Question 1

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

Accepted Answer

Expectations of inflation decrease as a result of lower inflation in previous periods, leading to a downward shift in the Dynamic Aggregate Supply (DAS) curve. This is because the central bank's actions to reduce the inflation target influence people's expectations about future inflation, which in turn affects wage-setting and price-setting behavior, aligning with lower inflation expectations.

Question 2

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact of a permanent increase in the central bank's inflation target when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

Accepted Answer

The answer of Use the model of dynamic aggregate demand...

Question 3

Use the model of dynamic aggregate demand and aggregate supply to compare the time paths of output and inflation in response to a one-period positive demand shock versus a one-period positive supply shock.

Accepted Answer

The answer of Use the model of dynamic aggregate demand...

Question 4

A central bank that chooses a small value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a large value of $\theta$_Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _____ at the expense of more _____.

Accepted Answer

The answer of A central bank that chooses a small...

Question 5

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

Accepted Answer

A permanent reduction in the central bank's inflation target would initially lead to higher real interest rates as the nominal interest rate does not adjust immediately. This would reduce aggregate demand, leading to lower output and inflation. Over time, as expectations adjust to the new lower inflation target, the nominal interest rate would decline, settling at a lower level in the long run. This process describes an initial increase followed by a decline in nominal interest rates.

Question 6

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _____ and the DAD curve _____.

Accepted Answer

The answer of Beginning at long-run equilibrium in the dynamic...

Question 7

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact on output and inflation of an exceptional weather pattern that results in a one-period glut of food worldwide that reduces food prices (a one-period negative supply shock) when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

Accepted Answer

The answer of Use the model of dynamic aggregate demand...

Question 8

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact of a temporary 4-period increase in taxes (a four-period negative demand shock) on output and inflation when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

Accepted Answer

The answer of Use the model of dynamic aggregate demand...

Question 9

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a small value of $\theta$_$\pi$ , the responsiveness of nominal interest rates to inflation, and a large value of $\theta$_Y, the responsiveness of nominal interest rates to output, then the DAD curve will be relatively _____, and supply shocks will have relatively ____ impacts on inflation than output.

Accepted Answer

When the central bank chooses a large value of the slope of the Phillips curve (F1F1F1S1F1F1F10), it means that nominal interest rates are highly responsive to inflation. This leads to a steep DAD curve as changes in inflation have a large impact on the nominal interest rates. When the central bank chooses a large value for the slope of the IS curve (F1F1F1S1F1F1F10_Y), it means that nominal interest rates are less responsive to output. This also contributes to a steep DAD curve as changes in output have less impact on nominal interest rates. A steep DAD curve will mean that supply shocks (which are represented by shifts in the SAS curve) will have a larger impact on inflation than on output. Hence, the correct answer is (C) steep; larger.

Question 10

According to the Taylor principle, for inflation to be stable, the central bank must respond to an increase in inflation with ____ increase in the nominal interest rate.

Accepted Answer

The Taylor principle states that for inflation to be stable, the central bank must respond to an increase in inflation with a greater increase in the nominal interest rate. This means that if inflation increases by 1%, the central bank should increase the nominal interest rate by more than 1% to prevent further inflationary pressure. This helps anchor inflation expectations and prevent a spiral of rising inflation.

Question 11

A central bank that chooses a large value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _____ at the expense of more _____.

Accepted Answer

The answer of A central bank that chooses a large...

Question 12

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _____ and inflation _____.

Accepted Answer

In the first period of a four-period positive demand shock, output increases as firms increase production to meet the higher demand. However, the increase in demand puts upward pressure on prices, leading to an increase in inflation. This is consistent with the basic principles of the dynamic model of aggregate demand and aggregate supply, which predicts that output and inflation move in opposite directions in response to changes in aggregate demand.

Question 13

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a multiperiod positive demand shock occurs, the DAS shifts upward because:

Accepted Answer

Expectations of inflation increase as a result of higher inflation in previous periods, leading to an upward shift in the Dynamic Aggregate Supply (DAS) curve. This is because workers and firms adjust their expectations of future inflation based on current and past inflation rates, which influences wage-setting and price-setting behavior.

Question 14

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period of the change output _____ and inflation _____.

Accepted Answer

In the initial period following a permanent reduction in the inflation target by the central bank, output decreases because higher real interest rates reduce investment and consumption. Inflation decreases as the central bank tightens monetary policy to achieve the lower inflation target.

Question 15

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ until returning to the natural level in the long run.

Accepted Answer

A temporary tax increase reduces aggregate demand, causing output to fall below the natural level initially. As the tax increase is temporary, expectations adjust, and output eventually returns to the natural level, moving above it before stabilizing.

Question 16

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, the DAS curve _____ and the DAD curve _____.

Accepted Answer

In response to a positive demand shock, the Dynamic Aggregate Demand (DAD) curve shifts rightward as demand increases. The Dynamic Aggregate Supply (DAS) curve does not shift immediately because it represents the long-term supply, which is not affected by short-term demand changes.

Question 17

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$_Y, the responsiveness of nominal interest rates to output, then the DAD curve will be relatively _____, and supply shocks will have relatively ____ impacts on inflation than output.

Accepted Answer

The answer of In the dynamic model of aggregate demand...

Question 18

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output to _____ until returning to the natural level in the long run.

Accepted Answer

In the short run, the positive demand shock shifts the AD curve to the right, causing output to increase above the natural level. However, as prices adjust over time, the SRAS curve shifts to the left and eventually intersects with the long-run AD curve at the natural level of output. Therefore, in the long run, output returns to its natural level, but in the short run, it initially moves above and then below the natural level.

Question 19

Central Bank A conducts monetary policy according to the following monetary policy rule:
i =  $\pi$ + 2.0 + 0.90 ( $\pi$ - 2.0) + 0.10 (Y - 100),
and Central Bank B conducts monetary according to the following monetary policy rule:
i =  $\pi$ + 2.0 + 0.10 ( $\pi$ - 2.0) +0 .90 (Y - 100),
where i is the nominal interest rate measured in percent,  $\pi$ is the inflation rate measured in percent, and Y is output measured as a percentage of the natural level of output. The economies of the two countries are otherwise identical and operate as described by the dynamic model of aggregate demand and aggregate supply.
a. In which country will the dynamic aggregate demand curve be steeper? Explain.
b. If a positive supply shock of the same magnitude hits both countries, which country will experience the greatest variability in output? Explain.

Accepted Answer

The answer of Central Bank A conducts monetary policy according...

Question 20

Use the following to answer questions :
Equation: Monetary Policy Rule
iS1U1B1tS1U1B0 =  $\pi$S1U1B1tS1U1B0 + $\rho$+ $\theta$  S1U1B1 $\pi$S1U1B0 ( $\pi$S1U1B1tS1U1B0 -  $\pi$*S1U1B1tS1U1B0) + $\theta$ S1U1B1YS1U1B0(YS1U1B1tS1U1B0 - $\bar { Y } _ { t }$ )
-(Equation: Monetary Policy Rule) Given the monetary policy rule of the dynamic model of aggregate demand and aggregate supply, if the inflation rate increases by 1 percentage point, by how much does the nominal interest increase:

Accepted Answer

According to the monetary policy rule equation, a 1 percentage point increase in inflation will lead to an increase in the nominal interest rate by the coefficient of the term F1F1F1S1θF1F1F10F1F1F1_πF1F1F10. Therefore, the correct answer is C.

Quiz 15: A Dynamic Model of Economic Fluctuations

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact of a permanent increase in the central bank's inflation target when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

Use the model of dynamic aggregate demand and aggregate supply to compare the time paths of output and inflation in response to a one-period positive demand shock versus a one-period positive supply shock.

A central bank that chooses a small value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a large value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _ at the expense of more _.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _ and the DAD curve _.

According to the Taylor principle, for inflation to be stable, the central bank must respond to an increase in inflation with ____ increase in the nominal interest rate.

A central bank that chooses a large value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _ at the expense of more _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _ and inflation _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a multiperiod positive demand shock occurs, the DAS shifts upward because:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period of the change output _ and inflation _.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ until returning to the natural level in the long run.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, the DAS curve _ and the DAD curve _.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output to _____ until returning to the natural level in the long run.

Quiz 15: A Dynamic Model of Economic Fluctuations

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact of a permanent increase in the central bank's inflation target when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

Use the model of dynamic aggregate demand and aggregate supply to compare the time paths of output and inflation in response to a one-period positive demand shock versus a one-period positive supply shock.

A central bank that chooses a small value of θ\thetaθ π\piπ , the responsiveness of nominal interest rates to inflation, and a large value of θ\thetaθ Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _____ at the expense of more _____.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _____ and the DAD curve _____.

According to the Taylor principle, for inflation to be stable, the central bank must respond to an increase in inflation with ____ increase in the nominal interest rate.

A central bank that chooses a large value of θ\thetaθ π\piπ , the responsiveness of nominal interest rates to inflation, and a small value of θ\thetaθ Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _____ at the expense of more _____.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _____ and inflation _____.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a multiperiod positive demand shock occurs, the DAS shifts upward because:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period of the change output _____ and inflation _____.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ until returning to the natural level in the long run.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, the DAS curve _____ and the DAD curve _____.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output to _____ until returning to the natural level in the long run.

A central bank that chooses a small value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a large value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _ at the expense of more _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _ and the DAD curve _.

A central bank that chooses a large value of $\theta$ _$\pi$ , the responsiveness of nominal interest rates to inflation, and a small value of $\theta$ _Y, the responsiveness of nominal interest rates to output, is choosing to obtain less _ at the expense of more _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, output _ and inflation _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period of the change output _ and inflation _.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, the DAS curve _ and the DAD curve _.