Question 1

Which of the following statements is correct?

Accepted Answer

D

Question 2

When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then

Accepted Answer

E

Question 3

If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government

Accepted Answer

Nonactivists believe in the self-correcting nature of the economy and would recommend that the government not intervene, allowing market forces to adjust and return to the natural rate level on their own.

Question 4

When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run

Accepted Answer

In the long run, the economy naturally adjusts back to its potential output level as prices and wages adapt to the shock, meaning output will be at its potential (B). Central banks typically target inflation rates, and if they do not alter monetary policy in response to a temporary shock, inflation will eventually return to its target or pre-shock level, indicating inflation will be unchanged (D). Thus, both B and D are correct.

Question 5

If aggregate output is below the natural rate level, activists of policies would recommend that the government

Accepted Answer

Activists of policies would recommend that the government attempt to shift the aggregate demand curve to the right in order to eliminate high unemployment and return to the natural rate of output. By increasing government spending, reducing taxes, or implementing monetary policies such as lowering interest rates, the government can increase the demand for goods and services and stimulate economic growth. Attempting to shift the aggregate supply curve to the right may not be effective in cases of high unemployment because there may not be enough demand for goods and services to justify an increase in production.

Question 6

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

Accepted Answer

A negative supply shock will increase the cost of production, reducing supply and therefore output. If the central bank does not respond by adjusting monetary policy, there will be no increase in aggregate demand to offset the decrease in supply. This will result in a lower output level, while inflation may remain unchanged or even increase due to the supply shock. Therefore, the correct answer is C, output will be lower.

Question 7

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

Accepted Answer

The answer of When the economy suffers a permanent negative...

Question 8

If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then

Accepted Answer

If there is a permanent negative supply shock due to increased regulations that reduce potential output, then potential output falls, which means the long-run aggregate supply curve shifts leftward. Additionally, in the short-run, businesses may struggle to adjust to the new regulations, resulting in an upward shift of the short-run aggregate supply curve. Therefore, all of the above (choices A, B, and C) are correct.

Question 9

When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

Accepted Answer

When the economy experiences a temporary negative supply shock, short-run aggregate supply shifts leftward causing a decrease in aggregate output in the short run. However, the central bank tries to keep inflation at the target level by changing the autonomous component of monetary policy, which could be either an increase in interest rates or a decrease in the money supply. This might lead to a decrease in aggregate demand and output in the short run but would help prevent inflation in the long run. Over time, the economy will adjust and output will return to potential output level.

Question 10

Policy makers cannot achieve both price stability and economic activity stability when facing

Accepted Answer

Policy makers can respond to demand shocks by adjusting monetary or fiscal policy to stabilize economic activity and employment, while allowing prices to adjust to their new equilibrium level. However, they cannot achieve both price stability and economic activity stability when faced with temporary supply shocks, such as natural disasters or oil price spikes. In this case, prices will rise in response to the decrease in supply, but attempting to stabilize prices through monetary policy would cause economic activity to decline further. Permanent supply shocks, such as a technological breakthrough or a change in demographics, also create a trade-off between price stability and economic activity stability, as prices and output will both be affected in the long run.

Question 11

When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to

Accepted Answer

The answer of When the economy suffers a temporary negative...

Question 12

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

Accepted Answer

A permanent negative supply shock causes a leftward shift in the aggregate supply curve, leading to a lower level of output and higher inflation. To keep inflation at the target rate, the central bank needs to adjust monetary policy by shifting the aggregate demand curve leftward, reducing spending and output. Therefore, the correct answer is A) aggregate demand curve shifts leftward. Output will be reduced.

Question 13

The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall

Accepted Answer

The disruption to financial markets caused by the collapse of the housing bubble and the ensuing financial crisis led to a decrease in overall economic confidence, resulting in both consumer and business spending falling. This decrease in spending would shift the aggregate demand curve to the left, as there is less overall demand for goods and services.

Question 14

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

Accepted Answer

The answer of When the economy suffers a permanent negative...

Question 15

Activists of the policies believe that

Accepted Answer

Activists of the policies believe that the self-correcting mechanism through wage and price adjustment is very slow and wages and prices are sticky, therefore the government needs to pursue active policy to eliminate high unemployment when it develops.

Question 16

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

Accepted Answer

When the economy suffers a permanent negative supply shock, the aggregate supply curve shifts leftward which will cause both output and the aggregate demand curve to shift leftward. However, if the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then output will be at its potential. Therefore, the correct answer is E, as the aggregate demand curve will shift leftward (A) and output will be at its potential (C).

Question 17

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

Accepted Answer

The answer of When the economy suffers a permanent negative...

Question 18

When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then

Accepted Answer

When monetary policymakers attempt to stabilize economic activity in response to a temporary negative supply shock by increasing the money supply, the aggregate demand curve shifts rightward to counteract the decrease in output, leading to higher inflation rates. Thus, while output may temporarily move towards its potential, the trade-off is a higher inflation rate, making all of the given statements correct.

Question 19

Nonactivists of the policies believe that

Accepted Answer

Nonactivists believe that the economy is self-correcting and that wages and prices adjust quickly to changes in supply and demand. They argue that government intervention in the economy, such as fiscal or monetary policy, is unnecessary and can even be harmful.

Question 20

When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then

Accepted Answer

The answer of When the economy is hit by a...

Quiz 24: Monetary Policy Theory

Which of the following statements is correct?

When the economy is hit by a negative demand shock and the central bank pursues policies to increase aggregate demand to its initial level, then

If aggregate output is below the natural rate level, nonactivists of policies would recommend that the government

When the economy is hit by a temporary negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then in the long run

If aggregate output is below the natural rate level, activists of policies would recommend that the government

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output, then

When the economy suffers a temporary negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

Policy makers cannot achieve both price stability and economic activity stability when facing

When the economy suffers a temporary negative supply shock, the central bank's autonomous monetary policy to keep inflation at the target inflation rate leads to

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

The disruption to financial markets starting in August 2007 that caused both consumer and business spending to fall

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

Activists of the policies believe that

When the economy suffers a permanent negative supply shock and the central bank responds by changing the autonomous component of monetary policy to keep inflation at the target inflation rate, then

When the economy suffers a permanent negative supply shock and the central bank does not respond by changing the autonomous component of monetary policy, then

When the economy suffers a temporary negative supply shock and the monetary policy makers try to stabilize economic activity in the short run, then

Nonactivists of the policies believe that

When the economy is hit by a negative demand shock and the central bank does not respond by changing the autonomous component of monetary policy, then