Question 1

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

C

Question 2

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 rate of money growth, as an increase in the money supply leads to a proportional increase in prices. While factors such as aggregate demand and fiscal policy may affect inflation in the short run, they are not sustainable determinants of inflation in the long run. The exchange rate can also affect inflation, but its impact is limited and often dampened by other economic forces.

Question 3

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 continuous and sustained increase in the overall price level in an economy. It is not just a one-time change in prices or limited to specific goods like food and energy.

Question 4

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.

Accepted Answer

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

Question 5

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 level of output an economy can produce when all resources are fully employed, while during a recession, there is a lack of demand for goods and services, resulting in lower production levels.

Question 6

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 7

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, the economy will tend to reach its potential output, which is the maximum level of output that can be sustained without causing inflation. This is because in the long run, all resources are fully utilized and the economy operates at full capacity. Therefore, the actual output will equal the potential output.

Question 8

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

Inflation occurs due to excessive growth in the money supply. Thus, in order to control high inflation rates, monetary policymakers must shift their focus to controlling the growth rate of money supply. Hence, the best choice is D. The interest rate and exchange rate may also be influenced by changes in the money supply, but they are not as effective in controlling high inflation rates.

Question 9

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 10

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

When viewed over long periods of time, the potential output of a country tends to rise due to factors such as technological advancements, population growth, and increases in productivity. While there may be occasional dips or setbacks, the overall trend is upward.

Question 11

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 takes into account inflation, while the federal funds rate only targets the nominal interest rate. Therefore, if the FOMC wants to influence borrowing and spending in the economy, they must also influence the real interest rate.

Question 12

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

In order for central bankers to alter the real interest rate by changing the nominal interest rate, inflation expectations must be quite stable. If inflation expectations are not stable, changes in the nominal interest rate may not translate into changes in the real interest rate. Thus, choice B is the correct answer. A) and C) are incorrect because they suggest that inflation must remain constant or change, which is not necessarily true. D) is incorrect because the change in the expected rate of inflation does not necessarily need to equal the change in the nominal interest rate for central bankers to alter the real interest rate.

Question 13

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 can be attributed to changes in both aggregate demand and aggregate supply. Changes in aggregate demand can shift the economy's demand curve, leading to changes in output and prices in the short run. Similarly, changes in aggregate supply, such as changes in production costs or technology, can shift the economy's supply curve, leading to changes in output and prices in the short run. Therefore, the best choice is D, as both aggregate demand and aggregate supply are important factors in explaining short-run movements in inflation and output.

Question 14

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, specifically movements in the short-run equilibrium. These cycles can be characterized by periods of expansion and contraction in the economy, often driven by changes in consumer spending, investment, and government policies.

Question 15

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 refers to the amount of physical assets available for production such as machinery, buildings, and equipment, would increase the potential output of a country as it would enable firms to produce more goods and services. A temporary decrease in exports, an increase in the money supply, and a decrease in the labor force would all have a negative impact on potential output.

Question 16

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 mentioned short-term interest-rate and balance-sheet adjustments with no mention of money growth targets.

Question 17

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 result in a decrease in the potential output of a country, as the capital stock is a key factor in production. A decrease in the capital stock would result in a decrease in the amount of resources available for production, thereby reducing the potential output.

Question 18

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 refers to the maximum level of output an economy can produce when its resources are used at normal rates. Long-run equilibrium occurs when an economy is producing at its potential output level, meaning that there is no cyclical unemployment and resources are being used efficiently. Therefore, the correct choice is B - the level of output the economy produces when its resources are used at normal rates.

Question 19

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, such as adjusting interest rates or implementing quantitative easing measures. Changing the production function or fiscal policy would require actions from the government or private sector, and altering aggregate supply alone may not affect short-run inflation and output.

Question 20

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. This means that as the level of inflation changes, the amount of real output demanded in the economy will also change.

Quiz 21: Output, Inflation, and Monetary Policy

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

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

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

Empirical evidence suggests that over the last ten years:

Which of the following statements is most accurate?

Aggregate supply is the quantity of:

In the long run, current output will:

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

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:

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

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

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

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

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:

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

The aggregate demand curve shows the quantity of: