Question 1

Does an increase in the rate of inflation always imply that aggregate demand is increasing? Explain.

Accepted Answer

No, not always.While rightward shifts in the dynamic aggregate demand curve can cause increases in the rate of inflation, higher inflation rates can also occur even if the dynamic aggregate demand curve is stable.Negative inflation shocks that shift the short-run aggregate supply curve to the left will also cause higher rates of inflation.

Question 2

Which of the following would be classified as a negative supply shock?

Accepted Answer

A) An increase in the price of oil 
B) An increase in government purchases 
C) An increase in export demand 
D) Either an increase in the price of oil or an increase in government purchases 
A) An increase in the price of oil 
B) An increase in government purchases 
C) An increase in export demand 
D) Either an increase in the price of oil or an increase in government purchases A

Question 3

Use the long-run model presented in Chapter 22 to answer this question.If there is a decrease in aggregate demand, and monetary policymakers counter the decrease in aggregate demand, what will be the impact on output and inflation? Explain.

Accepted Answer

If aggregate demand decreases, there will be a temporary recessionary output gap.Eventually the self-correcting mechanism would cause the short-run aggregate supply curve to shift to the right as the inflation rate decreases and the output would grow to the potential level, but at a lower rate of inflation than what existed before the decrease in aggregate demand.If monetary policymakers counter the demand decrease, the output gap potentially is avoided but at the cost of not having the lower rate of inflation.

Question 4

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 5

The effect 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 6

Explain why understanding short-run fluctuations in output and inflation requires that we study shifts in dynamic aggregate demand and short-run aggregate supply.

Accepted Answer

The economy naturally moves to long-run

Question 7

Increases in potential output shift:

Accepted Answer

A) The long-run aggregate supply curve 
B) The short-run aggregate supply curve 
C) Both the long-run aggregate supply curve and the short-run aggregate supply curve 
D) The long-run aggregate supply curve, the short-run aggregate supply curve, and the dynamic aggregate demand curve 
A) The long-run aggregate supply curve 
B) The short-run aggregate supply curve 
C) Both the long-run aggregate supply curve and the short-run aggregate supply curve 
D) The long-run aggregate supply curve, the short-run aggregate supply curve, and the dynamic aggregate demand curve

Question 8

Disinflation occurs when:

Accepted Answer

A) The inflation rate is negative 
B) The inflation rate is 2 percent or less 
C) The inflation rate goes above ten percent 
D) The rate of inflation declines 
A) The inflation rate is negative 
B) The inflation rate is 2 percent or less 
C) The inflation rate goes above ten percent 
D) The rate of inflation declines

Question 9

If monetary policymakers respond aggressively to current inflation above the target inflation rate, the:

Accepted Answer

A) Monetary policy reaction curve would be flat 
B) Dynamic aggregate demand curve would have a steep slope 
C) Monetary policy reaction curve would have a positive and steep slope 
D) Dynamic aggregate demand curve would shift rightward 
A) Monetary policy reaction curve would be flat 
B) Dynamic aggregate demand curve would have a steep slope 
C) Monetary policy reaction curve would have a positive and steep slope 
D) Dynamic aggregate demand curve would shift rightward

Question 10

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 11

Monetary policymakers can take advantage of the impact that positive inflation shocks have on output by shifting the:

Accepted Answer

A) Monetary policy reaction curve left 
B) Monetary policy reaction curve right 
C) Short-run aggregate supply curve to the left 
D) Short-run aggregate supply curve to the right 
A) Monetary policy reaction curve left 
B) Monetary policy reaction curve right 
C) Short-run aggregate supply curve to the left 
D) Short-run aggregate supply curve to the right

Question 12

If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a decrease in aggregate demand will include:

Accepted Answer

A) An expansionary gap 
B) A higher rate of inflation 
C) A higher level of potential output 
D) A recessionary gap 
A) An expansionary gap 
B) A higher rate of inflation 
C) A higher level of potential output 
D) A recessionary gap

Question 13

During the Great Moderation experienced in the United States during the 1990s the volatility of inflation and growth:

Accepted Answer

A) Moved in opposite directions. 
B) Both dropped significantly. 
C) Both increased but only slightly. 
D) Disappeared. 
A) Moved in opposite directions. 
B) Both dropped significantly. 
C) Both increased but only slightly. 
D) Disappeared.

Question 14

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 15

In 2001 a combination of tax cuts and increased defense spending did not have the same inflationary effect as the similar policy in the 1960s.Explain the difference.

Accepted Answer

The cut in taxes and increased defense s

Question 16

During the Great Moderation experienced in the United States during the 1990s:

Accepted Answer

A) Output never decreased and inflation fell steadily 
B) Output and inflation both fell steadily 
C) Output and inflation both increased 
D) Output never decreased and inflation rose only slightly 
A) Output never decreased and inflation fell steadily 
B) Output and inflation both fell steadily 
C) Output and inflation both increased 
D) Output never decreased and inflation rose only slightly

Question 17

Opportunistic disinflation occurs when policymakers:

Accepted Answer

A) Change the target inflation rate 
B) Take advantage of positive supply shocks 
C) Are able to permanently lower inflation 
D) All of the answers given are correct 
A) Change the target inflation rate 
B) Take advantage of positive supply shocks 
C) Are able to permanently lower inflation 
D) All of the answers given are correct

Question 18

Describe a scenario where a negative supply shock (that raises the rate of inflation) results in a permanently higher rate of inflation.

Accepted Answer

If there is an increase in the price of

Question 19

If monetary policymakers do not change their inflation target and aggregate demand shifts left:

Accepted Answer

A) There will be a temporary decrease in output 
B) Potential output will decrease 
C) There will be an increase in inflation in the long run 
D) It will result in a permanent reduction in inflation 
A) There will be a temporary decrease in output 
B) Potential output will decrease 
C) There will be an increase in inflation in the long run 
D) It will result in a permanent reduction in inflation

Question 20

Which of the following statements is most correct?

Accepted Answer

A) Policymakers can eliminate the effects of negative supply shock 
B) Policymakers can neutralize movements in aggregate demand 
C) Policymakers can shift the short-run aggregate supply curve 
D) Shifts in the monetary policy reaction function used to stabilize the economy shift the short-run aggregate supply curve 
A) Policymakers can eliminate the effects of negative supply shock 
B) Policymakers can neutralize movements in aggregate demand 
C) Policymakers can shift the short-run aggregate supply curve 
D) Shifts in the monetary policy reaction function used to stabilize the economy shift the short-run aggregate supply curve

Exam 22: Understanding Business Cycle Fluctuations

Does an increase in the rate of inflation always imply that aggregate demand is increasing? Explain.

Which of the following would be classified as a negative supply shock?

Use the long-run model presented in Chapter 22 to answer this question.If there is a decrease in aggregate demand, and monetary policymakers counter the decrease in aggregate demand, what will be the impact on output and inflation? Explain.

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?

The effect of a decrease in import prices on overall inflation can be best described as:

Explain why understanding short-run fluctuations in output and inflation requires that we study shifts in dynamic aggregate demand and short-run aggregate supply.

Increases in potential output shift:

Disinflation occurs when:

If monetary policymakers respond aggressively to current inflation above the target inflation rate, the:

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?

Monetary policymakers can take advantage of the impact that positive inflation shocks have on output by shifting the:

If an economy is initially at a state of long-run equilibrium, the short-run effect(s) from a decrease in aggregate demand will include:

During the Great Moderation experienced in the United States during the 1990s the volatility of inflation and growth:

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

In 2001 a combination of tax cuts and increased defense spending did not have the same inflationary effect as the similar policy in the 1960s.Explain the difference.

During the Great Moderation experienced in the United States during the 1990s:

Opportunistic disinflation occurs when policymakers:

Describe a scenario where a negative supply shock (that raises the rate of inflation) results in a permanently higher rate of inflation.

If monetary policymakers do not change their inflation target and aggregate demand shifts left:

Which of the following statements is most correct?

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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