Question 1

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from 
To 
1 will lead to a short-run equilibrium at point ________,creating _________ gap.
A) A;an expansionary
B) A;a recessionary
C) A;no output
D) B;an expansionary
E) B;a recessionary

Accepted Answer

The answer of 
-Based on the diagram above,starting from a...

Question 2

Starting from long-run equilibrium,a large decrease in government purchases will result in a(n)_________ gap in the short run,and ________ inflation and ________ output in the long run.
A) expansionary;higher;potential
B) expansionary;lower;potential
C) expansionary;higher;higher
D) recessionary;higher;potential
E) recessionary;lower;potential

Accepted Answer

A large decrease in government purchases will lead to a recessionary gap in the short run as aggregate demand decreases. In the long run, inflation will be lower due to decreased demand, and output will return to its potential level as prices and wages adjust.

Question 3

A large increase in oil prices is an example of
A) a downward inflation shock.
B) an upward inflation shock.
C) inflation inertia.
D) excessive aggregate demand.
E) a self-correcting tendency.

Accepted Answer

An increase in oil prices typically leads to an increase in the prices of other goods and services, as businesses pass on the increased cost of production to consumers. This results in a general increase in prices across the economy, causing inflation to rise. Therefore, a large increase in oil prices is an example of an upward inflation shock.

Question 4

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from 
To 
1 will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________,if left to self-correcting tendencies.
A) A;B
B) A;C
C) B;A
D) B;C
E) B;B

Accepted Answer

The answer of 
-Based on the diagram above,starting from a...

Question 5

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from 
To 
1 will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________,if left to self-correcting tendencies.
A) A;B
B) A;C
C) B;A
D) B;C
E) B;B

Accepted Answer

The answer of 
-Based on the diagram above,starting from a...

Question 6

-Based on the diagram above,an economy in short-run equilibrium at point A has a(n)___________ gap.The gap could be eliminated by the self-correcting mechanism of the model and eventually achieve a long-run equilibrium at point ________,or the central bank could intervene with monetary "easing" and the long-run equilibrium would be at point ________.
A) recessionary;B;C
B) recessionary;C;B
C) recessionary;C;C
D) expansionary;B;C
E) expansionary;C;B

Accepted Answer

The answer of 
-Based on the diagram above,an economy in...

Question 7

-Based on the diagram above,starting from a long-run equilibrium at point C,a tax cut that increases aggregate demand from ADI to ADI¹ will lead to a short-run equilibrium at point ________,and eventually to a long-run equilibrium at point ________,due to rising inflation and the raising of real interest rates by the Bank of Canada. A) D;B B) D;C C) B;A D) B;C E) B;B

Accepted Answer

In the short run, a tax cut increases aggregate demand, moving the equilibrium from point C to point D. In the long run, rising inflation and higher interest rates will shift the economy back to a new long-run equilibrium at point B.

Question 8

Starting from a long-run equilibrium,an upward inflation shock results in a short-run equilibrium with ________ inflation and ________ output.
A) higher;higher
B) higher;lower
C) higher;potential
D) lower;lower
E) lower;higher

Accepted Answer

An upward inflation shock will initially increase prices, reducing the purchasing power of consumers and leading to a decrease in real output. Therefore, the short-run equilibrium will have higher inflation and lower output. Choice B is the only option that reflects this outcome.

Question 9

Starting from a long-run equilibrium,a downward inflation shock results in a short-run equilibrium with ________ inflation and ________ output.
A) higher;higher
B) higher;lower
C) higher;potential
D) lower;lower
E) lower;higher

Accepted Answer

A downward inflation shock will initially cause a decrease in prices, leading to a lower inflation rate. This will cause a decrease in the aggregate demand as real interest rates increase, leading to a decrease in output. Thus, the short-run equilibrium will have lower inflation and higher output.

Question 10

A sudden change in the normal behaviour of inflation,unrelated to the nation's output gap,is called
A) short-run equilibrium.
B) long-run equilibrium.
C) an inflation shock.
D) excessive aggregate demand.
E) inflation inertia.

Accepted Answer

A sudden change in the normal behaviour of inflation, unrelated to the nation's output gap, is referred to as an inflation shock. This is typically caused by external factors such as changes in global oil prices or extreme natural disasters. In contrast, excessive aggregate demand results in a sustained increase in prices over time, and inflation inertia refers to the tendency for prices to keep rising even after the initial inflationary shock has passed. Short-run and long-run equilibrium refer to the balance between supply and demand in the economy and do not necessarily indicate a sudden change in inflation.

Question 11

If policy-makers attempt to offset an upward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.
A) "tightening";a higher
B) "tightening";a lower
C) "easing";a higher
D) "easing";a lower
E) "easing";the same

Accepted Answer

The answer of If policy-makers attempt to offset an upward...

Question 12

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from 
To 
1 will lead to a short-run equilibrium at point ________,creating _________ gap.
A) A;an expansionary
B) A;a recessionary
C) A;no output
D) B;an expansionary
E) B;a recessionary

Accepted Answer

The answer of 
-Based on the diagram above,starting from a...

Question 13

-Based on the diagram above,starting from a long-run equilibrium at point C,an increase in government spending that increases aggregate demand from ADI to ADI¹ will lead to a short-run equilibrium at point ________,creating _________ gap. A) D;an expansionary B) D;a recessionary C) D;no output D) B;an expansionary E) B;a recessionary

Accepted Answer

An increase in government spending shifts the aggregate demand curve from ADI to ADI¹, moving the economy from point C to point D, creating an expansionary gap.

Question 14

-Based on the diagram above,starting from a long-run equilibrium at point C,a decrease in government spending that decreases aggregate demand from ADI¹ to ADI will lead to a short-run equilibrium at ________,creating _________ gap. A) D;an expansionary B) D;a recessionary C) D;no output D) B;an expansionary E) B;a recessionary

Accepted Answer

The answer of 
-Based on the diagram above,starting from a...

Question 15

An inflation shock is
A) the level of inflation consistent with output in a recessionary gap.
B) the level of inflation consistent with output in an expansionary gap.
C) a sudden change in the normal behaviour of inflation,unrelated to the nation's output gap.
D) a change in the inflation rate generated by excessive aggregate demand.
E) a change in inflation brought about by changes in inflation expectations and pricing decisions.

Accepted Answer

An inflation shock is a sudden and unexpected change in the inflation rate that is not directly related to the nation's output gap, meaning it is not caused by the usual economic factors like demand or supply changes.

Question 16

-Based on the diagram above,starting from a long-run equilibrium at point C,a tax increase that decreases aggregate demand from ADI¹ to ADI will lead to a short-run equilibrium at point ________,and eventually to a long-run equilibrium at point ________,due to falling inflation and the lowering of real interest rates by the Bank of Canada. A) D;B B) D;C C) D;A D) B;C E) B;B

Accepted Answer

A tax increase that decreases aggregate demand will initially move the economy from point C to point D in the short run. Over time, as inflation falls and the Bank of Canada lowers real interest rates, the economy will adjust back to a new long-run equilibrium at point B.

Question 17

If policy-makers attempt to offset a downward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.
A) "tightening";a higher
B) "tightening";a lower
C) "easing";a higher
D) "easing";a lower
E) "easing";the same

Accepted Answer

If policy-makers use monetary tightening to offset a downward inflation shock, they will be reducing the money supply, which will lead to higher interest rates, lower aggregate demand, and, therefore, lower inflation. However, in the long run, the economy will return to its potential output level, but with lower inflation than the initial equilibrium. Therefore, the resulting long-run equilibrium will be at a lower inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

Question 18

In general,it may be expected that the speed with which a particular economy corrects an output gap
A) depends directly on the size of the output gap.
B) depends inversely on the size of the output gap.
C) is unrelated to the size of the output gap.
D) depends only on the monetary policy reaction function.
E) is unrelated to the monetary policy reaction function.

Accepted Answer

Larger output gaps often lead to stronger policy responses and faster adjustments, as there is more pressure to return to potential output.

Question 19

A large decrease in oil prices is an example of
A) a downward inflation shock.
B) an upward inflation shock.
C) inflation inertia.
D) excessive aggregate demand.
E) a self-correcting tendency.

Accepted Answer

A large decrease in oil prices would lead to a decrease in production costs for firms, allowing them to lower their prices and potentially resulting in a downward inflation shock. This would be in contrast to an upward inflation shock, which would occur if there were a significant increase in prices across the economy. Inflation inertia refers to the tendency for prices to continue rising even after the initial shock that caused the increase has dissipated. Excessive aggregate demand refers to a situation in which demand for goods and services outstrips supply, leading to rising prices. The self-correcting tendency refers to the idea that market forces will eventually lead to a return to equilibrium, with prices and output adjusting to clear any imbalances in supply and demand.

Question 20

Starting from long-run equilibrium,a large increase in government purchases will result in a(n)_________ gap in the short run,and ________ inflation and ________ output in the long run.
A) expansionary;higher;potential
B) expansionary;lower;potential
C) expansionary;higher;higher
D) recessionary;higher;potential
E) recessionary;lower;lower

Accepted Answer

In the short run, an increase in government purchases leads to an expansionary gap as aggregate demand increases. In the long run, the economy returns to potential output, but with higher inflation due to increased demand pressures.

Quiz 12: The Production Function Approach to Understanding Growth

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

Starting from long-run equilibrium,a large decrease in government purchases will result in a(n) _ gap in the short run,and inflation and output in the long run.

A large increase in oil prices is an example of

Starting from a long-run equilibrium,an upward inflation shock results in a short-run equilibrium with inflation and output.

Starting from a long-run equilibrium,a downward inflation shock results in a short-run equilibrium with inflation and output.

A sudden change in the normal behaviour of inflation,unrelated to the nation's output gap,is called

If policy-makers attempt to offset an upward inflation shock with monetary _,the resulting long-run equilibrium will be at _ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

-Based on the diagram above,starting from a long-run equilibrium at point C,an increase in government spending that increases aggregate demand from ADI to ADI¹ will lead to a short-run equilibrium at point ,creating _ gap.

-Based on the diagram above,starting from a long-run equilibrium at point C,a decrease in government spending that decreases aggregate demand from ADI¹ to ADI will lead to a short-run equilibrium at ,creating _ gap.

An inflation shock is

If policy-makers attempt to offset a downward inflation shock with monetary _,the resulting long-run equilibrium will be at _ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

In general,it may be expected that the speed with which a particular economy corrects an output gap

A large decrease in oil prices is an example of

Starting from long-run equilibrium,a large increase in government purchases will result in a(n) _ gap in the short run,and inflation and output in the long run.

Quiz 12: The Production Function Approach to Understanding Growth

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ________,creating _________ gap.

Starting from long-run equilibrium,a large decrease in government purchases will result in a(n) _________ gap in the short run,and ________ inflation and ________ output in the long run.

A large increase in oil prices is an example of

Starting from a long-run equilibrium,an upward inflation shock results in a short-run equilibrium with ________ inflation and ________ output.

Starting from a long-run equilibrium,a downward inflation shock results in a short-run equilibrium with ________ inflation and ________ output.

A sudden change in the normal behaviour of inflation,unrelated to the nation's output gap,is called

If policy-makers attempt to offset an upward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ________,creating _________ gap.

-Based on the diagram above,starting from a long-run equilibrium at point C,an increase in government spending that increases aggregate demand from ADI to ADI1 will lead to a short-run equilibrium at point ________,creating _________ gap.

-Based on the diagram above,starting from a long-run equilibrium at point C,a decrease in government spending that decreases aggregate demand from ADI1 to ADI will lead to a short-run equilibrium at ________,creating _________ gap.

An inflation shock is

If policy-makers attempt to offset a downward inflation shock with monetary _________,the resulting long-run equilibrium will be at _________ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

In general,it may be expected that the speed with which a particular economy corrects an output gap

A large decrease in oil prices is an example of

Starting from long-run equilibrium,a large increase in government purchases will result in a(n) _________ gap in the short run,and ________ inflation and ________ output in the long run.

-Based on the diagram above,starting from a long-run equilibrium at point C,a downward inflation shock that decreases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

Starting from long-run equilibrium,a large decrease in government purchases will result in a(n) _ gap in the short run,and inflation and output in the long run.

Starting from a long-run equilibrium,an upward inflation shock results in a short-run equilibrium with inflation and output.

Starting from a long-run equilibrium,a downward inflation shock results in a short-run equilibrium with inflation and output.

If policy-makers attempt to offset an upward inflation shock with monetary _,the resulting long-run equilibrium will be at _ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

-Based on the diagram above,starting from a long-run equilibrium at point C,an upward inflation shock that increases inflation from To 11ec9ae2_bd79_1ce7_a39a_a9c7bc0c6307_TB34225555_11 1 will lead to a short-run equilibrium at point ,creating _ gap.

-Based on the diagram above,starting from a long-run equilibrium at point C,an increase in government spending that increases aggregate demand from ADI to ADI¹ will lead to a short-run equilibrium at point ,creating _ gap.

-Based on the diagram above,starting from a long-run equilibrium at point C,a decrease in government spending that decreases aggregate demand from ADI¹ to ADI will lead to a short-run equilibrium at ,creating _ gap.

If policy-makers attempt to offset a downward inflation shock with monetary _,the resulting long-run equilibrium will be at _ inflation rate compared to allowing the self-correcting mechanism to return the economy to potential output.

Starting from long-run equilibrium,a large increase in government purchases will result in a(n) _ gap in the short run,and inflation and output in the long run.