Question 1

If the Bank of Canada adopts stronger anti-inflation policy (for example,by lowering its inflation target),

Accepted Answer

A)  in the short run,the IA curve will shift downward and a recessionary gap is created. 
B)  in the long run,the ADI curve will shift to the left and the long-run equilibrium is restored. 
C)  in the short run,the ADI curve will shift to the right and an expansionary gap will be created. 
D)  in the short run,the ADI curve shifts to the left and a recessionary gap is created. 
E)  in the short run,the ADI curve shifts to the right and a recessionary gap is created.

Question 2

When an expansionary gap exists,the rate of inflation will

Accepted Answer

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

Question 3

If the aggregate demand (ADI)curve in an economy is Y = 20,000 - 20,000 
,current inflation (  )equals 0.06 (6%),and potential output (Y*)equals 19,200,then in the short run,equilibrium output equals ________ and,in the long run,the inflation rate equals ________%.

Accepted Answer

A)  19,200;4 
B)  19,200;6 
C)  18,800;4 
D)  18,800;6 
E)  18,400;8

Question 4

In a self-correcting model of the economy,recessionary gaps are eventually eliminated by

Accepted Answer

A)  rising inflation and rising real interest rates. 
B)  falling inflation and falling real interest rates. 
C)  increasing potential output. 
D)  decreasing potential output. 
E)  government policy.

Question 5

Policy-makers' use of stabilization policy is more appropriate when the self-correcting mechanism that eventually eliminates an output gap works ________ and when the output gap is very ________.

Accepted Answer

A)  rapidly;large 
B)  rapidly;small 
C)  rapidly;recent 
D)  slowly;large 
E)  slowly;small

Question 6

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.

Accepted Answer

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

Question 7

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from 
To 
1 will lead to a short-run equilibrium at point ________,creating _________ gap.

Accepted Answer

A)  A;an expansionary 
B)  A;a recessionary 
C)  A;no output 
D)  B;an expansionary 
E)  B;a recessionary

Question 8

Starting from long-run equilibrium,the long-run impact(s)of an increase in autonomous investment,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)  lower inflation and higher output.

Question 9

To reduce inflation in an economy at full employment,the central bank must set the

Accepted Answer

A)  real interest rate at a level lower than normal. 
B)  real interest rate at a level higher than normal. 
C)  inflation rate at a level lower than normal. 
D)  inflation rate at a level higher than normal. 
E)  GDP growth rate at a level higher than normal.

Question 10

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.

Accepted Answer

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 11

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from 
To 
1 will lead to a short-run equilibrium at point ________,creating _________ gap.

Accepted Answer

A)  A;an expansionary 
B)  A;a recessionary 
C)  A;no output 
D)  B;an expansionary 
E)  B;a recessionary

Question 12

To reduce inflation in an economy at full employment,policy-makers can use monetary policy or fiscal policy to __________ aggregate demand and lead to a __________ shift in the inflation adjustment line.

Accepted Answer

A)  reduce;downward 
B)  increase;downward 
C)  reduce;upward 
D)  increase;upward 
E)  maintain;downward

Question 13

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.

Accepted Answer

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 14

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

Accepted Answer

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 15

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 _________.

Accepted Answer

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

Question 16

Graphically,inflation shocks shift the _________ and shocks to potential output shift the __________.

Accepted Answer

A)  aggregate demand (ADI)curve;long-run aggregate supply (LRAS)line 
B)  aggregate demand (ADI)curve;inflation adjustment (I
A) line 
C)  inflation adjustment (I
A) line;long-run aggregate supply (LRAS)line 
D)  inflation adjustment (I
A) line;aggregate demand (ADI)curve 
E)  long-run aggregate supply line;inflation adjustment (I
A) line

Question 17

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

Accepted Answer

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

Question 18

Inflation shocks and shocks to potential output are called _________ shocks.

Accepted Answer

A)  monetary policy 
B)  fiscal policy 
C)  structural policy 
D)  aggregate demand 
E)  aggregate supply

Question 19

An inflation shock is

Accepted Answer

A)  the level of inflation consistent with output in a recessionary gap. 
B)  the level of inflation consistent with output in an expansionary gap. 
C)  a sudden change in the normal behaviour of inflation,unrelated to the nation's output gap. 
D)  a change in the inflation rate generated by excessive aggregate demand. 
E)  a change in inflation brought about by changes in inflation expectations and pricing decisions.

Question 20

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

Accepted Answer

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

Exam 12: The Production Function Approach to Understanding Growth

If the Bank of Canada adopts stronger anti-inflation policy (for example,by lowering its inflation target) ,

When an expansionary gap exists,the rate of inflation will

In a self-correcting model of the economy,recessionary gaps are eventually eliminated by

Policy-makers' use of stabilization policy is more appropriate when the self-correcting mechanism that eventually eliminates an output gap works and when the output gap is very .

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

Starting from long-run equilibrium,the long-run impact(s) of an increase in autonomous investment,compared to the original equilibrium,would be

To reduce inflation in an economy at full employment,the central bank must set the

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.

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

To reduce inflation in an economy at full employment,policy-makers can use monetary policy or fiscal policy to aggregate demand and lead to a shift in the inflation adjustment line.

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.

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

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 _.

Graphically,inflation shocks shift the _ and shocks to potential output shift the __.

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

Inflation shocks and shocks to potential output are called _________ shocks.

An inflation shock is

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

Exam 12: The Production Function Approach to Understanding Growth

If the Bank of Canada adopts stronger anti-inflation policy (for example,by lowering its inflation target) ,

When an expansionary gap exists,the rate of inflation will

In a self-correcting model of the economy,recessionary gaps are eventually eliminated by

Policy-makers' use of stabilization policy is more appropriate when the self-correcting mechanism that eventually eliminates an output gap works ________ and when the output gap is very ________.

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ________,creating _________ gap.

Starting from long-run equilibrium,the long-run impact(s) of an increase in autonomous investment,compared to the original equilibrium,would be

To reduce inflation in an economy at full employment,the central bank must set the

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.

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ________,creating _________ gap.

To reduce inflation in an economy at full employment,policy-makers can use monetary policy or fiscal policy to __________ aggregate demand and lead to a __________ shift in the inflation adjustment line.

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.

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

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 _________.

Graphically,inflation shocks shift the _________ and shocks to potential output shift the __________.

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

Inflation shocks and shocks to potential output are called _________ shocks.

An inflation shock is

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

Policy-makers' use of stabilization policy is more appropriate when the self-correcting mechanism that eventually eliminates an output gap works and when the output gap is very .

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

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.

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

To reduce inflation in an economy at full employment,policy-makers can use monetary policy or fiscal policy to aggregate demand and lead to a shift in the inflation adjustment line.

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.

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 _.

Graphically,inflation shocks shift the _ and shocks to potential output shift the __.

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