Exam 5 smartbook

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 is most likely to happen in the short run after a nation reduces its government purchases?

A decrease in both inflation and current output.

Economic fluctuations can be caused by shifts in ______________; the central bank's policy responses can shift ____________.

AD or SRAS; only AD.

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.

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

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

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

Changes in the components of aggregate expenditure

When real interest rates increase,

Consumption falls.

Which of the following is true about the many difficulties that arise between economists and politicians?

Discretionary fiscal policy may focus too much on making voters happy in the short run.

Which of the following is not a commonly hypothesized explanation for the Great Moderation?

Error is data collection over the period. IS: Financial innovation Simply a lucky period of history Better information technology and inventory management

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

Government transfers

From 1991 to 2001, a period often called the __________, the United States experienced no __________.

Great Moderation; decline in output

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.

Current output will equal potential output

In the long run when nothing unexpected occurs

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

Investment rises

Which of the following is true about potential output?

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

Which of the following does NOT determine the slope of the dynamic AD curve?

Short run aggregate supply curve Long run aggregate supply curve IS: Monetary policy response curve

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

The price level rises at a significant rate.

Which of the following will most likely occur in the short run when a nation's central bank lowers its inflation target?

There will be an increase in the real interest rate at each inflation rate.

Describe the shape of the monetary policy reaction curve

Upward sloping

A drastic change in consumer confidence is considered

a demand shock

When potential output exceeds current output

a recessionary gap exists

An increase in potential output would be shown on a graph via

a rightward shift of both the SRAS and the LRAS.

An unexpected event that shifts the AD or SRAS curve is called

a shock

An increase in the price of oil is considered

a supply shock

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

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

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.

When current output exceeds potential output

an expansionary gap exists

A shock refers to

an unexpected shift of the demand or supply curve.

Two types of fiscal policy are

automatic and discretionary.

A fiscal policy that requires no additional actions on the part of the government is called ______.

automatic fiscal policy

Policymakers ____ neutralize demand shocks; they ______ neutralize supply shocks. Multiple choice question.

can; cannot

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

changes in either aggregate demand or aggregate supply.

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.

Monetary policymakers can neutralize

demand but not supply shocks.

Saying that the increase in prices is less than it was last year describes

disinflation.

The dynamic aggregate demand curve slopes ________ because,

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

Short-run equilibrium is determined by the intersection of the

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

When an expansionary output gap exists, current output is ________ than potential output and we are in the ___________.

greater; short run

In the new short run equilibrium after the central bank raises its inflation target, inflation will be _____ and current output will be ______.

higher; higher

Real-business-cycle theory

ignores the SRAS curve, locating equilibrium where the LRAS meets the AD curve.

Policymakers tend to change the real interest rate,

in the same direction as inflation.

Negative supply shocks do which of the following?

increase cost of production decrease the aggregate supply curve

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.

Evidence indicates that

increases in productivity in the long run can increase potential output.

The dynamic aggregate demand curve relates

inflation and the level of output.

Disinflation occurs when _____________; deflation occurs when __________.

inflation slows; overall prices fall

Tax cuts in 2001 did not have the same ______ impact as similar cuts in the 1960s.

inflationary

If the central bank increases its inflation target, a short run _______________ gap is likely to form. It can be eliminated by a ________________.

inflationary; movement along the dynamic AD curve to the left

When real interest rates increase,

investment falls.

According to historical data from the United States, the level of inflation

is unrelated to economic expansion and contraction, and the inflation rate moves along with economic expansion and contraction.

Historical data from the United States indicate that in general the level of inflation _____________ economic expansion and contraction, and the inflation rate ___________ economic expansion and contraction.

is unrelated to; moves along with

When the Federal Reserve wants to encourage investment,

it decreases the real interest rate and shifts the dynamic aggregate demand curve rightward.

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

leftward shifts in the aggregate demand curve.

Consider an economy in which confidence about the future has suddenly decreased, shifting the dynamic aggregate demand curve _______. The Fed would respond by shifting the monetary policy reaction curve _______.

leftward; rightward

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 _________; when inflation is relatively low, it will focus on __________.

monetary growth; interest rates

Ultimately, the slope of the dynamic AD curve is determined by the slope of the

monetary policy response curve

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

money growth less growth in potential output. We can imply from the equation of exchange MV = PY that %ΔM + %ΔV = %ΔP + %ΔY. So in the long run, when the percentage change in velocity is insignificant and real growth %ΔY is the growth in potential output, %ΔP = %ΔM - %ΔY; in other words, inflation equals money growth less growth in potential output.

In an economy that has reduced its government purchases, movement from the short run to the long run will occur as we _______________, causing inflation to __________.

move rightward along the AD curve; fall

When real interest rates increase,

net exports fall.

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.

The long-run aggregate supply curve shifts when

potential output changes.

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

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.

If we ignore the SRAS curve, and locate equilibrium where the LRAS meets the AD curve, we are employing

real-business-cycle theory.

When a decrease in consumer confidence shifts the aggregate expenditures curve leftward, monetary policymakers

shift the monetary policy response curve rightward.

Policymakers lack the ability to neutralize a shock (such as an oil price increase) since they can employ policy that Multiple choice question.

shifts the aggregate demand curve but not the short-run aggregate supply curve.

Fiscal policy in response to changes in aggregate demand is generally __________ to monetary policy; one shortcoming is the difficulty in implementation and slowness of __________ policy.

similar; discretionary fiscal

In the 1960s, significant increases in government spending on the Vietnam War led to lasting inflation, but similar increases in spending in 2001 during the conflict in Iraq turned out differently in that Multiple choice question.

the Federal Reserve raised interest rates so that inflation stayed low.

After stagflation occurs in the short run,

the SRAS curve moves back to its original position.

Stagflation occurs when

the SRAS curve shifts left, increasing inflation and decreasing output.

A positive supply shock happens when

the SRAS curve shifts rightward.

When a recessionary output gap exists,

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

A positive supply shock gives policymakers an opportunity to lower ______ without starting ______.

the inflation target; a recession

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