Exam 12: Inflation and Aggregate Supply

For a fixed inflation rate target, an increase in the inflation rate corresponds to a _____ the aggregate demand curve and an increase in exogenous spending corresponds to a _____ the aggregate demand curve.

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

When the economy is in short-run equilibrium, there will be ______ output gap.

The self-correcting tendency of the economy means that falling inflation eventually eliminates:

Graphically inflation shocks shift the _____ and shocks to potential shift the ______.

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

Exogenous changes in spending refer to changes in planned spending:

The Fed has announced that its views its long term target for the inflation rate as:

Increases in inflation redistribute resources from _____-spending to ____-spending households and hence, _____ short-run equilibrium output.

An inflation shock is:

A downward shift in the Fed's reaction function is equivalent to:

Based on the figure below, 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 $\pi$ ' and the Federal Reserve's target inflation rate is $\pi$ *1. If the Federal Reserve lowers its target inflation rate to $\pi$ *₂, then the Federal Reserve's monetary policy reaction function will _____ and the aggregate demand curve will _____.

When actual output equals potential output, there is ______ output gap and the inflation rate will ____.

Inflation shocks and shocks to potential output are called _____ shocks.

When actual output exceeds potential output there is ____ output gap and the rate of inflation will tend to ____.

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

A horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions is called the:

Higher rates of inflation reduce spending because:

Starting from long-run equilibrium, a large decrease in government purchases will result in a(n) _____ gap in the short-run and ____ inflation and ____ output in the long-run.

Policymakers' use of stabilization policy to eliminate output gaps is more appropriate when an economy self corrects very ____ and when the output gap is very ____.