Question 1

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:
A)the central bank increases the target rate of inflation in response to higher rates of inflation.
B)the deviation of output from the natural level of output increases as result of higher rates of inflation.
C)higher rates of inflation generate positive supply shocks.
D)expectations of inflation increase as a result of higher inflation in previous periods.

Accepted Answer

Expectations of inflation increase as a result of higher inflation in previous periods, leading to a shift upward in the DAS. As individuals and firms expect higher inflation, they will demand higher wages and prices, shifting the DAS upward to achieve a higher equilibrium price level. Choices A, B, and C do not accurately describe the mechanism behind the upward shift in the DAS.

Question 2

A central bank that chooses a small value of θ_π and a large value of θ_Y is choosing less _____ at the expense of more _____. A)inflation; output B)output; inflation C)inflation variability; output variability D)output variability; inflation variability

Accepted Answer

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

Question 3

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 4

Fill in the blanks: As a dynamic response to a positive supply shock in the short run, the DAS curve shifts (say in period t) _____ while the DAD curve _____, causing inflation to _____ and output to _____.

Accepted Answer

The answer of Fill in the blanks: As a dynamic...

Question 5

How does the AD-AS model take a novel approach to explaining money supply effects on economic fluctuations?

Accepted Answer

The answer of How does the AD-AS model take a...

Question 6

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by the AD-AS model in light of this difference.

Accepted Answer

The answer of What is the difference between the ex...

Question 7

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:
A)decline continuously until reaching a lower level in the long run.
B)increase initially and then decline until reaching a lower level in the long run.
C)decline immediately to a lower level in the long run.
D)fall below and then rise continuously to long-run level below the initial level.

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 8

Illustrate with graphs the dynamic aggregate demand curve (DAD) and dynamic aggregate supply curve (DAS).

Accepted Answer

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Question 9

A central bank that chooses a large value of θ_π and a small value of θ_Y is choosing to obtain less _____ at the expense of more _____. A)inflation; output B)output; inflation C)inflation variability; output variability D)output variability; inflation variability

Accepted Answer

A large value of θ_π indicates a strong response to inflation, reducing inflation variability, while a small value of θ_Y indicates a weaker response to output, leading to more output variability.

Question 10

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 11

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)remain continuously above the natural level of output
B)move above and then below the natural level of output
C)remain continuously below the natural level of output
D)move below and then above the natural level of output

Accepted Answer

A positive demand shock causes an increase in aggregate demand in the short run. This leads to an increase in output and prices. However, in the long run, as prices adjust to the new level of demand, the economy returns to the natural level of output. This process takes time, usually several periods. Therefore, in the short run, output will move above the natural level, but in the long run, it will return to the natural level. Option B is the best choice as it reflects the short-run rise in output followed by a return to the long-run natural level.

Question 12

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)no
B)an equal
C)a greater
D)a smaller

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 is because a greater increase in interest rates helps to slow down economic activity and reduce demand, ultimately helping to reduce inflation.

Question 13

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 after the policy change, output _____, and inflation _____.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Accepted Answer

In the initial period after the central bank reduces its inflation target, the aggregate demand curve shifts leftward, leading to a decrease in output and inflation as the economy adjusts to the new lower inflation target.

Question 14

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θ_π and a small value of θ_Y, then the DAD curve will be relatively _____, and supply shocks will have relatively _____ impacts on inflation than output. A)flat; larger B)flat; smaller C)steep; larger D)steep; smaller

Accepted Answer

The DAD curve will be relatively flat because a large value of θ_π means that the central bank is more concerned with inflation than output, so it will raise interest rates more aggressively in response to inflation. A small value of θ_Y means that the central bank is less concerned with output, so it will be less likely to lower interest rates in response to a negative supply shock. As a result, supply shocks will have relatively smaller impacts on inflation than output.

Question 15

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact of a temporary four-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 16

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a multi-period positive demand shock, output _____, and inflation _____.
A)increases; increases
B)increases; decreases
C)decreases; decreases
D)decreases; increases

Accepted Answer

In the first period of a positive demand shock, aggregate demand increases, leading to higher output and higher inflation as the economy moves away from its long-run equilibrium.

Question 17

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:
A)the natural level of output increases in response to the lower rates of inflation.
B)the deviation of output from the natural level of output increases as a result of lower rates of inflation.
C)lower rates of inflation generate negative supply shocks.
D)expectations of inflation decrease as a result of lower inflation in previous periods.

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 18

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a temporary five-period tax increase causes output to _____ returning to the natural level in the long run.
A)remain continuously above the natural level of output until
B)move above and then below the natural level of output until
C)remain continuously below the natural level of output until
D)move below and then above the natural level of output before

Accepted Answer

A temporary tax increase reduces disposable income, leading to a decrease in consumption and aggregate demand. This causes output to initially fall below the natural level. As the tax increase is temporary, expectations adjust, and output eventually returns to the natural level, moving above it before settling back.

Question 19

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 20

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 first period after the policy change, the DAS curve _____, and the DAD curve _____.
A)shifts upward; shifts rightward
B)does not shift; shifts leftward
C)does not shift; does not shift
D)shifts downward; shifts leftward

Accepted Answer

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

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 multiperiod positive demand shock occurs, the DAS shifts upward because:

A central bank that chooses a small value of θ_π and a large value of θ_Y is choosing less _ at the expense of more _.

Fill in the blanks: As a dynamic response to a positive supply shock in the short run, the DAS curve shifts (say in period t) ___ while the DAD curve _, causing inflation to _ and output to ___.

How does the AD-AS model take a novel approach to explaining money supply effects on economic fluctuations?

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by the AD-AS model in light of this difference.

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:

Illustrate with graphs the dynamic aggregate demand curve (DAD) and dynamic aggregate supply curve (DAS).

A central bank that chooses a large value of θ_π and a small value of θ_Y is choosing to obtain less _ at the expense of more _.

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.

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.

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.

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 after the policy change, output _, and inflation _.

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θ_π and a small value of θ_Y, then the DAD curve will be relatively _, and supply shocks will have relatively _ impacts on inflation than output.

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

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

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.

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 first period after the policy change, the DAS curve _, and the DAD curve _.

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 multiperiod positive demand shock occurs, the DAS shifts upward because:

A central bank that chooses a small value of θπ and a large value of θY is choosing less _____ at the expense of more _____.

Fill in the blanks: As a dynamic response to a positive supply shock in the short run, the DAS curve shifts (say in period t) _____ while the DAD curve _____, causing inflation to _____ and output to _____.

How does the AD-AS model take a novel approach to explaining money supply effects on economic fluctuations?

What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by the AD-AS model in light of this difference.

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:

Illustrate with graphs the dynamic aggregate demand curve (DAD) and dynamic aggregate supply curve (DAS).

A central bank that chooses a large value of θπ and a small value of θY is choosing to obtain less _____ at the expense of more _____.

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.

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.

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.

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 after the policy change, output _____, and inflation _____.

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θπ and a small value of θY, then the DAD curve will be relatively _____, and supply shocks will have relatively _____ impacts on inflation than output.

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

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

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.

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 first period after the policy change, the DAS curve _____, and the DAD curve _____.

A central bank that chooses a small value of θ_π and a large value of θ_Y is choosing less _ at the expense of more _.

Fill in the blanks: As a dynamic response to a positive supply shock in the short run, the DAS curve shifts (say in period t) ___ while the DAD curve _, causing inflation to _ and output to ___.

A central bank that chooses a large value of θ_π and a small value of θ_Y 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 after the policy change, output _, and inflation _.

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θ_π and a small value of θ_Y, then the DAD curve will be relatively _, and supply shocks will have relatively _ impacts on inflation than output.

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a multi-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 first period after the policy change, the DAS curve _, and the DAD curve _.