Chapter 21
What would be the effect of an increase in U.S. net exports on the aggregate demand curve? Would an increase in net exports affect the monetary policy curve?
The aggregate demand curve shifts to the right. No, the monetary policy curve does not shift.
Describe how (if at all) the IS curve, MP curve, and AD curve are affected in the following situation: There is an increase in the current inflation rate.
There is a movement along the MP curve, which increases the real interest rate, a movement along the IS curve to lower output, and a movement along the AD curve comma reducing output.
Which of the following causes the MP curve to shift down? When r (overbarr) decreases, this causes a movement along the________ curve, and shifts the _________ curve.
an autonomous easing of monetary policy IS; AD
The Taylor principle The MP curve is... sloping due to the Taylor principle.
holds when λ>0. upward
"If f (overbar) increases, then the Fed can keep output constant by reducing the real interest rate by the same amount as the increase in financial frictions." Is this statement true, false, or uncertain? Explain your answer.
False. The Fed would need to reduce the real interest rate by a little bit less than the change in f (overbar) to keep output constant.
Any factor that shifts the __________ curve shifts the __________ curve in the __________ direction. Suppose that taxes are decreased and the central bank conducts an autonomous easing of monetary policy. What will be the result? Which of the following represents a movement along a given AD curve?
IS; AD; same The IS curve shifts right, the MP curve shifts down, and the AD curve shifts right. Inflation decreases, the real interest rate decreases, and aggregate output increases.
What is the monetary policy curve? Why does the monetary policy curve slope upward? (Check all that apply.) A. Monetary policymakers will follow the Taylor principle and respond aggressively to an increase in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. B. When inflation increases, the supply of real money balances increases. This increases the equilibrium nominal interest rate in the money market, which also increases the real interest rate in the short run. C. Monetary policymakers will follow the Taylor principle and respond aggressively to a decrease in the inflation rate by raising nominal interest rates by an even greater amount so that the real interest rate also rises. D. When inflation increases, the supply of real money balances declines. This increases the equilibrium nominal interest rate in the money market, which also increases the real interest rate in the short run.
It indicates the relationship between the inflation rate and the real interest rate. A D
What is the aggregate demand curve? Why does the aggregate demand curve slope downward?
It is the relationship between the inflation rate and aggregate output when the goods market is in equilibrium. A rise in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output.
If government spending increases while taxes are raised to balance the budget, which of the following is true?
One component of aggregate demand will increase and another will decrease.
Assume the IS curve is given as Y = 12 − 2r, and the MP curve is given as r = 0.50 + 0.5π. The AD curve is If π = 11%., then the real interest rate is ... and output is ...
The AD curve is Y = 12 − 2 × 0.50 − π Y = 11.00 - π Real interest rate is 0.50+0.5=1.00 and output is 12 − 2 × (0.50 + 0.5) = 10.00.
Assume that the IS curve is given as Y=20−2r and the MP curve is given as r=2+0.5π. Which of the following statements is true? If the central bank changes the autonomous real interest rate to r (overbar) = 3, what will happen to output if inflation remains constant at 1%?
The AD curve is given as Y=16−π. The AD curve is given as Y=20−2×(2+0.5π)=16−π. Output will decrease from Y = 15 to Y = 13 Since π=1, then r=2+0.5π=2.5 and the original Y is given by Y=20−2r=20−2(2.5)=15. with r (overbar)=3, the new r =r (overbar)+λπ=3+0.5×1=3.5 and the new output will be given by Y=20−2r=20−2×3.5=13.
Suppose that a new Fed chair is appointed, and his or her approach to monetary policy can be summarized by the following statement: "I care only about increasing employment; inflation has been at very low levels for quite some time; my priority is to ease monetary policy to promote employment." How would you expect the monetary policy curve to be affected, if at all? What would be the effect on the aggregate demand curve?
The MP curve will shift downward because decreasing unemployment results in a loosening of monetary policy. The AD curve will shift to the right.
How do changes in planned expenditures affect the aggregate demand curve?
The aggregate demand curve shifts to the right if autonomous consumption, autonomous investment, autonomous net exports, or government purchases increase, or if taxes decrease.
How does a tightening or easing of monetary policy by the Fed affect the aggregate demand curve?
Tightening of monetary policy shifts the aggregate demand curve to the left, while easing of monetary policy shifts the aggregate demand curve to the right.
If net exports were not sensitive to changes in the real interest rate, would monetary policy be more or less effective in changing output? Monetary policy would be ... effective in changing output because net exports: A. are negatively correlated with the real interest rate and output. B. represent an additional channel through which interest rate changes can affect output. C. are usually insensitive to changes in the real interest rate. D. do not have any significant impact on output.
less represent an additional channel through which interest rate changes can affect output.
Which of the following factors will affect the slope of the aggregate demand curve?
mic
The MP curve gives the relationship between the A movement to the right along a given MP curve means
real interest rate and the inflation rate. inflation is increasing.
