Question 1

Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF₁)and the aggregate demand curve (AD₁). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*₁.  
  
If the Federal Reserve raises its target inflation rate to π*₃, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

Accepted Answer

A) shift to RF₃; shift to AD₂ 
B) shift to RF₂; shift to AD₂ 
C) shift to RF₃; shift to AD₃ 
D) shift to RF₂; shift to AD₃

Question 2

Starting from long-run equilibrium, a war that raises government purchases results in ________ output in the short run and ________ output in the long run.

Accepted Answer

A) higher; higher 
B) higher; potential 
C) lower; potential 
D) lower; higher

Question 3

The economy pictured in the given figure has a(n)________ gap with a short-run equilibrium combination of inflation and output indicated by point ________.

Accepted Answer

A) recessionary; A 
B) recessionary; B 
C) recessionary; C 
D) expansionary; A

Question 4

A combination of inflation and recession is called:

Accepted Answer

A) deflation. 
B) stagflation. 
C) disinflation. 
D) infusion.

Question 5

The AD curve can be shifted by:

Accepted Answer

A) both fiscal and monetary policy. 
B) neither fiscal nor monetary policy. 
C) fiscal policy only. 
D) monetary policy only.

Question 6

Refer to the accompanying figure.  An economy is currently in long-run equilibrium at point B, at an inflation rate of π', which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________.

Accepted Answer

A) A; B 
B) A; C 
C) B; A 
D) B; C

Question 7

When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

Accepted Answer

A) higher; shift to the right 
B) lower; shift to the right 
C) higher; shift to the left 
D) lower; shift to the left

Question 8

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

Accepted Answer

A) Income taxes are raised. 
B) The government reduces purchases to balance the budget. 
C) Consumers become more optimistic about the future. 
D) Foreign economies fall into recession, reducing their demand for domestic exports.

Question 9

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n)________ gap and inflation will ________.

Accepted Answer

A) recessionary; increase 
B) recessionary; decrease 
C) expansionary; decrease 
D) expansionary; increase

Question 10

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n)________ gap and inflation will ________.

Accepted Answer

A) recessionary; increase 
B) recessionary; decrease 
C) expansionary; decrease 
D) expansionary; increase

Question 11

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

Accepted Answer

A) increases; increases 
B) decreases; increases 
C) increases; decreases 
D) decreases; decreases

Question 12

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with ________ inflation and ________ output.

Accepted Answer

A) higher; higher 
B) higher; lower 
C) higher; potential 
D) lower; lower

Question 13

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

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

Question 14

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

Accepted Answer

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

Question 15

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ________ equilibrium.

Accepted Answer

A) long-run 
B) recessionary 
C) expansionary 
D) short-run

Question 16

At a short-run equilibrium ________, while at a long-run equilibrium ________.

Accepted Answer

A) output is at a level consistent with inflation; there is an output gap 
B) output equals potential output; the inflation rate is stable 
C) the inflation rate is stable; there is an output gap 
D) there is an output gap; output equals potential output

Question 17

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

Accepted Answer

A) increase. 
B) decrease. 
C) not change. 
D) either increase or decrease depending on the relative shifts of AD and AS.

Question 18

For a fixed target real interest rate and target inflation rate, when inflation decreases, the Fed ________ interest rates, hence ________ short-run equilibrium output.

Accepted Answer

A) increases; increasing 
B) decreases; increasing 
C) increases; decreasing 
D) decreases; decreasing

Question 19

Starting from long-run equilibrium, the long-run impact(s)of a sharp drop in oil prices, compared to the original equilibrium, is(are):

Accepted Answer

A) higher inflation and the same output. 
B) lower inflation and lower output. 
C) the same inflation and the same output. 
D) higher inflation and lower output.

Question 20

A large decrease in oil prices is an example of:

Accepted Answer

A) a favorable inflation shock. 
B) an adverse inflation shock 
C) inflation inertia. 
D) excessive aggregate spending.

Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

Starting from long-run equilibrium, a war that raises government purchases results in output in the short run and output in the long run.

The economy pictured in the given figure has a(n) gap with a short-run equilibrium combination of inflation and output indicated by point .

A combination of inflation and recession is called:

The AD curve can be shifted by:

When the Federal Reserve reduces its target rate of inflation, it will set a real interest rate at every inflation rate and the aggregate demand curve will .

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

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) gap and inflation will .

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) gap and inflation will .

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

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with inflation and output.

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a the aggregate demand curve and a decrease in exogenous spending corresponds to a the aggregate demand curve.

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a the aggregate demand curve.

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ________ equilibrium.

At a short-run equilibrium , while at a long-run equilibrium .

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

For a fixed target real interest rate and target inflation rate, when inflation decreases, the Fed interest rates, hence short-run equilibrium output.

Starting from long-run equilibrium, the long-run impact(s) of a sharp drop in oil prices, compared to the original equilibrium, is(are) :

A large decrease in oil prices is an example of:

Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

Starting from long-run equilibrium, a war that raises government purchases results in ________ output in the short run and ________ output in the long run.

The economy pictured in the given figure has a(n) ________ gap with a short-run equilibrium combination of inflation and output indicated by point ________.

A combination of inflation and recession is called:

The AD curve can be shifted by:

When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

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

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) ________ gap and inflation will ________.

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) ________ gap and inflation will ________.

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

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with ________ inflation and ________ output.

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

When actual output equals potential output and the inflation rate is equal to the expected rate of inflation, the economy is said to be in ________ equilibrium.

At a short-run equilibrium ________, while at a long-run equilibrium ________.

To achieve long-run equilibrium in an economy with a recessionary gap, without the use of stabilization policy, the inflation rate must:

For a fixed target real interest rate and target inflation rate, when inflation decreases, the Fed ________ interest rates, hence ________ short-run equilibrium output.

Starting from long-run equilibrium, the long-run impact(s) of a sharp drop in oil prices, compared to the original equilibrium, is(are) :

A large decrease in oil prices is an example of:

Starting from long-run equilibrium, a war that raises government purchases results in output in the short run and output in the long run.

The economy pictured in the given figure has a(n) gap with a short-run equilibrium combination of inflation and output indicated by point .

When the Federal Reserve reduces its target rate of inflation, it will set a real interest rate at every inflation rate and the aggregate demand curve will .

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n) gap and inflation will .

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n) gap and inflation will .

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

Starting from long-run equilibrium, an adverse inflation shock results in a short-run equilibrium with inflation and output.

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a the aggregate demand curve and a decrease in exogenous spending corresponds to a the aggregate demand curve.

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a the aggregate demand curve.

At a short-run equilibrium , while at a long-run equilibrium .

For a fixed target real interest rate and target inflation rate, when inflation decreases, the Fed interest rates, hence short-run equilibrium output.