Question 1

A spending 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 2

Which of the following graphs correctly represents a positive supply shock on the Phillips curve?

Accepted Answer

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

Question 3

In the IS-MP analysis in the Fed model, the risk-free rate rises in response to:

Accepted Answer

A) increased capital inflows. 
B) adverse supply shocks. 
C) fiscal policy. 
D) monetary policy. 
A) increased capital inflows. 
B) adverse supply shocks. 
C) fiscal policy. 
D) monetary policy.

Question 4

If you see a newspaper headline that says "Banks shut doors - depositors scrambling to get their money back," 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 5

Take a look at the IS-MP-PC model shown here. If the expected inflation rate is 2.5%, the actual inflation rate is:

Accepted Answer

A) 2.5%. 
B) 1.5%. 
C) -1.5%. 
D) -2.5%. 
A) 2.5%. 
B) 1.5%. 
C) -1.5%. 
D) -2.5%.

Question 6

Assume that the economy starts at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. Based on this scenario, the Chinese economy experiences:
​
Figure A
  ​
Figure B
  ​
Figure C
  ​
Figure D

Accepted Answer

A)  no change, as shown in Figure A. 
B)  a leftward shift of the IS curve and an output gap of -6%, as shown in Figure B. 
C)  an upward shift of the Phillips curve and 1% unexpected inflation, as shown in Figure C. 
D)  an upward shift of the MP curve and a new interest rate of 3%, as shown in Figure D. 
A)  no change, as shown in Figure A. 
B)  a leftward shift of the IS curve and an output gap of -6%, as shown in Figure B. 
C)  an upward shift of the Phillips curve and 1% unexpected inflation, as shown in Figure C. 
D)  an upward shift of the MP curve and a new interest rate of 3%, as shown in Figure D.

Question 7

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

Accepted Answer

A) 5%. 
B) 3%. 
C) -4%. 
D) -1%. 
A) 5%. 
B) 3%. 
C) -4%. 
D) -1%.

Question 8

Holding everything else equal, India begins to import more processed food. Analyze this shock graphically, and explain using the Fed model.

Accepted Answer

The answer of Holding everything else equal, India begins to...

Question 9

Take a look at the IS-MP-PC model shown here. If the expected inflation rate is 1.75%, the actual inflation rate is:

Accepted Answer

A) 0.75%. 
B) -0.75%. 
C) 1.75%. 
D) 2.75%. 
A) 0.75%. 
B) -0.75%. 
C) 1.75%. 
D) 2.75%.

Question 10

Which of the following graphs correctly represents the effect on the Phillips curve in Ethiopia if the Ethiopian birr appreciates?

Accepted Answer

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

Question 11

Suppose liquidity risk decreases. Analyze this shock graphically, and explain using the Fed model.

Accepted Answer

The answer of Suppose liquidity risk decreases. Analyze this shock...

Question 12

Take a look at the IS-MP-PC model shown here. At equilibrium, unexpected inflation is:

Accepted Answer

A) 5%. 
B) 3%. 
C) -4%. 
D) -1%. 
A) 5%. 
B) 3%. 
C) -4%. 
D) -1%.

Question 13

What are the steps for forecasting an economic outcome when there is a macroeconomic shock?

Accepted Answer

The answer of What are the steps for forecasting an...

Question 14

You are an economic adviser using the Fed model to analyze the economy. Now suppose that manufacturers in China face rising costs of rubber as an input. What is the effect on the economy?

Accepted Answer

A) a rise in the real interest rate, an unchanged output gap, and unexpected deflation 
B) a rise in the real interest rate, rising output, and unexpected inflation 
C) an unchanged real interest rate, falling output, and unexpected inflation 
D) an unchanged real interest rate, an unchanged output gap, and unexpected inflation 
A) a rise in the real interest rate, an unchanged output gap, and unexpected deflation 
B) a rise in the real interest rate, rising output, and unexpected inflation 
C) an unchanged real interest rate, falling output, and unexpected inflation 
D) an unchanged real interest rate, an unchanged output gap, and unexpected inflation

Question 15

When using the Fed model to diagnose the economy, if a shock causes the real interest rate to rise, then the economy has been hit by _____ shock.

Accepted Answer

A) an inflation 
B) a financial 
C) a supply 
D) a spending 
A) an inflation 
B) a financial 
C) a supply 
D) a spending

Question 16

Suppose that Banco de Mexico (Mexico's central bank) lowers real interest rates. Analyze this shock graphically, and explain using the Fed model.

Accepted Answer

The answer of Suppose that Banco de Mexico (Mexico's central...

Question 17

In the IS-MP analysis in the Fed model, a decrease in the risk premium shifts 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 18

When a supply shock causes higher inflation but also causes output to fall, then the economy experiences:

Accepted Answer

A) a depression. 
B) economic growth. 
C) deflation. 
D) stagflation. 
A) a depression. 
B) economic growth. 
C) deflation. 
D) stagflation.

Question 19

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.
- The real interest rate and output gap remain unchanged.
- The economy is in a recession.
- Actual inflation has increased.

Accepted Answer

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

Question 20

Assume that a positive spending shock of $35 million hits the economy. If the multiplier is 4, by how much will the IS curve shift and in what direction?

Accepted Answer

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

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

A spending shock is any change in:

Which of the following graphs correctly represents a positive supply shock on the Phillips curve?

In the IS-MP analysis in the Fed model, the risk-free rate rises in response to:

If you see a newspaper headline that says "Banks shut doors - depositors scrambling to get their money back," this is an example of _____ shock.

Take a look at the IS-MP-PC model shown here. If the expected inflation rate is 2.5%, the actual inflation rate is:

Assume that the economy starts at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. Based on this scenario, the Chinese economy experiences: ​ Figure A ​ Figure B ​ Figure C ​ Figure D

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

Holding everything else equal, India begins to import more processed food. Analyze this shock graphically, and explain using the Fed model.

Take a look at the IS-MP-PC model shown here. If the expected inflation rate is 1.75%, the actual inflation rate is:

Which of the following graphs correctly represents the effect on the Phillips curve in Ethiopia if the Ethiopian birr appreciates?

Suppose liquidity risk decreases. Analyze this shock graphically, and explain using the Fed model.

Take a look at the IS-MP-PC model shown here. At equilibrium, unexpected inflation is:

What are the steps for forecasting an economic outcome when there is a macroeconomic shock?

You are an economic adviser using the Fed model to analyze the economy. Now suppose that manufacturers in China face rising costs of rubber as an input. What is the effect on the economy?

When using the Fed model to diagnose the economy, if a shock causes the real interest rate to rise, then the economy has been hit by _____ shock.

Suppose that Banco de Mexico (Mexico's central bank) lowers real interest rates. Analyze this shock graphically, and explain using the Fed model.

In the IS-MP analysis in the Fed model, a decrease in the risk premium shifts the:

When a supply shock causes higher inflation but also causes output to fall, then the economy experiences:

Assume that a positive spending shock of $35 million hits the economy. If the multiplier is 4, by how much will the IS curve shift and in what direction?

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

Filters

Assume that the economy starts at a 0% output gap. Now suppose that manufacturers in China face rising costs of rubber as an input. Based on this scenario, the Chinese economy experiences: Figure A Figure B Figure C Figure D