Question 1

In a self-correcting model of the economy,rising inflation and rising real interest rates eventually eliminate

Accepted Answer

A)  expansionary gaps. 
B)  recessionary gaps. 
C)  autonomous spending. 
D)  induced spending. 
E)  unemployment.

Question 2

-Based on the diagram above,starting from a long-run equilibrium at point C,a tax cut that increases aggregate demand from ADI to ADI1 will lead to a short-run equilibrium at point ________,and eventually to a long-run equilibrium at point ________,due to rising inflation and the raising of real interest rates by the Bank of Canada.

Accepted Answer

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

Question 3

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

Accepted Answer

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 4

When national income in other nations increases,the domestic

Accepted Answer

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 5

The Bank of Canada's response to changes in inflation is more complex than identified in the ADI-IA model because

Accepted Answer

A)  the model does not distinguish between core inflation and total CPI inflation. 
B)  we cannot calculate the monetary policy rule. 
C)  the self-correcting mechanism is only effective for recessionary gaps. 
D)  the self-correcting mechanism is only effective for expansionary gaps. 
E)  the Bank of Canada only responds to current inflation

Question 6

Starting from a long-run equilibrium,immediate or eventual decreases in the rate of inflation may be the result of any of the following EXCEPT

Accepted Answer

A)  a downward inflation shock. 
B)  an upward inflation shock. 
C)  a decrease in government purchases. 
D)  a monetary "tightening." 
E)  a tax increasE.

Question 7

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 _________.

Accepted Answer

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

Question 8

Real-world policy debates are about the __________ of actual output relative to the __________ of potential output,not about the __________ of actual output relative to the __________ of potential output.

Accepted Answer

A)  growth;growth;level;level 
B)  level;level;growth;growth 
C)  growth;level;level;level 
D)  level;level;growth;level 
E)  level;growth;level;growth

Question 9

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

Accepted Answer

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

Question 10

Starting from long-run equilibrium,the long-run impact(s)of a war that increases government purchases,compared to the original equilibrium,would be

Accepted Answer

A)  higher inflation. 
B)  higher output. 
C)  higher inflation and higher output. 
D)  lower inflation and lower output. 
E)  no change in inflation or output.

Question 11

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)  zero;high 
D)  low;high 
E)  low;low

Question 12

Aggregate supply shocks are

Accepted Answer

A)  the results of monetary policy actions. 
B)  the results of fiscal policy actions. 
C)  the results of structural policy actions. 
D)  inflation shocks or shocks to potential output. 
E)  abrupt changes in autonomous investment.

Question 13

If policy-makers attempt to offset an upward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

Accepted Answer

A)  "tightening";a higher 
B)  "tightening";a lower 
C)  "easing";a higher 
D)  "easing";a lower 
E)  "easing";the same

Question 14

If the aggregate demand (ADI)curve in an economy is Y = 10,000 - 10,000 
,current inflation (  )equals 0.05 (5%),and potential output (Y*)equals 9,700,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%

Accepted Answer

A)  9,700;3 
B)  9,700;5 
C)  9,500;3 
D)  9,500;5 
E)  9,300;3

Question 15

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

Accepted Answer

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

Question 16

Expansionary output gaps are eliminated through

Accepted Answer

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 17

A __________ can open up without a __________ taking place,if __________ output is growing at an unusually slow rate that is less than the growth rate of __________ output.

Accepted Answer

A)  recessionary gap;recession;actual;potential 
B)  recessionary gap;recession;potential;actual 
C)  recession;recessionary gap;actual;potential 
D)  recession;recessionary gap;potential;actual 
E)  expansionary gap;expansion;actual;potential

Question 18

The long-run self-correcting mechanism that eliminates recessionary and expansionary output gaps in the economy assumes

Accepted Answer

A)  only that the growth in wages and production costs adjusts over time. 
B)  only that the inflation rate adjusts over time. 
C)  only that the central bank adjusts the real interest rate over time in response to changes in the inflation rate. 
D)  only that aggregate demand and actual output (Y)adjust towards potential output (Y*)over time. 
E)  that the growth in wages and production costs,the inflation rate,the real interest rate,and aggregate demand and output all adjust over timE.

Question 19

The self-correcting character of the ADI-IA model implies that the central bank should

Accepted Answer

A)  never use active monetary policy (i.e. ,shift the policy reaction function)to eliminate output gaps. 
B)  always use active monetary policy to eliminate output gaps. 
C)  use active monetary policy to eliminate output gaps only when the self-correcting processes of the economy work very slowly. 
D)  active monetary policy to eliminate output gaps only when the self-correcting processes of the economy work very rapidly. 
E)  active monetary policy to eliminate expansionary gaps but not recessionary gaps.

Question 20

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

Accepted Answer

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

Exam 12: The Production Function Approach to Understanding Growth

In a self-correcting model of the economy,rising inflation and rising real interest rates eventually eliminate

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

When national income in other nations increases,the domestic

The Bank of Canada's response to changes in inflation is more complex than identified in the ADI-IA model because

Starting from a long-run equilibrium,immediate or eventual decreases in the rate of inflation may be the result of any of the following EXCEPT

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 _.

Real-world policy debates are about the of actual output relative to the of potential output,not about the of actual output relative to the of potential output.

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

Starting from long-run equilibrium,the long-run impact(s) of a war that increases government purchases,compared to the original equilibrium,would be

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.

Aggregate supply shocks are

If policy-makers attempt to offset an upward inflation shock with monetary _,the resulting long-run equilibrium will be at _ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

If the aggregate demand (ADI) curve in an economy is Y = 10,000 - 10,000 ,current inflation ( 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 ) equals 0.05 (5%) ,and potential output (Y*) equals 9,700,then in the short run,equilibrium output equals and,in the long run,the inflation rate equals %

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

Expansionary output gaps are eliminated through

A can open up without a taking place,if output is growing at an unusually slow rate that is less than the growth rate of output.

The long-run self-correcting mechanism that eliminates recessionary and expansionary output gaps in the economy assumes

The self-correcting character of the ADI-IA model implies that the central bank should

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

Exam 12: The Production Function Approach to Understanding Growth

In a self-correcting model of the economy,rising inflation and rising real interest rates eventually eliminate

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

When national income in other nations increases,the domestic

The Bank of Canada's response to changes in inflation is more complex than identified in the ADI-IA model because

Starting from a long-run equilibrium,immediate or eventual decreases in the rate of inflation may be the result of any of the following EXCEPT

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 _________.

Real-world policy debates are about the __________ of actual output relative to the __________ of potential output,not about the __________ of actual output relative to the __________ of potential output.

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

Starting from long-run equilibrium,the long-run impact(s) of a war that increases government purchases,compared to the original equilibrium,would be

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.

Aggregate supply shocks are

If policy-makers attempt to offset an upward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

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

Expansionary output gaps are eliminated through

A __________ can open up without a __________ taking place,if __________ output is growing at an unusually slow rate that is less than the growth rate of __________ output.

The long-run self-correcting mechanism that eliminates recessionary and expansionary output gaps in the economy assumes

The self-correcting character of the ADI-IA model implies that the central bank should

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

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

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 _.

Real-world policy debates are about the of actual output relative to the of potential output,not about the of actual output relative to the of potential output.

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

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.

If policy-makers attempt to offset an upward inflation shock with monetary _,the resulting long-run equilibrium will be at _ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

A can open up without a taking place,if output is growing at an unusually slow rate that is less than the growth rate of output.