Question 1

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.

Accepted Answer

In the long run, the inflation rate is primarily determined by the growth rate of the money supply. This is because, over time, any increase in money supply will result in an equal increase in prices as the demand for goods and services increases. Therefore, choice A is the best answer.

Question 2

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.

Accepted Answer

This is because of economic growth, technological advancements, and other factors that contribute to increasing productivity over time. While there may be short-term fluctuations, the overall trend is upward.

Question 3

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.

Accepted Answer

Aggregate supply refers to the total quantity of real goods and services that firms are willing and able to produce at various price levels. It is determined by factors such as the availability of inputs, technology, and productivity. Therefore, the correct option is A, which states that aggregate supply is the quantity of real output supplied at each level of inflation.

Question 4

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.

Accepted Answer

Depreciation of the capital stock would decrease the potential output of a country as it means a reduction in the amount of physical goods and equipment available for production. The other options would increase potential output.

Question 5

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%.

Accepted Answer

Potential output is the level of output an economy can produce when all its resources are fully and efficiently employed. Long-run equilibrium occurs when an economy is producing at its potential output, meaning all its resources are utilized at normal rates. Therefore, option B is the correct choice. Option A defines the maximum level of output, which is not necessarily the potential output. Option C sets a specific level of resource utilization, which is not necessarily the case for every economy. Option D references an arbitrary unemployment rate, which does not necessarily relate to potential output.

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.

Accepted Answer

The aggregate demand curve shows the quantity of real output demanded at each level of inflation. It shows the relationship between the overall level of prices in the economy (measured by the inflation rate) and the quantity of real output that the economy is willing to buy (measured by real GDP).

Question 7

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.

Accepted Answer

In the long run, inflation is determined by the difference between the rate of money growth and the growth in potential output, assuming velocity is constant. This is based on the quantity theory of money.

Question 8

Empirical evidence suggests that over the last several decades:
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.

Accepted Answer

Empirical evidence shows that nominal and real federal funds rates tend to move together, indicating a positive correlation.

Question 9

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.

Accepted Answer

In the long run, current output will eventually equal potential output as the economy adjusts and reaches full employment. This is known as the natural rate of output, where all available resources are being used efficiently. Therefore, option A is correct. Option D is incorrect as there can still be some unemployment even when the economy is at full employment, such as frictional and structural unemployment.

Question 10

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.

Accepted Answer

Business cycles are fluctuations in economic activity over time, characterized by expansions (increases in output, employment, and income) and contractions (decreases in output, employment, and income). These movements are viewed as deviations from the economy's short-run equilibrium.

Question 11

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

Accepted Answer

An increase in the capital stock, which includes physical investments such as machinery, equipment, and facilities, would lead to an increase in the potential output of a country by increasing the productivity and efficiency of workers. A temporary decrease in exports (B) would have a negative impact on the country's output, while an increase in the money supply (C) would only cause inflation and not necessarily increase the country's potential output. A decrease in the labor force (D) would also have a negative impact on the country's output.

Question 12

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.

Accepted Answer

The recent policy statements by the FOMC have focused on short-term interest-rate and balance-sheet adjustments, while not mentioning money growth targets.

Question 13

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.

Accepted Answer

During a recessionary gap, current output is below potential output. This is because potential output represents the maximum sustainable output level that can be achieved without creating inflationary pressures, and during a recession, the actual output falls below this level due to a shortfall in aggregate demand. Therefore, option D is the most accurate statement. Option A is incorrect because potential output determines the capacity for current output rather than the other way around. Option B is incorrect because an expansionary gap occurs when current output exceeds potential output. Option C is incorrect because in the short run, current output may exceed potential output due to cyclical factors, but it cannot do so in the long run.

Question 14

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.

Accepted Answer

Short-run movements in inflation and output are attributed to changes in both aggregate demand and aggregate supply, so the best choice is D. Foreign policy may affect economic conditions in the long run, but it is not the primary driver of short-term fluctuations in inflation and output.

Question 15

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.

Accepted Answer

When inflation is very high, the most effective way to lower it would be to control the growth of the money supply. This can be done through various measures, such as increasing reserve requirements for banks, open market operations, and adjusting interest rates. However, controlling money growth would be the most direct and effective method to tackle inflation. Therefore, the correct option is D.

Question 16

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.

Accepted Answer

Inflation expectations need to be quite stable for central bankers to alter the real interest rate by changing the nominal interest rate. If inflation expectations are volatile, then changes in the nominal interest rate may have unpredictable effects on the real interest rate, potentially causing economic instability. A stable inflation expectation allows for a clearer relationship between the nominal and real interest rates. A, C, and D are incorrect because the rate of inflation and the expected rate of inflation are not necessarily constant, nor do they have to change in tandem with changes in the nominal interest rate. Additionally, the change in the expected rate of inflation does not have to equal the change in the nominal interest rate for central bankers to alter the real interest rate.

Question 17

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.

Accepted Answer

The real interest rate is the nominal interest rate adjusted for inflation. By influencing both the nominal interest rate and inflation, the FOMC can impact the real interest rate, which in turn affects borrowing and investment decisions by households and businesses, ultimately impacting the economy as a whole. While the long-term nominal interest rate, real exchange rate, and nominal exchange rate can all have an impact on the economy, they are not direct targets of the FOMC's policy decisions.

Question 18

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.

Accepted Answer

Central bankers control short-term nominal interest rates by adjusting the level of reserves in the banking system, which directly affects the money supply (M). This action influences the rate of growth of M, as changes in the banking system's reserves can either expand or contract the amount of money available in the economy.

Question 19

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.

Accepted Answer

Inflation refers to a sustained increase in the general price level of goods and services in an economy over a period of time. It is not a one-time change in the average price level, nor is it solely based on increases in the prices of important goods like food and energy. Any price increase does not necessarily qualify as inflation unless it is part of a persistent trend of rising prices over time.

Question 20

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.

Accepted Answer

The Fed can impact short-run inflation and output by altering aggregate demand through monetary policy tools such as changing interest rates or the money supply. This can affect consumer and business spending, as well as investment decisions, ultimately impacting overall demand in the economy. Additionally, altering aggregate supply or the production function would typically require longer-term structural changes rather than short-term adjustments. Fiscal policy is typically controlled by the government, rather than the Fed.

Quiz 21:Output, Inflation, and Monetary Policy

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

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

Aggregate supply is the quantity of:

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

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

The aggregate demand curve shows the quantity of:

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

Empirical evidence suggests that over the last several decades:

In the long run, current output will:

Business cycles are viewed as:

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

Recent policy statements by the FOMC announce and explain its:

Which of the following statements is most accurate?

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

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

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

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

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:

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

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