely to occur when inflation moves above the target rate of inflation in an economy?

Why is it important for businesses to understand the interest rate path? How do companies use debt to leverage their ?nancial returns? Illustrate with an example.

Which of the following situations is likely to cause a central bank to undertake a loose monetary policy?

Which of the following can lead to expectations of future price stability?

The Taylor rule is used to link interest rates to both inflation and output changes.

Potential GDP is the level of output that could be produced in an economy if all factors of production were employed.

When an output gap exists, fiscal or monetary policy should be neutral.