Question 1

If most shocks to the economy are ________ shocks, then ________.

Accepted Answer

A)  aggregate demand; there is a tradeoff between the dual objectives in the short-run 
B)  temporary aggregate supply; inflation stabilization policy will not stabilize activity in the short-run 
C)  temporary aggregate supply; output stabilization policy is consistent with no change in inflation in the long-run 
D)  all of the above 
E)  none of the above 
A)  aggregate demand; there is a tradeoff between the dual objectives in the short-run 
B)  temporary aggregate supply; inflation stabilization policy will not stabilize activity in the short-run 
C)  temporary aggregate supply; output stabilization policy is consistent with no change in inflation in the long-run 
D)  all of the above 
E)  none of the above B

Question 2

When a temporary negative supply shock hits the economy, then in the short-run ________.

Accepted Answer

A)  if the central bank focuses on stabilizing output, it cannot stabilize inflation 
B)  if the central bank focuses on stabilizing inflation, it cannot stabilize output 
C)  the divine coincidence does not hold 
D)  all of the above 
E)  none of the above 
A)  if the central bank focuses on stabilizing output, it cannot stabilize inflation 
B)  if the central bank focuses on stabilizing inflation, it cannot stabilize output 
C)  the divine coincidence does not hold 
D)  all of the above 
E)  none of the above D

Question 3

Macroeconomic Shocks & Policies
  
-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 shifts reversed. The increase in the real interest rate causes a decrease in expenditures (AD shifts down). Declining inflation lowers the real interest rate (movement along the MP curve), which increases expenditures (movement along the AD curve). Since there has been no shift of the IS curve, the real interest rate must return to its original value, so that aggregate demand is equal to potential output.

Question 4

If higher inflation ensues from a temporary negative supply shock, and in response, the central bank raises interest rates, then the resulting decrease in AD will return inflation back to its original level ________.

Accepted Answer

A)  and no further action will be required by the central bank 
B)  but the ensuing positive output gap will lead to higher inflation once again so further interest rate increases will be required by the central bank to return inflation back to its long run level 
C)  but the ensuing negative output gap will lead to short-run increases in AS and the central bank will have to "undo" its original interest rate hike in order to return inflation back to its target rate 
D)  all of the above 
E)  none of the above 
A)  and no further action will be required by the central bank 
B)  but the ensuing positive output gap will lead to higher inflation once again so further interest rate increases will be required by the central bank to return inflation back to its long run level 
C)  but the ensuing negative output gap will lead to short-run increases in AS and the central bank will have to "undo" its original interest rate hike in order to return inflation back to its target rate 
D)  all of the above 
E)  none of the above

Question 5

How might strict adherence to the Taylor rule discourage demand-pull inflation? How might demand-pull inflation occur, nonetheless?

Accepted Answer

The Taylor rule requires monetary policy

Question 6

According to the Taylor rule, which of the following will lead to a higher nominal federal funds rate?

Accepted Answer

A)  a decrease in inflation 
B)  a negative output gap 
C)  a positive inflation gap 
D)  all of the above 
E)  none of the above 
A)  a decrease in inflation 
B)  a negative output gap 
C)  a positive inflation gap 
D)  all of the above 
E)  none of the above

Question 7

Is the Taylor rule of greater use to activist or to nonactivist policy makers?

Accepted Answer

Nonactivist. The Taylor rule is an alter

Question 8

How do the hierarchical and dual mandates differ in terms of macroeconomic consequences?

Accepted Answer

A dual mandate implies more tolerance of

Question 9

What is the divine coincidence? When and why does it not hold true?

Accepted Answer

The divine coincidence is the ability to

Question 10

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 11

If the inflation rate target is 2%, the current inflation rate is 3%, and the output gap is 2%, then according to the Taylor rule, the nominal federal funds rate should be ________ percent.

Accepted Answer

A)  4.5 
B)  7 
C)  6.5 
D)  5.5 
E)  none of the above 
A)  4.5 
B)  7 
C)  6.5 
D)  5.5 
E)  none of the above

Question 12

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 13

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 14

How might long policy lags impact the divine coincidence?

Accepted Answer

The divine coincidence applies when poli

Question 15

The goal of maximum sustainable employment is roughly equivalent to achieving ________.

Accepted Answer

A)  the natural rate of unemployment 
B)  an inflation target that is slightly above zero 
C)  the elimination of frictional and structural unemployment 
D)  all of the above 
E)  none of the above 
A)  the natural rate of unemployment 
B)  an inflation target that is slightly above zero 
C)  the elimination of frictional and structural unemployment 
D)  all of the above 
E)  none of the above

Question 16

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss how to best adjust ________ to accommodate shocks that shift the level of ________.

Accepted Answer

A)  the equilibrium real interest rate; the target Fed Funds rate 
B)  the target Fed Funds rate; the equilibrium real interest rate 
C)  the 3 month T-bill rate; the inflation gap 
D)  target rate of inflation; money demand 
E)  none of the above 
A)  the equilibrium real interest rate; the target Fed Funds rate 
B)  the target Fed Funds rate; the equilibrium real interest rate 
C)  the 3 month T-bill rate; the inflation gap 
D)  target rate of inflation; money demand 
E)  none of the above

Question 17

In 2008 and 2009, the federal funds rate was well below the rate suggested by the Taylor rule. A likely explanation for the discrepancy is that ________.

Accepted Answer

A)  the Fed's dual mandate prevents a close reliance on the Taylor rule. 
B)  policy makers decided that the Taylor rule underestimates the risk of inflation 
C)  the Taylor rule is not intended to guide policy in response to aggregate supply shocks 
D)  all of the above 
E)  none of the above 
A)  the Fed's dual mandate prevents a close reliance on the Taylor rule. 
B)  policy makers decided that the Taylor rule underestimates the risk of inflation 
C)  the Taylor rule is not intended to guide policy in response to aggregate supply shocks 
D)  all of the above 
E)  none of the above

Question 18

Which of the following is a primary objective of macroeconomic policy?

Accepted Answer

A)  Achieving a zero rate of unemployment 
B)  Achieving a zero rate of inflation 
C)  Stabilizing economic activity 
D)  all of the above 
E)  none of the above 
A)  Achieving a zero rate of unemployment 
B)  Achieving a zero rate of inflation 
C)  Stabilizing economic activity 
D)  all of the above 
E)  none of the above

Question 19

The equilibrium real interest rate is the rate ________.

Accepted Answer

A)  at which the output gap is zero 
B)  at which the inflation rate is low 
C)  controlled by the central bank 
D)  all of the above 
E)  none of the above 
A)  at which the output gap is zero 
B)  at which the inflation rate is low 
C)  controlled by the central bank 
D)  all of the above 
E)  none of the above

Question 20

A goal of very high employment may lead to ________.

Accepted Answer

A)  inflationary monetary policy 
B)  inflationary fiscal policy 
C)  demand-pull inflation 
D)  all of the above 
E)  none of the above 
A)  inflationary monetary policy 
B)  inflationary fiscal policy 
C)  demand-pull inflation 
D)  all of the above 
E)  none of the above

Exam 13: Macroeconomic Policy and Aggregate Demand and Supply Analysis

If most shocks to the economy are ________ shocks, then ________.

When a temporary negative supply shock hits the economy, then in the short-run ________.

Macroeconomic Shocks & Policies -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 higher inflation ensues from a temporary negative supply shock, and in response, the central bank raises interest rates, then the resulting decrease in AD will return inflation back to its original level ________.

How might strict adherence to the Taylor rule discourage demand-pull inflation? How might demand-pull inflation occur, nonetheless?

According to the Taylor rule, which of the following will lead to a higher nominal federal funds rate?

Is the Taylor rule of greater use to activist or to nonactivist policy makers?

How do the hierarchical and dual mandates differ in terms of macroeconomic consequences?

What is the divine coincidence? When and why does it not hold true?

When an aggregate demand shock hits the economy ________.

If the inflation rate target is 2%, the current inflation rate is 3%, and the output gap is 2%, then according to the Taylor rule, the nominal federal funds rate should be ________ percent.

Nonactivists believe that ________.

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

How might long policy lags impact the divine coincidence?

The goal of maximum sustainable employment is roughly equivalent to achieving ________.

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss how to best adjust ________ to accommodate shocks that shift the level of ________.

In 2008 and 2009, the federal funds rate was well below the rate suggested by the Taylor rule. A likely explanation for the discrepancy is that ________.

Which of the following is a primary objective of macroeconomic policy?

The equilibrium real interest rate is the rate ________.

A goal of very high employment may lead to ________.

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

If most shocks to the economy are shocks, then .

Every six weeks, the Federal Open Market Committee (FOMC) meets to discuss how to best adjust to accommodate shocks that shift the level of .