Chapter 16

U.S. housing prices peaked in

2006

If the economy is hit by a negative real shock that reduces real GDP growth below the Solow growth rate, which of the following is the appropriate monetary policy to move real GDP growth back to the Solow growth rate without raising inflation?

No monetary policy can achieve that goal.

Which of the following is a reason it might be hard for the Fed to restore aggregate demand in the face of a nominal shock?

The Fed must operate in real time, when a lot of the data about the state of the economy are unknown

If the Federal Reserve wished to avoid short-run increases in the unemployment rate, the correct response to a negative AD shock would be

an increase in money supply growth.

Disinflation in the 1980s was a result of

leftward shifts in the aggregate demand curve due to money supply reductions.

If the Fed reduces to fight inflation after a negative real shock, which of the following should occur?

low real growth

In the late 1990s, America's economy

was booming and unemployment was very low.

Which of the following does NOT explain why the 1997-2006 housing boom increased aggregate demand?

During the boom, some builders were working 60 or 80 hours a week instead of 40

Nobel Prize-winner Milton Friedman advocated which of the following as an adequate monetary policy?

a strict rule in which the money supply should grow at the rate of the long-run economic growth rate

In the case of a negative shock to aggregate demand, the central bank should

increase the rate of growth in the money supply to restore spending growth.

Low interest rates in 2003-2004

increased demand for homes.

Shortly after September 11, 2011, the Federal Reserve

increased its lending to banks.

Many economists worry about the Federal Reserve overstimulating the economy because such overstimulation will lead to rising

inflation.

Uncertainty drives people away from

investment spending and toward more liquid assets.

Increased uncertainty will cause the economy's AD to

shift inward.

When a bubble arises, asset prices are driven by

shifts in market psychology and successive waves of irrational exuberance.

When facing a real shock, a central bank will encounter a dilemma that forces it to choose between

too low a rate of growth or too high a rate of inflation.

In the face of a shock to consumer confidence, politicians are on the fence about whether to implement policies based on the advice of economists or to make decisions on the basis of Tarot card readings. What would happen during the period in which they are making up their minds about which strategy to pursue?

would fall