Question 1

If the unemployment rate is above its natural rate, then ________.

Accepted Answer

A)  output is below its potential level 
B)  there is excess tightness in the labor market 
C)  wages and prices will rise more rapidly and the AS curve will shift to the left 
D)  all of the above 
E)  none of the above 
A)  output is below its potential level 
B)  there is excess tightness in the labor market 
C)  wages and prices will rise more rapidly and the AS curve will shift to the left 
D)  all of the above 
E)  none of the above

Question 2

Suppose that households and businesses increase autonomous expenditures, driving output well above potential. Describe, in detail, how monetary policy might react to minimize the increase in inflation.

Accepted Answer

A positive output gap puts upward pressu

Question 3

By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By the end of 1986 the inflation rate had been brought down to 1.9%. Which of the following is true about the Volcker Disinflation?

Accepted Answer

A)  lower inflation resulted from a tightening of monetary policy 
B)  by raising the federal funds rate to over 20%, the Federal Reserve stimulated the economy resulting in lower levels of both inflation and the unemployment rate by the early 1980s 
C)  the unemployment rate was brought down by 1982 but it took longer to reach lower inflation rates 
D)  all of the above 
E)  none of the above 
A)  lower inflation resulted from a tightening of monetary policy 
B)  by raising the federal funds rate to over 20%, the Federal Reserve stimulated the economy resulting in lower levels of both inflation and the unemployment rate by the early 1980s 
C)  the unemployment rate was brought down by 1982 but it took longer to reach lower inflation rates 
D)  all of the above 
E)  none of the above

Question 4

AD - AS Shocks
  
-On the graph above, suppose the economy is at point F when there is a temporary negative supply shock. The new long-run equilibrium is at point ________.

Accepted Answer

A)  H 
B)  I 
C)  F 
D)  G 
E)  none of the above 
A)  H 
B)  I 
C)  F 
D)  G 
E)  none of the above

Question 5

By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, both the inflation and unemployment rates were higher than during most of the 1950s, 60s and early 70s. The Federal Reserve implemented an autonomous tightening of monetary policy that resulted in the famous Volker Disinflation which was successful in bringing both problems under control. Which of the following is an appropriate description had Mr. Volker conducted an expansionary monetary policy instead?

Accepted Answer

A)  The AD curve would have likely shifted right due to the Federal Reserve lowering of interest rates which might have resulted in a temporary decline in the unemployment rate but at the cost of skyrocketing inflation 
B)  Due to the autonomous expansion of monetary policy, a temporary positive output gap might have ensued thereby decreasing the unemployment rate while exerting huge inflationary pressures in the economy 
C)  Due to the autonomous expansion of monetary policy the unemployment rate might have artificially declined. However, the AS curve would then have shifted left to close the ensuing positive output gap thereby returning the unemployment rate to the levels prior to the Fed's action while, likely, making inflation even worse than before Mr. Volker took office 
D)  all of the above 
E)  none of the above 
A)  The AD curve would have likely shifted right due to the Federal Reserve lowering of interest rates which might have resulted in a temporary decline in the unemployment rate but at the cost of skyrocketing inflation 
B)  Due to the autonomous expansion of monetary policy, a temporary positive output gap might have ensued thereby decreasing the unemployment rate while exerting huge inflationary pressures in the economy 
C)  Due to the autonomous expansion of monetary policy the unemployment rate might have artificially declined. However, the AS curve would then have shifted left to close the ensuing positive output gap thereby returning the unemployment rate to the levels prior to the Fed's action while, likely, making inflation even worse than before Mr. Volker took office 
D)  all of the above 
E)  none of the above

Question 6

What was(were) the effect(s) of the Enron Bankruptcy in late 2001 and other corporate scandals in 2002?

Accepted Answer

A)  An ensuing lack of confidence in financial accounting 
B)  The value of corporate bonds declined 
C)  It became more expensive for firms to finance their investments 
D)  all of the above 
E)  none of the above 
A)  An ensuing lack of confidence in financial accounting 
B)  The value of corporate bonds declined 
C)  It became more expensive for firms to finance their investments 
D)  all of the above 
E)  none of the above

Question 7

Which of the following is (are) linked to (an) adverse supply shock(s)?

Accepted Answer

A)  The Arab-Israeli war of 1973 
B)  the Iranian revolution of 1979 
C)  The wage renegotiations that followed the termination of U.S. wage and price controls in 1973 
D)  all of the above 
E)  none of the above 
A)  The Arab-Israeli war of 1973 
B)  the Iranian revolution of 1979 
C)  The wage renegotiations that followed the termination of U.S. wage and price controls in 1973 
D)  all of the above 
E)  none of the above

Question 8

If the unemployment rate is below its natural rate, then ________.

Accepted Answer

A)  output is above its potential level 
B)  there is excess tightness in the labor market 
C)  wages and prices will rise more rapidly and the AS curve will shift to the left 
D)  all of the above 
E)  none of the above 
A)  output is above its potential level 
B)  there is excess tightness in the labor market 
C)  wages and prices will rise more rapidly and the AS curve will shift to the left 
D)  all of the above 
E)  none of the above

Question 9

AD - AS Shocks
  
-On the graph above, a movement from point ________ to point ________ might represent a positive supply shock.

Accepted Answer

A)  F; I 
B)  H: G 
C)  H: F 
D)  F; G 
E)  none of the above 
A)  F; I 
B)  H: G 
C)  H: F 
D)  F; G 
E)  none of the above

Question 10

If the Federal Reserve raises the real interest rate for any given inflation rate ________.

Accepted Answer

A)  investment spending would increase 
B)  it would lead to higher consumption spending and net exports 
C)  the aggregate demand curve would shift to the left 
D)  all of the above 
E)  none of the above 
A)  investment spending would increase 
B)  it would lead to higher consumption spending and net exports 
C)  the aggregate demand curve would shift to the left 
D)  all of the above 
E)  none of the above

Question 11

Suppose there is a temporary supply shock because of a war in the Middle East, then ________.

Accepted Answer

A)  this would constitute a cost push shock due to a restriction in the supply of oil 
B)  the AS curve would shift to the left 
C)  this could theoretically lead to stagflation 
D)  all of the above 
E)  none of the above 
A)  this would constitute a cost push shock due to a restriction in the supply of oil 
B)  the AS curve would shift to the left 
C)  this could theoretically lead to stagflation 
D)  all of the above 
E)  none of the above

Question 12

An economy is in long-run equilibrium when output equals potential output. Why is there no long-run equilibrium rate of "potential inflation"?

Accepted Answer

Potential output is a real variable dete

Question 13

Which equation is a plausible aggregate demand curve?

Accepted Answer

A)  π = 2 + 0.3Y 
B)  Y = 50 - 1.25π 
C)  Y = 250 - 80r 
D)  π = 5 - 0.4 (U - 6) 
E)  none of the above 
A)  π = 2 + 0.3Y 
B)  Y = 50 - 1.25π 
C)  Y = 250 - 80r 
D)  π = 5 - 0.4 (U - 6) 
E)  none of the above

Question 14

How does the aggregate demand curve differ from a demand curve for, say, bananas?

Accepted Answer

The demand for bananas expresses the qua

Question 15

By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By the end of 1986 the inflation rate had been brought down to 1.9%. Which of the following is true about the Volcker Disinflation?

Accepted Answer

A)  lower inflation resulted from a tightening of monetary policy 
B)  by raising the federal funds rate to over 20%, the Federal Reserve slowed the economy and was able to cut inflation in half by 1982 at the cost of a substantial hike in the unemployment rate causing a recession 
C)  this policy induced a substantial negative output gap 
D)  all of the above 
E)  none of the above 
A)  lower inflation resulted from a tightening of monetary policy 
B)  by raising the federal funds rate to over 20%, the Federal Reserve slowed the economy and was able to cut inflation in half by 1982 at the cost of a substantial hike in the unemployment rate causing a recession 
C)  this policy induced a substantial negative output gap 
D)  all of the above 
E)  none of the above

Question 16

-On the graph above, if inflation is rising, while the quantity demanded and output are rising, the economy may be at a point on ________.

Accepted Answer

A)  the aggregate supply curve above the aggregate demand curve 
B)  the aggregate supply curve below the aggregate demand curve 
C)  the aggregate demand curve above the aggregate supply curve 
D)  the aggregate demand curve below the aggregate supply curve 
E)  none of the above 
A)  the aggregate supply curve above the aggregate demand curve 
B)  the aggregate supply curve below the aggregate demand curve 
C)  the aggregate demand curve above the aggregate supply curve 
D)  the aggregate demand curve below the aggregate supply curve 
E)  none of the above

Question 17

Picture an economy that is in general equilibrium. What would happen if the natural rate of unemployment were to experience an increase?

Accepted Answer

A)  according to the Phillips curve, the ensuing negative unemployment gap would exert inflationary pressures 
B)  according to Okun's Law, the ensuing negative unemployment gap would be consistent with a positive output gap 
C)  according to the AD-AS framework, the LRAS curve would shift to the left and the ensuing positive output gap would be closed by subsequent leftward shifts in the AS curve to higher equilibrium levels of inflation 
D)  all of the above 
E)  none of the above 
A)  according to the Phillips curve, the ensuing negative unemployment gap would exert inflationary pressures 
B)  according to Okun's Law, the ensuing negative unemployment gap would be consistent with a positive output gap 
C)  according to the AD-AS framework, the LRAS curve would shift to the left and the ensuing positive output gap would be closed by subsequent leftward shifts in the AS curve to higher equilibrium levels of inflation 
D)  all of the above 
E)  none of the above

Question 18

As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.

Accepted Answer

Policy in China reversed the decline in

Question 19

A likely result of the September 11, 2001 terrorist attacks was ________.

Accepted Answer

A)  weaker consumer confidence 
B)  lower business confidence 
C)  a leftward shift of the AD curve 
D)  all of the above 
E)  none of the above 
A)  weaker consumer confidence 
B)  lower business confidence 
C)  a leftward shift of the AD curve 
D)  all of the above 
E)  none of the above

Question 20

What is the main difference between a temporary and permanently negative supply shock?

Accepted Answer

A)  The real interest rate immediately decreases after a temporary shock while it eventually increases after a permanent shock 
B)  Output increases right away after a temporary shock but the impact does not last whereas for a permanent shock output permanently decreases 
C)  A temporary shock will see a permanent increase in inflation while inflation will only rise temporarily after a permanent shock 
D)  all of the above 
E)  none of the above 
A)  The real interest rate immediately decreases after a temporary shock while it eventually increases after a permanent shock 
B)  Output increases right away after a temporary shock but the impact does not last whereas for a permanent shock output permanently decreases 
C)  A temporary shock will see a permanent increase in inflation while inflation will only rise temporarily after a permanent shock 
D)  all of the above 
E)  none of the above

Exam 12: The Aggregate Demand and Supply Model

If the unemployment rate is above its natural rate, then ________.

Suppose that households and businesses increase autonomous expenditures, driving output well above potential. Describe, in detail, how monetary policy might react to minimize the increase in inflation.

By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By the end of 1986 the inflation rate had been brought down to 1.9%. Which of the following is true about the Volcker Disinflation?

AD - AS Shocks -On the graph above, suppose the economy is at point F when there is a temporary negative supply shock. The new long-run equilibrium is at point ________.

What was(were) the effect(s) of the Enron Bankruptcy in late 2001 and other corporate scandals in 2002?

Which of the following is (are) linked to (an) adverse supply shock(s)?

If the unemployment rate is below its natural rate, then ________.

AD - AS Shocks -On the graph above, a movement from point ________ to point ________ might represent a positive supply shock.

If the Federal Reserve raises the real interest rate for any given inflation rate ________.

Suppose there is a temporary supply shock because of a war in the Middle East, then ________.

An economy is in long-run equilibrium when output equals potential output. Why is there no long-run equilibrium rate of "potential inflation"?

Which equation is a plausible aggregate demand curve?

How does the aggregate demand curve differ from a demand curve for, say, bananas?

By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By the end of 1986 the inflation rate had been brought down to 1.9%. Which of the following is true about the Volcker Disinflation?

-On the graph above, if inflation is rising, while the quantity demanded and output are rising, the economy may be at a point on ________.

Picture an economy that is in general equilibrium. What would happen if the natural rate of unemployment were to experience an increase?

As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.

A likely result of the September 11, 2001 terrorist attacks was ________.

What is the main difference between a temporary and permanently negative supply shock?

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

Macroeconomic Policy and Aggregate Demand and Supply Analysis

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

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AD - AS Shocks -On the graph above, a movement from point to point might represent a positive supply shock.