PS4 & PS5

(Figure: Real Shocks) From point X in the accompanying dynamic aggregate demand model, a negative real shock will cause the economy to move to point: A) Y. B) X. C) W. D) Z.

A) Y

In a diagram with the inflation rate on the vertical axis and the real growth rate on the horizontal axis, the Solow growth curve is: A) a vertical line at the Solow growth rate. B) a horizontal line at the zero inflation rate. C) downward sloping. D) upward sloping.

A) a vertical line at the Solow growth rate.

An open market operation occurs when: A) the Fed buys or sells government bonds. B) the Fed enforces regulations on the banking industry. C) banks increase the reserve ratio. D) banks loan funds to each other.

A) the Fed buys or sells government bonds.

When hit with a real negative economic shock, the Fed must make its policy choice between: A) too low of a growth rate and too high of an inflation rate. B) too low of a growth rate and too high of an unemployment rate. C) too high of a growth rate and too low wages. D) too high of a growth rate and too low of a savings rate.

A) too low of a growth rate and too high of an inflation rate.

The short-run aggregate supply curve is: A) downward sloping. B) upward sloping. C) a vertical line. D) a horizontal line.

B) upward sloping.

(Figure: Monetary Policy) Assume that the economy is initially at point Y. In the best case scenario, the Fed will: A) decrease money supply to take the economy to point W. B) decrease money supply to take the economy to point X. C) increase money supply to take the economy to point X. D) increase money supply to take the economy to point W.

C) increase money supply to take the economy to point X.

When a positive shock to aggregate demand occurs, the inflation rate will: a. increase. b. remain the same. c. decrease. d. be automatically adjusted by the Fed.

a. increase.

Which of these would help a government fight a recession? a. raising taxes b. cutting taxes c. cutting spending d. paying down the national debt

b. cutting taxes

Beginning at point A in the accompanying diagram, can you say what is the short-run growth rate in this economy after a positive money shock? a. 6% b. 1.2% c. 3% d. 2%

c. 3%

An increase in money growth will cause inflation to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run.

c. both the short run and the long run.

When the Fed buys U.S. government bonds to affect the money supply, it is conducting: a. discount rate lending. b. discount rate borrowing. c. an open market sale. d. an open market purchase.

d. an open market purchase.

To increase the money supply in the economy, the Fed would: a. carry out open market sales and/or lower the discount rate. b. increase the discount rate, and/or lower the reserve ratio. c. carry out open market purchases and/or raise the reserve ratio. d. carry out open market purchases and/or lower the discount rate.

d. carry out open market purchases and/or lower the discount rate.

Suppose you deposit $1,000 in your checking account. If the reserve ratio is 10%, how much of your deposit must the bank keep as reserves? A) $100. B) $0. C) $900. D) $1,000.

A) $100.

If the required reserve ratio is 4%, the money multiplier is: A) 25. B) 20. C) 4. D) 16.

A) 25.

(Figure: Aggregate Demand and Fiscal Policy) For an economy in a recession at point Z, what will happen in the long run in the absence of any government action to counter the recession? A) Wages will become flexible, and the economy will return to the long-run growth rate. B) The economy will remain in a recession. C) Aggregate demand will rise above the long-run Solow growth curve. D) Wages will remain sticky and aggregate demand will fall further.

A) Wages will become flexible, and the economy will return to the long-run growth rate.

Using the dynamic AD-AS model, if the US government does not avoid the fiscal cliff (increase in taxes and a decrease in government spending), there would be A) a decrease in the aggregate demand. B) a decrease in the Solow Growth curve. C) an increase in the aggregate demand. D) an increase in the Solow Growth curve.

A) a decrease in the aggregate demand.

To increase the money supply in the economy, the Fed would: A) carry out open market purchases and/or lower the discount rate. B) carry out open market sales and/or lower the discount rate. C) increase the discount rate, and/or lower the reserve ratio. D) carry out open market purchases and/or raise the reserve ratio.

A) carry out open market purchases and/or lower the discount rate.

When a negative shock to aggregate demand occurs, the inflation rate will: A) decrease. B) remain the same. C) increase. D) be automatically adjusted by the Fed.

A) decrease.

The relationship between bond prices and interest rates is: A) negative. B) sometimes positive and sometimes negative. C) positive. D) neither positive nor negative.

A) negative.

In the New Keynesian model, money is non-neutral in the short run because: A) of sticky wages and prices. B) π>πe. C) π<πe. D) unexpected inflation always turns into expected inflation.

A) of sticky wages and prices.

(Figure: Three Dynamic AD Curves) Beginning at point A in the figure above, can you say what is the short-run growth rate in this economy after a negative money shock? A) 1.8% B) 1.2% C) 3% D) 2%

B) 1.2%

(Figure: Dynamic Aggregate Demand) Point B on this dynamic aggregate demand curve represents an inflation rate of: A) 3%. B) 4%. C) 5%. D) 7%.

B) 4%.

A positive real shock causes a shift of the: A) aggregate demand curve to the left. B) Solow growth curve to the right. C) Solow growth curve to the left. D) aggregate demand curve to the right.

B) Solow growth curve to the right.

Which of these would help a government fight a recession? A) raising taxes B) cutting taxes C) paying down the national debt D) cutting spending

B) cutting taxes

(Figure: Aggregate Demand Conditions) Suppose the economy is initially at point A. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by: A) increasing government spending so that the AD curve shifts back to AD1. B) increasing taxes so that the AD curve shifts back to AD1. C) increasing government spending so that the AD curve shirts further out to AD5 D) increasing taxes so that the AD curve shifts further out to AD5.

B) increasing taxes so that the AD curve shifts back to AD1.

A negative real shock causes the Solow growth curve to shift: A) up. B) left. C) down. D) right.

B) left.

Increased export growth is a: A) negative AD shock. B) positive AD shock. C) factor that is always matched by decreased import growth. D) factor that has no impact on AD in the short run in the New Keynesian model with sticky prices.

B) positive AD shock

A decrease in consumption growth will cause the Solow growth curve to A) first shift outward and then shift inward. B) remain unchanged. C) shift inward. D) shift outward.

B) remain unchanged.

An increase in the growth rate of the money supply will cause the dynamic aggregate demand curve to: A) shift randomly. B) shift outward. C) not shift at all. D) shift inward.

B) shift outward.

The Federal Reserve can influence the economy by shifting: A) the Solow growth curve. B) the AD curve. C) All of the answers are correct. D) the SRAS curve.

B) the AD curve.

Other things being equal, a decrease in government spending growth causes: A) the dynamic AD curve to shift to the right. B) the dynamic AD curve to shift to the left. C) the Solow growth curve to shift to the left. D) the Solow growth curve to shift to the right.

B) the dynamic AD curve to shift to the left.

When consumers cut back on spending what falls? A) interest rates B) the velocity of money C) tax rates D) the money supply

B) the velocity of money

Using the dynamic AD-AS model, if the US government does not avoid the fiscal cliff (increase in taxes and a decrease in government spending), there would be A) an increase in real GDP growth rates and a decrease in inflation. B) a decrease in real GDP growth rates and an increase in inflation. C) a decrease in real GDP growth rates and a decrease in inflation. D) an increase in real GDP growth rates and an increase in inflation.

C) a decrease in real GDP growth rates and a decrease in inflation.

Which of the following combinations would be on an aggregate demand curve with a spending growth rate of 6%? A) inflation rate of 3%, real growth rate of 6% B) inflation rate of 12%, real growth rate of 3% C) inflation rate of 8%, real growth rate of -2% D) inflation rate of 2%, real growth rate of 8%

C) inflation rate of 8%, real growth rate of -2%

In the long run, money: A) will lift the standard of living for everyone in a nation. B) always increases GDP . C) is neutral. D) will not affect prices.

C) is neutral.

Holding reserves is costly for banks because: A) the Fed charges banks interest on required reserves. B) it leads to the risk of bank robberies. C) it leads to fewer profits. D) it forces banks to pay for ATM machines.

C) it leads to fewer profits.

(Figure: Solow Growth Curves) Which of the following answer choices can explain the shift of the Solow growth curve from A to C in the figure above? A) an increase in the nation's factors of production B) development of new technology C) negative supply shock D) increase in oil supply

C) negative supply shock

Suppose the economy is growing at the Solow growth rate of 3% and the inflation rate is 4%. Suppose a positive aggregate demand shock occurs and the Fed responds to the shock by decreasing the money supply. If the Fed's response fails to offset the aggregate demand shock, then in the short run: A) the real growth rate will be higher than 3% and the inflation rate will be lower than 4%. B) the real growth rate will be 3% and the inflation rate will be 4%. C) the real growth rate will be higher than 3% and the inflation rate will be higher than 4%. D) the real growth rate will be lower than 3% and the inflation rate will be lower than 4%.

C) the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.

(Figure: Aggregate Demand and Fiscal Policy) In the best case scenario, an economy in a recession at point Y would use fiscal policy to increase spending growth to: A) 15%. B) 7%. C) 5%. D) 10%.

D) 10%.

If the growth rate of money is 3%, and the growth rate of velocity is 1%, the growth rate of nominal GDP is: A) 0%. B) 2%. C) 1%. D) 4%.

D) 4%.

A negative real shock causes: A) a higher inflation rate and a higher real growth rate. B) a lower inflation rate and a lower real growth rate. C) a lower inflation rate and a higher real growth rate. D) a higher inflation rate and a lower real growth rate.

D) a higher inflation rate and a lower real growth rate.

An increase in money growth will cause inflation to increase in: A) neither the short run nor the long run. B) the short run only. C) the long run only. D) both the short run and the long run.

D) both the short run and the long run.

The percentage increase in a price index from one year to the next is the: A) GDP inflator. B) change in real GDP . C) None of the answers is correct. D) rate of inflation.

D) rate of inflation.

Beginning from an equilibrium in an AD-Solow growth curve model, a negative supply shock will cause: A) both real growth and inflation to increase. B) real growth to increase and inflation to decrease. C) both real growth and inflation to decrease. D) real growth to decrease and inflation to increase.

D) real growth to decrease and inflation to increase.

An increase in money growth will cause output growth to increase in: A) neither the short run nor the long run. B) the long run only. C) both the short run and the long run. D) the short run only.

D) the short run only.

Fiscal policy can best be defined as: A) the manipulation of the money supply to influence the business cycle. B) the use of government expenditure and taxation to mitigate recessions only. C) the use of international political relations to influence the business cycle. D) the use of government expenditure, government borrowing, and taxation to influence the business cycle.

D) the use of government expenditure, government borrowing, and taxation to influence the business cycle.

Imagine that a government starts out with the budget surplus. If in the next period the government temporarily runs a budget deficit, what would you expect to happen to aggregate demand? a. AD would increase. b. AD would lie on the Solow growth rate. c. AD would stay the same. d. AD would decrease.

a. AD would increase.

Why does so much U.S. currency circulate in other countries? a. All of the answers are correct. b. Dollars hold their value in unstable countries. c. The U.S. dollar is frequently used in drug trafficking. d. Several countries use the U.S. dollar as their official currency.

a. All of the answers are correct.

The Solow growth curve is represented by a vertical line at the Solow growth rate because: I. it does not depend on the rate of inflation. II. there is an underlying assumption of strong money neutrality. III. it does not depend on the stock of factors of production. a. I and II only b. II and III only c. I only d. I and III only

a. I and II only

If the Fed sets a target rate of inflation below 4%, it is an example of the Fed using: a. a monetary policy rule. b. discretion. c. unofficial influence. d. the bully pulpit.

a. a monetary policy rule.

A decrease in oil prices is an example of: a. a positive productivity shock. b. a negative productivity shock. c. a deflationary productivity shock. d. a neutral productivity shock.

a. a positive productivity shock.

Which of the following choices can explain the shift of the Solow growth curve from A to B in the figure above? a. development of new technology b. war c. oil crisis d. negative supply shock

a. development of new technology

What is taking place when an economy experiences quick changes that have large effects on productivity? a. economic shocks b. decreases in aggregate demand c. geographic capital fluctuations d. time bunching

a. economic shocks

Assume that the economy is initially at point Y. In the best case scenario, the Fed will: a. increase money supply to take the economy to point X. b. decrease money supply to take the economy to point W. c. increase money supply to take the economy to point W. d. decrease money supply to take the economy to point X.

a. increase money supply to take the economy to point X.

Suppose the economy is initially at point A. If an increase in investment spending causes a shift of the AD curve from AD1 to AD4, then the government can avoid a short run increase in inflation by: a. increasing taxes so that the AD curve shifts back to AD1. b. increasing taxes so that the AD curve shifts further out to AD5. c. increasing government spending so that the AD curve shifts back to AD1. d. increasing government spending so that the AD curve shirts further out to AD5.

a. increasing taxes so that the AD curve shifts back to AD1.

The implementation lag is likely to be: a. longer for changes in government spending than for changes in taxation. b. shorter for changes in government spending than for changes in taxation. c. indefinitely long for both changes in government spending and changes in taxation. d. similar in length for both changes in government spending and changes in taxation.

a. longer for changes in government spending than for changes in taxation.

Suppose that the original real growth rate of the economy is 3% and that a positive aggregate demand shock causes a shift of the AD curve from AD1to AD4. The correct monetary policy response is to: a. lower money supply growth, so that the AD curve shifts back to AD1. b. lower money supply growth, so that the AD curve remains at AD4. c. raise money supply growth, so that the AD curve shifts to AD3. d. raise money supply growth, so that the AD curve shifts to AD5.

a. lower money supply growth, so that the AD curve shifts back to AD1.

The Solow growth rate is the rate of economic growth that occurs when: a. prices and wages are flexible. b. prices and wages are sticky. c. the money supply is growing. d. inflation is moderate.

a. prices and wages are flexible.

Wages that do not respond quickly to changes in the inflation rate are: a. sticky wages. b. real wages. c. decreasing wages. d. flexible wages.

a. sticky wages.

Who is Janet Yellen? a. the Chair of the Federal Reserve b. the Secretary of the U.S. Treasury c. the Chair of the President's Council of Economic Advisors d. the Vice President of the United States

a. the Chair of the Federal Reserve

What part of the money pyramid does the Fed have direct control over? a. the monetary base b. M1 c. the monetary base plus M1 d. M2

a. the monetary base

An increase in money growth will cause output growth to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run.

a. the short run only.

An increase in velocity growth will cause inflation to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run.

a. the short run only.

An increase in velocity growth will cause output growth to increase in: a. the short run only. b. the long run only. c. both the short run and the long run. d. neither the short run nor the long run.

a. the short run only.

When consumers cut back on spending what falls? a. the velocity of money b. the money supply c. interest rates d. tax rates

a. the velocity of money

Bank A has $100 million in deposits, $15 million in required reserves, and $85 million in loans. Bank A's reserve ratio is: a. 10%. b. 15%. c. 20%. d. 75%.

b. 15%.

Refer to the figure above; what is the long-run growth rate in this economy after a positive money shock? a. 4% b. 2% c. 3% d. 6%

b. 2%

According to this dynamic aggregate demand model, the Solow growth rate is: a. 12%. b. 4%. c. 3%. d. 8%.

b. 4%.

Point A on this dynamic aggregate demand curve represents a real GDP growth rate of: a. 3%. b. 5%. c. 7%. d. 2%.

b. 5%.

Wages are sticky when: a. they are set according to inflation expectations that end up differing from actual inflation rates. b. All of the answers are correct. c. labor unions have set wages for a certain period of time. d. they are not changed as often as prices.

b. All of the answers are correct.

How can the Fed offset a positive shock to aggregate demand? a. Increase the growth rate of the money supply. b. Decrease the growth rate of the money supply. c. Increase the growth rate of government spending. d. Decrease the growth rate of government spending.

b. Decrease the growth rate of the money supply.

A positive real shock causes a shift of the: a. aggregate demand curve to the left. b. Solow growth curve to the right. c. Solow growth curve to the left. d. aggregate demand curve to the right.

b. Solow growth curve to the right.

Suppose that the original real growth rate of the economy is 3% and that a negative aggregate demand shock causes a shift of the AD curve from AD1to AD2. As a result of the Fed's policy response, the AD curve in the short run shifts to AD5. Which of the following is TRUE about the Fed's policy response? a. The Fed responded too little to the shock. b. The Fed responded too much to the shock. c. The Fed provided just the right amount of response to the shock. d. The Fed was too fast in responding to the shock.

b. The Fed responded too much to the shock.

Using the dynamic AD-AS model, if a country decreases government expenditures there would be a. a decrease in real GDP growth rates and an increase in inflation. b. a decrease in real GDP growth rates and a decrease in inflation. c. an increase in real GDP growth rates and an increase in inflation. d. an increase in real GDP growth rates and a decrease in inflation.

b. a decrease in real GDP growth rates and a decrease in inflation.

In a recession, automatic stabilizers cause: a. an increase in tax revenues and a decrease in government spending. b. a decrease in tax revenues and an increase in government spending. c. an increase in both tax revenues and government spending. d. a decrease in both tax revenues and government spending.

b. a decrease in tax revenues and an increase in government spending

Using the dynamic AD-AS model, if a country decreases government expenditures there would be a. an increase in the aggregate demand. b. a decrease in the aggregate demand. c. an increase in the Solow Growth curve. d. a decrease in the Solow Growth curve.

b. a decrease in the aggregate demand.

Suppose the growth rate of the money supply is fixed, then an increase in the growth rate of exports will cause: a. a shift of the dynamic AD curve to the left. b. a shift of the dynamic AD curve to the right. c. an upward movement along the dynamic AD curve. d. a downward movement along the dynamic AD curve.

b. a shift of the dynamic AD curve to the right.

When a negative shock to aggregate demand occurs, the inflation rate will: a. be automatically adjusted by the Fed. b. decrease. c. increase. d. remain the same.

b. decrease.

In the New Keynesian model, changes in the growth rate of C, I, G, and NX tend to be changes in: a. price levels. b. money velocity. c. money supply. d. All of the answers are correct.

b. money velocity.

A major hurricane hitting the East Coast of the United States is an example of a: a. GDP deflator. b. real shock. c. geographic distress. d. productivity neutralizing event.

b. real shock.

When the Federal Reserve buys bonds, the demand curve for bonds: a. does not shift. b. shifts outward. c. shifts inward. d. sometimes shifts inward and sometimes shifts outward.

b. shifts outward.

Other things being equal, a decrease in government spending growth causes: a. the dynamic AD curve to shift to the right. b. the dynamic AD curve to shift to the left. c. the Solow growth curve to shift to the right. d. the Solow growth curve to shift to the left.

b. the dynamic AD curve to shift to the left.

Fiscal policy can best be defined as: a. the use of government expenditure and taxation to mitigate recessions only. b. the use of government expenditure, government borrowing, and taxation to influence the business cycle. c. the manipulation of the money supply to influence the business cycle. d. the use of international political relations to influence the business cycle.

b. the use of government expenditure, government borrowing, and taxation to influence the business cycle.

When hit with a real negative economic shock, the Fed must make its policy choice between: a. too low of a growth rate and too high of an unemployment rate. b. too low of a growth rate and too high of an inflation rate. c. too high of a growth rate and too low wages. d. too high of a growth rate and too low of a savings rate.

b. too low of a growth rate and too high of an inflation rate.

To be considered money, an asset must be: a. backed by gold or other precious metals. b. widely accepted as a means of payment. c. currency. d. All of the answers are correct.

b. widely accepted as a means of payment.

Suppose you deposit $1,000 in your checking account. If the reserve ratio is 10%, how much of your deposit can the bank loan? a. $100. b. $1,000. c. $900. d. $0.

c. $900.

If spending growth is 3%, and real GDP growth is 2%, what is the inflation rate? a. 5% b. 3% c. 1% d. 2%

c. 1%

From point X in the accompanying dynamic aggregate demand model, a negative supply shock will change the inflation rate to: a. 5%. b. 3%. c. 7%. d. 10%

c. 7%.

Examples of automatic stabilizers include: I. food stamps. II. unemployment benefits. III. implementation lags. a. I only b. II only c. I and II only d. II and III only

c. I and II only

Which of the following causes a shift of the dynamic AD curve to the left? I. increased taxes II. increased consumer confidence III. increased import growth a. I, II, and III b. II and III only c. I and III only d. I and II only

c. I and III only

How do conservative politicians who want smaller government impact the economy's expenditures? a. It is an increase in taxes. b. It is a decrease in consumer expenditures. c. It is a decrease in government expenditures. d. It is an increase in government expenditures.

c. It is a decrease in government expenditures.

From point X in the accompanying dynamic aggregate demand model, an increase in the supply of oil will cause the economy to move to point: a. Y. b. Z. c. W. d. X.

c. W.

The lags associated with monetary policy make its implementation of monetary policy more difficult during: a. recessions only. b. contractions only. c. both expansions and contractions. d. None of the answers are correct.

c. both expansions and contractions.

A hurricane that damages buildings and roadways in the Gulf Coast is considered a: a. positive transmission mechanism. b. positive shock to the economy. c. negative shock to the economy. d. negative transmission mechanism.

c. negative shock to the economy.

The relationship between bond prices and interest rates is: a. neither positive nor negative. b. positive. c. negative. d. sometimes positive and sometimes negative.

c. negative.

Using the AD-Solow growth curve model, the internet revolution of the 1990s caused: a. both real growth and inflation to increase. b. both real growth and inflation to decrease. c. real growth to increase and inflation to decrease. d. real growth to decrease and inflation to increase.

c. real growth to increase and inflation to decrease.

A decrease in consumption growth will cause the Solow growth curve to a. shift inward. b. shift outward. c. remain unchanged. d. first shift outward and then shift inward.

c. remain unchanged.

Which of the following are examples of negative shocks to the economy? a. decreases in oil prices b. new technology c. terrorist attacks d. tax cuts

c. terrorist attacks

The Federal Reserve can influence the economy by shifting: a. All of the answers are correct. b. the SRAS curve. c. the AD curve. d. the Solow growth curve.

c. the AD curve.

Assume that the economy is initially at point Y. If the Fed takes the appropriate action with monetary policy, but banks are slow to lend: a. the Fed action would be magnified and the economy would move to point X. b. the Fed action would be nullified and the economy would remain at point Y. c. the Fed action would be partially effective and the economy would move to point Z. d. the Solow growth curve would shift to the left.

c. the Fed action would be partially effective and the economy would move to point Z.

An open market operation occurs when: a. banks loan funds to each other. b. banks increase the reserve ratio. c. the Fed buys or sells government bonds. d. the Fed enforces regulations on the banking industry.

c. the Fed buys or sells government bonds.

In the dynamic AD-AS model, an increase in money growth will cause the growth rate of real GDP to increase in: a. both the short run and the long run. b. neither the short run nor the long run. c. the short run only. d. the long run only.

c. the short run only.

If the required reserve ratio is 4%, the money multiplier is: a. 4. b. 20. c. 16. d. 25.

d. 25.

Which of the following would be an example of running monetary policy by rules? a. A 5% increase in money supply automatically leads to a 2% increase in real GDP. b. An increase in money supply automatically leads to an increase in inflation. c. The Fed will increase money growth to different levels, depending on the severity of the recession. d. A 1% drop in real GDP will automatically elicit a 2% increase in money supply.

d. A 1% drop in real GDP will automatically elicit a 2% increase in money supply.

Expansionary fiscal policy today might mean: a. increased taxes in the future. b. contractionary fiscal policy in the future. c. increased public borrowing in the future. d. All of the answers are correct.

d. All of the answers are correct.

Insolvent banks: a. have liabilities that are greater than their assets. b. have loan values that are too low compared to what they owe their depositors. c. have on some occasions been recapitalized by the Treasury. d. All of the answers are correct.

d. All of the answers are correct.

The Federal Reserve is the: a. federal government's bank. b. U.S. central bank. c. banker's bank in the U.S. d. All of the answers are correct.

d. All of the answers are correct.

Which of the following can shift the Solow growth curve? a. wars b. strikes c. increases in technology d. All of the answers are correct.

d. All of the answers are correct.

When the U.S. Treasury borrows, the borrowing is managed by the: a. Treasury itself. b. Senate Banking Committee. c. Comptroller of the Currency. d. Federal Reserve.

d. Federal Reserve.

Referring to these two SRAS curves, which of the following is TRUE of point A? a. The actual inflation rate is 5% and the expected inflation rate is 3%. b. The actual inflation rate and the expected inflation rate are both 3%. c. The actual inflation rate is 3% and the expected inflation rate is 5%. d. The actual inflation rate and the expected inflation rate are both 5%.

d. The actual inflation rate and the expected inflation rate are both 5%.

A negative real shock causes: a. a higher inflation rate and a higher real growth rate. b. a lower inflation rate and a lower real growth rate. c. a lower inflation rate and a higher real growth rate. d. a higher inflation rate and a lower real growth rate.

d. a higher inflation rate and a lower real growth rate.

If wages are not as flexible as prices, an increase in money growth will lead to: a. an increase in inflation and a rise in real long-run GDP growth. b. no change in inflation, but a fall in firms' profits. c. an increase in inflation but no rise in real short-run GDP growth. d. an increase in inflation and in firms' profits.

d. an increase in inflation and in firms' profits.

Money is best defined as: a. the total amount of fixed assets we own. b. only the amount we spend in a given period. c. anything that has a high nominal value. d. anything that is a widely accepted means of payment.

d. anything that is a widely accepted means of payment.

Holding reserves is costly for banks because: a. it leads to the risk of bank robberies. b. it forces banks to pay for ATM machines. c. the Fed charges banks interest on required reserves. d. it leads to fewer profits.

d. it leads to fewer profits.

Which of the following is not a function of the Federal Reserve? a. serving as the lender of last resort b. regulating the U.S. financial system c. regulating the U.S. money supply d. providing loans to small businesses

d. providing loans to small businesses

Rapid changes in economic conditions that have large effects on the productivity of capital and labor are called: a. transmission mechanisms. b. business cycles. c. recessions. d. shocks.

d. shocks.

The financial crisis of 2008 illustrates that: a. systemic risk is no longer a serious concern for the U.S. economy. b. the Fed does not concern itself with the actions of investment banks. c. the Fed has the power to control the President's responses to a financial and economic crisis and supervise fiscal policy. d. the Fed has the power to step outside its normal functions and lend to investment banks as well as traditional commercial banks if it perceives the risk of financial contagion.

d. the Fed has the power to step outside its normal functions and lend to investment banks as well as traditional commercial banks if it perceives the risk of financial contagion.

Assume that the economy is initially at point Y. If the Fed takes the appropriate action with monetary policy, but overestimates how serious the recession is: a. the Solow growth curve would shift to the left. b. the Fed would take the economy to point X. c. the Fed would fail to stimulate the economy and it would remain at point Y. d. the Fed would overshoot and the economy would move to point W.

d. the Fed would overshoot and the economy would move to point W.

The Fed has the most control over: a. M1. b. M2. c. money market mutual funds. d. the monetary base.

d. the monetary base.

Suppose the economy is growing at the Solow growth rate of 3% and the inflation rate is 4%. Suppose a positive aggregate demand shock occurs and the Fed responds to the shock by decreasing the money supply. If the Fed's response fails to offset the aggregate demand shock, then in the short run: a. the real growth rate will be 3% and the inflation rate will be 4%. b. the real growth rate will be lower than 3% and the inflation rate will be lower than 4%. c. the real growth rate will be higher than 3% and the inflation rate will be lower than 4%. d. the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.

d. the real growth rate will be higher than 3% and the inflation rate will be higher than 4%.