Question 1

-On the graph above, consider a point A on the aggregate demand curve and above the aggregate supply curve. At this point, ________.

Accepted Answer

A)  quantity demanded equals output, but the inflation rate will fall, so output will rise 
B)  quantity demanded is greater than quantity supplied, so the inflation rate will rise 
C)  output is greater than the quantity demanded, so output will fall 
D)  the aggregate demand curve will shift to the right until quantity demanded is equal to quantity supplied 
E)  none of the above 
A)  quantity demanded equals output, but the inflation rate will fall, so output will rise 
B)  quantity demanded is greater than quantity supplied, so the inflation rate will rise 
C)  output is greater than the quantity demanded, so output will fall 
D)  the aggregate demand curve will shift to the right until quantity demanded is equal to quantity supplied 
E)  none of the above

Question 2

-On the graph above, consider a point A on the aggregate supply curve and above the aggregate demand curve. At this point, ________.

Accepted Answer

A)  quantity demanded equals output, but the inflation rate will fall, so output will rise 
B)  quantity demanded is greater than quantity supplied, so the inflation rate will rise 
C)  output is greater than the quantity demanded, so output will fall 
D)  the aggregate demand curve will shift to the right until quantity demanded is equal to quantity supplied 
E)  none of the above 
A)  quantity demanded equals output, but the inflation rate will fall, so output will rise 
B)  quantity demanded is greater than quantity supplied, so the inflation rate will rise 
C)  output is greater than the quantity demanded, so output will fall 
D)  the aggregate demand curve will shift to the right until quantity demanded is equal to quantity supplied 
E)  none of the above

Question 3

Suppose there is a temporary supply shock because of a war in the Middle East, then, ceteris paribus, the ensuing cost push shock ________.

Accepted Answer

A)  would lead to a temporary increase in prices due to a restriction in the supply of oil 
B)  would lead to a temporary decrease in output as the AS curve would shift to the left 
C)  would lead to a temporary shift in the AS curve but ultimately output and inflation would return to the original long-run values 
D)  all of the above 
E)  none of the above 
A)  would lead to a temporary increase in prices due to a restriction in the supply of oil 
B)  would lead to a temporary decrease in output as the AS curve would shift to the left 
C)  would lead to a temporary shift in the AS curve but ultimately output and inflation would return to the original long-run values 
D)  all of the above 
E)  none of the above

Question 4

The short-run aggregate supply curve shows how ________ cause output to rise.

Accepted Answer

A)  increases in inflation 
B)  decreases in unemployment 
C)  decreases in nominal interest rates 
D)  all of the above 
E)  none of the above 
A)  increases in inflation 
B)  decreases in unemployment 
C)  decreases in nominal interest rates 
D)  all of the above 
E)  none of the above

Question 5

The endogenous variable in the aggregate demand curve is ________.

Accepted Answer

A)  the real interest rate 
B)  output 
C)  inflation 
D)  planned expenditure 
E)  none of the above 
A)  the real interest rate 
B)  output 
C)  inflation 
D)  planned expenditure 
E)  none of the above

Question 6

-On the graph above, at the point where quantity demanded equals quantity supplied (let's call it point A), the economy has reached its ________.

Accepted Answer

A)  general equilibrium, and barring any shocks, it will not move from A 
B)  long-run equilibrium, and barring any shocks, it will not move from A 
C)  short-run equilibrium, and even without any shocks, it may move away from A 
D)  short-run equilibrium, and barring any shocks, it will not move from A 
E)  none of the above 
A)  general equilibrium, and barring any shocks, it will not move from A 
B)  long-run equilibrium, and barring any shocks, it will not move from A 
C)  short-run equilibrium, and even without any shocks, it may move away from A 
D)  short-run equilibrium, and barring any shocks, it will not move from A 
E)  none of the above

Question 7

By the time Paul Volcker took office as the new Federal Reserve chairman in 1979, the inflation rate exceeded 10%. By 1982 the unemployment rate soared to 9.7% and inflation was cut to 6.2%. By the end of 1986 the unemployment rate was brought down to 7% and the inflation rate was brought further down to 1.9%. Which of the following is an appropriate description of the mechanism behind the Volcker Disinflation?

Accepted Answer

A)  The AD curve shifted right due to the autonomous tightening of monetary policy which explains the lowering of the unemployment rate between 1982 and 1986 
B)  With the Federal Reserve raising interest rates, the AD curve shifted to the left lowering the equilibrium level of inflation but inducing a negative output gap, which explains the lower inflation rate between 1979 and 1982 at the cost of a higher unemployment rate over the same period 
C)  The LRAS curve shifted left due to the tightening of monetary policy generating a positive output gap or a negative unemployment gap which explains the lowering of the unemployment rate between 1982 and 1986 
D)  all of the above 
E)  none of the above 
A)  The AD curve shifted right due to the autonomous tightening of monetary policy which explains the lowering of the unemployment rate between 1982 and 1986 
B)  With the Federal Reserve raising interest rates, the AD curve shifted to the left lowering the equilibrium level of inflation but inducing a negative output gap, which explains the lower inflation rate between 1979 and 1982 at the cost of a higher unemployment rate over the same period 
C)  The LRAS curve shifted left due to the tightening of monetary policy generating a positive output gap or a negative unemployment gap which explains the lowering of the unemployment rate between 1982 and 1986 
D)  all of the above 
E)  none of the above

Question 8

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

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 right and the ensuing output gap would have to be closed by subsequent rightward shifts in the AS curve to a lower equilibrium level 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 right and the ensuing output gap would have to be closed by subsequent rightward shifts in the AS curve to a lower equilibrium level of inflation 
D)  all of the above 
E)  none of the above

Question 9

The Volcker Disinflation (1980-1986) was costly in terms of output and unemployment. Would it not have been better to reduce inflation with a positive supply shock, rather than a negative demand shock?

Accepted Answer

Probably, but a positive supply shock is

Question 10

According to the economy's self-correcting mechanism, how does the economy return to potential output following a negative demand shock? How is the recovery process different, if the government implements a policy of economic stimulus?

Accepted Answer

The negative demand shock causes output

Question 11

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

Accepted Answer

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

Question 12

AD - AS Shocks
  
-On the graph above, suppose point G is on the short-run aggregate supply curve π = 2.5 + 2∗(Y - 22) and aggregate demand curve Y = 29.25 - 0.5π. If output at point G is 25, and inflation expectations are adaptive, then the inflation rate next period will be ________.

Accepted Answer

A)  11.5 
B)  14.5 
C)  8.5 
D)  2.5 
E)  none of the above 
A)  11.5 
B)  14.5 
C)  8.5 
D)  2.5 
E)  none of the above

Question 13

The assumption that in the long run prices and wages are fully flexible implies that the long-run aggregate supply curve is determined by ________.

Accepted Answer

A)  capital and labor inputs 
B)  technology 
C)  the natural rate of unemployment 
D)  all of the above 
E)  none of the above 
A)  capital and labor inputs 
B)  technology 
C)  the natural rate of unemployment 
D)  all of the above 
E)  none of the above

Question 14

-According to the "self-correcting mechanism" in the AD-AS framework, ________.

Accepted Answer

A)  the aggregate demand curve shifts up or down as needed to bring the economy to full employment 
B)  the inflation rate changes as needed to move the economy along the short-run aggregate supply curve until output is at potential output 
C)  the long-run aggregate supply curve shifts until it intersects both the aggregate demand and short-run aggregate supply curves at a single point 
D)  inflation and expected inflation are unaffected by deviations of output from potential output 
E)  none of the above 
A)  the aggregate demand curve shifts up or down as needed to bring the economy to full employment 
B)  the inflation rate changes as needed to move the economy along the short-run aggregate supply curve until output is at potential output 
C)  the long-run aggregate supply curve shifts until it intersects both the aggregate demand and short-run aggregate supply curves at a single point 
D)  inflation and expected inflation are unaffected by deviations of output from potential output 
E)  none of the above

Question 15

In the mid-to-late 1990s, changes in the health care industry, substantially reduced health care costs relative to other goods and services. Which of the following is an appropriate description of the mechanism behind this supply shock?

Accepted Answer

A)  The AS curve likely shifted to the right which likely explains the short-run fall in unemployment 
B)  The ensuing increase in productive capacity led to the rightward shift of the LRAS which is a likely explanation for the protracted decline in the unemployment rate of the 1990s 
C)  A positive output gap would have resulted in the short-run but it was eventually closed by a rightward shift of the LRAS which is a likely explanation for the protracted decline in the inflation rate of the 1990s 
D)  all of the above 
E)  none of the above 
A)  The AS curve likely shifted to the right which likely explains the short-run fall in unemployment 
B)  The ensuing increase in productive capacity led to the rightward shift of the LRAS which is a likely explanation for the protracted decline in the unemployment rate of the 1990s 
C)  A positive output gap would have resulted in the short-run but it was eventually closed by a rightward shift of the LRAS which is a likely explanation for the protracted decline in the inflation rate of the 1990s 
D)  all of the above 
E)  none of the above

Question 16

AD - AS Shocks
  
-On the graph above, suppose the economy has moved from point H to point G. If the shock was temporary and inflation expectations are adaptive, the economy will next ________.

Accepted Answer

A)  return to point H 
B)  move to point F 
C)  move to a point between points G and H 
D)  remain at point G 
E)  none of the above 
A)  return to point H 
B)  move to point F 
C)  move to a point between points G and H 
D)  remain at point G 
E)  none of the above

Question 17

Under a favorable business environment and if the economic outlook of the future looked promising ________.

Accepted Answer

A)  firms might spend more for any given inflation rate 
B)  planned investment might increase leading to a higher equilibrium level of output 
C)  the aggregate demand curve would likely shift to the right 
D)  all of the above 
E)  none of the above 
A)  firms might spend more for any given inflation rate 
B)  planned investment might increase leading to a higher equilibrium level of output 
C)  the aggregate demand curve would likely shift to the right 
D)  all of the above 
E)  none of the above

Question 18

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. What would have been a likely short-run result had Mr. Volker conducted an expansionary monetary policy instead?

Accepted Answer

A)  Inflation would have been made worse right away but unemployment would have been lowered 
B)  Both inflation and unemployment would have declined 
C)  Both inflation and unemployment would have been made worse 
D)  There would have been no effect on the unemployment and inflation rates 
E)  none of the above 
A)  Inflation would have been made worse right away but unemployment would have been lowered 
B)  Both inflation and unemployment would have declined 
C)  Both inflation and unemployment would have been made worse 
D)  There would have been no effect on the unemployment and inflation rates 
E)  none of the above

Question 19

-In the AD-AS framework, long-run equilibrium implies that ________.

Accepted Answer

A)  quantity demanded equals quantity supplied at a moderate level of equilibrium inflation 
B)  quantity demanded equals quantity supplied at a point consistent with the short-run equilibrium level of inflation 
C)  quantity demanded equals quantity supplied at a point consistent with the natural rate of unemployment 
D)  all of the above 
E)  none of the above 
A)  quantity demanded equals quantity supplied at a moderate level of equilibrium inflation 
B)  quantity demanded equals quantity supplied at a point consistent with the short-run equilibrium level of inflation 
C)  quantity demanded equals quantity supplied at a point consistent with the natural rate of unemployment 
D)  all of the above 
E)  none of the above

Question 20

In the short run, as output rises above potential ________.

Accepted Answer

A)  inflation will fall from its current level which explains the upward-sloping nature of the Phillips curve 
B)  inflation will rise from its current level which explains the upward-sloping nature of the aggregate supply curve 
C)  unemployment will rise above the natural rate which explains the upward-sloping nature of both the Phillips curve and the AS curve 
D)  all of the above 
E)  none of the above 
A)  inflation will fall from its current level which explains the upward-sloping nature of the Phillips curve 
B)  inflation will rise from its current level which explains the upward-sloping nature of the aggregate supply curve 
C)  unemployment will rise above the natural rate which explains the upward-sloping nature of both the Phillips curve and the AS curve 
D)  all of the above 
E)  none of the above

-On the graph above, consider a point A on the aggregate demand curve and above the aggregate supply curve. At this point, ________.

-On the graph above, consider a point A on the aggregate supply curve and above the aggregate demand curve. At this point, ________.

Suppose there is a temporary supply shock because of a war in the Middle East, then, ceteris paribus, the ensuing cost push shock ________.

The short-run aggregate supply curve shows how ________ cause output to rise.

The endogenous variable in the aggregate demand curve is ________.

-On the graph above, at the point where quantity demanded equals quantity supplied (let's call it point A), the economy has reached its ________.

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

The Volcker Disinflation (1980-1986) was costly in terms of output and unemployment. Would it not have been better to reduce inflation with a positive supply shock, rather than a negative demand shock?

According to the economy's self-correcting mechanism, how does the economy return to potential output following a negative demand shock? How is the recovery process different, if the government implements a policy of economic stimulus?

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

AD - AS Shocks -On the graph above, suppose point G is on the short-run aggregate supply curve π = 2.5 + 2∗(Y - 22) and aggregate demand curve Y = 29.25 - 0.5π. If output at point G is 25, and inflation expectations are adaptive, then the inflation rate next period will be ________.

The assumption that in the long run prices and wages are fully flexible implies that the long-run aggregate supply curve is determined by ________.

-According to the "self-correcting mechanism" in the AD-AS framework, ________.

In the mid-to-late 1990s, changes in the health care industry, substantially reduced health care costs relative to other goods and services. Which of the following is an appropriate description of the mechanism behind this supply shock?

AD - AS Shocks -On the graph above, suppose the economy has moved from point H to point G. If the shock was temporary and inflation expectations are adaptive, the economy will next ________.

Under a favorable business environment and if the economic outlook of the future looked promising ________.

-In the AD-AS framework, long-run equilibrium implies that ________.

In the short run, as output rises above potential ________.

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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Exam 12: The Aggregate Demand and Supply Model

-On the graph above, consider a point A on the aggregate demand curve and above the aggregate supply curve. At this point, ________.

-On the graph above, consider a point A on the aggregate supply curve and above the aggregate demand curve. At this point, ________.

Suppose there is a temporary supply shock because of a war in the Middle East, then, ceteris paribus, the ensuing cost push shock ________.

The short-run aggregate supply curve shows how ________ cause output to rise.

The endogenous variable in the aggregate demand curve is ________.

-On the graph above, at the point where quantity demanded equals quantity supplied (let's call it point A), the economy has reached its ________.

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

The Volcker Disinflation (1980-1986) was costly in terms of output and unemployment. Would it not have been better to reduce inflation with a positive supply shock, rather than a negative demand shock?

According to the economy's self-correcting mechanism, how does the economy return to potential output following a negative demand shock? How is the recovery process different, if the government implements a policy of economic stimulus?

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

AD - AS Shocks -On the graph above, suppose point G is on the short-run aggregate supply curve π = 2.5 + 2∗(Y - 22) and aggregate demand curve Y = 29.25 - 0.5π. If output at point G is 25, and inflation expectations are adaptive, then the inflation rate next period will be ________.

The assumption that in the long run prices and wages are fully flexible implies that the long-run aggregate supply curve is determined by ________.

-According to the "self-correcting mechanism" in the AD-AS framework, ________.

In the mid-to-late 1990s, changes in the health care industry, substantially reduced health care costs relative to other goods and services. Which of the following is an appropriate description of the mechanism behind this supply shock?

AD - AS Shocks -On the graph above, suppose the economy has moved from point H to point G. If the shock was temporary and inflation expectations are adaptive, the economy will next ________.

Under a favorable business environment and if the economic outlook of the future looked promising ________.

-In the AD-AS framework, long-run equilibrium implies that ________.

In the short run, as output rises above potential ________.

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

Filters