Exam 11: The Is-Mp Model: Adding Inflation and the Open Economy

Negative supply shocks can have a tendency to ________ costs of production and ________ the inflation rate.

Figure 11.2 -Refer to Figure 11.2..Assume the economy is in equilibrium at Ȳ₁,where real GDP equals potential GDP.The economy experiences a positive demand shock,and the Bank of Canada responds by increasing real interest rates to bring real GDP and inflation back to their original levels.Other things equal,the Bank of Canada's response to the positive demand shock is best represented by a movement from

Figure 11.2 -Refer to Figure 11.2...Assume the economy is in equilibrium at Ȳ₁,where real GDP equals potential GDP.The economy experiences a negative demand shock,and the Bank of Canada responds by decreasing real interest rates to bring real GDP and inflation back to their original levels.Other things equal,the Bank of Canada's response to the negative demand shock is best represented by a movement from

Under a fixed exchange rate system,a real interest rate corresponding to the upward-sloping portion of the NCF curve reflects the fact that a central bank ________,and the real interest rate corresponding to the horizontal portion of the NCF curve reflects the fact that a central bank ________.

How does the open-economy IS-MP model incorporate net exports with a fixed exchange rate system?

An increase in the real interest rate outside of Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.

A decrease in the real interest rate in Canada will cause the dollar to ________ relative to other currencies and ________ net exports and real GDP.

Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate.If the economy experiences a negative demand shock,the output gap will ________ and the inflation rate will ________.

The housing shock that occurred during the Great Recession reduced wealth and residential construction,causing the

Figure 11.1 -Refer to Figure 11.1...Assume the economy is in equilibrium at Ȳ₁ = 0.Other things equal,an unexpected large increase in the price of oil will result in a movement from point ________ to point ________.

The oil shock of 2007-2008 saw the price of oil rising from less than $60 a barrel in March 2007 to over $145 a barrel in July 2008,and decreasing again to just over $30 a barrel in December 2008.Assuming the economy was at potential GDP prior to the oil shock,the increase in the price of oil,such as what occurred between March 2007 and July 2008,acts as a negative supply shock,resulting in

Negative demand shocks have a tendency to ________ real GDP relative to potential GDP and ________ the inflation rate.

Explain three shocks that the Canadian economy experienced during the Great Recession,and how these shocks affect the IS curve,the MP curve,and the Phillips curve.

Once the Phillips curve has shifted up,the economy is ________ because ________.

As countries that currently use the euro,what are the two ways that Spain and Greece could reduce the prices of their exports and of their domestic goods to remain competitive with their trading partners?

Suppose the economy is in equilibrium with an output gap equal to zero and the actual inflation rate equals the expected inflation rate.If the economy experiences a positive demand shock,the output gap will ________ and the inflation rate will ________.

A reason that the inflation rate did not increase substantially following the Great Recession is that

A decrease in the real interest rate in Canada will cause net capital outflows to ________ and cause the dollar to ________ relative to other currencies.

Positive supply shocks can have a tendency to ________ costs of production and ________ the inflation rate.

The oil shock of 2007-2008 saw the price of oil rising from less than $60 a barrel in March 2007 to over $145 a barrel in July 2008,and decreasing again to just over $30 a barrel in December 2008.Assuming the economy was at potential GDP prior to the oil shock,the increase in the price of oil,such as what occurred between March 2007 and July 2008,acts as a negative supply shock,causing the inflation rate to ________ and the output gap to ________.