Deck 21: Output, Inflation, and Monetary Policy

Question 1

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

Answer 1

D

Question 2

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%

Answer 2

B

Question 3

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

Answer 3

A

Question 4

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 5

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

Question 6

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 7

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 8

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

A)Aggregate demand
B)Aggregate supply
C)Changes in foreign policy
D)Aggregate demand and aggregate supply

Question 9

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 10

To economists, inflation means all of the following except:

A)A one-time increase in the price level
B)A sustained increase in the price level
C)A continually rising price level
D)Temporary or permanent changes in a continuously rising price level

Question 11

If inflation is very high, say 50 or 100 percent a year, monetary policymakers 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 12

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

Question 13

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 14

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 decisions 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 15

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 do not change
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 16

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 17

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 18

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 19

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

Question 20

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 21

If the level of current output is 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 22

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 23

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 24

Of all of the interest-sensitive component parts of aggregate expenditures, the most important component is:

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

Question 25

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 26

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 27

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 28

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 29

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 30

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 31

In the U.S., most of the recessions are the result of:

A)Ill-timed fiscal policy
B)Decreasing net exports
C)Decreases in investment
D)Large decreases in consumption

Question 32

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 33

Empirical research reveals that during recessions:

A)Investment falls by two to three times the percentage decrease in GDP
B)The percentage decrease in GDP equals the percentage decrease in investment
C)GDP falls by one-half the percentage decrease in investment
D)Investment spending actually increases though GDP decreases

Question 34

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 35

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 36

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 37

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 38

The federal government undertakes a large military buildup; the economy is at its potential level of output, 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 39

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 40

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 41

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 42

Changes in investment can usually be attributed to:

A)Changes in the real interest rate
B)Expectations about future business conditions
C)Changes in inflation
D)Changes in exports

Question 43

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 44

Inflation reduces aggregate demand mainly by:

A)Increasing nominal GDP
B)Increasing velocity
C)Reducing real balances
D)Increasing wealth

Question 45

The effect on the monetary policy reaction curve resulting from policymakers increasing 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 46

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

A)Interest rate target
B)Inflation target
C)Unemployment target
D)Growth target

Question 47

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

A)Direct
B)Inverse
C)Independent
D)Undefined

Question 48

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 49

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 50

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 51

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 52

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 53

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 demand to changes in the interest rate

Question 54

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 55

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 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

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 58

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 59

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 60

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 61

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 62

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 policy makers to increase the real interest rate, which depresses various components of aggregate expenditures

Question 63

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 64

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 65

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 actual inflation
C)Inflation and output are unrelated in the long run
D)In the long run, inflation is determined by monetary policy

Question 66

In the short run, the aggregate supply curve is:

A)Vertical
B)Horizontal
C)Upward sloping
D)Downward sloping

Question 67

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 68

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 69

Rising domestic inflation rates can be contributing to the downward sloping dynamic aggregate demand curve through net exports because:

A)Foreign goods may cost more relative to domestic goods
B)Foreign goods may be relatively cheaper than domestic goods
C)Net exports will be increasing
D)Foreigners will want to invest in the U.S.stock market

Question 70

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 71

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 72

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 73

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 74

Businesses successfully lobby Congress into passing legislation that eliminates the minimum wage law.The impact of this change would:

A)Shift the short-run aggregate supply curve to the left
B)Make the long-run aggregate supply curve less vertical
C)Shift the short-run aggregate supply curve to the right
D)Make the short-run aggregate supply curve horizontal

Question 75

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 76

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 77

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 78

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 79

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)Inflation adjusts
D)The economy's long-run growth rate will have to adjust

Question 80

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