Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF₁)and the aggregate demand curve (AD₁). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*₁.     If the Federal Reserve raises its target inflation rate to π*₃, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

Starting from long-run equilibrium, a war that raises government purchases results in ________ output in the short run and ________ output in the long run.

The economy pictured in the given figure has a(n)________ gap with a short-run equilibrium combination of inflation and output indicated by point ________.

A combination of inflation and recession is called:

The AD curve can be shifted by:

Refer to the accompanying figure. An economy is currently in long-run equilibrium at point B, at an inflation rate of π', which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________.

When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

Which of the following will shift the aggregate demand curve to the right?

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n)________ gap and inflation will ________.

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n)________ gap and inflation will ________.

All else equal, a decrease in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with ________ inflation and ________ output.

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ________ equilibrium.

At a short-run equilibrium ________, while at a long-run equilibrium ________.

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

For a fixed target real interest rate and target inflation rate, when inflation decreases, the Fed ________ interest rates, hence ________ short-run equilibrium output.

Starting from long-run equilibrium, the long-run impact(s)of a sharp drop in oil prices, compared to the original equilibrium, is(are):

A large decrease in oil prices is an example of: