Question 1

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

Accepted Answer

A)     π\piπ t, inflation
B)    πt∗\pi _ { \mathrm { t } } ^ { \mathrm { * } }πt∗​  central bank's inflation target
C)    ρ\rhoρ , the natural rate of interest
D)     π\piπ t - 1, previous period's inflation  A

Question 2

A higher real interest rate reduces the demand for goods and services by:

Accepted Answer

A)   shifting the dynamic aggregate supply curve.
B)   decreasing the natural level of output.
C)   increasing inflation expectations.
D)   reducing investment and consumption spending. D

Question 3

The ex post real interest rate that prevails at time t equals:

Accepted Answer

A)   it - Et  π\piπ t
B)   it - Et  π\piπ t + 1
C)   it -   π\piπ t
D)   it -   π\piπ t + 1  D

Question 4

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 5

Which of the following would be represented by a negative value of the random demand shock, $\varepsilon$t?

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)   a decrease in the central bank's inflation target

Question 6

To reduce the demand for goods and services, the central bank will ___ its target inflation rate and _____ nominal and real interest rates.

Accepted Answer

A)   reduce; decrease
B)   reduce; increase
C)   raise; decrease
D)   raise; increase

Question 7

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

Accepted Answer

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

Question 8

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of $\theta$  $\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$Y, the responsiveness of nominal interest rates to output, then the DAD curve will be relatively _____, and supply shocks will have relatively ____ impacts on inflation than output.

Accepted Answer

A)   flat; larger
B)   flat; smaller
C)   steep; larger
D)   steep; smaller

Question 9

The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _____the real interest rate and _____ the quantity of goods and services demanded.

Accepted Answer

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

Question 10

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to:

Accepted Answer

A)   remain above the natural level for only one period.
B)   remain above the natural level for more than one period.
C)   remain below the natural level for only one period.
D)   remain below the natural level for more than one period.

Question 11

An increase in the central bank's target rate of inflation is represented by:

Accepted Answer

A)   a movement up the DAD curve.
B)   a movement down the DAD curve.
C)   a rightward shift in the DAD curve
D)   a leftward shift in the DAD curve.

Question 12

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 13

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

Accepted Answer

A)   decline continuously until reaching a lower level in the long run.
B)   increase initially and then decline until reaching a lower level in the long run.
C)   decline immediately to a lower level in the long run.
D)   fall below and then rise continuously to long-run level below the initial level.

Question 14

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _____ and inflation _____.

Accepted Answer

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

Question 15

All of the following are endogenous variables in the dynamic model of aggregate demand and aggregate supply except:

Accepted Answer

A)   Yt, output
B)    πt∗\pi _ { \mathrm { t } } ^ { \mathrm { * } }πt∗​  central bank's inflation target
C)   rt, real interest rate
D)   Et  π\piπ t + 1, expected inflation

Question 16

A central bank that chooses a large value of $\theta$  $\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$ Y, the responsiveness of nominal interest rates to output, 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 17

The interest rate at which banks make loans to other banks is called the:

Accepted Answer

A)   federal funds rate.
B)   prime rate.
C)   Federal Reserve discount rate.
D)   Treasury bill rate.

Question 18

The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:

Accepted Answer

A)   inflation expectations.
B)   money supply and money demand.
C)   inflation and output.
D)   nominal and real exchange rates.

Question 19

In the dynamic model, the demand for goods and services decreases as the natural rate of output _____ or the real rate of interest _____.

Accepted Answer

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

Question 20

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

Accepted Answer

A)   the natural level of output increases in response to the lower rates of inflation.
B)   the deviation of output from the natural level of output increases as a result of lower rates of inflation.
C)   lower rates of inflation generate negative supply shocks.
D)   expectations of inflation decrease as a result of lower inflation in previous periods.

Exam 15: A Dynamic Model of Economic Fluctuations

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

A higher real interest rate reduces the demand for goods and services by:

The ex post real interest rate that prevails at time t equals:

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

Which of the following would be represented by a negative value of the random demand shock, $\varepsilon$ _t?

To reduce the demand for goods and services, the central bank will _ its target inflation rate and ___ nominal and real interest rates.

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

The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _the real interest rate and _ the quantity of goods and services demanded.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to:

An increase in the central bank's target rate of inflation is represented by:

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

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _ and inflation _.

All of the following are endogenous variables in the dynamic model of aggregate demand and aggregate supply except:

A central bank that chooses a large value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _ at the expense of more _.

The interest rate at which banks make loans to other banks is called the:

The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:

In the dynamic model, the demand for goods and services decreases as the natural rate of output _ or the real rate of interest _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

Exam 15: A Dynamic Model of Economic Fluctuations

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

A higher real interest rate reduces the demand for goods and services by:

The ex post real interest rate that prevails at time t equals:

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

Which of the following would be represented by a negative value of the random demand shock, ε\varepsilonε t?

To reduce the demand for goods and services, the central bank will ___ its target inflation rate and _____ nominal and real interest rates.

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

The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _____the real interest rate and _____ the quantity of goods and services demanded.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to:

An increase in the central bank's target rate of inflation is represented by:

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

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _____ and inflation _____.

All of the following are endogenous variables in the dynamic model of aggregate demand and aggregate supply except:

A central bank that chooses a large value of θ\thetaθ π\piπ , the responsiveness of nominal interest rates to inflation, and a small value of θ\thetaθ Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _____ at the expense of more _____.

The interest rate at which banks make loans to other banks is called the:

The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:

In the dynamic model, the demand for goods and services decreases as the natural rate of output _____ or the real rate of interest _____.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

Which of the following would be represented by a negative value of the random demand shock, $\varepsilon$ _t?

To reduce the demand for goods and services, the central bank will _ its target inflation rate and ___ nominal and real interest rates.

The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _the real interest rate and _ the quantity of goods and services demanded.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _ and inflation _.

A central bank that chooses a large value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _ at the expense of more _.

In the dynamic model, the demand for goods and services decreases as the natural rate of output _ or the real rate of interest _.