Question 1

When the central bank lowers its target inflation rate, it _____ the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _____.

Accepted Answer

A) lowers; right 
B) lowers; left 
C) raises; right 
D) raises; left

Question 2

According to the monetary policy rule (assuming θπ > 0) when inflation increases, the central bank increases the nominal interest rate by _____ the increase in the rate of inflation, which _____ the real interest rate.

Accepted Answer

A) more than; increases 
B) less than; decreases 
C) an amount equal to; does not change 
D) less than; increases

Question 3

Which of the following would be represented by a positive value of the demand shock, εt?

Accepted Answer

A) an irrational wave of optimism among investors 
B) a decrease in government spending 
C) an aggressive increase in oil prices by a cartel 
D) an increase in the central bank's inflation target

Question 4

The dynamic aggregate demand curve illustrates the _____ relationship between the quantity of output in the short run and _____.

Accepted Answer

A) positive; inflation 
B) positive; the price level 
C) negative; inflation 
D) negative; the price level

Question 5

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

Accepted Answer

A) DADt and DASt - 1. 
B) DADt and DASt. 
C) Yt and DASt. 
D) DADt - 1 and Yt.

Question 6

Expectations of inflation based on recently observed inflation is called the assumption of _____ expectations.

Accepted Answer

A) natural 
B) rational 
C) dynamic 
D) adaptive

Question 7

Increases in the natural level of output allow the economy to produce _____ goods and services and make people want to buy _____ goods and services.

Accepted Answer

A) fewer; fewer 
B) fewer; more 
C) more; more 
D) more; fewer

Question 8

A central bank that chooses a large value of θπ and a small value of θY is choosing to obtain less _____ at the expense of more _____.

Accepted Answer

A) inflation; output 
B) output; inflation 
C) inflation variability; output variability 
D) output variability; inflation variability

Question 9

Fill in the blanks: As a dynamic response to a positive supply shock in the short run, the DAS curve shifts (say in period t) _____ while the DAD curve _____, causing inflation to _____ and output to _____.

Accepted Answer

The answer of Fill in the blanks: As a dynamic...

Question 10

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

Accepted Answer

A) the inflation rate. 
B) the natural rate of interest. 
C) the money supply. 
D) the inflation target.

Question 11

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

Accepted Answer

A) remain continuously above the natural level of output until 
B) move above and then below the natural level of output until 
C) remain continuously below the natural level of output until 
D) move below and then above the natural level of output before

Question 12

Which of the following is an endogenous variable in the dynamic model of aggregate demand and aggregate supply?

Accepted Answer

A) πt, inflation 
B) πt* the central bank's inflation target 
C) ρ, the natural rate of interest 
D) πt - 1, the previous period's inflation

Question 13

The short-run equilibrium in the dynamic model of aggregate demand and supply determines the:

Accepted Answer

A) inflation rate and inflation target. 
B) real interest rate and natural level of output. 
C) level of output and inflation rate. 
D) natural level of output and level of output.

Question 14

The dynamic aggregate supply curve shows the short-run relation between:

Accepted Answer

A) the natural rate of output and inflation. 
B) the natural rate of output and expected rate of inflation. 
C) output and inflation. 
D) output and the natural rate of interest.

Question 15

According to the Fisher equation, the real interest rate equals the nominal interest rate minus the:

Accepted Answer

A) natural rate of interest. 
B) expected rate of inflation. 
C) expected rate of interest. 
D) ex ante rate of interest.

Question 16

Of the five endogenous variables in the dynamic model of aggregate demand and aggregate supply, which are the nominal variables that will change in long-run equilibrium if the central bank changes its inflation target?

Accepted Answer

A) Yt, rt, and it 
B) Yt, it, and Etπt + 1 
C) πt, it, and Etπt + 1 
D) rt, πt, and it

Question 17

The dynamic aggregate demand curve will shift to the right if there is a:

Accepted Answer

A) tax cut. 
B) cut in government spending. 
C) decrease in the money supply. 
D) cut in oil prices when the cartel falls apart.

Question 18

That output Yt and the real interest rate rt do not depend on the central bank's inflation target in long-run equilibrium in the dynamic model of aggregate demand and aggregate supply demonstrates:

Accepted Answer

A) monetary neutrality. 
B) an impulse response function. 
C) adaptive expectations. 
D) Taylor's principle.

Question 19

According to the Taylor rule, when real GDP is below its natural level, the overnight rate should be _____, and when inflation exceeds 2 percent, the overnight rate should be _____.

Accepted Answer

A) raised; raised 
B) raised; lowered 
C) lowered; raised 
D) lowered; lowered

Question 20

Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate supply when:

Accepted Answer

A) dynamic aggregate demand equals dynamic aggregate supply. 
B) there are no shocks and inflation is stable. 
C) the demand shock equals the supply shock. 
D) the nominal interest rate equals the real interest rate.

Exam 15: A Dynamic Model of Economic Fluctuations

When the central bank lowers its target inflation rate, it _ the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _.

According to the monetary policy rule (assuming θ_π > 0) when inflation increases, the central bank increases the nominal interest rate by _ the increase in the rate of inflation, which _ the real interest rate.

Which of the following would be represented by a positive value of the demand shock, ε_t?

The dynamic aggregate demand curve illustrates the _ relationship between the quantity of output in the short run and _.

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

Expectations of inflation based on recently observed inflation is called the assumption of _____ expectations.

Increases in the natural level of output allow the economy to produce _ goods and services and make people want to buy _ goods and services.

A central bank that chooses a large value of θ_π and a small value of θ_Y is choosing to obtain less _ at the expense of more _.

Fill in the blanks: As a dynamic response to a positive supply shock in the short run, the DAS curve shifts (say in period t) ___ while the DAD curve _, causing inflation to _ and output to ___.