Exam 15: A Dynamic Model of Economic Fluctuations

The upward slope of the dynamic aggregate supply curve indicates that, holding other factors constant, high levels of economic activity are associated with:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the demand and supply shocks ε_t and υ_t equal _____, and current inflation π_t equals _____.

A central bank that chooses a small value of θ_π and a large value of θ_Y is choosing less _____ at the expense of more _____.

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by the AD-AS model in light of this difference.

Use the model of dynamic aggregate demand and aggregate supply to compare the time paths of output and inflation in response to a one-period positive demand shock versus a one-period positive supply shock.

According to the Phillips curve, firms raise prices when output is _____ the natural level of output or, equivalently, when the unemployment rate is _____ the natural rate of unemployment.

In the dynamic model, the supply shock variable, υ_t, is a variable appearing in which of the following equations of the model?

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θ_π and a small value of θ_Y, then the DAD curve will be relatively _____, and supply shocks will have relatively _____ impacts on inflation than output.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

In the dynamic model, changes in fiscal policy are captured in changes in the:

A higher real interest rate reduces the demand for goods and services by:

The dynamic aggregate demand curve will shift if any of the following changes except the:

To follow a monetary policy rule, the central bank raises the nominal interest rate by:

What is stagflation? How does it occur as a result of a shock to the aggregate supply curve?

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

The dynamic model of aggregate demand and aggregate supply assumes that people form expectations of inflation based on:

Central Bank A conducts monetary policy according to the following monetary policy rule: i = π + 2.0 + 0.90 (π - 2.0) + 0.10 (Y - 100), and Central Bank B conducts monetary according to the following monetary policy rule: i = π + 2.0 + 0.10 (π - 2.0) +0 .90 (Y - 100), where i is the nominal interest rate measured in percent, π is the inflation rate measured in percent, and Y is output measured as a percentage of the natural level of output. The economies of the two countries are otherwise identical and operate as described by the dynamic model of aggregate demand and aggregate supply. a. In which country will the dynamic aggregate demand curve be steeper? Explain. b. If a positive supply shock of the same magnitude hits both countries, which country will experience the greatest variability in output? Explain.

The dynamic aggregate supply curve is derived from:

The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:

According to the Phillips curve, inflation depends on expected inflation because: