Question 1

The flat inflation adjustment line reflects the idea that

Accepted Answer

A) inflation occurs only when real GDP exceeds potential GDP. 
B) prices usually remain constant. 
C) current prices and wages do not depend on what has happened in the past. 
D) prices and wages are as likely to decline as they are to increase. 
E) inflation is partly due to inertia. 
A) inflation occurs only when real GDP exceeds potential GDP. 
B) prices usually remain constant. 
C) current prices and wages do not depend on what has happened in the past. 
D) prices and wages are as likely to decline as they are to increase. 
E) inflation is partly due to inertia. E

Question 2

How do changes in real interest rates affect real GDP?

Accepted Answer

A change in real interest rates will cause investment,net exports,and consumption to change in the opposite direction.This change in aggregate expenditure will cause real GDP to change via the multiplier process.

Question 3

If,for any given rate of inflation,the real rate of interest declines,the AD curve will shift to the left.

Accepted Answer

A) True 
 B)False  False

Question 4

Which of the following explains a downward shift in the expenditure line along the vertical axis?

Accepted Answer

A) A decrease in the MPC 
B) An increase in real interest rates 
C) A decrease in taxes 
D) A decrease in real interest rates 
E) A weaker value of the domestic currency 
A) A decrease in the MPC 
B) An increase in real interest rates 
C) A decrease in taxes 
D) A decrease in real interest rates 
E) A weaker value of the domestic currency

Question 5

Which of the following is probably the most sensitive to changes in real interest rates?

Accepted Answer

A) Government purchases 
B) Exports 
C) Consumption 
D) Imports 
E) Investment 
A) Government purchases 
B) Exports 
C) Consumption 
D) Imports 
E) Investment

Question 6

If the economy is in an expansion,it is likely that

Accepted Answer

A) the economy is not in equilibrium and is therefore not on the aggregate demand curve. 
B) the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is less than potential GDP. 
C) the aggregate demand curve and the inflation adjustment line do not intersect. 
D) the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is higher than potential GDP. 
E) aggregate expenditures are unequal to real GDP. 
A) the economy is not in equilibrium and is therefore not on the aggregate demand curve. 
B) the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is less than potential GDP. 
C) the aggregate demand curve and the inflation adjustment line do not intersect. 
D) the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is higher than potential GDP. 
E) aggregate expenditures are unequal to real GDP.

Question 7

The central bank's monetary policy rule shows that

Accepted Answer

A) the real interest rate must increase to match the increase in inflation. 
B) the nominal interest rate must increase to match the increase in inflation. 
C) the nominal interest rate must increase by more than the increase in inflation. 
D) the real interest rate must increase by less than the increase in inflation. 
E) the nominal interest rate must increase by less than the increase in inflation. 
A) the real interest rate must increase to match the increase in inflation. 
B) the nominal interest rate must increase to match the increase in inflation. 
C) the nominal interest rate must increase by more than the increase in inflation. 
D) the real interest rate must increase by less than the increase in inflation. 
E) the nominal interest rate must increase by less than the increase in inflation.

Question 8

Any point along the aggregate demand curve represents

Accepted Answer

A) a possible equilibrium combination of potential GDP and inflation. 
B) the inflation rate at any point in time. 
C) an equilibrium combination of real GDP and inflation. 
D) a possible equilibrium combination of real GDP and inflation. 
E) an equilibrium combination of potential GDP and inflation. 
A) a possible equilibrium combination of potential GDP and inflation. 
B) the inflation rate at any point in time. 
C) an equilibrium combination of real GDP and inflation. 
D) a possible equilibrium combination of real GDP and inflation. 
E) an equilibrium combination of potential GDP and inflation.

Question 9

In order for the aggregate demand (AD)curve to be downward-sloping,

Accepted Answer

A) there has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
B) there has to be a positive relationship between the real interest rate and real GDP and a negative relationship between inflation and the real interest rate. 
C) there has to be an inverse relationship between the real interest rate and real GDP and an inverse relationship between inflation and the real interest rate. 
D) there has to be a positive relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
E) there has to be an inverse relationship between the real interest rate and real GDP but there cannot be a relationship between inflation and the real interest rate. 
A) there has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
B) there has to be a positive relationship between the real interest rate and real GDP and a negative relationship between inflation and the real interest rate. 
C) there has to be an inverse relationship between the real interest rate and real GDP and an inverse relationship between inflation and the real interest rate. 
D) there has to be a positive relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. 
E) there has to be an inverse relationship between the real interest rate and real GDP but there cannot be a relationship between inflation and the real interest rate.

Question 10

The inflation adjustment line is a flat line showing the level of inflation in the economy at a given point in time.

Accepted Answer

A) True 
 B)False

Question 11

Expectations of steady inflation and staggered wage and price setting are two reasons why

Accepted Answer

A) the IA line is usually upward-sloping. 
B) inflation is highly variable during the short run. 
C) inflation does not change very much in the short run. 
D) inflation changes immediately after a change in real GDP. 
E) the IA line is usually downward-sloping. 
A) the IA line is usually upward-sloping. 
B) inflation is highly variable during the short run. 
C) inflation does not change very much in the short run. 
D) inflation changes immediately after a change in real GDP. 
E) the IA line is usually downward-sloping.

Question 12

Which of the following best explains what will happen if government purchases decline?

Accepted Answer

A) For any given rate of inflation,real GDP will decrease. 
B) For any given rate of inflation,real GDP will increase. 
C) For any given rate of inflation,potential GDP will increase. 
D) There will be an upward movement along the AD curve. 
E) There will be a downward movement along the AD curve. 
A) For any given rate of inflation,real GDP will decrease. 
B) For any given rate of inflation,real GDP will increase. 
C) For any given rate of inflation,potential GDP will increase. 
D) There will be an upward movement along the AD curve. 
E) There will be a downward movement along the AD curve.

Question 13

Unlike business investment,housing investment declines when the real interest rate falls.

Accepted Answer

A) True 
 B)False

Question 14

Explain how real interest rates affect investment expenditures.

Accepted Answer

Changes in the real interest rate affect

Question 15

Suppose the current rate of inflation is 4 percent.However,if real and potential GDP are to be equal,inflation will need to be at 6 percent.Show,using the AD curve and the IA line,where real GDP is relative to potential GDP under these circumstances.

Accepted Answer

As shown in the figure below,t

Question 16

The economic fluctuations model is used to determine

Accepted Answer

A) real GDP and inflation. 
B) potential GDP and inflation. 
C) inflation and unemployment. 
D) potential GDP and real GDP. 
E) real GDP and unemployment. 
A) real GDP and inflation. 
B) potential GDP and inflation. 
C) inflation and unemployment. 
D) potential GDP and real GDP. 
E) real GDP and unemployment.

Question 17

During a recession,the rate of inflation is

Accepted Answer

A) decreasing while real GDP is increasing relative to potential GDP. 
B) increasing while real GDP is falling relative to potential GDP. 
C) decreasing while real GDP is falling relative to potential GDP. 
D) increasing while real GDP is increasing relative to potential GDP. 
E) constant while real GDP is falling relative to potential GDP. 
A) decreasing while real GDP is increasing relative to potential GDP. 
B) increasing while real GDP is falling relative to potential GDP. 
C) decreasing while real GDP is falling relative to potential GDP. 
D) increasing while real GDP is increasing relative to potential GDP. 
E) constant while real GDP is falling relative to potential GDP.

Question 18

Which of the following would cause the AD curve to shift to the right?

Accepted Answer

A) An increase in the real rate of interest 
B) A decrease in government purchases 
C) An increase in government purchases 
D) An increase in the rate of inflation 
E) A decrease in the rate of inflation 
A) An increase in the real rate of interest 
B) A decrease in government purchases 
C) An increase in government purchases 
D) An increase in the rate of inflation 
E) A decrease in the rate of inflation

Question 19

Exhibit 24-6  
-According to Exhibit 24-6,what should have happened to the rate of inflation between 1972 and 1974?

Accepted Answer

A) Not enough information is given to answer this question. 
B) It should have decreased. 
C) It should have been negative. 
D) It should have increased. 
E) It should have remained constant. 
A) Not enough information is given to answer this question. 
B) It should have decreased. 
C) It should have been negative. 
D) It should have increased. 
E) It should have remained constant.

Question 20

Since changes in both monetary policy and fiscal policy can shift the aggregate demand curve,it doesn't matter whether we reduce income taxes or reduce the target inflation rate to increase real GDP.Both policies will have the same effect on consumption,net exports,and investment.Please answer true or false and explain.

Accepted Answer

This statement is false.Reducing the tar

Exam 24: The Economic Fluctuations Model

The flat inflation adjustment line reflects the idea that

How do changes in real interest rates affect real GDP?

If,for any given rate of inflation,the real rate of interest declines,the AD curve will shift to the left.

Which of the following explains a downward shift in the expenditure line along the vertical axis?

Which of the following is probably the most sensitive to changes in real interest rates?

If the economy is in an expansion,it is likely that

The central bank's monetary policy rule shows that

Any point along the aggregate demand curve represents

In order for the aggregate demand (AD)curve to be downward-sloping,

The inflation adjustment line is a flat line showing the level of inflation in the economy at a given point in time.

Expectations of steady inflation and staggered wage and price setting are two reasons why

Which of the following best explains what will happen if government purchases decline?

Unlike business investment,housing investment declines when the real interest rate falls.

Explain how real interest rates affect investment expenditures.

Suppose the current rate of inflation is 4 percent.However,if real and potential GDP are to be equal,inflation will need to be at 6 percent.Show,using the AD curve and the IA line,where real GDP is relative to potential GDP under these circumstances.

The economic fluctuations model is used to determine

During a recession,the rate of inflation is

Which of the following would cause the AD curve to shift to the right?

Exhibit 24-6 -According to Exhibit 24-6,what should have happened to the rate of inflation between 1972 and 1974?

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model: Price Floors,price Ceilings,and Elasticity

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Interaction of People in Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, transfers, and Income Distribution

Public Goods, externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth and Globalization

International Trade

International Finance

Reading,understanding,and Creating Graphs

Consumer Theory With Indifference Curves

Producer Theory With Isoquants

Present Discounted Value

The Miracle of Compound Growth

Deriving the Growth Accounting Formula

Deriving the Formula for the Keynesian Multiplier and the Forward-Looking Consumption Model

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