Deck 27: Aggregate Demand, Aggregate Supply, and Inflation

Question 1

The aggregate demand curve shows the relationship between inflation and:

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

Answer 1

short-run equilibrium output.

Question 2

Changes in aggregate spending not caused by changes in output or the inflation rate, also known as exogenous changes in spending, will shift the:

A)short-run aggregate supply curve.
B)long-run aggregate supply curve.
C)potential output line.
D)aggregate demand curve.

Answer 2

aggregate demand curve.

Question 3

The aggregate demand curve shifts when there are changes in:

A)inflation inertia and aggregate supply shocks.
B)exogenous spending and the Fed's reaction function.
C)exogenous spending and inflation inertia.
D)potential output and exogenous spending.

Answer 3

exogenous spending and the Fed's reaction function.

Question 4

At a constant rate of exchange between currencies, higher inflation makes domestic goods sold abroad ________ expensive and hence, ________ short-run equilibrium output.

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

Question 5

As inflation decreases, households become ________ uncertain leading to ________ spending.

A)more; more
B)more; less
C)less; more
D)less; less

Question 6

The aggregate demand curve is downward sloping for all of the following reasons EXCEPT for the:

A)response of the Fed to inflation through its policy reaction function.
B)effect of inflation on the value of money.
C)impact of inflation on the consumer price index (CPI).
D)distributional impact of inflation on spending.

Question 7

As inflation increases, households become ________ uncertain leading to ________ spending.

A)more; more
B)more; less
C)less; more
D)less; less

Question 8

All else equal, a decrease in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

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

Question 9

Because decreases in inflation increase planned spending and short-run equilibrium output:

A)the short-run aggregate supply line is downward sloping.
B)the aggregate demand curve is horizontal.
C)the aggregate demand curve is downward sloping.
D)the aggregate demand curve is upward sloping.

Question 10

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

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

Question 11

For a fixed target real interest rate and target inflation rate, when inflation decreases, the Fed ________ interest rates, hence ________ short-run equilibrium output.

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

Question 12

If the Fed's monetary policy reaction function does not change, then when inflation decreases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.

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

Question 13

High levels of inflation ________ the real value of money and, hence, ________ short-run equilibrium output.

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

Question 14

If the Fed's monetary policy reaction function does not change, then when inflation increases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.

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

Question 15

The aggregate demand curve shows the relationship between short-run equilibrium output and the:

A)nominal interest rate.
B)real interest rate.
C)unemployment rate.
D)inflation rate.

Question 16

Higher rates of inflation reduce planned spending because:

A)the Fed reacts to the higher inflation by lowering interest rates.
B)the reduction in wealth, resulting from the reduced real value of money, restricts spending.
C)resources are redistributed from low-spending households to high-spending households.
D)the real value of money increases.

Question 17

Because increases in inflation reduce planned spending and short-run equilibrium output:

A)the short-run aggregate supply line is downward sloping.
B)the aggregate demand curve is horizontal.
C)the aggregate demand curve is downward sloping.
D)the aggregate demand curve is upward sloping.

Question 18

For a fixed target real interest rate and target inflation rate, when inflation increases, the Fed ________ interest rates, hence ________ short-run equilibrium output.

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

Question 19

Lower rates of inflation increase planned spending because:

A)the Fed reacts to the lower inflation by lowering interest rates.
B)the reduction in wealth, resulting from the reduced real value of money, restrains spending.
C)resources are redistributed from high-spending households to low-spending households.
D)the prices of domestic goods sold abroad increase (with a constant exchange rate).

Question 20

Increases in inflation redistribute resources from ________-spending to ________-spending households and hence, ________ short-run equilibrium output.

A)high; low; increase
B)low; high; increase
C)high; low; decrease
D)low; high; decrease

Question 21

For a given inflation rate, if increasing threats to domestic security cause the government to increase military spending, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 22

For a given level of inflation, if there is a greater reluctance by foreigners to purchase domestic goods, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 23

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

A)Income taxes are lowered.
B)The government increases spending on education.
C)Consumers become optimistic about the future.
D)Foreign economies fall into recession, reducing their demand for domestic exports.

Question 24

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

A)shifts upward to the left; shifts to the right
B)shifts downward to the right; shifts to the right
C)shifts upward to the left; shifts to the left
D)shifts downward to the right; shifts to the left

Question 25

For a given level of inflation, if there is a greater willingness by foreigners to purchase domestic goods, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 26

An upward shift in the Fed's policy reaction function is a(n)________ of monetary policy, and the aggregate demand curve ________.

A)tightening; shifts right
B)easing; shifts right
C)tightening; shifts left
D)easing; shifts left

Question 27

For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 28

If the Federal Reserve lowers its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

A)shifts upward to the left; shifts to the right
B)shifts downward to the right; shifts to the right
C)shifts upward to the left; shifts to the left
D)shifts downward to the right; shifts to the left

Question 29

Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF₁)and the aggregate demand curve (AD₁). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*₁.  
If the Federal Reserve lowers its target inflation rate to π*₂, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

A)shift to RF₃; shift to AD₂
B)shift to RF₂; shift to AD₂
C)shift to RF₃; shift to AD₃
D)shift to RF₂; shift to AD₃

Question 30

A downward shift in the Fed's policy reaction function is a(n)________ of monetary policy, and the aggregate demand curve ________.

A)tightening; shifts right
B)easing; shifts right
C)tightening; shifts left
D)easing; shifts left

Question 31

Exogenous changes in spending refer to changes in planned spending:

A)caused by changes in output.
B)caused by changes in the inflation rate.
C)caused by changes in the real interest rate.
D)not caused by changes in output or changes in the inflation rate.

Question 32

Which of the following will shift the aggregate demand curve to the right?

A)Income taxes are raised.
B)The government increases spending on education.
C)Consumers become pessimistic about the future.
D)Business managers become pessimistic about the future.

Question 33

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 34

Which of the following will shift the aggregate demand curve to the right?

A)Income taxes are raised.
B)The government reduces purchases to balance the budget.
C)Consumers become more optimistic about the future.
D)Foreign economies fall into recession, reducing their demand for domestic exports.

Question 35

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 36

When the Federal Reserve reduces its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

A)higher; shift to the right
B)lower; shift to the right
C)higher; shift to the left
D)lower; shift to the left

Question 37

For a given level of inflation, if a rise in the stock market makes consumers more willing to spend, known as the wealth effect, then the ________ shifts ________.

A)aggregate demand curve; right
B)short-run aggregate supply line; downward
C)aggregate demand curve; left
D)short-run aggregate supply line; upward

Question 38

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

A)Income taxes are raised.
B)The government increases spending on education.
C)Consumers become optimistic about the future.
D)A new technology is developed that will increase profits.

Question 39

The AD curve can be shifted by:

A)both fiscal and monetary policy.
B)neither fiscal nor monetary policy.
C)fiscal policy only.
D)monetary policy only.

Question 40

When the Federal Reserve increases its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

A)higher; shift to the right
B)lower; shift to the right
C)higher; shift to the left
D)lower; shift to the left

Question 41

If households and firms expect higher rates of inflation, the ________ curve will shift ________.

A)AD; rightward
B)SRAS; upward
C)SRAS; downward
D)AD; until it becomes vertical

Question 42

The economy moves up a stationary aggregate demand curve when the Fed:

A)increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function.
B)decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function.
C)increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.
D)decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question 43

For a fixed inflation rate target, an increase in the inflation rate corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.

A)shift left of; movement up
B)movement up; shift right of
C)shift left of; shift right of
D)movement up; movement down

Question 44

An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

A)shift left of; movement up
B)movement up; shift left of
C)shift left of; shift right of
D)movement up; shift right

Question 45

The aggregate demand curve shifts to the right when the Fed:

A)increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function.
B)decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function.
C)increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.
D)decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question 46

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

A)large; high
B)large; low
C)small; low
D)small; high

Question 47

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

A)large; high
B)large; low
C)small; low
D)small; high

Question 48

Changes in the expected rate of inflation will:

A)not shift but create a movement along the SRAS curve.
B)shift the SRAS curve downward or upward.
C)cause the SRAS curve to become vertical.
D)cause the SRAS curve to become upward-sloping.

Question 49

Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF₁)and the aggregate demand curve (AD₁). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*₁.  
 
If the Federal Reserve raises its target inflation rate to π*₃, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

A)shift to RF₃; shift to AD₂
B)shift to RF₂; shift to AD₂
C)shift to RF₃; shift to AD₃
D)shift to RF₂; shift to AD₃

Question 50

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

A)shift left of; movement up
B)shift left of; shift right of
C)movement up; movement down
D)movement down; shift right of

Question 51

When actual output equals potential output there is ________ output gap and the rate of inflation will tend to ________.

A)an expansionary; increase
B)an expansionary; decrease
C)no; remain the same
D)a recessionary; increase

Question 52

An upward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.

A)shift left of; movement up
B)shift left of; shift right of
C)shift right of; shift left of
D)movement up; shift right of

Question 53

The economy moves down a stationary aggregate demand curve when the Fed:

A)increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function.
B)decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function.
C)increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.
D)decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question 54

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

A)shift left of; movement up
B)movement up; shift right of
C)shift left of; shift right of
D)movement down; shift left of

Question 55

A downward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

A)shift left of; movement up
B)shift left of; shift right of
C)shift right of; shift left of
D)movement up; shift right of

Question 56

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

A)the inflation gap.
B)inflation expectations.
C)inflation inertia.
D)potential inflation.

Question 57

The aggregate demand curve shifts to the left when the Fed:

A)increases its target inflation rate, reflected by a downward shift in the Fed's policy reaction function.
B)decreases its target inflation rate, reflected by an upward shift in the Fed's policy reaction function.
C)increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.
D)decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed's policy reaction function.

Question 58

Inflation inertia is the result of the behavior of ________ and the existence of ________.

A)the central bank; automatic stabilizers
B)real and nominal interest rates; an output gap
C)autonomous aggregate demand; the Fed's policy reaction function
D)inflation expectations; long-term wage and price contracts

Question 59

Inflation inertia is the tendency for inflation to:

A)equal zero.
B)change relatively slowly from year to year.
C)decrease when the Fed increases interest rates.
D)increase when the Fed decreases interest rates.

Question 60

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.

A)high; high
B)high; low
C)low; low
D)low; high

Question 61

When actual output is less than potential output, there is ________ output gap and the rate of inflation will tend to ________.

A)an expansionary; increase
B)an expansionary; decrease
C)a recessionary; decrease
D)a recessionary; increase

Question 62

A horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions is called the:

A)aggregate demand curve.
B)long-run aggregate supply line.
C)short-run equilibrium output line.
D)short-run aggregate supply line.

Question 63

The short-run aggregate supply line is:

A)downward sloping.
B)vertical at the economy's potential output.
C)upward sloping.
D)horizontal at the current rate of inflation.

Question 64

Starting from potential output, if firms become less optimistic about the future and decide to decrease their investment in new capital, then this will generate a(n)________ gap and inflation will ________.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 65

When actual output exceeds potential output there is ________ output gap and the rate of inflation will tend to ________.

A)an expansionary; increase
B)an expansionary; decrease
C)no; remain the same
D)a recessionary; increase

Question 66

Starting from potential output, if consumer confidence decreases and consumers decide to spend less, then this will generate a(n)________ gap and inflation will ________.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 67

When an expansionary gap exists, actual output ________ potential output and the rate of inflation will tend to ________.

A)exceeds; increase
B)exceeds; decrease
C)is less than; decrease
D)is less than; increase

Question 68

When inflation equals the value determined by past expectations and pricing decisions and output equals the level of short-run equilibrium output consistent with that inflation, the economy is said to be in ________ equilibrium.

A)potential
B)short-run
C)long-run
D)full-employment

Question 69

A vertical line showing the economy's potential is called the:

A)aggregate demand curve.
B)long-run aggregate supply line.
C)short-run equilibrium output line.
D)short-run aggregate supply line.

Question 70

Graphically the intersection of the aggregate demand curve and the short-run aggregate supply line determines:

A)potential output.
B)short-run equilibrium.
C)long-run equilibrium.
D)exogenous spending.

Question 71

Graphically short-run equilibrium occurs at the intersection of the aggregate demand curve and the:

A)short-run aggregate supply line and the long-run aggregate supply line.
B)the aggregate expenditure line.
C)short-run aggregate supply line.
D)long-run aggregate supply line.

Question 72

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

A)exceeds; increase
B)exceeds; decrease
C)is less than; decrease
D)is less than; increase

Question 73

At long-run equilibrium inflation ________ and output equals ________.

A)equals the value determined by past expectations and pricing decisions; potential
B)equals the value determined by part expectations and pricing decisions; the level of short-run equilibrium output consistent with that inflation rate
C)equals the value consistent with potential output; the level of output consistent with zero inflation
D)is stable; potential

Question 74

When no output gap exists actual output ________ potential output and the rate of inflation will tend to ________.

A)exceeds; increase
B)exceeds; decrease
C)is less than; decrease
D)equals; remain the same

Question 75

Starting from potential output, if firms become more optimistic about the future and decide to increase their investment in new capital, then this will generate a(n)________ gap and inflation will ________.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 76

A vertical line showing an economy's potential output is called the ________, while a horizontal line showing the current rate of inflation is called the ________.

A)long-run aggregate supply; short-run aggregate supply
B)short-run aggregate supply; long-run aggregate supply
C)long-run aggregate supply; aggregate demand
D)short-run aggregate supply; aggregate demand

Question 77

The long-run aggregate supply line is:

A)downward sloping.
B)vertical at the economy's potential output.
C)upward sloping.
D)vertical at the economy's actual output.

Question 78

At short-run equilibrium inflation ________ and output equals ________.

A)equals the value determined by past expectations and pricing decisions; potential
B)equals the value determined by part expectations and pricing decisions; the level of short-run equilibrium output consistent with that inflation rate
C)equals the value consistent with potential output; the level of output consistent with zero inflation
D)is stable; the level of output consistent with zero inflation

Question 79

Starting from potential output, if consumer confidence increases and consumers decide to spend more, then this will generate a(n)________ gap and inflation will ________.

A)recessionary; increase
B)recessionary; decrease
C)expansionary; decrease
D)expansionary; increase

Question 80

The short-run aggregate supply curve shows ________ while the long-run aggregate supply curve shows ________.

A)potential output; the current inflation rate
B)output; aggregate spending
C)potential output; aggregate spending
D)the current inflation rate; potential output