ECON CHAPTER 22

Negative supply shocks do which of the following?

- Increase costs of production - Decrease the aggregate supply curve

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

- Long run aggregate supply curve - Short run aggregate supply curve

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 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?

Errors in data collection over the period

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

Great Moderation; decline in output

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.

In the framework used in the textbook, a demand shock shifts the __________, and a supply shock shifts the ____________.

aggregate demand curve; short-run aggregate supply curve

A shock refers to

an unexpected shift of the demand or supply curve.

The 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.

can; cannot

Monetary policymakers can neutralize

demand but not supply shocks.

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

disinflation.

Negative supply shocks are events that

increase costs of production.

Evidence indicates that

increases in productivity in the long run can increase potential 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

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

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

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

monetary policy response curve.

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

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

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

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.

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

the inflation target; a recession

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.