econ 21

Which of the following represents a movement along a given AD​ curve? A. Inflation​ increases, the real interest rate​ increases, and aggregate output increases. B. Inflation​ increases, the real interest rate​ decreases, and aggregate output increases. C. Inflation​ decreases, the real interest rate​ decreases, and aggregate output decreases. .D. Inflation​ decreases, the real interest rate​ decreases, and aggregate output increases.

D

What is the aggregate demand​ curve?

It is the relationship between the inflation rate and aggregate output when the goods market is in equilibrium.

Which of the following causes the MP curve to shift​ down?

an autonomous easing of monetary policy

If the Fed continued a movement up along the MP curve as inflation​ rose, its actions would be described as ________

automatic

If lambdaλ ​= 0, what does that imply about the relationship between the nominal interest rate and the inflation​ rate? When lambdaλ ​= 0, this means that as inflation​ increases, the nominal interest rate will _______ by _______ the inflation rate, so that the real interest rate _______

increase, exactly the same as, stays constant

mp curve

r+lamda(pie)

Why does the aggregate demand curve slope​ downward?

A rise in inflation works through the increase in real interest rates to reduce the equilibrium quantity of aggregate output.

Why is it necessary for the MP curve to have an upward​ slope?

An​ upward-sloping MP curve keeps inflation from spinning out of control.

What is the key assumption underlying the​ Fed's ability to control the real interest​ rate?

Because inflation is relatively sticky in the short​ run, when the Federal Reserve changes the federal funds​ rate, it implies similar changes in real interest rates.

Given that a steep downturn ensued following the financial crisis despite the​ Fed's autonomous​ easing, it may be concluded that the A. Fed acted too late to stem the downturn. B. negative shock to the economy was overwhelmingly severe. C. Fed was insufficiently aggressive. D. all of the above are plausible conclusions.

D

When r overbarr decreasesdecreases​, this causes a movement along​ the________ curve, and shifts the ​_________ curve.

IS;AD

Why can the Fed control the real interest rate in the short run but not in the long​ run?

It adjusts for​ inflation, and prices are sticky in the short run.​ Hence, when a change in the​ Fed's monetary policy causes the nominal interest rate to​ change, the real interest rate also changes in the same direction. In the long​ run, actual and expected inflation change in response to changes in monetary​ policy, leaving the real interest rate unaffected.

What is the monetary policy​ curve?

It indicates the relationship between the inflation rate and the real interest rate.

Why does the monetary policy curve slope​ upward? ​

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. 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

Would aa decreasedecrease in net exports affect the monetary policy​ curve?

No, the monetary policy curve does not shift.

Allowing the real interest rate to rise as inflation rises is said to be driven by the

Taylor principal

Describe how​ (if at​ all) the IS​ curve, MP​ curve, and AD curve are affected in the following ​situation: There is an increase in taxes comma and an autonomous easing of monetary policy.There is an increase in taxes, and an autonomous easing of monetary policy.

The IS curve shifts to the left and the economy moves along the IS curve, the MP curve shifts down, and the net effect on the AD curve cannot be definitely determined.effect on the AD curve cannot be definitely determined.

Suppose that taxes are decreased and the central bank conducts an autonomous easing of monetary policy. What will be the​ result?

The IS curve shifts​ right, the MP curve shifts​ down, and the AD curve shifts right.

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.

What would be the effect of a decrease in U.S. net exports on the aggregate demand​ curve?

The aggregate demand curve shifts to the left

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 an autonomous tightening or easing of monetary policy by the Fed affect the MP​ curve?

When the Fed decides to raise the real interest rate at any given inflation​ rate, the MP curve shifts upward. Monetary policy​ easing, a decision to lower the real interest rate at any given inflation​ rate, shifts the MP curve downward.

How is an autonomous tightening or easing of monetary policy different than a change in the real interest rate due to a change in the current inflation​ rate?

With a tightening or easing of monetary​ policy, some projected changes in monetary policy independent of the current inflation rate may occur.

The​ Fed's decision to shift the MP curve downward came from its belief that the financial crisis had the potential to drive the economy into a ________

deep recession

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 usually insensitive to changes in the real interest rate. B. represent an additional channel through which interest rate changes can affect output. C. are negatively correlated with the real interest rate and output. D. do not have any significant impact on output.

less; B

Taylor Principle

the principle that the monetary authorities should raise nominal interest rates by more than the increase in the inflation rate holds when λ>0.

The MP curve is ____ sloping due to the Taylor principle.

upward

Any factor that shifts the​ __________ curve shifts the​ __________ curve in the​ __________ direction.

​IS; AD; same