Deck 21: Output, Inflation, and Monetary Policy

Question 1

In the long run, if we ignore changes in velocity, inflation will:

A)be zero.
B)equal the rate of money growth.
C)equal money growth less the growth in potential output.
D)equal money growth plus the growth in potential output.

Answer 1

C

Question 2

In the long run the inflation rate equals the level implied by:

A)the rate of money growth.
B)aggregate demand.
C)the exchange rate.
D)fiscal policy.

Answer 2

A

Question 3

To an economist, the term "inflation" refers to:

A)any price increases.
B)a continually rising price level.
C)a one-time change in the average price level.
D)increases in prices of important goods like food and energy.

Answer 3

B

Question 4

Empirical evidence suggests that over the last ten years:

A)the nominal and real federal funds rates are related inversely.
B)the nominal and real federal funds rates are highly positively correlated.
C)while the FOMC has had a lot of influence over the nominal federal funds rate, they have been less successful at changing the real federal funds rate.
D)there is no correlation between the nominal and real federal funds.

Question 5

Which of the following statements is most accurate?

A)Potential output is determined by current output.
B)When an expansionary gap exists, current output is below potential output.
C)Current output cannot exceed potential output.
D)During a recessionary gap, current output is below potential output.

Question 6

Aggregate supply is the quantity of:

A)real output supplied at each level of inflation.
B)nominal output supplied at each level of inflation.
C)real output supplied at each level of real interest rate.
D)output the country wants at each level of inflation.

Question 7

In the long run, current output will:

A)equal potential output.
B)be less than potential output.
C)be above potential output.
D)only equal potential output if unemployment is zero.

Question 8

If inflation is very high, say 50 or 100 percent a year, monetary policymakers wishing to lower it will shift their focus to controlling:

A)the long-term interest rate.
B)the short-term interest rate.
C)the exchange rate.
D)money growth.

Question 9

Given the equation of exchange, MV = PY, when central bankers control short-term nominal interest rates by adjusting the level of reserves in the banking system, their actions are expected to primarily affect:

A)the rate of growth of V.
B)the value of V.
C)potential Y as opposed to current Y.
D)the rate of growth of M.

Question 10

Potential output of the country when viewed over long periods of time:

A)rises in spurts and then starts a downward trend that can last years.
B)is surprisingly constant.
C)always decreases.
D)tends to rise over time.

Question 11

The FOMC targets the federal funds rate, but if they are going to alter the course of the economy they must influence the:

A)real interest rate as well.
B)long-term nominal interest rate as well.
C)real exchange rate as well.
D)nominal exchange rate as well.

Question 12

For central bankers to alter the real interest rate by changing the nominal interest rate, which of the following must be true?

A)The rate of inflation has to remain constant.
B)Inflation expectations are quite stable.
C)The expected rate of inflation has to change.
D)The change in the expected rate of inflation must equal the change in the nominal interest rate.

Question 13

Short-run movements in inflation and output are ultimately attributed to changes in:

A)aggregate demand.
B)aggregate supply.
C)foreign policy.
D)aggregate demand and aggregate supply.

Question 14

Business cycles are viewed as:

A)movements in the short-run equilibrium.
B)situations where aggregate demand does not equal short-run aggregate supply.
C)inevitable; every economy must experience them.
D)movements in the long-run equilibrium.

Question 15

Which of the following would cause an increase in the potential output of a country?

A)An increase in the capital stock
B)A temporary decrease in exports
C)An increase in the money supply
D)A decrease in the labor force

Question 16

Recent policy statements by the FOMC announce and explain its:

A)targets for money growth with no mention of interest-rate targets.
B)short-term interest-rate and balance-sheet adjustments with no mention of money growth targets.
C)decisions for long-term interest rates.
D)decisions for money-growth targets but also mentioning short-term interest-rate decisions.

Question 17

The potential output of a country would increase as a result of each of the following, except:

A)an increase in population.
B)an increase in capital per worker.
C)technological innovation that increases labor productivity.
D)depreciation of the capital stock.

Question 18

A characteristic of long-run equilibrium is the economy is producing its potential output.This is:

A)the maximum level of output the economy could produce at any time.
B)the level of output the economy produces when its resources are used at normal rates.
C)defined as using 80 percent of the economy's resources at any time.
D)the level of output consistent with an unemployment rate of 7.5%.

Question 19

The Fed hopes to impact short-run inflation and output by altering:

A)the production function.
B)aggregate supply.
C)aggregate demand.
D)fiscal policy.

Question 20

The aggregate demand curve shows the quantity of:

A)nominal output demanded at each level of inflation.
B)real output demanded at each level of inflation.
C)output made available at each level of inflation.
D)real output demanded at each level of real interest rate.

Question 21

Which of the following is not a part of aggregate expenditure?

A)Consumption
B)The nominal interest rate
C)Government purchases
D)Net exports

Question 22

A decrease in the real interest rate in the U.S.will cause net exports to:

A)increase because exports will remain constant but imports will decrease.
B)decrease because exports will decrease and imports will increase.
C)decrease because exports will increase but imports will increase.
D)increase because exports will increase and imports will decrease.

Question 23

Which of the following statements is most correct?

A)When the real interest rate increases the reward for saving decreases.
B)When the real interest rate decreases current consumption becomes less expensive and the reward for saving decreases.
C)When the real interest rate decreases the cost of current consumption increases.
D)When the real interest rate increases the level of saving always decreases.

Question 24

Which of the following would not shift the aggregate expenditures curve?

A)A change in the real interest rate
B)Changes in consumer or business confidence
C)Fiscal policy changes
D)Changes in net exports that result from exchange rate changes

Question 25

Which of the following statements is correct?

A)The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and inversely with potential output.
B)The long-run real interest rate varies inversely with changes in non-interest sensitive components of aggregate demand and inversely with potential output.
C)The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and directly with potential output.
D)The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and does not vary with potential output.

Question 26

In the U.S., most of the recessions are associated with:

A)ill-timed fiscal policy.
B)decreasing net exports.
C)decreases in investment.
D)large decreases in consumption.

Question 27

The monetary policy reaction curve:

A)is the guideline the Fed publishes in setting their interest rate target.
B)approximates the behavior of central bankers.
C)has remained fairly constant over the years.
D)is set by Congress and given to the Fed as a guideline to follow.

Question 28

What should be the impact on aggregate expenditures from an increase in the real interest rate?

A)It should increase
B)It should decrease
C)It should remain constant
D)The impact is indeterminate

Question 29

Which component of aggregate expenditures is the least sensitive to changes in the real interest rate?

A)Investment
B)Consumption
C)Net exports
D)Government purchases

Question 30

It has been argued that the information technology age has greatly increased productivity and potential output.If this is true:

A)the long-run real interest rate is also higher as a result.
B)nominal long-run interest rates should have increased.
C)we should have seen lower short-run interest rates than we have seen.
D)the long-run real interest rate is lower as a result.

Question 31

If the level of current output suddenly falls below the potential level of output, central bankers would:

A)lower the real interest rate.
B)raise the real interest rate.
C)keep the real interest rate constant and focus on only changing the nominal interest rate.
D)attempt to shift the aggregate expenditures curve.

Question 32

The relationship between the long-run real interest rate and potential output:

A)is direct.
B)is inverse.
C)is constant since the long-run real interest rate is primarily determined by risk.
D)depends on the actions of central bankers.

Question 33

Which of the following would not be included in aggregate expenditures?

A)New military equipment purchased by the federal government
B)New computers purchased by a law firm
C)Social security payments made by the government to retirees
D)Tuition payments made by college students

Question 34

If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to:

A)lower the real interest rate.
B)raise the real interest rate.
C)keep the real interest rate constant and focus on only changing the nominal interest rate.
D)purchase Treasury securities.

Question 35

Which of the following would not be included in aggregate expenditures?

A)Your purchase of a new car
B)The value of 100 shares of Microsoft stock you purchased
C)The purchase of new textbooks by your local school district
D)The value of blue jeans produced in the U.S.and exported to Japan

Question 36

With the economy at its potential level of output, the federal government undertakes a large military buildup; all other things equal, the impact on the long-run real interest rate will be to:

A)increase.
B)decrease.
C)remain constant since output is at its potential level.
D)change at the same rate as inflation.

Question 37

Consumption can be sensitive to changes in the real interest rate because:

A)higher interest rates can increase the cost of durable goods like automobiles.
B)higher interest rates will result in less saving.
C)lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods.
D)lower interest rates increase savings.

Question 38

A monetary policy reaction curve requires the central bank to have a(n):

A)money growth target.
B)inflation target.
C)unemployment target.
D)economic growth target.

Question 39

Of all of the components of aggregate demand, the most interest sensitive is:

A)investment.
B)government purchases.
C)consumption.
D)net exports.

Question 40

Increases in the real interest rate in the U.S.will cause net exports to:

A)decrease, because the dollar depreciates.
B)increase, because the dollar depreciates.
C)decrease, because the dollar appreciates.
D)increase, because the dollar appreciates.

Question 41

A decrease in taxes would cause:

A)the dynamic aggregate demand curve to shift to the left.
B)a movement down and along the existing dynamic aggregate demand curve.
C)a movement up and along the existing dynamic aggregate demand curve.
D)the dynamic aggregate demand curve to shift to the right.

Question 42

If policymakers are aggressive in keeping current inflation near the target inflation rate then the monetary policy reaction curve will:

A)be steep.
B)be flat.
C)have an undefined slope.
D)be vertical.

Question 43

When the monetary policymakers raise the target inflation rate they:

A)raise the current real inflation rate at every level of current inflation.
B)lower the current real interest rate at every level of current inflation.
C)in effect shift the monetary policy reaction curve to the left.
D)in effect move up along the current monetary policy reaction curve.

Question 44

An inflation rate above the target rate will result in:

A)a movement up along the monetary policy reaction curve and a movement up the dynamic aggregate demand curve.
B)a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
C)a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.
D)a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve.

Question 45

Each of the following factors contribute to the slope of the dynamic aggregate demand curve, except the:

A)strength of the effect of inflation on real balances.
B)current level of technology.
C)extent to which monetary policymakers react to a change in current inflation.
D)size of the response of aggregate expenditures to changes in the interest rate.

Question 46

The slope of the monetary policy reaction curve is determined by:

A)how strongly the economy reacts to changes in the nominal interest rate.
B)how strongly the inflation rate impacts peoples' decisions.
C)how aggressively policymakers change interest rates in response to deviations between current and target inflation rates.
D)people's expectations for inflation.

Question 47

The fact that central bankers tend to respond to higher rates of inflation by increasing the real interest rate is:

A)one reason the dynamic aggregate demand curve shifts left.
B)one reason the dynamic aggregate demand curve slopes downward.
C)one reason the dynamic aggregate demand curve shifts right.
D)why the monetary policy reaction curve has a negative slope.

Question 48

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

A)The monetary policy reaction curve shifts to the left
B)A movement up the existing monetary policy reaction curve
C)A movement down the existing monetary policy reaction curve
D)The monetary policy reaction curve shifts to the right

Question 49

A decrease in the inflation target by the central bank would:

A)have no impact on the positioning of the dynamic aggregate demand curve.
B)cause the dynamic aggregate demand curve to shift to the left.
C)cause the dynamic aggregate demand curve to shift to the right.
D)be reflected by a movement down and along the existing dynamic aggregate demand curve.

Question 50

If policymakers are not aggressive about keeping inflation close to the target rate, the slope of the monetary policy reaction curve would be:

A)steep.
B)relatively flat.
C)horizontal.
D)negative.

Question 51

A rightward shift in the dynamic aggregate demand curve could result from:

A)a decrease in government purchases.
B)an increase in investment resulting from a lower inflation rate.
C)a rightward shift of the monetary policy reaction curve.
D)a leftward shift of the monetary policy reaction curve.

Question 52

The effect on the monetary policy reaction curve resulting from policymakers decreasing their inflation target would be:

A)the monetary policy reaction curve shifting to the left.
B)a movement up the existing monetary policy reaction curve.
C)a movement down the existing monetary policy reaction curve.
D)the monetary policy reaction curve shifting to the right.

Question 53

One way inflation reduces aggregate demand is by:

A)increasing nominal GDP.
B)increasing velocity.
C)reducing real balances.
D)increasing wealth.

Question 54

The point where the central bank's target inflation rate is consistent with the long-run real interest rate lies:

A)above the monetary policy reaction curve.
B)below the monetary policy reaction curve.
C)on the monetary policy reaction curve.
D)on the horizontal (inflation) axis.

Question 55

The dynamic aggregate demand curve illustrates that the relationship between inflation and real output is:

A)direct.
B)inverse.
C)independent.
D)undefined.

Question 56

If the slope of the monetary policy reaction curve is relatively flat, it means that central bankers are:

A)very concerned about keeping inflation close to the target rate.
B)not concerned at all about inflation.
C)less concerned about keeping inflation close to its short-run target.
D)not going to let inflation deviate from its target at all.

Question 57

If the axes in the model for the monetary policy reaction curve are the real interest rate (vertical axis) and the rate of inflation (horizontal axis), then the monetary policy reaction curve would:

A)have a positive slope.
B)have a negative slope.
C)have a zero slope.
D)be vertical.

Question 58

If a point lies on the monetary policy reaction curve, and at this point the inflation rate equals the target rate of inflation, we know that:

A)the real interest rate corresponding to this point is above the long-run real interest rate.
B)the real interest rate corresponding to this point is equal to the long-run real interest rate.
C)the real interest rate corresponding to this point is below the long-run real interest rate.
D)current output is above potential output.

Question 59

The dynamic aggregate demand curve has a negative slope for all of the following reasons except:

A)the reduction in real wealth caused by inflation.
B)the fact that high rates of inflation are good for the stock market.
C)the redistribution that occurs as inflation has a greater impact on the poor than it does on the wealthy.
D)higher current inflation leads policymakers to increase the real interest rate, which depresses various components of aggregate expenditures.

Question 60

An inflation rate below the target rate will result in:

A)a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
B)a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.
C)a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve.
D)a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.

Question 61

The conditions for long-run equilibrium include each of the following, except:

A)imports equal exports.
B)current inflation is steady and equals target inflation.
C)current output equals potential output.
D)current inflation equals expected inflation.

Question 62

The short-run effects from an increase in aggregate demand will include:

A)an increase in potential output.
B)an increase in the current inflation rate.
C)a decrease in current output.
D)a recessionary gap.

Question 63

If current output deviates from potential output, the short-run aggregate supply curve may shift because:

A)aggregate demand has to shift.
B)potential output will have to shift.
C)input costs (including wages) adjust.
D)the economy's long-run growth rate will have to adjust.

Question 64

If output and inflation are unrelated in the long run, the long-run aggregate supply curve must be:

A)horizontal.
B)vertical.
C)upward sloping.
D)non-existent.

Question 65

Which of the following statements seems to be verified by economic data?

A)Inflation tends to rise during recessions.
B)Inflation adjusts within three months to output gaps.
C)Inflation tends to fall during expansions.
D)It can take over a year for inflation to adjust to output gaps.

Question 66

One reason the long-run aggregate supply curve has the slope it does is due to the fact that:

A)if current output equals potential output, the short-run aggregate supply curve is stable.
B)that inflation is zero in the long run.
C)over long periods of time the economy moves to its potential level of output with higher inflation.
D)over long periods of time the economy moves to its potential level of output with lower inflation.

Question 67

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

A)current inflation, but not current output.
B)potential output.
C)current output, but not current inflation.
D)current output and current inflation.

Question 68

In the short run, the point on the aggregate demand curve where an economy will end up depends on:

A)the money supply.
B)the long-run rate of inflation.
C)potential output.
D)the short-run aggregate supply curve.

Question 69

If monetary policymakers fear a recession resulting from increased pessimism on the part of business people, and they want to avoid the recession, they would:

A)shift the monetary policy reaction curve to the right.
B)shift the monetary policy reaction curve to the left.
C)likely lower their target rate for inflation.
D)encourage fiscal policymakers to act.

Question 70

The long-run aggregate supply curve intersects the horizontal axis at the:

A)potential level of output.
B)current level of output.
C)expected rate of inflation.
D)actual rate of inflation.

Question 71

If the economy's current level of output is below its potential level of output, the short-run aggregate supply curve:

A)will shift right.
B)will shift left.
C)will be vertical.
D)does not matter; only the long-run aggregate supply curve matters in this situation.

Question 72

The economy is in both a short- and long-run equilibrium if:

A)current inflation equals expected inflation and current output equals potential output.
B)the aggregate demand curve intersects the short-run aggregate supply curve.
C)the long-run aggregate supply curve is at potential output.
D)the short-run aggregate supply curve intersects the long-run aggregate supply curve at potential output.

Question 73

Select the answer which best completes the following statement: "at any point along the long-run aggregate supply curve…"

A)expected inflation equals current inflation and current output is below potential output.
B)the economy is moving toward its potential output level.
C)current output equals potential output and expected inflation equals current inflation.
D)expected inflation is moving toward current inflation.

Question 74

An output gap occurs when:

A)aggregate demand does not equal short-run aggregate supply.
B)aggregate demand equals long-run aggregate supply.
C)aggregate demand equals short-run aggregate supply but not long-run aggregate supply.
D)short-run aggregate supply equals long-run aggregate supply.

Question 75

In the short run, the aggregate supply curve is:

A)vertical.
B)horizontal.
C)upward sloping.
D)downward sloping.

Question 76

The self-correcting mechanism to return the economy to potential output from output gaps is the change in:

A)potential output.
B)aggregate demand.
C)short-run aggregate supply.
D)the real interest rate by the central bank.

Question 77

If the economy is in long-run equilibrium:

A)inflation should be accelerating.
B)current output should be greater than potential output.
C)current inflation should equal expected inflation.
D)current inflation should be less than expected inflation.

Question 78

If most people expect the inflation rate will increase, the:

A)long-run aggregate supply curve would shift right.
B)aggregate demand curve would shift right.
C)short-run aggregate supply curve would shift to the right.
D)short-run aggregate supply curve would shift to the left.

Question 79

If the economy's current level of output rises above its potential level of output, the short-run aggregate supply curve will:

A)shift right.
B)shift left.
C)become horizontal.
D)become vertical.

Question 80

Which of the following statements is incorrect?

A)The point where the short-run and long-run supply curves intersect corresponds to the potential level of output.
B)Any point on the short-run aggregate supply curve reflects current inflation equals target inflation.
C)Inflation and output are unrelated in the long run.
D)In the long run, inflation is determined by monetary policy.