Question 1

Take a look at the IS-MP-PC model shown here. The equilibrium real interest rate is:

Accepted Answer

A) 4%. 
B) 3%. 
C) 2%. 
D) -1%. 
A) 4%. 
B) 3%. 
C) 2%. 
D) -1%.

Question 2

Assume that a negative spending shock of $68 million hits the economy. If the multiplier is 2, by how much will the IS curve shift and in what direction?

Accepted Answer

The answer of Assume that a negative spending shock of...

Question 3

Describe the steps used to forecast an economic outcome when the economy is in equilibrium.

Accepted Answer

The answer of Describe the steps used to forecast an...

Question 4

The second step in analyzing a macroeconomic shock is to:

Accepted Answer

A) assess inflation. 
B) find the output gap. 
C) identify the shock and shift the curve. 
D) forecast future GDP growth. 
A) assess inflation. 
B) find the output gap. 
C) identify the shock and shift the curve. 
D) forecast future GDP growth.

Question 5

Which of the following graphs correctly represents the effect of increased consumer confidence and spending on the IS curve?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 6

If you see a newspaper headline that says "Consumer spending booms," this is an example of _____ shock.

Accepted Answer

A) a spending 
B) an interest rate 
C) a financial 
D) a supply 
A) a spending 
B) an interest rate 
C) a financial 
D) a supply

Question 7

In the IS-MP analysis in the Fed model, contractionary fiscal policy will shift the:

Accepted Answer

A) IS curve to the left. 
B) IS curve to the right. 
C) MP curve up. 
D) MP curve down. 
A) IS curve to the left. 
B) IS curve to the right. 
C) MP curve up. 
D) MP curve down.

Question 8

A financial shock is any change in:

Accepted Answer

A) aggregate expenditure, at a given interest rate and level of income. 
B) borrowing conditions that changes the real interest rate at which people can borrow. 
C) production costs that leads suppliers to change the prices they charge at any given level of output. 
D) potential GDP in the economy. 
A) aggregate expenditure, at a given interest rate and level of income. 
B) borrowing conditions that changes the real interest rate at which people can borrow. 
C) production costs that leads suppliers to change the prices they charge at any given level of output. 
D) potential GDP in the economy.

Question 9

Define the Fed model.

Accepted Answer

The Fed model is the framework

Question 10

In the IS-MP analysis in the Fed model, a decrease in imports will shift the:

Accepted Answer

A) MP curve up. 
B) MP curve down. 
C) IS curve to the left. 
D) IS curve to the right. 
A) MP curve up. 
B) MP curve down. 
C) IS curve to the left. 
D) IS curve to the right.

Question 11

The economy shown here begins at a 0% output gap. A rise in the risk premium by 2% leads to:

Accepted Answer

A) unexpected inflation of 0%. 
B) unexpected inflation of -1%. 
C) a new output gap of 2%. 
D) a new real interest rate of 1%. 
A) unexpected inflation of 0%. 
B) unexpected inflation of -1%. 
C) a new output gap of 2%. 
D) a new real interest rate of 1%.

Question 12

Holding everything else equal, exports rise in Nigeria. Analyze this shock graphically, and explain using the Fed model.

Accepted Answer

The answer of Holding everything else equal, exports rise in...

Question 13

The economy shown here begins at a 0% output gap. A rise in the risk premium by 2% leads to:

Accepted Answer

A) a new real interest rate of 3%. 
B) unexpected inflation of 1%. 
C) a new output gap of 2%. 
D) a new real interest rate of 0%. 
A) a new real interest rate of 3%. 
B) unexpected inflation of 1%. 
C) a new output gap of 2%. 
D) a new real interest rate of 0%.

Question 14

You are an economic detective. Using the three clues provided, explain what kind of shock the economy most likely experienced. Further explain what curve in the Fed model was affected and in which direction the curve shifted.
- Interest rates remain unchanged.
- The output gap has become more positive.
- Actual inflation has increased.

Accepted Answer

The answer of You are an economic detective. Using the...

Question 15

The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be:

Accepted Answer

A) 2% higher. 
B) 1% higher. 
C) 1% lower. 
D) 4% lower. 
A) 2% higher. 
B) 1% higher. 
C) 1% lower. 
D) 4% lower.

Question 16

Once you have identified the point of equilibrium in the IS-MP graph in the Fed model, the horizontal axis will show you the:

Accepted Answer

A) actual inflation. 
B) unexpected inflation. 
C) output gap. 
D) equilibrium real interest rate. 
A) actual inflation. 
B) unexpected inflation. 
C) output gap. 
D) equilibrium real interest rate.

Question 17

Once you have identified the output gap in the IS-MP graph in the Fed model, how would you connect to the Phillips curve?

Accepted Answer

A) Trace the inflation rate from the IS-MP model down to the same inflation rate in the Phillips curve. 
B) Trace the real interest rate from the IS-MP model down to the same real interest rate in the Phillips curve. 
C) Trace the unemployment rate from the IS-MP model down to the same unemployment gap in the Phillips curve. 
D) Trace the output gap from the IS-MP model down to the same output gap in the Phillips curve. 
A) Trace the inflation rate from the IS-MP model down to the same inflation rate in the Phillips curve. 
B) Trace the real interest rate from the IS-MP model down to the same real interest rate in the Phillips curve. 
C) Trace the unemployment rate from the IS-MP model down to the same unemployment gap in the Phillips curve. 
D) Trace the output gap from the IS-MP model down to the same output gap in the Phillips curve.

Question 18

Which of the following graphs correctly represents the effect on the MP curve in Canada if mortgage rates decrease?

Accepted Answer

A) 
  
B) 
  
C) 
  
D) 
  
A) 
  
B) 
  
C) 
  
D)

Question 19

If you see a newspaper headline that says "Steel prices rise sharply," this is an example of _____ shock.

Accepted Answer

A) a spending 
B) an interest rate 
C) a financial 
D) a supply 
A) a spending 
B) an interest rate 
C) a financial 
D) a supply

Question 20

When a spending shock occurs, the IS curve shifts by the:

Accepted Answer

A) size of the multiplier. 
B) change in spending times the multiplier. 
C) change in spending. 
D) change in spending divided by the multiplier. 
A) size of the multiplier. 
B) change in spending times the multiplier. 
C) change in spending. 
D) change in spending divided by the multiplier.

Exam 32: The Fed Model: Linking Interest Rates, Output, and Inflation

Take a look at the IS-MP-PC model shown here. The equilibrium real interest rate is:

Assume that a negative spending shock of $68 million hits the economy. If the multiplier is 2, by how much will the IS curve shift and in what direction?

Describe the steps used to forecast an economic outcome when the economy is in equilibrium.

The second step in analyzing a macroeconomic shock is to:

Which of the following graphs correctly represents the effect of increased consumer confidence and spending on the IS curve?

If you see a newspaper headline that says "Consumer spending booms," this is an example of _____ shock.

In the IS-MP analysis in the Fed model, contractionary fiscal policy will shift the:

A financial shock is any change in:

Define the Fed model.

In the IS-MP analysis in the Fed model, a decrease in imports will shift the:

The economy shown here begins at a 0% output gap. A rise in the risk premium by 2% leads to:

Holding everything else equal, exports rise in Nigeria. Analyze this shock graphically, and explain using the Fed model.

The economy shown here begins at a 0% output gap. A rise in the risk premium by 2% leads to:

The economy shown here begins at a 0% output gap. Now suppose that banks begin to fear the risk of default and the risk premium rises by 2%. If inflation expectations remain unchanged, the actual inflation rate will be:

Once you have identified the point of equilibrium in the IS-MP graph in the Fed model, the horizontal axis will show you the:

Once you have identified the output gap in the IS-MP graph in the Fed model, how would you connect to the Phillips curve?

Which of the following graphs correctly represents the effect on the MP curve in Canada if mortgage rates decrease?

If you see a newspaper headline that says "Steel prices rise sharply," this is an example of _____ shock.

When a spending shock occurs, the IS curve shifts by the:

The Core Principles of Economics

Demand: Thinking Like a Buyer

Supply: Thinking Like a Seller

Equilibrium: Where Supply Meets Demand

Elasticity: Measuring Responsiveness

When Governments Intervene in Markets

Welfare and Efficiency

Gains From Trade

International Trade

Externalities and Public Goods

Labor Demand and Supply

Wages, Workers, and Management

Inequality, Social Insurance, and Redistribution

Market Structure and Market Power

Entry, Exit, and Long-Run Profitability

Business Strategy

Sophisticated Pricing Strategies

Game Theory and Strategic Choices

Decisions Involving Uncertainty

Decisions With Private Information

Sizing up the Economy Using Gdp

Economic Growth

Unemployment

Inflation and Money

Consumption and Saving

Investment

The Financial Sector

International Finance and the Exchange Rate

Business Cycles

IS-MP Analysis: Interest Rates and Output

Phillips Curve

Aggregate Demand and Aggregate Supply

Monetary Policy

Government Spending, Taxes, and Fiscal Policy

Appendix: Aggregate Expenditure and the Multiplier

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