Question 1

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate _____ when inflation is above its target, and the real interest rate _____ when output is below its natural level.

Accepted Answer

A)  rises; falls 
B)  rises; rises 
C)  falls; falls 
D)  falls; rises

Question 2

The short-run equilibrium in the dynamic model of aggregate demand and aggregate supply is determined by the intersection of the:

Accepted Answer

A)  DADt and DASt - 1 
B)  DADt and DASt 
C)  Yt and DASt 
D)  DADt - 1 and Yt

Question 3

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by AD-AS model in light of this difference.

Accepted Answer

The answer of What is the difference between the ex...

Question 4

What is stagflation? How does it occur as an effect of shock to aggregate supply curve?

Accepted Answer

The answer of What is stagflation? How does it occur...

Question 5

The current inflation rate,  $\pi$t, represents the change in the price level between periods:

Accepted Answer

A)  t - 1 and t 
B)  t and t + 1 
C)  t - 1 and t + 1 
D)  t and t + 2

Question 6

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation ____ its target, or output ____ its natural level.

Accepted Answer

A)  rises above; rises above 
B)  rises above; falls below 
C)  falls below; falls below 
D)  falls below; rises above

Question 7

In order to achieve the target for the nominal interest rate established by the monetary policy rule, the central bank adjusts:

Accepted Answer

A)  the inflation rate. 
B)  the natural rate of interest. 
C)  the money supply. 
D)  the inflation target.

Question 8

To follow a monetary policy rule, the central bank raises the nominal interest rate by:

Accepted Answer

A)  raising the inflation target. 
B)  decreasing the money supply. 
C)  increasing the GDP gap. 
D)  decreasing inflation expectations.

Question 9

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank's target rate of inflation?

Accepted Answer

A)  the current inflation rate, but not the expected inflation rate 
B)  the expected inflation rate, but not the current inflation rate 
C)  both the current and expected rates of inflation 
D)  neither the current nor the expected rates of inflation

Question 10

How does the AD-AS curve analyze the long run growth of an economy? Explain.

Accepted Answer

The answer of How does the AD-AS curve analyze the...

Question 11

The upward slope of the dynamic aggregate supply curve indicates that, holding other factors constant, high levels of economic activity are associated with:

Accepted Answer

A)  the natural level of output. 
B)  the inflation target. 
C)  positive supply shocks. 
D)  high inflation.

Question 12

The Taylor rule can be written as FF rate =  $\pi$ + 2.0 + 0.5 ( $\pi$- 2.0) + 0.5(GDP gap), where FF rate is the nominal federal funds rate,  $\pi$ is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 2 percent and the GDP gap is -2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at _____ percent.

Accepted Answer

A)  2 
B)  3 
C)  4 
D)  5

Question 13

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:

Accepted Answer

A)  nominal rate of interest. 
B)  target rate of inflation. 
C)  natural rate of interest. 
D)  current rate of inflation.

Question 14

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will be at their natural levels?

Accepted Answer

A)  inflation and output 
B)  real and nominal interest rates 
C)  inflation and the nominal interest rate 
D)  output and the real interest rate

Question 15

How does the AD-AS model take a novel approach towards taking up money supply effects on economic fluctuations?

Accepted Answer

The answer of How does the AD-AS model take a...

Question 16

The nominal interest rate, it, is the rate of return between periods:

Accepted Answer

A)  t - 1 and t 
B)  t and t + 1 
C)  t - 1 and t + 1 
D)  t and t + 2

Question 17

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

Accepted Answer

A)  it - Et $\pi$t 
B)  it - Et $\pi$t + 1 
C)  it -  $\pi$t 
D)  it -  $\pi$t + 1

Question 18

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock 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 19

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a small value of $\theta$ $\pi$ , the responsiveness of nominal interest rates to inflation, and a large 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 20

What is the tradeoff employed by the AS-AD models against supply shock, as a monetary policy rule?

Accepted Answer

The answer of What is the tradeoff employed by the...

Exam 15: A Dynamic Model of Economic Fluctuations

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate _ when inflation is above its target, and the real interest rate _ when output is below its natural level.

The short-run equilibrium in the dynamic model of aggregate demand and aggregate supply is determined by the intersection of the:

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by AD-AS model in light of this difference.

What is stagflation? How does it occur as an effect of shock to aggregate supply curve?

The current inflation rate, $\pi$ _t, represents the change in the price level between periods:

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation its target, or output its natural level.

In order to achieve the target for the nominal interest rate established by the monetary policy rule, the central bank adjusts:

To follow a monetary policy rule, the central bank raises the nominal interest rate by:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank's target rate of inflation?

How does the AD-AS curve analyze the long run growth of an economy? Explain.

The upward slope of the dynamic aggregate supply curve indicates that, holding other factors constant, high levels of economic activity are associated with:

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will be at their natural levels?

How does the AD-AS model take a novel approach towards taking up money supply effects on economic fluctuations?

The nominal interest rate, i_t, is the rate of return between periods:

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

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

What is the tradeoff employed by the AS-AD models against supply shock, as a monetary policy rule?

Exam 15: A Dynamic Model of Economic Fluctuations

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate _____ when inflation is above its target, and the real interest rate _____ when output is below its natural level.

The short-run equilibrium in the dynamic model of aggregate demand and aggregate supply is determined by the intersection of the:

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by AD-AS model in light of this difference.

What is stagflation? How does it occur as an effect of shock to aggregate supply curve?

The current inflation rate, π\piπ t, represents the change in the price level between periods:

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation ____ its target, or output ____ its natural level.

In order to achieve the target for the nominal interest rate established by the monetary policy rule, the central bank adjusts:

To follow a monetary policy rule, the central bank raises the nominal interest rate by:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank's target rate of inflation?

How does the AD-AS curve analyze the long run growth of an economy? Explain.

The upward slope of the dynamic aggregate supply curve indicates that, holding other factors constant, high levels of economic activity are associated with:

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will be at their natural levels?

How does the AD-AS model take a novel approach towards taking up money supply effects on economic fluctuations?

The nominal interest rate, it, is the rate of return between periods:

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

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

What is the tradeoff employed by the AS-AD models against supply shock, as a monetary policy rule?

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate _ when inflation is above its target, and the real interest rate _ when output is below its natural level.

The current inflation rate, $\pi$ _t, represents the change in the price level between periods:

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation its target, or output its natural level.

The nominal interest rate, i_t, is the rate of return between periods: