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Q:
When output is below potential and the policy rate has hit the floor of zero, if policymakers do nothing, output will ________ and inflation will ________.
A. rise; fall
B. fall; fall
C. fall; rise
D. rise; rise
Q:
When output is below potential and the policy rate has hit the floor of zero, the resulting fall in inflation leads to ________ real interest rates, which ________ output further, which causes inflation to fall further.
A. lower; increase
B. higher; depress
C. higher; increase
D. lower; depress
Q:
When the policy rate hits its lower bound and inflation keeps falling, this portion of the aggregate demand curve is
A. downward sloping.
B. upward sloping.
C. flat.
D. undetermined.
Q:
When the policy rate hits its lower bound and inflation keeps falling, this portion of the Monetary Policy curve is
A. downward sloping.
B. upward sloping.
C. flat.
D. undetermined.
Q:
In the period 1965 through the 1970s, policymakers pursued ________ policies in order to achieve ________.
A. expansionary; high employment
B. expansionary; low inflation
C. contractionary; high employment
D. contractionary; low inflation
Q:
Because policies in the United States were too expansionary from 1965 through 1973, the U.S. suffered
A. demand-pull inflation.
B. cost-push inflation, as workers sought higher wages in order to keep up with inflation.
C. both demand-pull and cost-push inflation.
D. neither demand-pull nor cost-push inflation.
Q:
Evidence from the time period 1960-1980 indicates that inflation in the United States resulted from
A. an employment target that was set too high.
B. the government's inability to sell bonds to the Fed.
C. an expansion in the money supply to finance federal government expenditures.
D. the excessive sale of government bonds to the public.
Q:
Which of the following is most likely to lead to inflationary monetary policy?
A. declining oil prices
B. resolution of conflict in the Middle East
C. the enactment of a free-trade agreement with Mexico
D. rising government budget deficits
Q:
Which of the following is most likely to lead to inflationary monetary policy?
A. declining oil prices
B. resolution of conflict in the Middle East
C. the enactment of a free-trade agreement with Mexico
D. rising unemployment
Q:
Which of the following is least likely to lead to inflationary monetary policy?
A. rising unemployment
B. expanding federal budget deficits
C. declining oil prices
D. conflict in the Middle East
Q:
Demand-pull inflation can result when
A. policymakers set an unemployment target that is too high.
B. a persistent budget deficit is financed by selling bonds to the public.
C. a persistent budget deficit is financed by selling bonds to the central bank.
D. workers get numerous wage increases.
Q:
Theoretically, one can distinguish a demand-pull inflation from a cost-push inflation by comparing
A. how fast prices rise relative to wages.
B. the unemployment rate with its natural rate level.
C. when prices rise relative to wages.
D. government debt to real GDP.
Q:
If policymakers set a target for unemployment that is too low because it is less than the natural rate of unemployment, this can set the stage for a higher rate of money growth and
A. cost-push inflation.
B. demand-pull inflation.
C. cost-pull inflation.
D. demand-push inflation.
Q:
If workers believe that government policymakers will increase aggregate demand to avoid a politically unpopular increase in unemployment when workers demand higher wages, then workers will not fear higher unemployment and their wage demands will result in
A. demand-pull inflation.
B. hyperinflation.
C. deflation.
D. cost-push inflation.
Q:
If workers do not believe that policymakers are serious about fighting inflation, they are most likely to push for higher wages, which will ________ aggregate ________ and lead to unemployment or inflation or both, everything else held constant.
A. decrease; demand
B. increase; demand
C. decrease; supply
D. increase; supply
Q:
The combination of a successful wage push by workers and the government's commitment to high employment leads to
A. demand-pull inflation.
B. supply-side inflation.
C. supply-shock inflation.
D. cost-push inflation.
Q:
A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. As a result, the monetary policy curve is ________ sloping and the aggregate demand curve is ________ sloping.
A. upward; downward
B. downward; downward
C. upward; upward
D. downward; upward
Q:
With downward-sloping monetary policy and IS curves,the aggregate demand curve is
A. downward sloping.
B. flat.
C. vertical.
D. upward sloping.
Q:
A central bank that does NOT follow the Taylor principle will fail to raise nominal interest rates by more than the increase in expected inflation. Therefore, higher inflation will lead to a ________ in real interest rates, resulting in ________-sloping monetary policy curves.
A. decline; downward
B. rise; downward
C. rise; upward
D. decline; upward
Q:
In the long-run equilibrium
A. output is a function of autonomous expenditures.
B. inflation is a function of past inflation.
C. inflation equals potential output.
D. output equals potential output.
Q:
The lon-run aggregate supply curve can be expressed by
A. output as a function of potential output.
B. inflation as a function of past inflation.
C. inflation as a function of past inflation and output gap.
D. output as a function of inflation and output gap.
Q:
An autonomous easing of monetary policy results in a ________ level of equilibrium output, shifting the aggregate demand curve to the ________.
A. higher; right
B. lower; right
C. higher; left
D. lower; left
Q:
The more willing monetary policymakers are to raise interest rates when faced with inflation, the ________ the AD curve is, and the ________ responsive equilibrium output is to the inflation rate.
A. steeper; more
B. steeper; less
C. flatter; more
D. flatter; less
Q:
Suppose that the short-run aggregate supply curve is: π= 2 + 1.5 (Y-10), where π is inflation and Y is output; and the aggregate demand curve is Y= 11 - 0.5π. The equilibrium output is ________ and the equilibrium inflation rate is ________ %.
A. 10; 2
B. 17.5; 2
C. 2; 10
D. 10; 5
Q:
If firms and households form their expectations about inflation by looking at past inflation, this form of expectations formation is known as ________ expectations.
A. adaptive
B. forward-looking
C. rational
D. perfect
Q:
A permanent negative supply shock causes stock prices to ________ than they would if the
supply shock were temporary.
A. fall more
B. fall less
C. rise more
D. rise less
Q:
A temporary negative supply shock ________ real interest rates and ________ output in the short run, thereby its effect on stock prices is ________.
A. raises; lowers; negative
B. raises; raises; ambiguous
C. lowers; raises; negative
D. lowers; raises; positive
Q:
A positive spending shock ________ real interest rates and ________ output in the short run, thereby its effect on stock prices is ________.
A. raises; lowers; positive
B. raises; raises; ambiguous
C. lowers; raises; negative
D. lowers; raises; positive
Q:
An autonomous monetary policy easing ________ real interest rates and ________ output in the short run, thereby ________ stock prices.
A. raises; lowers; lowering
B. raises; raises; raising
C. lowers; raises; raising
D. lowers; raises; lowering
Q:
A permanent negative supply shock leads to ________ inflation ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Q:
A permanent negative supply shock leads to ________ output ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Q:
A permanent negative supply shock leads to ________ real interest rates ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Q:
A temporary supply shock that raises prices
A. will cause the real interest rate to rise in the long run.
B. has no long-run impact on inflation and output.
C. causes output to fall in the long run.
D. causes inflation to rise in the long run.
Q:
A temporary supply shock that raises prices will cause the real interest rate to
A. rise in both the short and long runs.
B. rise in the short run but not in the long run.
C. fall in both the short and long runs.
D. fall in the short run but not in the long run.
Q:
Positive spending shocks lead to ________ inflation ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Q:
Positive spending shocks lead to ________ output ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Q:
positive spending shocks lead to ________ real interest rates ________.
A. higher; in both the short and long runs
B. higher; in the short run but not in the long run
C. lower; in both the short and long runs
D. lower; in the short run but not in the long run
Q:
Monetary policy authorities can affect real interest rates
A. in the short run, but not in the long run.
B. in the long run, but not in the short run.
C. permanently.
D. both in the long run and the short run.
Q:
An autonomous monetary policy easing reduces real interest rates and raises aggregate output ________ and the inflation rate rises ________.
A. temporarily; permanently
B. permanently; temporarily
C. permanently; permanently
D. temporarily; temporarily
Q:
An autonomous monetary policy easing temporarily ________ real interest rates and ________ aggregate output in the short run, but in the long run real interest rates and aggregate output return to the equilibrium levels.
A. reduces; raises
B. reduces; lowers
C. increases; lowers
D. increases; raises
Q:
The expectations-augmented Phillips curve implies that as expected inflation increases, nominal wages ________ to prevent real wages from ________.
A. fall; rising
B. fall; falling
C. rise; falling
D. rise; rising
Q:
The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply decreases.
A. easy; rise
B. easy; fall
C. tight; fall
D. tight; rise
Q:
The Phillips curve indicates that when the labor market is ________, production costs will ________ and aggregate supply increases.
A. easy; rise
B. easy; fall
C. tight; fall
D. tight; rise
Q:
As of 2009, China's economy had recovered from the global recession that began in 2008. Use aggregate demand and aggregate supply analysis to explain why, and to explain the likely consequences for China of an increase in the growth rate of the global economy.
Q:
In the long run, following a combination of a negative demand shock and a temporary negative supply shock,
A. both inflation and output return to the original long-run equilibrium values.
B. inflation is permanently increased, while output returns to potential output.
C. output returns to potential output, while inflation may be higher or lower than its initial value.
D. inflation is permanently reduced, while output returns to potential output.
E. None of the above.
Q:
The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the Chinese experience?
A. The worldwide decline in demand led to a collapse of Chinese exports.
B. Instead of relying solely on the economy's self-correcting mechanism, much more aggressive fiscal expansions than those of the U.S. (in addition to a substantial monetary easing) served to shift the AD curve back to general equilibrium relatively quickly.
C. The Chinese economy was better able than the U.S. economy to weather the financial crisis with output growth starting to grow earlier and more quickly than that of the U.S.
D. All of the above.
E. None of the above.
Q:
The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is TRUE of the United Kingdom's experience?
A. The increase in the price of oil immediately shifted the AS curve to the left.
B. The financial crisis did not take hold right away so the AD curve did not immediately shift.
C. Eventually, the Lehman Brothers bankruptcy caused a negative demand shock leading to a further fall in output and an increase in the unemployment rate.
D. All of the above.
E. None of the above.
Q:
The price of a barrel of oil doubled between 2007 and the middle of To make matters worse, a financial crisis hit the U.S. economy starting in August of 2007. Which of the following is an appropriate description of the mechanism that would have ensued?
A. The increase in the price of oil would have immediately shifted the AS curve to the right.
B. The financial crisis would have led to a sharp contraction in spending shifting the AD curve to the right.
C. Shifts in both the AD and the AS curve would have ensued in the short-run but as long as neither shock had an impact on potential output, ultimately unemployment will have been unaffected in the long run.
D. All of the above.
E. None of the above.
Q:
Explain and demonstrate graphically the effects of a negative supply shock in both the short-run and long-run.
Q:
According to aggregate demand and supply analysis, the rising oil prices coupled with the global financial crisis in 2007-2008 caused the unemployment rate to ________ and the level of real aggregate output to ________.
A. increase; increase
B. increase; decrease
C. decrease; increase
D. decrease; decrease
Q:
According to aggregate demand and supply analysis, the favorable supply shock of 1995-1999 had the effect of
A. increasing aggregate output, lowering unemployment, and raising inflation.
B. decreasing aggregate output, raising unemployment, and raising inflation.
C. increasing aggregate output, lowering unemployment, and lowering inflation.
D. decreasing aggregate output, raising unemployment, and lowering inflation.
Q:
According to aggregate demand and supply analysis, the negative supply shocks of 1973-1975 and 1978-1980 had the effect of
A. increasing aggregate output, lowering unemployment, and raising the inflation.
B. decreasing aggregate output, raising unemployment, and raising the inflation.
C. increasing aggregate output, raising unemployment, and raising the inflation.
D. decreasing aggregate output, raising unemployment, and lowering the inflation.
Q:
According to aggregate demand and supply analysis, America's involvement in the Vietnam War had the effect of
A. increasing aggregate output, lowering unemployment, and raising the inflation.
B. decreasing aggregate output, lowering unemployment, and lowering the inflation.
C. increasing aggregate output, raising unemployment, and raising the inflation.
D. decreasing aggregate output, raising unemployment, and lowering the inflation.
Q:
Because shifts in aggregate demand are not viewed as being particularly important to aggregate output fluctuations, they do not see much need for activist policy to eliminate high unemployment. "They" refers to proponents of
A. the natural rate hypothesis.
B. monetarism.
C. the Phillips curve model.
D. real business cycle theory.
Q:
This theory views shocks to tastes (workers' willingness to work, for example) and technology (productivity) as the major driving forces behind short-run fluctuations in the business cycle because these shocks lead to substantial short-run fluctuations in the natural rate of output.
A. the natural rate hypothesis
B. hysteresis
C. real business cycle theory
D. the Phillips curve model
Q:
A theory of aggregate economic fluctuations called real business cycle theory holds that
A. changes in the real money supply are the only demand shocks that affect the natural rate of output.
B. aggregate demand shocks do affect the natural rate of output.
C. aggregate supply shocks do affect the natural rate of output.
D. changes in net exports are the only demand shocks that affect the natural rate of output.
Q:
Suppose the U.S. economy is operating at potential output. A negative supply shock that is accommodated by an open market purchase by the Federal Reserve will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
A. no change; an increase
B. no change; a decrease
C. an increase; an increase
D. a decrease; a decrease
Q:
Suppose the economy is producing at the natural rate of output and the government passes legislation that severely restricts a company's ability to reduce production costs via outsourcing. Everything else held constant, this policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run.
A. an increase; an increase
B. a decrease; a decrease
C. a decrease; an increase
D. no change; no change
Q:
A positive supply shock causes ________ to ________.
A. aggregate demand; increase
B. aggregate demand; decrease
C. short-run aggregate supply; decrease
D. short-run aggregate supply; increase
Q:
A negative supply shock causes ________ to ________.
A. aggregate demand; increase
B. aggregate demand; decrease
C. short-run aggregate supply; decrease
D. short-run aggregate supply; increase
Q:
A decrease in the availability of raw materials that increases the price level is called a ________ shock
A. negative demand
B. positive demand
C. negative supply
D. positive supply
Q:
If workers demand and receive higher real wages (a successful wage push), the cost of production ________ and the short-run aggregate supply curve shifts ________.
A. rises; leftward
B. rises; rightward
C. falls; leftward
D. falls; rightward
Q:
Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, decreasing short-run aggregate supply.
A. above; fall
B. above; rise
C. below; fall
D. below; rise
Q:
Everything else held constant, when output is ________ the natural rate level, wages will begin to ________, increasing short-run aggregate supply.
A. above; fall
B. above; rise
C. below; fall
D. below; rise
Q:
Everything else held constant, a decrease in the cost of production ________ aggregate ________.
A. increases; demand
B. decreases; demand
C. increases; supply
D. decreases; supply
Q:
Everything else held constant, an increase in the cost of production ________ aggregate ________.
A. increases; demand
B. decreases; demand
C. increases; supply
D. decreases; supply
Q:
Using the aggregate demand-aggregate supply model, explain and demonstrate graphically the short-run and long-run effects of an increase in the money supply.
Q:
According to aggregate demand and supply analysis, the negative demand shock of 2000-2004 had the effect of
A. increasing aggregate output, lowering unemployment, and raising inflation.
B. decreasing aggregate output, raising unemployment, and raising inflation.
C. increasing aggregate output, lowering unemployment, and lowering inflation.
D. decreasing aggregate output, raising unemployment, and lowering inflation.
Q:
Suppose the economy is producing below the natural rate of output and the government is suffering from large budget deficits. To deal with the deficit problem, suppose the government takes a policy action to reduce the size of the deficits. This policy action will cause ________ in the unemployment rate in the short run and ________ in inflation in the short run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. a decrease; an increase
D. an increase; a decrease
Q:
Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the U.S. economy is producing at the natural rate of output. An appreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the appreciation causes no effects in the supply side of the economy.)
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the U.S. economy is producing at the natural rate of output. A depreciation of the U.S. dollar will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. An open market sale of bonds by the Fed will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP the the short run and ________ in inflation in the short run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. A decrease in consumer and business confidence will cause ________ in real GDP in the short run and ________ in inflation in the short run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease
Q:
Suppose the economy is producing at the natural rate of output. An increase in consumer and business confidence will cause ________ in real GDP in the long run and ________ in inflation in the long run, everything else held constant.
A. an increase; an increase
B. a decrease; a decrease
C. no change; an increase
D. no change; a decrease