macro final

which of the following shifts the aggregate supply curve?

- an increase in the price of oil - a change in the previous periods inflation rate - higher taxes on firms

In response to the Great Recession the federal government responded with ____ for the Troubled Asset Relief Program and ____ for the American Recovery and Reinvestment Act.

$700 billion; $787 billion

When a risk premium is added to the short-run model it:

- shifts the MP curve up - shifts the AD curve down.

consider the monetary rule Rt-r(bar)=.25(inflation t-inflation (bar)). If the inflation rate is 4%, the marginal product of capital is 2%, and the target rate of inflation is 3%, then the real interest rate should be...

2.25%

If the AS curve were more steeply sloped, how would the economy respond differently to aggregate demand shocks (shocks to a)?

A steeper AS would mean that output would fluctuate less, but inflation would fluctuate more under AD shocks.

financial frictions

An extra amount of money paid by a borrower in credit markets above and beyond what a lender would require to make a loan in normal times. A tax on borrowing is one example. During a financial crisis, such frictions appear to be large and significant

If British incomes rose, this would be reflected in the short-run model as a shift in the U.S. AS to the right.

FALSE

Since the 1990s, the country with the lowest rate of inflation has been

Japan

The current chairman of the Federal Reserve is

Jerome Powell

the reputations of ____, ____, and ____have convinced observers that the Fed is committed to low and stable inflation

Paul Volcker, Alan Greenspan, Ben Bernanke

the equation used to predict the federal funds rate is called the...

Taylor rule

Prior to the recent financial crisis, the bulk of the Fed's assets on its balance sheet were ___ and its liabilities were ___

US Treasury bills; currency

Which of the following best describes why the aggregate supply curve slopes upward

When actual output exceeds potential, firms struggle to keep production in line with the high demand. Firms therefore raise their prices by more than the usual amount in an attempt to cover increased production costs

which of the following best describes movement along the AD curve...

a change in the inflation rate causes the central bank to change interest rates thus causing a change in investment

which of the following best describes movement along the AD curve?

a change in the inflation rate causes the central bank to change interest rates, thereby causing a corresponding proportional change in investment

on the aggregate supply curve, an increase in inflation causes ___, while a price shock causes ____

an upward movement along the curve; the curve to shift

in the presence of rational expectations, the central banks' willingness to battle inflation

becomes a determinant of expected inflation

the simple monetary policy rule discussed in the chapter "dictates" the ...

choice of federal funds rate

during the great depression...

deflation raised the real interest rate

the risk premium is the

difference between federal funds rate and the interest rate in financial markets

the financial friction, or risk premium, is the...

difference between the federal funds rate and interest rates in financial matters

During the ________, the actual federal funds rate was substantially lower than the rate suggested by the simple Taylor rule.

early 1990s

between approximately 2001 and 2006, the taylor rule predicted that the federal funds rate was...

greater than the actual federal funds rate

the risk premium is...

higher in uncertain economic situations

economists believe that the way that policy makers handled the 2008 financial crisis...

increases moral hazard

the Taylor rule expresses the federal funds rate as the weighted average of...

inflation and short run output

the central bank pursues expansionary monetary policy and economic agents build this into their decision making, ____ will rise with no economic benefit; this is called ___ problem

inflation; time inconsistency

In the IS/ MP, the fed ___ the fed funds rate in the aftermath of the decline in housing market; the collapse of housing prices also raised the ___, pushing ____ the real interest rate

lowered; risk; up

if m bar is relatively high...

monetary policy is relatively aggressive and the AD curve is relatively flat

if m_bar is relatively high...

monetary policy is relatively aggressive and the AD curve is relatively flat

In the aftermath of the recent financial crisis, critics of the FedOs assets on its balance sheet grew to include which of the following

mortgage backed securities

in the aftermath of the financial crisis that began in 2008, the Fed's assets grew primarily as...

mortgage-backed securities

In the AS/ AD framework, the risk premium appears as a

negative demand shock

deflation

negative inflation; most prices in the economy are falling

the liquidity trap occurs when...

nominal interest rates are close to zero

moral hazard in the banking system can occur because...

of high leverage ratios

under rational expectations...

people use all the information at their disposal to make their best forecast of the coming rate of inflation

for most of 2008

real interest rate was negative

The effect of the subprime loan crisis pushed the ____. This pushes the MP curve ____ and the AD ____.

risk premium up; up; down

when we add financial risk to the AD curve, it ...

shifts the AD curve down

when a risk premium is added to the short-run model, it ...

shifts the MP curve up

Policy is conducted by discretion if policy makers

size up the economy and choose whatever policy seems appropriate at the time

The adjustment process back to the steady state in the short-run model hinges on the

slow adjustment of inflation reflected in the aggregate supply curve

the adjustment process to return to the steady state equilibrium in the short-run model depends on the

slow adjustment of inflation reflected in the aggregate supply curve

If Mexico lowers its inflation target from 3 percent to 2 percent, the initial response to this will be

that the AD will shift left

in 2008 oil prices jumped about 100 percent from the previous year. The initial response would be ___, pushing inflation ___ and output to ___ in the short run.

the AS to shift left; up; fall

the high growth rates of money in the late 2000s were likely due to...

the Fed's concern about deflation

the aggregate supply (AS) curve is derived from...

the Philips curve

combining the IS and the monetary policy rule curves results in...

the aggregate demand curve

when there is deflation...

the central bank cannot push the real interest rate to zero

to identify an asset bubble, economists and analysts, frequently rely on:

the price-earnings ratio

Policymakers will find it easier to achieve their goals by sticking to policy rules rather than discretion if they face the problem of...

time inconsistency

on the aggregate supply curve, an increase in inflation causes ______, whereas a price shock causes ______

upward movement along the curve; the curve to shift

the effects of the 9/11 attacks...

were a leftward shift in the AD curve and short-run output fell along the AS curve