Question 1

A characteristic of long-run equilibrium is the economy is producing its potential output. This is:

Accepted Answer

A)  the maximum level of output the economy could produce at any time. 
B)  the level of output the economy produces when its resources are used at normal rates. 
C)  defined as using 80 percent of the economy's resources at any time. 
D)  the level of output consistent with an unemployment rate of 7.5%. 
A)  the maximum level of output the economy could produce at any time. 
B)  the level of output the economy produces when its resources are used at normal rates. 
C)  defined as using 80 percent of the economy's resources at any time. 
D)  the level of output consistent with an unemployment rate of 7.5%.

Question 2

If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are:

Accepted Answer

A)  very concerned about keeping inflation close to the target rate. 
B)  not concerned at all about inflation. 
C)  less concerned about keeping inflation close to its short-run target. 
D)  not going to let inflation deviate from its target at all. 
A)  very concerned about keeping inflation close to the target rate. 
B)  not concerned at all about inflation. 
C)  less concerned about keeping inflation close to its short-run target. 
D)  not going to let inflation deviate from its target at all.

Question 3

The debate over the causes of recessions in the U.S. in recent years has included arguments about:

Accepted Answer

A)  monetary policy, but not higher oil prices. 
B)  decreases in exports. 
C)  higher oil prices, but not monetary policy. 
D)  both monetary policy and higher oil prices. 
A)  monetary policy, but not higher oil prices. 
B)  decreases in exports. 
C)  higher oil prices, but not monetary policy. 
D)  both monetary policy and higher oil prices.

Question 4

If a recession were the result of monetary policy, we should observe:

Accepted Answer

A)  inflation increasing as output decreases. 
B)  potential output decreasing. 
C)  inflation slowing as output falls. 
D)  a high rate of money growth. 
A)  inflation increasing as output decreases. 
B)  potential output decreasing. 
C)  inflation slowing as output falls. 
D)  a high rate of money growth.

Question 5

Given a central bank's monetary policy reaction curve, if inflation increases by 1% why would policymakers likely have to increase the nominal interest rate by more than the increase in the expected rate of inflation?

Accepted Answer

The higher rate of inflation will have t

Question 6

Assuming the free flow of capital across borders, explain why a country that has a fixed exchange rate cannot have an independent monetary policy reaction curve.

Accepted Answer

We saw that a country that adopts a fixe

Question 7

Explain the changes that would cause the dynamic aggregate demand curve to shift.

Accepted Answer

The dynamic aggregate demand curve would

Question 8

If the economy is producing a level of output that is consistent with the potential output level, and government purchases increase, describe what happens in terms of the long-run real interest rate, and why, to keep the economy at its potential output level.

Accepted Answer

If the economy is producing its potentia

Question 9

If most people expect the inflation rate will increase, the:

Accepted Answer

A)  long-run aggregate supply curve would shift right. 
B)  aggregate demand curve would shift right. 
C)  short-run aggregate supply curve would shift to the right. 
D)  short-run aggregate supply curve would shift to the left. 
A)  long-run aggregate supply curve would shift right. 
B)  aggregate demand curve would shift right. 
C)  short-run aggregate supply curve would shift to the right. 
D)  short-run aggregate supply curve would shift to the left.

Question 10

Economists usually maintain that policy designed to increase aggregate demand cannot have any long-run real effects. What lies behind this argument?

Accepted Answer

The basis for the argument lies in the f

Question 11

Which of the following statements is most correct?

Accepted Answer

A)  When the real interest rate increases the reward for saving decreases. 
B)  When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases. 
C)  When the real interest rate decreases the cost of current consumption increases. 
D)  When the real interest rate increases the level of saving always decreases. 
A)  When the real interest rate increases the reward for saving decreases. 
B)  When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases. 
C)  When the real interest rate decreases the cost of current consumption increases. 
D)  When the real interest rate increases the level of saving always decreases.

Question 12

A decrease in the inflation target by the central bank would:

Accepted Answer

A)  have no impact on the positioning of the dynamic aggregate demand curve. 
B)  cause the dynamic aggregate demand curve to shift to the left. 
C)  cause the dynamic aggregate demand curve to shift to the right. 
D)  be reflected by a movement down and along the existing dynamic aggregate demand curve. 
A)  have no impact on the positioning of the dynamic aggregate demand curve. 
B)  cause the dynamic aggregate demand curve to shift to the left. 
C)  cause the dynamic aggregate demand curve to shift to the right. 
D)  be reflected by a movement down and along the existing dynamic aggregate demand curve.

Question 13

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

Accepted Answer

The most sensitive is investment demand,

Question 14

What should be the impact on aggregate expenditures from an increase in the real interest rate?

Accepted Answer

A)  It should increase 
B)  It should decrease 
C)  It should remain constant 
D)  The impact is indeterminate 
A)  It should increase 
B)  It should decrease 
C)  It should remain constant 
D)  The impact is indeterminate

Question 15

Empirical evidence suggests that over the last several decades:

Accepted Answer

A)  the nominal and real federal funds rates are related inversely. 
B)  the nominal and real federal funds rates are highly positively correlated. 
C)  while the FOMC has had a lot of influence over the nominal federal funds rate, they have been less successful at changing the real federal funds rate. 
D)  there is no correlation between the nominal and real federal funds. 
A)  the nominal and real federal funds rates are related inversely. 
B)  the nominal and real federal funds rates are highly positively correlated. 
C)  while the FOMC has had a lot of influence over the nominal federal funds rate, they have been less successful at changing the real federal funds rate. 
D)  there is no correlation between the nominal and real federal funds.

Question 16

How would the discovery of a previously unknown large reserve of oil affect the short-run aggregate supply curve and why? What other change could have the same effect?

Accepted Answer

This discovery should mean a lower price

Question 17

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

Accepted Answer

A)  The monetary policy reaction curve shifts to the left 
B)  A movement up the existing monetary policy reaction curve 
C)  A movement down the existing monetary policy reaction curve 
D)  The monetary policy reaction curve shifts to the right 
A)  The monetary policy reaction curve shifts to the left 
B)  A movement up the existing monetary policy reaction curve 
C)  A movement down the existing monetary policy reaction curve 
D)  The monetary policy reaction curve shifts to the right

Question 18

Temporary changes in inflation lead to adjustments in the price level. What causes permanent increases in inflation and why?

Accepted Answer

Permanent increases in inflation can onl

Question 19

Business cycles are viewed as:

Accepted Answer

A)  movements in the short-run equilibrium. 
B)  situations where aggregate demand does not equal short-run aggregate supply. 
C)  inevitable; every economy must experience them. 
D)  movements in the long-run equilibrium. 
A)  movements in the short-run equilibrium. 
B)  situations where aggregate demand does not equal short-run aggregate supply. 
C)  inevitable; every economy must experience them. 
D)  movements in the long-run equilibrium.

Question 20

To an economist, the term "inflation" refers to:

Accepted Answer

A)  any price increases. 
B)  a continually rising price level. 
C)  a one-time change in the average price level. 
D)  increases in prices of important goods like food and energy. 
A)  any price increases. 
B)  a continually rising price level. 
C)  a one-time change in the average price level. 
D)  increases in prices of important goods like food and energy.

Exam 21:Output, Inflation, and Monetary Policy

A characteristic of long-run equilibrium is the economy is producing its potential output. This is:

If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are:

The debate over the causes of recessions in the U.S. in recent years has included arguments about:

If a recession were the result of monetary policy, we should observe:

Given a central bank's monetary policy reaction curve, if inflation increases by 1% why would policymakers likely have to increase the nominal interest rate by more than the increase in the expected rate of inflation?

Assuming the free flow of capital across borders, explain why a country that has a fixed exchange rate cannot have an independent monetary policy reaction curve.

Explain the changes that would cause the dynamic aggregate demand curve to shift.

If the economy is producing a level of output that is consistent with the potential output level, and government purchases increase, describe what happens in terms of the long-run real interest rate, and why, to keep the economy at its potential output level.

If most people expect the inflation rate will increase, the:

Economists usually maintain that policy designed to increase aggregate demand cannot have any long-run real effects. What lies behind this argument?

Which of the following statements is most correct?

A decrease in the inflation target by the central bank would:

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

What should be the impact on aggregate expenditures from an increase in the real interest rate?

Empirical evidence suggests that over the last several decades:

How would the discovery of a previously unknown large reserve of oil affect the short-run aggregate supply curve and why? What other change could have the same effect?

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

Temporary changes in inflation lead to adjustments in the price level. What causes permanent increases in inflation and why?

Business cycles are viewed as:

To an economist, the term "inflation" refers to:

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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