Exam 15: A Dynamic Model of Economic Fluctuations

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate _____ when inflation is above its target, and the real interest rate _____ when output is below its natural level.

The short-run equilibrium in the dynamic model of aggregate demand and aggregate supply is determined by the intersection of the:

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by AD-AS model in light of this difference.

What is stagflation? How does it occur as an effect of shock to aggregate supply curve?

The current inflation rate, $\pi$ _t, represents the change in the price level between periods:

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation ____ its target, or output ____ its natural level.

In order to achieve the target for the nominal interest rate established by the monetary policy rule, the central bank adjusts:

To follow a monetary policy rule, the central bank raises the nominal interest rate by:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank's target rate of inflation?

How does the AD-AS curve analyze the long run growth of an economy? Explain.

The upward slope of the dynamic aggregate supply curve indicates that, holding other factors constant, high levels of economic activity are associated with:

The Taylor rule can be written as FF rate = $\pi$ + 2.0 + 0.5 ( $\pi$ - 2.0) + 0.5(GDP gap), where FF rate is the nominal federal funds rate, $\pi$ is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 2 percent and the GDP gap is -2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at _____ percent.

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will be at their natural levels?

How does the AD-AS model take a novel approach towards taking up money supply effects on economic fluctuations?

The nominal interest rate, i_t, is the rate of return between periods:

The ex ante real interest rate that prevails at time t equals:

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output to _____ until returning to the natural level in the long run.

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a small value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a large value of $\theta$ _Y, the responsiveness of nominal interest rates to output, then the DAD curve will be relatively _____, and supply shocks will have relatively ____ impacts on inflation than output.

What is the tradeoff employed by the AS-AD models against supply shock, as a monetary policy rule?