Question 1

If households and firms expect higher rates of inflation, the ________ curve will shift ________.

Accepted Answer

Aggregate supply curves are built on inflationary expectations. When firms anticipate higher rates of inflation the SRAS curve shifts upward.

Question 2

The economy moves up a stationary aggregate demand curve when the Fed:

Accepted Answer

For a fixed inflation rate target, an increase in interest rates corresponds to an increase in the inflation rate. A higher inflation rate is seen as a movement up the aggregate demand curve, as the rate of inflation is measured on the vertical axis when drawing aggregate demand.

Question 3

For a fixed inflation rate target, an increase in the inflation rate corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

For a fixed inflation rate target, an increase in the inflation rate corresponds to a movement up the aggregate demand curve. Note that rate of inflation is measured on the vertical axis when drawing aggregate demand. An increase in exogenous spending corresponds to a shift right of the aggregate demand curve, as this is a change in spending that is unrelated to output or the inflation rate (the only two variables measured in the AD graph).

Question 4

An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

Accepted Answer

For a fixed inflation rate target, an increase in interest rates corresponds to an increase in the inflation rate. A higher inflation rate is seen as a movement up the aggregate demand curve, as the rate of inflation is measured on the vertical axis when drawing aggregate demand. An upward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate higher than before at each given rate of inflation. So each level of inflation now corresponds to a new lower level of output. Thus an upward shift of the Fed's policy reaction function makes the AD curve shift to the left

Question 5

The aggregate demand curve shifts to the right when the Fed:

Accepted Answer

A downward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate lower than before at each given rate of inflation. So each level of inflation now corresponds to a new higher level of output. Thus a downward shift of the Fed's policy reaction function makes the AD curve shift to the right.

Question 6

High expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

Accepted Answer

Inflation follows a "wage-price spiral." Increased prices follow increased wages, which then creates another round of price increases and wage increases.

Question 7

Low expected inflation leads to ________ increases in wages and costs and to ________ actual inflation.

Accepted Answer

Inflation follows a "wage-price spiral." Small increases in prices are followed by small increases wages, which again only creates another round of minor price and wage increases.

Question 8

Changes in the expected rate of inflation will:

Accepted Answer

Changes in the expected rate of inflation will shift the SRAS curve upward if expected inflation goes up, and downward if expected inflation goes down.

Question 9

Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF₁)and the aggregate demand curve (AD₁). The actual rate of inflation is π' and the Federal Reserve's target inflation rate is π*₁.  
  
If the Federal Reserve raises its target inflation rate to π*₃, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.

Accepted Answer

A higher target inflation rate means easier monetary policy, which is seen as a downward shift in the Fed's policy reaction. At RF₃ the Fed is setting the real interest rate lower than before at each given rate of inflation. Aggregate expenditure and the short-run equilibrium output are increased at each rate of inflation as seen in the shift in AD curve from AD₁ to AD₂.

Question 10

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a ________ the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a ________ the aggregate demand curve.

Accepted Answer

For a fixed inflation rate target, a decrease in interest rates corresponds to a decrease in the inflation rate. A lower inflation rate is seen as a movement down the aggregate demand curve, as the rate of inflation is measured on the vertical axis when drawing aggregate demand. A downward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate lower than before at each given rate of inflation. So each level of inflation now corresponds to a new higher level of output. Thus a downward shift of the Fed's policy reaction function makes the AD curve shift to the right.

Question 11

When actual output equals potential output there is ________ output gap and the rate of inflation will tend to ________.

Accepted Answer

If there is no output gap, the economy is at full-employment equilibrium. In this case there is no tendency for the price level to change.

Question 12

An upward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and an increase in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

An upward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate higher than before at each given rate of inflation. So each level of inflation now corresponds to a new lower level of output. Thus an upward shift of the Fed's policy reaction function makes the AD curve shift to the left. An increase in exogenous spending corresponds to a shift right of the aggregate demand curve, as this is a change in spending that is unrelated to output or the inflation rate (the only two variables measured in the AD graph).

Question 13

The economy moves down a stationary aggregate demand curve when the Fed:

Accepted Answer

For a fixed inflation rate target, a decrease in interest rates corresponds to a decrease in the inflation rate. A lower inflation rate is seen as a movement down the aggregate demand curve, as the rate of inflation is measured on the vertical axis when drawing aggregate demand.

Question 14

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a movement down the aggregate demand curve. Note that rate of inflation is measured on the vertical axis when drawing aggregate demand. A decrease in exogenous spending corresponds to a shift left of the aggregate demand curve, as this is a change in spending that is unrelated to output or the inflation rate (the only two variables measured in the AD graph).

Question 15

A downward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

A downward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate lower than before at each given rate of inflation. So each level of inflation now corresponds to a new higher level of output. Thus a downward shift of the Fed's policy reaction function makes the AD curve shift to the right. A decrease in exogenous spending corresponds to a shift left of the aggregate demand curve, as this is a change in spending that is unrelated to output or the inflation rate (the only two variables measured in the AD graph).

Question 16

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

Accepted Answer

Many economists have noted that inflation seems to be inertial, in the sense that it tends to remain roughly constant as long as the economy is at potential output and there are no external shocks to the price level. This phenomenon is known as "inflation inertia."

Question 17

The aggregate demand curve shifts to the left when the Fed:

Accepted Answer

An upward shift in the Fed's policy reaction function means that the Fed is setting the real interest rate higher than before at each given rate of inflation. So each level of inflation now corresponds to a new lower level of output. Thus an upward shift of the Fed's policy reaction function makes the AD curve shift to the left.

Question 18

Inflation inertia is the result of the behavior of ________ and the existence of ________.

Accepted Answer

Households and businesses become accustomed to gradually rising prices so actual inflation seems to follow inflation expectations. Long-term wage and price contracts are additional ways that momentum is built into inflation.

Question 19

Inflation inertia is the tendency for inflation to:

Accepted Answer

Many economists have noted that inflation seems to be inertial, in the sense that it tends to remain roughly constant as long as the economy is at potential output and there are no external shocks to the price level. This phenomenon is known as "inflation inertia."

Question 20

A low rate of expected inflation tends to lead to a ________ rate of actual inflation and a high rate of expected inflation tends to lead to a ________ rate of actual inflation.

Accepted Answer

Households and businesses become accustomed to gradually rising prices so actual inflation seems to follow inflation expectations. Inflation expectations are built on recent past experiences.

Quiz 27: Aggregate Demand, Aggregate Supply, and Inflation

If households and firms expect higher rates of inflation, the curve will shift .

The economy moves up a stationary aggregate demand curve when the Fed:

For a fixed inflation rate target, an increase in the inflation rate corresponds to a the aggregate demand curve and an increase in exogenous spending corresponds to a the aggregate demand curve.

An increase in interest rates by the Fed based on a given and unchanged policy reaction function represents a the aggregate demand curve, and higher interest rates resulting from an upward shift in the Fed's policy reaction function represents a the aggregate demand curve.

The aggregate demand curve shifts to the right when the Fed:

High expected inflation leads to increases in wages and costs and to actual inflation.

Low expected inflation leads to increases in wages and costs and to actual inflation.

Changes in the expected rate of inflation will:

A decrease in interest rates by the Fed based on a given and unchanged policy reaction function represents a the aggregate demand curve, and lower interest rates resulting from a downward shift in the Fed's policy reaction function represents a the aggregate demand curve.

When actual output equals potential output there is output gap and the rate of inflation will tend to .

An upward shift in the Fed's policy reaction function corresponds to a the aggregate demand curve and an increase in exogenous spending corresponds to a the aggregate demand curve.

The economy moves down a stationary aggregate demand curve when the Fed:

For a fixed inflation rate target, a decrease in the inflation rate corresponds to a the aggregate demand curve and a decrease in exogenous spending corresponds to a the aggregate demand curve.

A downward shift in the Fed's policy reaction function corresponds to a the aggregate demand curve and a decrease in exogenous spending corresponds to a the aggregate demand curve.

The tendency for inflation to change relatively slowly from year to year in industrial countries is called:

The aggregate demand curve shifts to the left when the Fed:

Inflation inertia is the result of the behavior of and the existence of .

Inflation inertia is the tendency for inflation to:

A low rate of expected inflation tends to lead to a rate of actual inflation and a high rate of expected inflation tends to lead to a rate of actual inflation.