Question 1

Explain why changes in the central bank's inflation target will shift the dynamic aggregate demand curve.

Accepted Answer

To explain this, let us illustrate with

Question 2

If a recession results from higher oil prices:

Accepted Answer

A) inflation should increase as output decreases. 
B) inflation should fall as output falls. 
C) output should not change but inflation should increase. 
D) an expansionary gap should occur. 
A) inflation should increase as output decreases. 
B) inflation should fall as output falls. 
C) output should not change but inflation should increase. 
D) an expansionary gap should occur.

Question 3

In an economy like the United States, the impact of a decrease in import prices on overall inflation can be best described as:

Accepted Answer

A) nonexistent. 
B) a modest increase. 
C) a modest decrease. 
D) a significant decrease, particularly as globalization and trade increase. 
A) nonexistent. 
B) a modest increase. 
C) a modest decrease. 
D) a significant decrease, particularly as globalization and trade increase.

Question 4

Tax cuts would have the same directional effect on the dynamic aggregate demand curve as:

Accepted Answer

A) decreases in government purchases. 
B) the Federal Reserve selling U.S.treasury securities. 
C) the Federal Reserve buying U.S.treasury securities. 
D) temporary tax increases. 
A) decreases in government purchases. 
B) the Federal Reserve selling U.S.treasury securities. 
C) the Federal Reserve buying U.S.treasury securities. 
D) temporary tax increases.

Question 5

Estimates of gross domestic product (GDP) are revised:

Accepted Answer

A) quickly and often. 
B) for many years after the fact. 
C) only in the following quarter. 
D) each month. 
A) quickly and often. 
B) for many years after the fact. 
C) only in the following quarter. 
D) each month.

Question 6

If a positive inflation shock occurs and monetary policymakers do not change the inflation target:

Accepted Answer

A) output will eventually return to potential output and inflation will equal the inflation target. 
B) output will eventually rise above potential output while inflation will equal the inflation target. 
C) output will eventually fall below potential output while inflation will equal the inflation target. 
D) output will eventually return to potential output but inflation will exceed the inflation target. 
A) output will eventually return to potential output and inflation will equal the inflation target. 
B) output will eventually rise above potential output while inflation will equal the inflation target. 
C) output will eventually fall below potential output while inflation will equal the inflation target. 
D) output will eventually return to potential output but inflation will exceed the inflation target.

Question 7

If monetary policymakers do not want the current inflation rate to increase, yet they observe increasing aggregate demand from higher government purchases, will they have to accept a higher inflation target? Explain.

Accepted Answer

Not necessarily.If the increase in aggre

Question 8

What tool is available to monetary policymakers to shift the short-run aggregate supply curve to the left following a positive inflation shock?

Accepted Answer

A) A rightward shift of the monetary policy reaction curve 
B) A leftward shift of the monetary policy reaction curve 
C) Open market purchases of government securities 
D) None of the answers given is correct; the actions of monetary policymakers affect the dynamic aggregate demand curve 
A) A rightward shift of the monetary policy reaction curve 
B) A leftward shift of the monetary policy reaction curve 
C) Open market purchases of government securities 
D) None of the answers given is correct; the actions of monetary policymakers affect the dynamic aggregate demand curve

Question 9

Permanent declines in inflation such as those seen in Chile and Sweden must have been a result of:

Accepted Answer

A) an increase in the central bank's inflation target. 
B) a decrease in the central bank's inflation target. 
C) less independence for their central banks. 
D) a change to targeting interest rates instead of inflation rates. 
A) an increase in the central bank's inflation target. 
B) a decrease in the central bank's inflation target. 
C) less independence for their central banks. 
D) a change to targeting interest rates instead of inflation rates.

Question 10

Real business cycle theory explains fluctuations in output through:

Accepted Answer

A) changes in aggregate demand. 
B) changes in productivity. 
C) shifts of the short-run aggregate supply curve. 
D) changes in monetary policy. 
A) changes in aggregate demand. 
B) changes in productivity. 
C) shifts of the short-run aggregate supply curve. 
D) changes in monetary policy.

Question 11

If consumer and business sentiment were to increase dramatically, causing an expansionary gap:

Accepted Answer

A) monetary policymakers could stabilize the economy by shifting their monetary policy reaction curve to the right. 
B) fiscal policymakers could stabilize aggregate demand by cutting income and business taxes. 
C) monetary policymakers would likely shift the monetary policy reaction curve to the left to shift the dynamic aggregate demand left. 
D) fiscal policymakers could stabilize aggregate demand by increasing government purchases. 
A) monetary policymakers could stabilize the economy by shifting their monetary policy reaction curve to the right. 
B) fiscal policymakers could stabilize aggregate demand by cutting income and business taxes. 
C) monetary policymakers would likely shift the monetary policy reaction curve to the left to shift the dynamic aggregate demand left. 
D) fiscal policymakers could stabilize aggregate demand by increasing government purchases.

Question 12

An increase in aggregate demand with no adjustment in monetary policy will result in:

Accepted Answer

A) an increase in potential output and higher inflation. 
B) a decrease in potential output and higher inflation. 
C) no change in potential output but higher inflation. 
D) no change in inflation. 
A) an increase in potential output and higher inflation. 
B) a decrease in potential output and higher inflation. 
C) no change in potential output but higher inflation. 
D) no change in inflation.

Question 13

If a negative supply shock is associated with a decline in potential output, keeping inflation at its target requires:

Accepted Answer

A) a leftward shift in the monetary policy reaction curve because there is an expansionary gap. 
B) a rightward shift in the monetary policy reaction curve because there is an expansionary gap. 
C) a leftward shift in the monetary policy reaction curve because there is a recessionary gap. 
D) a rightward shift in the monetary policy reaction curve because there is a recessionary gap. 
A) a leftward shift in the monetary policy reaction curve because there is an expansionary gap. 
B) a rightward shift in the monetary policy reaction curve because there is an expansionary gap. 
C) a leftward shift in the monetary policy reaction curve because there is a recessionary gap. 
D) a rightward shift in the monetary policy reaction curve because there is a recessionary gap.

Question 14

If a negative supply shock is associated with a decline in potential output, policymakers need to:

Accepted Answer

A) raise the real interest rate by even less than they would in the case of a recessionary gap. 
B) raise the real interest rate by even more than they would in the case of a recessionary gap. 
C) raise the real interest rate by the same amount as they would in the case of a recessionary gap. 
D) not shift the monetary policy reaction curve. 
A) raise the real interest rate by even less than they would in the case of a recessionary gap. 
B) raise the real interest rate by even more than they would in the case of a recessionary gap. 
C) raise the real interest rate by the same amount as they would in the case of a recessionary gap. 
D) not shift the monetary policy reaction curve.

Question 15

While monetary policymakers cannot shift the short-run aggregate supply curve following inflation shocks, they can minimize the impact that the changes in inflation have on output.Describe how they can do this through the monetary policy reaction curve.

Accepted Answer

The steepness of the monetary policy rea

Question 16

Suppose that consumer and business confidence fall.What is the ultimate outcome for the economy if monetary policymakers respond to keep inflation on an unchanged target?

Accepted Answer

A) If monetary policymakers respond, output would remain close to potential output. 
B) If monetary policymakers respond, output would fall below potential output. 
C) If monetary policymakers respond, output would rise above potential output. 
D) If monetary policymakers respond, output would remain close to potential output but inflation would still rise despite their actions. 
A) If monetary policymakers respond, output would remain close to potential output. 
B) If monetary policymakers respond, output would fall below potential output. 
C) If monetary policymakers respond, output would rise above potential output. 
D) If monetary policymakers respond, output would remain close to potential output but inflation would still rise despite their actions.

Question 17

Which of the following statements best describes the level of potential output in the U.S.?

Accepted Answer

A) It never changes year to year 
B) It is very erratic year to year 
C) It usually increases year to year 
D) It has been decreasing since 1999 
A) It never changes year to year 
B) It is very erratic year to year 
C) It usually increases year to year 
D) It has been decreasing since 1999

Question 18

If monetary policymakers do not want an increase in government purchases, which increases aggregate demand, to cause an increase in inflation, they would:

Accepted Answer

A) shift the monetary policy reaction curve to the right, raising inflation at every real interest rate. 
B) do nothing and let the economy's self-correcting mechanism work. 
C) shift the monetary policy reaction function left, increasing the real interest rate at every rate of inflation. 
D) increase the growth rate of money. 
A) shift the monetary policy reaction curve to the right, raising inflation at every real interest rate. 
B) do nothing and let the economy's self-correcting mechanism work. 
C) shift the monetary policy reaction function left, increasing the real interest rate at every rate of inflation. 
D) increase the growth rate of money.

Question 19

When a negative supply shock occurs it is extremely important for monetary policymakers to discern whether or not potential output has decreased.Why does that matter?

Accepted Answer

If a supply shock drives inflation up an

Question 20

Why does it take so long for the declaration of the beginning and end of recessions in the U.S.and why is there a lack of clarity as to what is and is not a recession?

Accepted Answer

There is no official definition of a rec

Exam 22: Understanding Business Cycle Fluctuations

Explain why changes in the central bank's inflation target will shift the dynamic aggregate demand curve.

If a recession results from higher oil prices:

In an economy like the United States, the impact of a decrease in import prices on overall inflation can be best described as:

Tax cuts would have the same directional effect on the dynamic aggregate demand curve as:

Estimates of gross domestic product (GDP) are revised:

If a positive inflation shock occurs and monetary policymakers do not change the inflation target:

If monetary policymakers do not want the current inflation rate to increase, yet they observe increasing aggregate demand from higher government purchases, will they have to accept a higher inflation target? Explain.

What tool is available to monetary policymakers to shift the short-run aggregate supply curve to the left following a positive inflation shock?

Permanent declines in inflation such as those seen in Chile and Sweden must have been a result of:

Real business cycle theory explains fluctuations in output through:

If consumer and business sentiment were to increase dramatically, causing an expansionary gap:

An increase in aggregate demand with no adjustment in monetary policy will result in:

If a negative supply shock is associated with a decline in potential output, keeping inflation at its target requires:

If a negative supply shock is associated with a decline in potential output, policymakers need to:

While monetary policymakers cannot shift the short-run aggregate supply curve following inflation shocks, they can minimize the impact that the changes in inflation have on output.Describe how they can do this through the monetary policy reaction curve.

Suppose that consumer and business confidence fall.What is the ultimate outcome for the economy if monetary policymakers respond to keep inflation on an unchanged target?

Which of the following statements best describes the level of potential output in the U.S.?

If monetary policymakers do not want an increase in government purchases, which increases aggregate demand, to cause an increase in inflation, they would:

When a negative supply shock occurs it is extremely important for monetary policymakers to discern whether or not potential output has decreased.Why does that matter?

Why does it take so long for the declaration of the beginning and end of recessions in the U.S.and why is there a lack of clarity as to what is and is not a recession?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value, and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets, and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange-Rate Policy and the Central Bank

Money Growth, Money Demand, and Modern Monetary Policy

Output, Inflation, and Monetary Policy

Modern Monetary Policy and the Challenges Facing Central Bankers

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