Deck 12: The Production Function Approach to Understanding Growth

Question 1

The aggregate demand (ADI)curve shows the relationship between short-run equilibrium output and the __________ rate.

A) nominal interest
B) real interest
C) unemployment
D) inflation
E) exchange

Answer 1

inflation

Question 2

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 2%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 1;20,000
B) 2;20,000
C) 2;19,200
D) 3;18,800
E) 3;18,000

Answer 2

3;18,800

Question 3

Changes in autonomous aggregate demand and the Bank of Canada's reaction function shift the

A) inflation adjustment (IA)line.
B) long-run aggregate supply line
C) potential output line.
D) aggregate demand (ADI)curve.
E) 45º linE.

Answer 3

aggregate demand (ADI)curve.

Question 4

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 1%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;20,000
B) 1;20,000
C) 1;19,600
D) 2;15,000
E) 2;19,200

Question 5

All else being equal,a decrease in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

A) increases;increases
B) increases;decreases
C) does not change;does not change
D) decreases;increases
E) decreases;decreases

Question 6

The aggregate demand (ADI)curve shifts when there are changes in

A) inflation inertia and aggregate supply shocks.
B) autonomous aggregate demand and the Bank of Canada's reaction function.
C) autonomous aggregate demand and inflation inertia.
D) the Bank of Canada's reaction function and inflation inertia.
E) potential output and autonomous aggregate demand.

Question 7

Based on the Bank of Canada's monetary policy rule,when inflation falls,the Bank of Canada ________ interest rates,hence _________ short-run equilibrium output.

A) increases;increasing
B) increases;decreasing
C) does not change;increasing
D) decreases;increasing
E) decreases;decreasing

Question 8

If,for any given inflation rate,the Bank of Canada raises interest rates more than normal,this is called a monetary _________ and the aggregate demand (ADI)curve shifts to the __________.

A) "tightening";right
B) "tightening";left
C) gap;right
D) "easing";right
E) "easing";left

Question 9

Which of the following will shift the aggregate demand (ADI)curve to the left?

A) Income taxes are lowered.
B) The government increases spending on education.
C) Consumers become optimistic about the future.
D) A new technology is developed that will increase profits.
E) Foreign economies fall into recession,reducing their demand for domestic exports.

Question 10

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 4%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 3;18,800
B) 4;20,000
C) 4;18,800
D) 5;18,000
E) 5;18,400

Question 11

Which of the following will shift the aggregate demand (ADI)curve to the right?

A) Income taxes are raised.
B) The government increases spending on education.
C) Consumers become pessimistic about the future.
D) Business managers become pessimistic about the future.
E) Foreign economies fall into recession,reducing their demand for domestic exports.

Question 12

Based on the Bank of Canada's monetary policy rule,when inflation rises,the Bank of Canada ________ interest rates,hence _________ short-run equilibrium output.

A) increases;increasing
B) increases;decreasing
C) does not change;increasing
D) decreases;increasing
E) decreases;decreasing

Question 13

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 3%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 2;19,200
B) 3;20,000
C) 3;18,800
D) 4;18,000
E) 4;18,400

Question 14

Because decreases in inflation increase planned spending and short-run equilibrium output,the

A) inflation adjustment (IA)line is downward-sloping.
B) inflation adjustment (IA)line is upward-sloping.
C) aggregate demand (ADI)curve is horizontal.
D) aggregate demand (ADI)curve is downward-sloping.
E) aggregate demand (ADI)curve is upward-sloping.

Question 15

The aggregate demand (ADI)curve shows the relationship between inflation and the

A) nominal interest rate.
B) real interest rate.
C) unemployment rate.
D) exchange rate.
E) short-run equilibrium output.

Question 16

All else being equal,an increase in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

A) increases;increases
B) increases;decreases
C) does not change;does not change
D) decreases;increases
E) decreases;decreases

Question 17

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 0%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;20,000
B) 1;20,000
C) 1;19,600
D) 1;15,000
E) 2;19,200

Question 18

Because increases in inflation reduce planned spending and short-run equilibrium output,the

A) inflation adjustment (IA)line is downward-sloping.
B) inflation adjustment (IA)line is upward-sloping.
C) aggregate demand (ADI)curve is horizontal.
D) aggregate demand (ADI)curve is downward-sloping.
E) aggregate demand (ADI)curve is upward-sloping.

Question 19

Which of the following will shift the aggregate demand (ADI)curve to the right?

A) Income taxes are raised.
B) The government reduces purchases to balance the budget.
C) Consumers become pessimistic about the future.
D) A new technology is developed that will increase profits.
E) Foreign economies fall into recession,reducing their demand for domestic exports.

Question 20

Which of the following will shift the aggregate demand (ADI)curve to the left?

A) Income taxes are raised.
B) The government increases spending on education.
C) Consumers become optimistic about the future.
D) A new technology is developed that will increase profits.
E) Foreign economies boom,increasing their demand for domestic exports.

Question 21

If,for any given inflation rate,the Bank of Canada raises interest rates less than normal,this is called a monetary _________ and the aggregate demand (ADI)curve shifts to the __________.

A) "tightening";right
B) "tightening";left
C) gap;right
D) "easing";right
E) "easing";left

Question 22

A downward shift of the Bank of Canada's monetary policy rule corresponds to a _________ the aggregate demand (ADI)curve,and a decrease in autonomous aggregate demand corresponds to a _________ the aggregate demand (ADI)curve.

A) shift to the left of;movement up
B) shift to the left of;shift to the right of
C) movement up;movement down
D) movement up;shift to the right of
E) shift to the right of;shift to the left of

Question 23

Suppose that,in an economy,ADI = 800 + 0.9Y - 20,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 0%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;8,000
B) 1;8,000
C) 1;6,000
D) 1;5,000
E) 1.5;5,000

Question 24

Suppose that,in an economy,ADI = 800 + 0.9Y - 20,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 4%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;8,000
B) 3;2,000
C) 3;4,000
D) 4;3,000
E) 4;8,000

Question 25

An increase in the interest rate by the Bank of Canada based on a given monetary policy rule represents a ________ the aggregate demand (ADI)curve,but an increase in the interest rate resulting from an upward shift in the Bank of Canada's monetary policy rule represents a _________ the aggregate demand (ADI)curve.

A) shift to the left of;movement up
B) shift to the left of;shift to the right of
C) movement up;movement down
D) movement up;shift to the left of
E) movement down;shift to the left of

Question 26

A decrease in the inflation rate corresponds to a _________ the aggregate demand (ADI)curve,and a decrease in autonomous aggregate demand corresponds to a _________ the aggregate demand (ADI)curve.

A) shift to the left of;movement up
B) shift to the left of;shift to the right of
C) movement up;movement down
D) movement up;shift to the right of
E) movement down;shift to the left of

Question 27

Suppose that,in an economy,ADI = 800 + 0.9Y - 20,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 3%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;8,000
B) 2;4,000
C) 2.5;6,000
D) 2.5;3,000
E) 3;2,000

Question 28

If the Bank of Canada's monetary policy rule changes from r = 0.02 +
To r = 0.04 + ,this is an example of monetary __________ and will lead to a _________ the aggregate demand (ADI)curve.

A) "tightening";shift to the right of
B) "tightening";shift to the left of
C) "tightening";upward movement along
D) "easing";shift to the right of
E) "easing";shift to the left of

Question 29

If the Bank of Canada's monetary policy rule changes from r = 0.04 +
To r = 0.02 + ,this is an example of monetary __________ and will lead to a _________ the aggregate demand (ADI)curve.

A) "tightening";shift to the right of
B) "tightening";shift to the left of
C) "tightening";upward movement along
D) "easing";shift to the right of
E) "easing";shift to the left of

Question 30

A decrease in the interest rate by the Bank of Canada based on a given monetary policy rule represents a ________ the aggregate demand (ADI)curve,but decrease in the interest rate resulting from a downward shift in the Bank of Canada's monetary policy rule represents a _________ the aggregate demand (ADI)curve.

A) shift to the left of;movement up
B) shift to the left of;shift to the right of
C) movement up;movement down
D) movement up;shift to the left of
E) movement down;shift to the right of

Question 31

If the Bank of Canada's monetary policy rule is r = 0.02 +
,the aggregate demand function for the economy is ADI = 5,000 + 0.8Y - 20,000r,current inflation equals 5% (0.05),and potential output (Y*)equals 20,000,then short-run equilibrium output equals __________,and inflation will eventually equal ________% when the economy returns to potential.

A) 17,000;3
B) 17,000;5
C) 18,000;5
D) 18,000;3
E) 19,000;4

Question 32

Suppose that,in an economy,ADI = 800 + 0.9Y - 20,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 2%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;8,000
B) 2;4,000
C) 2;6,000
D) 2.5;3,000
E) 2.5;8,000

Question 33

If the Bank of Canada's monetary policy rule is r = 0.02 +
,the aggregate demand function for the economy is ADI = 5,000 + 0.8Y - 20,000r,current inflation equals 6% (0.06),and potential output (Y*)equals 19,000,then short-run equilibrium output equals __________,and inflation will eventually equal ________% when the economy returns to potential.

A) 17,000;4
B) 17,000;5
C) 18,000;6
D) 18,000;7
E) 19,000;4

Question 34

An upward shift in the Bank of Canada's monetary policy rule is a monetary _________,and the aggregate demand (ADI)curve ___________.

A) "tightening";shifts right
B) "tightening";shifts left
C) "tightening";does not shift
D) "easing";shifts right
E) "easing";shifts left

Question 35

A downward shift in the Bank of Canada's monetary policy rule is a monetary _________,and the aggregate demand (ADI)curve ___________.

A) "tightening";shifts right
B) "tightening";shifts left
C) "tightening";does not shift
D) "easing";shifts right
E) "easing";shifts left

Question 36

The aggregate demand (ADI)curve shifts to the right if,for any given inflation rate,the Bank of Canada ________ interest rates more than normal,making monetary policy _________.

A) raises;"easier"
B) raises;"tighter"
C) raises;faster
D) lowers;"easier"
E) lowers;"tighter"

Question 37

An upward shift of the Bank of Canada's monetary policy rule function corresponds to a _________ the aggregate demand (ADI)curve,and an increase in autonomous aggregate demand corresponds to a _________ the aggregate demand (ADI)curve.

A) shift to the left of;movement up
B) shift to the left of;shift to the right of
C) movement up;movement down
D) movement up;shift to the right of
E) shift to the right of;shift to the left of

Question 38

Suppose that,in an economy,ADI = 800 + 0.9Y - 20,000r,and the central bank acts according to the following monetary policy rule:
If inflation is 1%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

A) 0;8,000
B) 1;8,000
C) 1;6,000
D) 1.5;5,000
E) 1.5;8,000

Question 39

An increase in the inflation rate corresponds to a _________ the aggregate demand (ADI)curve,and an increase in autonomous aggregate demand corresponds to a _________ the aggregate demand (ADI)curve.

A) shift to the left of;movement up
B) shift to the left of;shift to the right of
C) movement up;movement down
D) movement up;shift to the right of
E) movement down;shift to the left of

Question 40

The aggregate demand (ADI)curve shifts to the left if,for any given inflation rate,the Bank of Canada ________ interest rates more than normal,making monetary policy _________.

A) raises;"easier"
B) raises;"tighter"
C) raises;faster
D) lowers;"easier"
E) lowers;"tighter"

Question 41

An expected decline in the prices of consumer goods will

A) decrease aggregate demand.
B) increase the quantity of real domestic output demanded.
C) increase aggregate demand.
D) decrease the quantity of real domestic output demanded.
E) decrease savings.

Question 42

An expected rise in the rate of inflation for consumer goods will

A) decrease aggregate demand.
B) increase aggregate supply.
C) increase aggregate demand.
D) decrease aggregate supply.
E) increase unemployment.

Question 43

The development of a new cost-saving technology would increase

A) autonomous consumption spending and,thus,shift the ADI curve to the right.
B) autonomous consumption spending and,thus,shift the ADI curve to the left.
C) autonomous investment spending and,thus,shift the ADI curve to the right.
D) autonomous investment spending and,thus,shift the ADI curve to the left.
E) net exports and government purchases and,thus,shift the ADI curve to the right.

Question 44

When national income in other nations increases,the domestic

A) ADI curve shifts to the right.
B) ADI curve shifts to the left.
C) ADI curve is unaffected.
D) IA line shifts down.
E) LRAS line shifts right.

Question 45

When the Bank of Canada responds to higher inflation by raising real interest rates,

A) consumption and investment spending rise and,thus,aggregate demand increases.
B) consumption and investment spending fall and,thus,aggregate demand increases.
C) consumption and investment spending rise and,thus,aggregate demand decreases.
D) consumption and investment spending fall and,thus,aggregate demand decreases.
E) the Bank of Canada changes its policy reaction function.

Question 46

An increase in taxes will most likely cause a(n)

A) decrease in aggregate supply.
B) increase in aggregate supply.
C) decrease in aggregate demand.
D) increase in aggregate demand.
E) increase in exports.

Question 47

If the Bank of Canada were to shift its policy reaction function rightward (i.e. ,an easing of monetary policy),the

A) IA line would shift upward,causing an increase in the inflation rate.
B) LRAS line would shift upward,causing an increase in the inflation rate.
C) IA line would shift downward,causing a decrease in the inflation rate.
D) ADI curve would shift to the left.
E) ADI curve would shift to the right.

Question 48

Which would shift the aggregate demand (ADI)curve? A change in

A) input prices.
B) net export spending.
C) the prices of imported resources.
D) the legal-institutional environment.
E) the price level.

Question 49

A shift in the aggregate demand (ADI)curve would be caused by a change in

A) the quantity of real output demanded.
B) a determinant of aggregate demand.
C) the price level.
D) aggregate supply.
E) the inflation ratE.

Question 50

An increase in expected future income will

A) increase both aggregate demand and aggregate supply.
B) decrease both aggregate demand and aggregate supply.
C) increase aggregate supply only.
D) increase aggregate demand only.
E) not affect aggregate demand.

Question 51

Which combination of factors would most likely shift the ADI curve to the right?

A) An increase in household indebtedness and a decrease in foreign demand for products.
B) An increase in consumer wealth and a decrease in interest rates.
C) An increase in personal taxes and a decrease in government spending.
D) An increase in business taxes and a decrease in profit expectations.
E) An increase in demand for foreign products and an increase in interest rates.

Question 52

An increase in government purchases will cause a(n)

A) increase in aggregate supply.
B) decrease in aggregate supply.
C) decrease in planned aggregate spending.
D) increase in planned aggregate spending.
E) no change in planned aggregate spending.

Question 53

An increase in aggregate demand is most likely to be caused by a decrease in

A) the wealth of consumers.
B) consumer confidence.
C) interest rates for home mortgages.
D) tax rates on household income.
E) business subsidies.

Question 54

Inflation inertia is the tendency for inflation to

A) equal zero.
B) change relatively slowly from year to year.
C) decrease when the Bank of Canada increases interest rates.
D) increase when the Bank of Canada decreases interest rates.
E) redistribute resources to low-spending households.

Question 55

The tendency for inflation to change relatively slowly from year to year in industrial countries is called

A) the inflation gap.
B) inflation expectations.
C) inflation inertia.
D) potential inflation.
E) autonomous inflation.

Question 56

Which would be one of the factors that shift the aggregate demand (ADI)curve? A change in

A) productivity.
B) the prices of imported resources.
C) domestic resource availability.
D) profit expectations on investment projects.
E) the price level.

Question 57

A decrease in taxes will cause a

A) movement downward along the ADI curve.
B) movement upward along the ADI curve.
C) rightward shift in the ADI curve.
D) leftward shift in the ADI curve.
E) decrease in planned aggregate expenditurE.

Question 58

If the dollar appreciates in value relative to foreign currencies,

A) planned aggregate expenditure decreases.
B) planned aggregate expenditure increases.
C) the quantity of real domestic output demanded increases.
D) the quantity of real domestic output demanded decreases.
E) planned aggregate expenditure is unaffected.

Question 59

A decrease in net exports will cause

A) a decrease in planned aggregate spending.
B) an increase in planned aggregate spending.
C) an increase in aggregate supply.
D) a decrease in aggregate supply.
E) no change in planned aggregate spending.

Question 60

Inflation inertia is the result of the behaviour of ________ and the existence of __________.

A) the central bank;the Bank of Canada's reaction function
B) real and nominal interest rates;an output gap
C) autonomous aggregate demand;the Bank of Canada's policy reaction function
D) inflation expectations;long-term wage and price contracts
E) potential output;automatic stabilizers

Question 61

When an expansionary gap exists,the rate of inflation will

A) tend to rise.
B) tend to fall.
C) remain unchanged.
D) become disinflation.
E) shift the IA line downward.

Question 62

When there is a recessionary gap,inflation will __________,in response to which the Bank of Canada will ________ real interest rates,and output will _________.

A) decrease;raise;decrease
B) decrease;lower;increase
C) decrease;lower;decrease
D) increase;raise;decrease
E) increase;lower;increase

Question 63

Inflation inertia is attributable to

A) inflation shocks and shocks to potential output.
B) output gaps and inflation shocks.
C) disinflation and inflation shocks.
D) output gaps and disinflation.
E) inflation expectations and long-term wage and price contracts.

Question 64

When there is an expansionary gap,inflation will __________,in response to which the Bank of Canada will ________ real interest rates,and output will _________.

A) decrease;raise;decrease
B) decrease;lower;increase
C) decrease;lower;decrease
D) increase;raise;decrease
E) increase;lower;increase

Question 65

When an expansionary gap exists,actual output _________ potential output and the rate of inflation will tend to __________.

A) is greater than;increase
B) is greater than;decrease
C) equals;remain the same
D) is less than;increase
E) is less than;decrease

Question 66

When actual output is less than potential output,there is ________ output gap and the rate of inflation will tend to ________.

A) an expansionary;increase
B) an expansionary;decrease
C) no;remain the same
D) a recessionary;increase
E) a recessionary;decrease

Question 67

A current high rate of inflation will tend to promote a

A) low expected inflation and a low rate of actual inflation.
B) moderate expected inflation and a moderate rate of actual inflation.
C) high expected inflation and a high rate of actual inflation.
D) low expected inflation and a high rate of actual inflation.
E) built-in expectation of low inflation in the futurE.

Question 68

Expansionary output gaps are eliminated through

A) rising inflation and higher real interest rate settings by the Bank of Canada.
B) rising inflation and lower real interest rate settings by the Bank of Canada.
C) falling inflation and lower real interest rate settings by the Bank of Canada.
D) falling inflation and higher real interest rate settings by the Bank of Canada.
E) unchanging inflation and lower real interest rate settings by the Bank of Canada.

Question 69

The long-run aggregate supply line is

A) downward-sloping.
B) upward-sloping.
C) horizontal at the current rate of inflation.
D) vertical at the economy's potential output.
E) vertical at the economy's actual output.

Question 70

Moderate expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

A) moderate;moderate
B) large;low
C) zero;high
D) small;high
E) small;low

Question 71

High expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

A) large;high
B) large;low
C) zero;high
D) small;high
E) small;low

Question 72

When a recessionary gap exists,actual output _________ potential output and the rate of inflation will tend to __________.

A) is greater than;increase
B) is greater than;decrease
C) equals;remain the same
D) is less than;increase
E) is less than;decrease

Question 73

A vertical line showing the economy's potential output is called the

A) aggregate demand (ADI)curve.
B) long-run aggregate supply line.
C) inflation adjustment (IA)line.
D) expenditure line.
E) short-run equilibrium output linE.

Question 74

The inflation adjustment (IA)line is

A) downward-sloping.
B) upward-sloping.
C) horizontal at the current rate of inflation.
D) vertical at the economy's potential output.
E) vertical at the economy's actual output.

Question 75

Low expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

A) large;high
B) large;low
C) zero;high
D) small;high
E) small;low

Question 76

When actual output exceeds potential output,there is ________ output gap and the rate of inflation will tend to ________.

A) an expansionary;increase
B) an expansionary;decrease
C) no;remain the same
D) a recessionary;increase
E) a recessionary;decrease

Question 77

A low rate of expected inflation tends to lead to a ________ rate of actual inflation,and a high rate of expected inflation tends to lead to a ________ rate of actual inflation.

A) high;high
B) high;low
C) zero;high
D) low;high
E) low;low

Question 78

When no output gap exists,actual output _________ potential output and the rate of inflation will tend to __________.

A) is greater than;increase
B) is greater than;decrease
C) equals;remain the same
D) is less than;increase
E) is less than;decrease

Question 79

A horizontal line showing the current rate of inflation,as determined by past expectations and pricing decisions,is called the

A) aggregate demand (ADI)curve.
B) long-run aggregate supply line.
C) inflation adjustment (IA)line.
D) expenditure line
E) short-run equilibrium output linE.

Question 80

When actual output equals potential output,there is ________ output gap and the rate of inflation will tend to ________.

A) an expansionary;increase
B) an expansionary;decrease
C) no;remain the same
D) a recessionary;increase
E) a recessionary;decrease