Question 1

Discuss what happens to the monetary policy reaction curve if the Fed were to lower their inflation target and why?

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Question 2

Given a central bank's monetary policy reaction curve, if inflation increases by 1% why would policymakers likely have to increase the nominal interest rate by more than the increase in the expected rate of inflation?

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Question 3

Explain the impact on the monetary policy reaction curve and the nominal interest rate if the level of government purchases were to decrease and the central bank does not change its inflation target?

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Question 4

Explain the changes that would cause the dynamic aggregate demand curve to shift.

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Question 5

Is the actual amount of output that corresponds to the long-run aggregate supply curve fixed? Explain.

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Question 6

What distinguishes the short-run real interest rate from the long-run real interest rate?

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Question 7

Why would central bankers have to pay attention to forecasts regarding consumer sentiment and expectations of business owners and managers?

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Question 8

If changes in the nominal federal funds rate result in equal changes to the expected rate of inflation, how effective would it be for the FOMC to target the nominal federal funds rate?

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Question 9

Can central bankers set short-term interest rate targets and still control inflation in the long run or are these goals mutually impossible? Explain.

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Question 10

Is the monetary policy reaction curve applicable only to central banks that have an explicit inflation target? Explain.

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Question 11

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate. Start with the most sensitive to the least sensitive.

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Question 12

Assuming the free flow of capital across borders, explain why a country that has a fixed exchange rate cannot have an independent monetary policy reaction curve.

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Question 13

How would the discovery of a previously unknown large reserve of oil affect the short-run aggregate supply curve and why? What other change could have the same effect?

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Question 14

Explain why the short-run aggregate supply curve has a positive slope.

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Question 15

Output and inflation movements can arise from either demand or supply shifts. How can we tell them apart?

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Question 16

If the economy is producing a level of output that is consistent with the potential output level, and government purchases increase, describe what happens in terms of the long-run real interest rate, and why, to keep the economy at its potential output level.

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Question 17

What are the conditions for long-run equilibrium?

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Question 18

Evidence seems to point out that just before recessions interest rates rose. Why would monetary policymakers choose to cause recessions?

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Question 19

Use the monetary policy reaction curve to link a higher inflation rate to lower aggregate demand.

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Question 20

Why is it necessary to understand fluctuations in investment if we want to understand the fluctuations in the business cycle?

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Quiz 21:Output, Inflation, and Monetary Policy