Question 1

A substantial reduction in the rate of inflation is called:

Accepted Answer

A)  inflation inertia 
B)  inflation shock 
C)  disinflation 
D)  hyperinflation

Question 2

Starting from long-run equilibrium, the long-run impact of a war that raises government purchases, compared to the original equilibrium, is:

Accepted Answer

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

Question 3

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 4

Based on the figure, the economy is initially in long-run equilibrium at point A If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

Accepted Answer

A)  E 
B)  B 
C)  C 
D)  D

Question 5

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 6

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap, is called:

Accepted Answer

A)  short-run equilibrium. 
B)  long-run equilibrium. 
C)  an inflation shock. 
D)  inflation inertia.

Question 7

Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π1 will lead to a short-run equilibrium at point ___ creating _____gap.

Accepted Answer

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

Question 8

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 9

Starting from a long-run equilibrium, a reduction in potential output leads to _____ gap in the short run and to a___ rate of inflation in the long run.

Accepted Answer

A)  an expansionary; higher 
B)  an expansionary; lower 
C)  a recessionary; lower 
D)  a recessionary; higher

Question 10

Starting from long-run equilibrium, a favorable inflation shock results in a short-run equilibrium with ___ inflation and ____ output.

Accepted Answer

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

Question 11

The self-correcting tendency of the economy means that rising inflation eventually eliminates:

Accepted Answer

A)  expansionary gaps. 
B)  recessionary gaps. 
C)  exogenous spending. 
D)  unemployment.

Question 12

A combination of inflation and recession is called:

Accepted Answer

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

Question 13

If the Fed decides to tighten monetary policy because the inflation rate has risen to a level inconsistent with economic efficiency and long-term growth:

Accepted Answer

A)  in the short run the SRAS curve will shift downward and a recessionary gap is created. 
B)  in the long run the AD curve will shift to the left and the long-run equilibrium is restored. 
C)  in the short run the AD curve shifts to the left and a recessionary gap is created. 
D)  in the short run the AD curve shifts to the right and a recessionary gap is created.

Question 14

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

Accepted Answer

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.

Question 15

According to the Aggregate Demand Aggregate Supply diagram, policy makers face a short-term trade-off between _________ when implementing anti-inflation policies.

Accepted Answer

A)  long-term equilibrium and short-term equilibrium 
B)  inflation and expansion 
C)  recession and stagflation 
D)  inflation and unemployment

Question 16

Changes in aggregate spending not caused by changes in output or the inflation rate, also known as exogenous changes in spending, will shift the:

Accepted Answer

A)  short-run aggregate supply curve. 
B)  long-run aggregate supply curve. 
C)  potential output line. 
D)  aggregate demand curve.

Question 17

The self-correcting property of the economy means that output gaps are eventually eliminated by:

Accepted Answer

A)  increasing or decreasing inflation. 
B)  decreasing inflation only. 
C)  increasing or decreasing potential output. 
D)  government policy.

Question 18

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.

Accepted Answer

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

Question 19

Because increases in inflation reduce aggregate spending and short-run equilibrium output:

Accepted Answer

A)  the short-run aggregate supply line is downward sloping. 
B)  the aggregate demand curve is horizontal. 
C)  the aggregate demand curve is downward sloping. 
D)  the aggregate demand curve is upward sloping.

Question 20

As inflation increases, households become _____ uncertain leading to _____ spending.

Accepted Answer

A)  more; more 
B)  more; less 
C)  less; more 
D)  less; less

Exam 12: Inflation and Aggregate Supply

A substantial reduction in the rate of inflation is called:

Starting from long-run equilibrium, the long-run impact of a war that raises government purchases, compared to the original equilibrium, is:

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 _.

Based on the figure, the economy is initially in long-run equilibrium at point A If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

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 _.

A sudden change in the normal behavior of inflation, unrelated to the nation's output gap, is called:

Based on the figure below. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from πto π¹ will lead to a short-run equilibrium at point _ creating ___gap.

The AD curve can be shifted by:

Starting from a long-run equilibrium, a reduction in potential output leads to ___ gap in the short run and to a_ rate of inflation in the long run.

Starting from long-run equilibrium, a favorable inflation shock results in a short-run equilibrium with _ inflation and __ output.