Question 1

Nonconventional monetary policy attempts to reduce financial frictions by ________.

Accepted Answer

A) correcting the shortage of liquidity that has made it costly for businesses to invest 
B) purchasing long-term assets,which raises their price and reduces the credit spread 
C) reducing the expected future short-term interest rate 
D) all of the above 
E) none of the above 
A) correcting the shortage of liquidity that has made it costly for businesses to invest 
B) purchasing long-term assets,which raises their price and reduces the credit spread 
C) reducing the expected future short-term interest rate 
D) all of the above 
E) none of the above

Question 2

Frictional unemployment is to ________ as structural unemployment is to ________.

Accepted Answer

A) search;mismatch 
B) temperature;rigidity 
C) job training;output gap 
D) all of the above 
E) none of the above 
A) search;mismatch 
B) temperature;rigidity 
C) job training;output gap 
D) all of the above 
E) none of the above

Question 3

A negative shock in aggregate demand will likely result in ________.

Accepted Answer

A) a short run decrease in output 
B) a permanently lower equilibrium inflation rate if the central bank does not respond by lowering interest rates 
C) an eventual increase in aggregate supply for any inflation rate if the central bank does not respond by lowering interest rates 
D) all of the above 
E) none of the above 
A) a short run decrease in output 
B) a permanently lower equilibrium inflation rate if the central bank does not respond by lowering interest rates 
C) an eventual increase in aggregate supply for any inflation rate if the central bank does not respond by lowering interest rates 
D) all of the above 
E) none of the above

Question 4

-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If a fiscal stimulus package is implemented quickly,raising output to $12 trillion,while inflation remains constant at one percent,then the figure implies that the real interest rate will be ________ percent.

Accepted Answer

A) 1.5 
B) zero 
C) one 
D) 0.5 
E) 2.5 
A) 1.5 
B) zero 
C) one 
D) 0.5 
E) 2.5

Question 5

If workers push for wages that are beyond what productivity gains can justify ________.

Accepted Answer

A) a temporary negative supply shock ensues driving up prices 
B) a negative output gap ensues which will lead to higher unemployment if the Federal Reserve does not act 
C) and the Federal Reserve eases monetary policy aimed at increasing aggregate demand to counter the negative supply shock,a price-wage spiral could ensue 
D) all of the above 
E) none of the above 
A) a temporary negative supply shock ensues driving up prices 
B) a negative output gap ensues which will lead to higher unemployment if the Federal Reserve does not act 
C) and the Federal Reserve eases monetary policy aimed at increasing aggregate demand to counter the negative supply shock,a price-wage spiral could ensue 
D) all of the above 
E) none of the above

Question 6

Nonactivists believe that ________.

Accepted Answer

A) there is a very rapid self-correcting mechanism since prices and wages are very flexible 
B) lags to policy implementation are so long that even the "correct" policies may lead to undesirable consequences 
C) policy interventions should take place less frequently than what Keynesians advocate 
D) all of the above 
E) none of the above 
A) there is a very rapid self-correcting mechanism since prices and wages are very flexible 
B) lags to policy implementation are so long that even the "correct" policies may lead to undesirable consequences 
C) policy interventions should take place less frequently than what Keynesians advocate 
D) all of the above 
E) none of the above

Question 7

When an aggregate demand shock hits the economy ________.

Accepted Answer

A) there is no conflict for the central bank between pursuing price or output stability because of the divine coincidence 
B) the same long-run equilibrium real interest rate is reached whether the central bank intervenes or not 
C) the long-run level of output is unaffected 
D) all of the above 
E) none of the above 
A) there is no conflict for the central bank between pursuing price or output stability because of the divine coincidence 
B) the same long-run equilibrium real interest rate is reached whether the central bank intervenes or not 
C) the long-run level of output is unaffected 
D) all of the above 
E) none of the above

Question 8

When a permanent negative supply shock hits the economy ________.

Accepted Answer

A) in the long-run,the output gap returns to zero only if the central bank raises interest rates 
B) the long-run equilibrium level of output depends on whether and how the central bank responds 
C) there is no permanent effect on inflation if the central bank raises interest rates 
D) all of the above 
E) none of the above 
A) in the long-run,the output gap returns to zero only if the central bank raises interest rates 
B) the long-run equilibrium level of output depends on whether and how the central bank responds 
C) there is no permanent effect on inflation if the central bank raises interest rates 
D) all of the above 
E) none of the above

Question 9

-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If there is no policy intervention,then the figure implies that when output has reached $12 trillion,the real interest rate will be ________ percent,and the inflation rate will be ________ percent.

Accepted Answer

A) 1.5;one 
B) one;zero 
C) zero;minus 2 
D) 0.5;minus one 
E) 2.5;three 
A) 1.5;one 
B) one;zero 
C) zero;minus 2 
D) 0.5;minus one 
E) 2.5;three

Question 10

If workers push for wages that are beyond what productivity gains can justify ________.

Accepted Answer

A) a positive output gap ensues which will lead to lower unemployment if the Federal Reserve does not act 
B) a temporary negative supply shock ensues driving up prices 
C) and the Federal Reserve eases monetary policy aimed at increasing aggregate demand to counter the negative supply shock,the inflation rate will decrease 
D) all of the above 
E) none of the above 
A) a positive output gap ensues which will lead to lower unemployment if the Federal Reserve does not act 
B) a temporary negative supply shock ensues driving up prices 
C) and the Federal Reserve eases monetary policy aimed at increasing aggregate demand to counter the negative supply shock,the inflation rate will decrease 
D) all of the above 
E) none of the above

Question 11

High inflation that persists beyond the ending of expansionary policies is probably ________.

Accepted Answer

A) demand-pull inflation 
B) Humphrey-Hawkins inflation 
C) cost-push inflation 
D) a result of unemployment remaining below the natural rate 
E) none of the above 
A) demand-pull inflation 
B) Humphrey-Hawkins inflation 
C) cost-push inflation 
D) a result of unemployment remaining below the natural rate 
E) none of the above

Question 12

Figure 13.1  
-In Figure 13.1,"the zero lower bound" is displayed at ________.

Accepted Answer

A) point 1 
B) point 2 
C)    
D) the origin (intersection of the axes) 
E) none of the above 
A) point 1 
B) point 2 
C)    
D) the origin (intersection of the axes) 
E) none of the above

Question 13

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007.Which of the following is a likely result of this increase in financial frictions?

Accepted Answer

A) The AD curve likely shifted left which caused a negative output gap. 
B) The AD curve likely shifted left causing a negative inflation gap. 
C) The AD curve likely shifted left followed by an downward movement along the MP curve to a lower equilibrium interest rate in the short run. 
D) all of the above 
E) none of the above 
A) The AD curve likely shifted left which caused a negative output gap. 
B) The AD curve likely shifted left causing a negative inflation gap. 
C) The AD curve likely shifted left followed by an downward movement along the MP curve to a lower equilibrium interest rate in the short run. 
D) all of the above 
E) none of the above

Question 14

When the credit spread rises,an effective policy response might be to ________.

Accepted Answer

A) lower the real interest rate on safe assets 
B) prevent the real federal funds rate from falling below zero 
C) pursue nonconventional monetary policies to restore the functioning of financial markets 
D) announce swift and stern action against those responsible for the financial disruption 
A) lower the real interest rate on safe assets 
B) prevent the real federal funds rate from falling below zero 
C) pursue nonconventional monetary policies to restore the functioning of financial markets 
D) announce swift and stern action against those responsible for the financial disruption

Question 15

-On the graphs above,show how the central bank implements a decrease in the inflation target.In words,explain why the change in the real interest rate is temporary.

Accepted Answer

The graphs resemble Fig.13.10 with all s

Question 16

If the inflation rate target is 2%,the current inflation rate is also 2%,and the output gap is zero,then according to the Taylor rule,the nominal federal funds rate should be ________ percent.

Accepted Answer

A) zero 
B) two 
C) four 
D) three 
E) none of the above 
A) zero 
B) two 
C) four 
D) three 
E) none of the above

Question 17

-Suppose the economy is in a long-run equilibrium when a positive demand shock occurs.On the graphs above,show what happens to bring the economy back to long-run equilibrium,assuming that there is no policy response.In words,describe how the graph would be different,if policy makers did intervene.

Accepted Answer

The graphs should be similar to Fig.13.2

Question 18

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007.Which of the following is a likely result of this increase in financial frictions?

Accepted Answer

A) The AD curve likely shifted left which caused a negative output gap. 
B) The AD curve likely shifted left which caused a positive inflation gap. 
C) The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate. 
D) The AD curve likely did not shift. 
E) none of the above 
A) The AD curve likely shifted left which caused a negative output gap. 
B) The AD curve likely shifted left which caused a positive inflation gap. 
C) The AD curve likely shifted left which caused an upward movement along the MP curve to a higher general equilibrium interest rate. 
D) The AD curve likely did not shift. 
E) none of the above

Question 19

An increase in financial frictions results in ________.

Accepted Answer

A) an increase in output and inflation 
B) a rise in the interest rate set by monetary policy 
C) a decline in the real interest rates faced by households and firms 
D) a decline in the interest rate set by monetary policy 
A) an increase in output and inflation 
B) a rise in the interest rate set by monetary policy 
C) a decline in the real interest rates faced by households and firms 
D) a decline in the interest rate set by monetary policy

Question 20

In the absence of financial frictions,________.

Accepted Answer

A) interest rates for different borrowers move closely together 
B) all loans in the economy are transacted at a common interest rate 
C) the level of output is not affected by changes in the real interest rate 
D) an increase in inflation leads to a decrease in the real interest rate 
A) interest rates for different borrowers move closely together 
B) all loans in the economy are transacted at a common interest rate 
C) the level of output is not affected by changes in the real interest rate 
D) an increase in inflation leads to a decrease in the real interest rate

Exam 13: Macroeconomic Policy and Aggregate Demand and Supply Analysis

Nonconventional monetary policy attempts to reduce financial frictions by ________.

Frictional unemployment is to ________ as structural unemployment is to ________.

A negative shock in aggregate demand will likely result in ________.

If workers push for wages that are beyond what productivity gains can justify ________.

Nonactivists believe that ________.

When an aggregate demand shock hits the economy ________.

When a permanent negative supply shock hits the economy ________.

-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If there is no policy intervention,then the figure implies that when output has reached $12 trillion,the real interest rate will be ________ percent,and the inflation rate will be ________ percent.

If workers push for wages that are beyond what productivity gains can justify ________.

High inflation that persists beyond the ending of expansionary policies is probably ________.

Figure 13.1 -In Figure 13.1,"the zero lower bound" is displayed at ________.

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007.Which of the following is a likely result of this increase in financial frictions?

When the credit spread rises,an effective policy response might be to ________.

-On the graphs above,show how the central bank implements a decrease in the inflation target.In words,explain why the change in the real interest rate is temporary.

If the inflation rate target is 2%,the current inflation rate is also 2%,and the output gap is zero,then according to the Taylor rule,the nominal federal funds rate should be ________ percent.

-Suppose the economy is in a long-run equilibrium when a positive demand shock occurs.On the graphs above,show what happens to bring the economy back to long-run equilibrium,assuming that there is no policy response.In words,describe how the graph would be different,if policy makers did intervene.

Many borrowers defaulted on subprime mortgages ultimately disrupting financial markets by August 2007.Which of the following is a likely result of this increase in financial frictions?

An increase in financial frictions results in ________.

In the absence of financial frictions,________.

The Policy and Practice of Macroeconomics

Measuring Macroeconomic Data

Aggregate Production and Productivity

Saving and Investment in Closed and Open Economies

Money and Inflation

The Sources of Growth and the Solow Model

Drivers of Growth: Technology, policy, and Institutions

Business Cycles: an Introduction

The Is Curve

Monetary Policy and Aggregate Demand

Aggregate Supply and the Phillips Curve

The Aggregate Demand and Supply Model

The Financial System and Economic Growth

Financial Crises and the Economy

Fiscal Policy and the Government Budget

Exchange Rates and International Economic Policy

Consumption and Saving

Investment

The Labor Market, employment, and Unemployment

The Role of Expectations in Macroeconomic Policy

Modern Business Cycle Theory

Filters

Frictional unemployment is to as structural unemployment is to .

-In the figure above,assume that output is $10.5 trillion,while potential output is $12 trillion.If there is no policy intervention,then the figure implies that when output has reached $12 trillion,the real interest rate will be percent,and the inflation rate will be percent.