ECON CHAPTER 21

Evaluate the following statements and determine which is NOT a reason for the downward slope of the dynamic aggregate demand curve?

- As inflation rises, risk falls. - As inflation rises, real wealth also rises. - Inflation tends to have a bigger effect on the wealthy than on the poor.

Which of the following is true about potential output?

It is output when inputs are used at their normal rates.

Describe the shape of the monetary policy reaction curve.

It is upward-sloping.

Which of the following is not a necessary condition for long-run equilibrium?

The price level rises at a significant rate.

When potential output exceeds current output

a recessionary gap exists

When income taxes increase, assuming no change in policy in response,

aggregate expenditure falls, and the dynamic aggregate demand curve shifts leftward.

When current output exceeds potential output

an expansionary gap exists.

Fluctuations in output and inflation have resulted over the last several decades from

changes in either aggregate demand or aggregate supply.

When real interest rates increase,

consumption falls.

Short-run equilibrium is determined by the intersection of the

dynamic AD curve and the short-run aggregate supply curve.

Current output will equal potential output

in the long run when nothing unexpected occurs.

Policymakers tend to change the real interest rate,

in the same direction as inflation.

The short-run aggregate supply curve allows us to conclude that in the short run

increases in inflation lead to increases in aggregate output supplied.

The dynamic aggregate demand curve relates

inflation and the level of output.

When inflation is very low, the central bank will focus primarily on _________.

interest rates

When real interest rates increase,

investment falls.

Over the last 50 years in the U.S. about 75% of recessions occurred because of

leftward shifts in the aggregate demand curve.

Historical data from the last several decades indicates that, in the short run, credible monetary policy that decreases the nominal interest rate

lowers the real interest rate too.

When inflation is very high, the central bank will focus primarily on _________.

monetary growth

The equation of exchange tells us that in the long run inflation equals

money growth less growth in potential output.

The Federal Reserve expresses policies in terms of _________ interest rates and enacts those policies with the goal of affecting _______ interest rates.

nominal; real

If supply shifts, such as those caused by increases in production costs, caused a given recession, we would expect to see

output fall and inflation rise.

In the long run, inflation equals growth in the money supply minus growth in potential output because

real growth equals growth in potential output.

The aggregate expenditure curve would not shift rightward if

real interest rates fell.

When current inflation increases and the central bank responds with appropriate monetary policy,

real interest rates will rise and the quantity of aggregate demand will fall.

When a recessionary output gap exists,

the SRAS will shift rightward as we move to long-run equilibrium.

The monetary policy reaction curve would shift leftward if there were an increase in

the long run real interest rate.

There are two aggregate supply curves - one for __________ and one for __________.

the long run; the short run

The aggregate supply curve has two versions. They are,

the short-run and the long-run aggregate supply curves

Of the four components of aggregate expenditure,

three are sensitive to interest rates, with investment the most important of these.

The monetary policy reaction curve slopes ________ because lower inflation today requires policy that drives the real interest rate ________.

upward; lower

The short-run aggregate supply curve slopes ______ because input prices are sticky in ___________.

upward; the short run

The long-run aggregate supply curve is ___________ starting at ________ output.

vertical; potential

Which of the following could not cause a change in the long run real interest rate?

A change in transfer payments

Which of the following accurately describes how a given shifter affects the short-run aggregate supply curve?

An increase in expected inflation will shift the short-run aggregate supply curve to the left.

Which of the following is one reason for the downward slope of the dynamic aggregate demand curve?

As inflation rises, foreign goods become cheaper than domestic goods.

Which will not cause the short-run aggregate supply curve to shift?

Changes in the components of aggregate expenditure

Which of the following is not a component of aggregate expenditure in an open economy?

Government transfers

Consider an economist studying historical data from a period in which inflation decreased dramatically. Which of the following would be true?

If output also fell, the decrease in inflation most likely came from a leftward shift of the aggregate demand curve.

Which of the following is not true about the responses of components of aggregate expenditure to increases in the real interest rate?

Investment rises.

In the long run, in an economy when nothing unexpected occurs,

current output will equal potential output.

All else equal, when consumer confidence rises,

aggregate expenditure rises and the dynamic aggregate demand curve shifts rightward.

The long-run real interest rate equates

aggregate expenditures to potential output.

Where the dynamic aggregate demand curve intersects the short-run aggregate supply curve, ___________________ are determined by this _________ equilibrium.

current output and inflation; short-run

At all points on the long-run aggregate supply curve,

current output equals potential output.

In the long run,

current output equals potential output.

We can expect the Federal Reserve to set a high policy rate when

current output is significantly higher than potential output.

The dynamic aggregate demand curve slopes ________ because,

downward; inflation and quantity of aggregate output demanded move in opposite directions

When inflation is very high, the central bank will focus primarily on _________; when inflation is relatively low, it will focus on __________.

monetary growth; interest rates

When real interest rates increase,

net exports fall.