Question 1

The aggregate demand curve shifts to the right 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

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function _____ and the aggregate demand curve _____.

Accepted Answer

A)  shifts upward to the left; shifts to the right 
B)  shifts downward to the right; shifts to the right 
C)  shifts upward to the left; shifts to the left 
D)  shifts downward to the right; shifts to the left 
A)  shifts upward to the left; shifts to the right 
B)  shifts downward to the right; shifts to the right 
C)  shifts upward to the left; shifts to the left 
D)  shifts downward to the right; shifts to the left

Question 3

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

Accepted Answer

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

Question 4

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 5

Starting from long-run equilibrium, the long-run impact of an increase in autonomous investment, compared to the original equilibrium, is:

Accepted Answer

A)  higher inflation and the same output. 
B)  lower inflation and lower output. 
C)  lower inflation and the same output. 
D)  higher inflation and higher output. 
A)  higher inflation and the same output. 
B)  lower inflation and lower output. 
C)  lower inflation and the same output. 
D)  higher inflation and higher output.

Question 6

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

Accepted Answer

A)  Income taxes are raised. 
B)  The government reduces purchases to balance the budget. 
C)  Consumers become more optimistic about the future. 
D)  Foreign economies fall into recession, reducing their demand for domestic exports. 
A)  Income taxes are raised. 
B)  The government reduces purchases to balance the budget. 
C)  Consumers become more optimistic about the future. 
D)  Foreign economies fall into recession, reducing their demand for domestic exports.

Question 7

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

Accepted Answer

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

Question 8

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

Accepted Answer

A)  increases; increases 
B)  decreases; increases 
C)  increases; decreases 
D)  decreases; decreases 
A)  increases; increases 
B)  decreases; increases 
C)  increases; decreases 
D)  decreases; decreases

Question 9

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

Accepted Answer

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

Question 10

Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases 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 11

At a short-run equilibrium output equals _____, while at a long-run equilibrium output equals _____.

Accepted Answer

A)  potential output; an output level consistent with the inflation rate 
B)  an output level consistent with the inflation rate; potential output 
C)  the monetary policy reaction function; aggregate demand 
D)  aggregate demand; the monetary policy reaction function 
A)  potential output; an output level consistent with the inflation rate 
B)  an output level consistent with the inflation rate; potential output 
C)  the monetary policy reaction function; aggregate demand 
D)  aggregate demand; the monetary policy reaction function

Question 12

The short-run aggregate supply curve shows _____ while the long-run aggregate supply curve shows _____.

Accepted Answer

A)  potential output; the current inflation rate 
B)  output; aggregate spending 
C)  potential output; aggregate spending 
D)  the current inflation rate; potential output 
A)  potential output; the current inflation rate 
B)  output; aggregate spending 
C)  potential output; aggregate spending 
D)  the current inflation rate; potential output

Question 13

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

Accepted Answer

A)  higher inflation and the same output. 
B)  lower inflation and lower output. 
C)  the same inflation and the same output. 
D)  higher inflation and lower output. 
A)  higher inflation and the same output. 
B)  lower inflation and lower output. 
C)  the same inflation and the same output. 
D)  higher inflation and lower output.

Question 14

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

Accepted Answer

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

Question 15

Aggregate supply shocks are:

Accepted Answer

A)  the results of monetary policy actions. 
B)  the results of fiscal policy actions. 
C)  the results of structural policy actions. 
D)  inflation shocks or shocks to potential output. 
A)  the results of monetary policy actions. 
B)  the results of fiscal policy actions. 
C)  the results of structural policy actions. 
D)  inflation shocks or shocks to potential output.

Question 16

If households and firms expect higher rates of inflation, the ______ curve will shift _____.

Accepted Answer

A)  AD; rightward 
B)  SRAS; upward 
C)  SRAS; downward 
D)  AD; until it becomes vertical 
A)  AD; rightward 
B)  SRAS; upward 
C)  SRAS; downward 
D)  AD; until it becomes vertical

Question 17

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

Accepted Answer

A)  increase. 
B)  decrease. 
C)  not change. 
D)  either increase or decrease depending on the relative shifts of AD and AS. 
A)  increase. 
B)  decrease. 
C)  not change. 
D)  either increase or decrease depending on the relative shifts of AD and AS.

Question 18

Graphically an increase in the short-run aggregate supply line represents a(n) _______, and a shift leftward of the long-run aggregate supply line represents a(n) ________.

Accepted Answer

A)  adverse inflation shock; shock to potential output 
B)  favorable inflation shock; shock to potential output 
C)  shock to potential output; adverse inflation shock 
D)  shock to potential output; favorable inflation shock 
A)  adverse inflation shock; shock to potential output 
B)  favorable inflation shock; shock to potential output 
C)  shock to potential output; adverse inflation shock 
D)  shock to potential output; favorable inflation shock

Question 19

A downward shift in the Fed's policy reaction function is a _____ of monetary policy, and the aggregate demand curve _______.

Accepted Answer

A)  tightening; shifts right 
B)  easing; shifts right 
C)  tightening; shifts left 
D)  easing; shifts left 
A)  tightening; shifts right 
B)  easing; shifts right 
C)  tightening; shifts left 
D)  easing; shifts left

Question 20

An example of an adverse inflation shock is:

Accepted Answer

A)  an increase in interest rates. 
B)  an increase in government purchases. 
C)  a significant rise in oil prices. 
D)  a tax increase. 
A)  an increase in interest rates. 
B)  an increase in government purchases. 
C)  a significant rise in oil prices. 
D)  a tax increase.

The aggregate demand curve shifts to the right when the Fed:

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function _ and the aggregate demand curve _.

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

A large increase in oil prices is an example of:

Starting from long-run equilibrium, the long-run impact of an increase in autonomous investment, compared to the original equilibrium, is:

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

Low expected inflation leads to increases in wages and costs and to actual inflation.

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

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

Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from πto 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.

At a short-run equilibrium output equals _, while at a long-run equilibrium output equals _.

The short-run aggregate supply curve shows _ while the long-run aggregate supply curve shows _.

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

High expected inflation leads to increases in wages and costs and to actual inflation.

Aggregate supply shocks are:

If households and firms expect higher rates of inflation, the __ curve will shift _.

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

Graphically an increase in the short-run aggregate supply line represents a(n) _, and a shift leftward of the long-run aggregate supply line represents a(n) __.

A downward shift in the Fed's policy reaction function is a _ of monetary policy, and the aggregate demand curve ___.

An example of an adverse inflation shock is:

Thinking Like an Economist

Supply and Demand

International Trade and Trade Policy

Macroeconomics: the Birds-Eye View of the Economy

Measuring Economic Activity: GDP, Unemployment, and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money, The Federal Reserve, and Global Financial Markets

Short-Term Economic Fluctuations and Fiscal Policy

Stabilizing the Economy: The Role of the Fed

Exchange Rates and the Open Economy

Filters

Exam 12: Inflation and Aggregate Supply

The aggregate demand curve shifts to the right when the Fed:

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function _____ and the aggregate demand curve _____.

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

A large increase in oil prices is an example of:

Starting from long-run equilibrium, the long-run impact of an increase in autonomous investment, compared to the original equilibrium, is:

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

Low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

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

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

Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases 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.

At a short-run equilibrium output equals _____, while at a long-run equilibrium output equals _____.

The short-run aggregate supply curve shows _____ while the long-run aggregate supply curve shows _____.

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

High expected inflation leads to ____ increases in wages and costs and to ____ actual inflation.

Aggregate supply shocks are:

If households and firms expect higher rates of inflation, the ______ curve will shift _____.

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

Graphically an increase in the short-run aggregate supply line represents a(n) _______, and a shift leftward of the long-run aggregate supply line represents a(n) ________.

A downward shift in the Fed's policy reaction function is a _____ of monetary policy, and the aggregate demand curve _______.

An example of an adverse inflation shock is:

Thinking Like an Economist

Supply and Demand

International Trade and Trade Policy

Macroeconomics: the Birds-Eye View of the Economy

Measuring Economic Activity: GDP, Unemployment, and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money, The Federal Reserve, and Global Financial Markets

Short-Term Economic Fluctuations and Fiscal Policy

Stabilizing the Economy: The Role of the Fed

Exchange Rates and the Open Economy

Filters

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function _ and the aggregate demand curve _.

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

Low expected inflation leads to increases in wages and costs and to actual inflation.

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

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

Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from πto 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.

At a short-run equilibrium output equals _, while at a long-run equilibrium output equals _.

The short-run aggregate supply curve shows _ while the long-run aggregate supply curve shows _.

High expected inflation leads to increases in wages and costs and to actual inflation.

If households and firms expect higher rates of inflation, the __ curve will shift _.

Graphically an increase in the short-run aggregate supply line represents a(n) _, and a shift leftward of the long-run aggregate supply line represents a(n) __.

A downward shift in the Fed's policy reaction function is a _ of monetary policy, and the aggregate demand curve ___.