Question 1

The economy moves up a stationary aggregate demand curve when the Fed:

Accepted Answer

A) increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function. 
B) decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function. 
C) increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function. 
D) decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function. 
A) increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function. 
B) decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function. 
C) increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function. 
D) decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question 2

A low rate of expected inflation tends to lead to a ________ rate of actual inflation and a high rate of expected inflation tends to lead to a ________ rate of actual inflation.

Accepted Answer

A) high; high 
B) high; low 
C) low; low 
D) low; high 
A) high; high 
B) high; low 
C) low; low 
D) low; high

Question 3

Graphically short-run equilibrium occurs at the intersection of the aggregate demand curve and the:

Accepted Answer

A) short-run aggregate supply line and the long-run aggregate supply line. 
B) the aggregate expenditure line. 
C) short-run aggregate supply line. 
D) long-run aggregate supply line. 
A) short-run aggregate supply line and the long-run aggregate supply line. 
B) the aggregate expenditure line. 
C) short-run aggregate supply line. 
D) long-run aggregate supply line.

Question 4

Changes in the expected rate of inflation will:

Accepted Answer

A) not shift but create a movement along the SRAS curve. 
B) shift the SRAS curve downward or upward. 
C) cause the SRAS curve to become vertical. 
D) cause the SRAS curve to become upward-sloping. 
A) not shift but create a movement along the SRAS curve. 
B) shift the SRAS curve downward or upward. 
C) cause the SRAS curve to become vertical. 
D) cause the SRAS curve to become upward-sloping.

Question 5

Starting from long-run equilibrium, a decrease in autonomous investment results in ________ output in the short run and ________ output in the long run.

Accepted Answer

A) higher; higher 
B) higher; potential 
C) lower; potential 
D) lower; higher 
A) higher; higher 
B) higher; potential 
C) lower; potential 
D) lower; higher

Question 6

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n)________ in the inflation rate, leading to a(n)________ in output.

Accepted Answer

A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease 
A) increase; increase 
B) increase; decrease 
C) decrease; increase 
D) decrease; decrease

Question 7

A vertical line showing an economy's potential output is called the ________, while a horizontal line showing the current rate of inflation is called the ________.

Accepted Answer

A) long-run aggregate supply; short-run aggregate supply 
B) short-run aggregate supply; long-run aggregate supply 
C) long-run aggregate supply; aggregate demand 
D) short-run aggregate supply; aggregate demand 
A) long-run aggregate supply; short-run aggregate supply 
B) short-run aggregate supply; long-run aggregate supply 
C) long-run aggregate supply; aggregate demand 
D) short-run aggregate supply; aggregate demand

Question 8

Refer to the accompanying figure.   Starting from long-run equilibrium at point C, a favorable inflation shock that decreases inflation from π to π¹ will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies.

Accepted Answer

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

Question 9

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 lowers its target inflation rate to π*₂, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

Accepted Answer

A) shift to RF₃; shift to AD₂ 
B) shift to RF₂; shift to AD₂ 
C) shift to RF₃; shift to AD₃ 
D) shift to RF₂; shift to AD₃ 
A) shift to RF₃; shift to AD₂ 
B) shift to RF₂; shift to AD₂ 
C) shift to RF₃; shift to AD₃ 
D) shift to RF₂; shift to AD₃

Question 10

A large increase in oil prices is an example of:

Accepted Answer

A) a favorable inflation shock. 
B) an adverse inflation shock. 
C) inflation inertia. 
D) excessive aggregate spending. 
A) a favorable inflation shock. 
B) an adverse inflation shock. 
C) inflation inertia. 
D) excessive aggregate spending.

Question 11

Refer to the accompanying figure.   Starting from long-run equilibrium at point C, a tax increase that decreases aggregate demand from AD¹ to AD will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies.

Accepted Answer

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

Question 12

When there is an expansionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.

Accepted Answer

A) decline; raise; decline 
B) decline; lower; expand 
C) decline; lower; decline 
D) increase; raise; decline 
A) decline; raise; decline 
B) decline; lower; expand 
C) decline; lower; decline 
D) increase; raise; decline

Question 13

Refer to the given figure.   ________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________.

Accepted Answer

A) Rising; A; C 
B) Falling; A; C 
C) Rising; A 
D) Falling; B: C 
A) Rising; A; C 
B) Falling; A; C 
C) Rising; A 
D) Falling; B: C

Question 14

When there is a recessionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.

Accepted Answer

A) decline; raise; decline 
B) decline; lower; expand 
C) decline; lower; decline 
D) increase; raise; decline 
A) decline; raise; decline 
B) decline; lower; expand 
C) decline; lower; decline 
D) increase; raise; decline

Question 15

Refer to the accompanying figure.   Starting from long-run equilibrium at point C, an increase in government spending that increases aggregate demand from AD to AD¹ will lead to a short-run equilibrium at point ________ creating ________ gap.

Accepted Answer

A) D; an expansionary 
B) B; expansionary 
C) A; a recessionary 
D) B; no output 
A) D; an expansionary 
B) B; expansionary 
C) A; a recessionary 
D) B; no output

Question 16

Starting from long-run equilibrium, a large tax increase will result in a(n)________ gap in the short-run and ________ inflation and ________ output in the long-run.

Accepted Answer

A) expansionary; higher; potential 
B) recessionary; lower; lower 
C) expansionary; lower; potential 
D) recessionary; lower; potential 
A) expansionary; higher; potential 
B) recessionary; lower; lower 
C) expansionary; lower; potential 
D) recessionary; lower; potential

Question 17

Graphically the intersection of the aggregate demand curve and the short-run aggregate supply line determines:

Accepted Answer

A) potential output. 
B) short-run equilibrium. 
C) long-run equilibrium. 
D) exogenous spending. 
A) potential output. 
B) short-run equilibrium. 
C) long-run equilibrium. 
D) exogenous spending.

Question 18

The economy moves down a stationary aggregate demand curve when the Fed:

Accepted Answer

A) increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function. 
B) decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function. 
C) increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function. 
D) decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function. 
A) increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function. 
B) decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function. 
C) increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function. 
D) decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question 19

The aggregate demand curve shows the relationship between short-run equilibrium output and the:

Accepted Answer

A) nominal interest rate. 
B) real interest rate. 
C) unemployment rate. 
D) inflation rate. 
A) nominal interest rate. 
B) real interest rate. 
C) unemployment rate. 
D) inflation rate.

Question 20

An upward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

A) shift left of; movement up 
B) shift left of; shift right of 
C) shift right of; shift left of 
D) movement up; shift right of 
A) shift left of; movement up 
B) shift left of; shift right of 
C) shift right of; shift left of 
D) movement up; shift right of

Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

The economy moves up a stationary aggregate demand curve when the Fed:

A low rate of expected inflation tends to lead to a ________ rate of actual inflation and a high rate of expected inflation tends to lead to a ________ rate of actual inflation.

Graphically short-run equilibrium occurs at the intersection of the aggregate demand curve and the:

Changes in the expected rate of inflation will:

Starting from long-run equilibrium, a decrease in autonomous investment results in ________ output in the short run and ________ output in the long run.

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n)________ in the inflation rate, leading to a(n)________ in output.

A vertical line showing an economy's potential output is called the ________, while a horizontal line showing the current rate of inflation is called the ________.

A large increase in oil prices is an example of:

Refer to the accompanying figure. Starting from long-run equilibrium at point C, a tax increase that decreases aggregate demand from AD¹ to AD will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies.

When there is an expansionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.

Refer to the given figure. ________ inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point ________ to long-run equilibrium at point ________.

When there is a recessionary gap, inflation will ________, in response to which the Federal Reserve will ________ real interest rates, and output will ________.

Refer to the accompanying figure. Starting from long-run equilibrium at point C, an increase in government spending that increases aggregate demand from AD to AD¹ will lead to a short-run equilibrium at point ________ creating ________ gap.

Starting from long-run equilibrium, a large tax increase will result in a(n)________ gap in the short-run and ________ inflation and ________ output in the long-run.

Graphically the intersection of the aggregate demand curve and the short-run aggregate supply line determines:

The economy moves down a stationary aggregate demand curve when the Fed:

The aggregate demand curve shows the relationship between short-run equilibrium output and the:

An upward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Exchange Rates and the Open Economy

Filters

A low rate of expected inflation tends to lead to a rate of actual inflation and a high rate of expected inflation tends to lead to a rate of actual inflation.

Starting from long-run equilibrium, a decrease in autonomous investment results in output in the short run and output in the long run.

An economy with an expansionary gap will, in the absence of stabilization policy, eventually experience a(n) in the inflation rate, leading to a(n) in output.

A vertical line showing an economy's potential output is called the , while a horizontal line showing the current rate of inflation is called the .

Refer to the accompanying figure. Starting from long-run equilibrium at point C, a tax increase that decreases aggregate demand from AD¹ to AD will lead to a short-run equilibrium at point and eventually to a long-run equilibrium at point , if left to self-correcting tendencies.

When there is an expansionary gap, inflation will , in response to which the Federal Reserve will real interest rates, and output will .

Refer to the given figure. inflation will eventually move the economy pictured in the diagram from short-run equilibrium at point to long-run equilibrium at point .

When there is a recessionary gap, inflation will , in response to which the Federal Reserve will real interest rates, and output will .

Refer to the accompanying figure. Starting from long-run equilibrium at point C, an increase in government spending that increases aggregate demand from AD to AD¹ will lead to a short-run equilibrium at point creating gap.

Starting from long-run equilibrium, a large tax increase will result in a(n) gap in the short-run and inflation and output in the long-run.

An upward shift in the Fed's policy reaction function corresponds to a the aggregate demand curve and an increase in exogenous spending corresponds to a the aggregate demand curve.