Chapter 12 The Economic Fluctuations Model Test Bank Docx - Principles of Macroeconomics -Complete Test Bank by Taylor. DOCX document preview.
Chapter 12
The Economic Fluctuations Model
Multiple Choice
1. The economic fluctuations model is used
a. | for all of these. |
b. | by the Fed to make decisions about monetary policy. |
c. | to explain how fluctuations in aggregate supply cause departures of real GDP from potential GDP. |
d. | primarily by stock market analysts. |
e. | to explain how real GDP grows over a long period of time. |
OBJ: factual
SEC: 0. The Economic Fluctuations Model
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge | AACSB: Analytic
2. The best way to approach the debate in Congress over the 2009 stimulus bill is
a. | to side with the Democrats' position. |
b. | to side with the Republicans' position. |
c. | to evaluate the underlying economic arguments used by each party and come to your own informed conclusion as to whose arguments are more valid. |
d. | to consider the position of both parties as equally valid, because that is how democracies work. |
e. | to support the bill because it was prepared by the President's able advisers. |
OBJ: conceptual
SEC: 0. The Economic Fluctuations Model
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
3. The purpose of the AD curve and the IA line is to
a. | derive potential GDP. |
b. | show the relationship between interest rates and potential GDP. |
c. | explain how movements in real GDP and the rate of inflation are related. |
d. | show the relationship between real GDP and interest rates. |
e. | explain spending balance. |
OBJ: factual
SEC: 0. The Economic Fluctuations Model
TOP: IA Line and the Aggregate Demand Curve
MSC: Bloom's: Knowledge
4. The economic fluctuations model is used to determine
a. | real GDP and inflation. |
b. | potential GDP and inflation. |
c. | inflation and unemployment. |
d. | potential GDP and real GDP. |
e. | real GDP and unemployment. |
OBJ: factual
SEC: 0. The Economic Fluctuations Model
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
5. Which of the following is NOT an element of the economic fluctuations model?
a. | An aggregate demand curve. |
b. | An inflation adjustment line. |
c. | An equilibrium at the intersection between an aggregate demand curve and an inflation adjustment line. |
d. | Productivity curve. |
e. | None of these: All are elements of the economic fluctuations model. |
OBJ: factual
SEC: 0. The Economic Fluctuations Model
TOP: Economic Fluctuations
MSC: Bloom's: Knowledge
/
6. The economic fluctuations model is older than the supply and demand model.
Moderate
OBJ: conceptual
SEC: 0. The Economic Fluctuations Model
TOP: Economic Fluctuations Model
MSC: Bloom's: Knowledge | AACSB: Analytic
7. John Maynard Keynes developed the economic fluctuations model.
Basic
OBJ: conceptual | factual
SEC: 0. The Economic Fluctuations Model
TOP: Economic Fluctuations Model
MSC: Bloom's: Knowledge
Multiple Choice
Exhibit 24-1
Year | Real GDP (billions of 2009 dollars) | Potential GDP (billions of 2009 dollars) | GDP Deflator (2009=100) |
2006 | 14,613.8 | 14,574.1 | 94.8 |
2007 | 14,873.8 | 14,840.2 | 97.3 |
2008 | 14,830.4 | 15,096.5 | 99.2 |
2009 | 14,418.8 | 15,310.1 | 100.0 |
2010 | 14,783.8 | 15,458.6 | 101.2 |
2011 | 15,020.6 | 15,619.3 | 103.3 |
2012 | 15,354.6 | 15,821.0 | 105.2 |
2013 | 15,612.2 | 16,057.3 | 106.9 |
2014 | 15,982.3 | 16,315.5 | 108.8 |
2015 | 16,397.2 | 16,588.6 | 110.0 |
\
8. According to the data in Exhibit 24-1, the rate of inflation for 2009 was
a. | 8.1 percent. |
b. | 1.8 percent. |
c. | 0.8 percent. |
d. | 0.8 percent. |
e. | percent. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Rate of Inflation
MSC: Bloom's: Application | AACSB: Analytic
9. According to the data in Exhibit 24-1, the percentage deviation of real GDP from potential GDP in 2009 was
a. | 58.2 percent. |
b. | 5.8 percent. |
c. | 5.8 percent. |
d. | 8.5 percent. |
e. | .7 percent. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Percentage Deviation from Potential GDP
MSC: Bloom's: Application | AACSB: Analytic
10. In order for the aggregate demand (AD) curve to be downward-sloping,
a. | there has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. |
b. | there has to be a positive relationship between the real interest rate and real GDP and a negative relationship between inflation and the real interest rate. |
c. | there has to be an inverse relationship between the real interest rate and real GDP and an inverse relationship between inflation and the real interest rate. |
d. | there has to be a positive relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. |
e. | there has to be an inverse relationship between the real interest rate and real GDP but there cannot be a relationship between inflation and the real interest rate. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand (AD) Curve
MSC: Bloom's: Analysis | AACSB: Analytic
11. According to the aggregate demand curve, there is a(n)
a. | positive relationship between inflation and real GDP. |
b. | inverse relationship between the price level and the percentage deviation of real GDP from potential GDP. |
c. | positive relationship between inflation and the percentage deviation of real GDP from potential GDP. |
d. | positive relationship between the price level and the percentage deviation of real GDP from potential GDP. |
e. | inverse relationship between inflation and the percentage deviation of real GDP from potential GDP. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
OP: Aggregate Demand Curve
MSC: Bloom's: Knowledge
12. The aggregate demand curve shows the relationship between
a. | real GDP and interest rates. |
b. | spending and the price level. |
c. | real GDP and inflation. |
d. | interest rates and inflation. |
e. | spending and interest rates. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge
/
13. The aggregate demand curve shows the level of spending for each price level in the economy.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
14. Since inflation tends to rise when the percentage deviation of real GDP from potential GDP is positive, the aggregate demand curve must be upward-sloping.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
15. The aggregate demand curve shows the relation between two economic variables: real GDP and unemployment.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand
MSC: Bloom's: Knowledge
16. Unlike the demand for bananas in a supermarket, aggregate demand slopes upward.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand
MSC: Bloom's: Analysis | AACSB: Analytic
17. The aggregate demand curve depends on the relationship between inflation and interest rates as well as the relationship between interest rates and real GDP.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge
Multiple Choice
18. When interest rates increase,
a. | government purchases will increase to offset the decline in consumption, investment, and net exports. |
b. | expenditures may increase or decrease. |
c. | investment will increase. |
d. | expenditures increase. |
e. | expenditures decrease. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Expenditure
MSC: Bloom's: Analysis | AACSB: Analytic
19. When interest rates decrease,
a. | investment will decrease, and consumption and net exports will increase, causing expenditures to increase. |
b. | government purchases will increase to offset the decline in consumption, investment, and net exports. |
c. | investment and consumption will increase, and net exports will decrease, causing expenditures to increase. |
d. | investment will decrease. |
e. | investment, consumption, and net exports will increase, causing expenditures to increase. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Expenditure
MSC: Bloom's: Analysis | AACSB: Analytic
20. The real rate of interest is
a. | the difference between the stated interest rate and the rate of growth of real GDP. |
b. | the difference between the stated interest rate and the expected rate of inflation. |
c. | the rate of interest on Treasury bills. |
d. | the sum of the stated interest rate plus the expected inflation rate. |
e. | the same as the federal funds rate. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Real Interest Rate
MSC: Bloom's: Knowledge
21. The equation for the real interest rate indicates that, other being things equal,
a. | as inflation increases, the nominal interest rate will fall. |
b. | as inflation increases, the real interest rate will rise. |
c. | as inflation decreases, real income will fall. |
d. | as inflation changes, the real interest rate will not change. |
e. | as inflation decreases, the real interest rate will rise. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Real Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
22. If the nominal interest rate exceeds the rate of inflation, the real interest rate will
a. | not be affected. |
b. | rise. |
c. | be greater than zero. |
d. | be less than zero. |
e. | fall. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
STOP: Real Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
23. Which of the following is the best measure of the effects of interest rates on aggregate expenditure?
a. | The real interest rate |
b. | The nominal interest rate |
c. | The discount rate |
d. | The Treasury bill rate |
e. | The federal funds rate |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Real Interest Rate
MSC: Bloom's: Knowledge
24. Which of the following is probably the most sensitive to changes in real interest rates?
a. | Government purchases |
b. | Exports |
c. | Consumption |
d. | Imports |
e. | Investment |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Investment
MSC: Bloom's: Knowledge
25. Which of the following facts about investment is not ?
a. | Investment is the component of expenditure that is least sensitive to the real interest rate. |
b. | Investment represents the purchase of new equipment or a new factory by a business firm. |
c. | Investment generally decreases when the real interest rate increases. |
d. | All of the above represent true facts about investment. |
e. | None of the above represent true facts about investment. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Investment
MSC: Bloom's: Knowledge | AACSB: Analytic
26. A reduction in real interest rates will cause the demand for new homes to
a. | increase, which results in an increase in investment expenditures. |
b. | increase, which results in an increase in consumption expenditures. |
c. | decrease, which results in a decrease in investment expenditures. |
d. | decrease, which results in a decrease in consumption expenditures. |
e. | increase, which will result in an increase in business fixed investment. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Residential Investment
MSC: Bloom's: Analysis | AACSB: Analytic
27. Economists refer to the purchase of a new home as
a. | fixed structure investment. |
b. | residential consumption. |
c. | building investment. |
d. | inventory investment. |
e. | residential investment. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Residential Investment
MSC: Bloom's: Knowledge
28. The housing boom that took place during the first half of the 2000s best illustrates how
a. | investment spending by households is insensitive to changes in the real interest rate. |
b. | fixed investment spending by businesses is sensitive to changes in the real rate of interest. |
c. | investment spending by households is sensitive to changes in the real rate of interest. |
d. | consumption expenditures are sensitive to changes in the real rate of interest. |
e. | fixed investment spending by businesses is insensitive to changes in the real rate of interest. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Residential Investment
MSC: Bloom's: Analysis | AACSB: Analytic
29. When real interest rates decrease,
a. | the firm's profits will decrease. |
b. | the opportunity cost of borrowing has increased. |
c. | the firm's profits will increase. |
d. | there are fewer profitable investment opportunities for the firm. |
e. | there are more profitable investment opportunities for the firm. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Investment
MSC: Bloom's: Analysis | AACSB: Analytic
30. Real interest rates and investment are
a. | negatively correlated because higher real interest rates make it easier for the firm to borrow funds. |
b. | negatively correlated because higher real interest rates will increase the firm's profits. |
c. | positively correlated because higher real interest rates make it easier for the firm to borrow funds. |
d. | negatively correlated because higher real interest rates make borrowing by firms more costly. |
e. | positively correlated because higher real interest rates make borrowing by firms less costly. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Investment
MSC: Bloom's: Analysis | AACSB: Analytic
31. The relationship between real interest rates and net exports is
a. | positive. |
b. | not predictable. |
c. | negative if imports are larger than exports. |
d. | negative. |
e. | positive if exports are larger than imports. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Knowledge
32. A lower real interest rate in the United States relative to the rest of the world will tend to
a. | increase the value of the dollar and increase net exports. |
b. | decrease the value of the dollar and have an indeterminate effect on net exports. |
c. | decrease the value of the dollar and increase net exports. |
d. | increase the value of the dollar and decrease net exports. |
e. | decrease the value of the dollar and decrease net exports. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Analysis | AACSB: Analytic
33. A rise in world real interest rates relative to U.S. interest rates
a. | will have no effect on the demand for dollar-denominated assets because investors always prefer dollar-denominated assets. |
b. | will have no effect on the demand for dollar-denominated assets but will cause a decrease in the demand for assets denominated in other currencies. |
c. | will have no effect on the demand for dollar-denominated assets but will cause an increase in the demand for assets denominated in other currencies. |
d. | will cause international investors to increase their demand for dollar-denominated assets. |
e. | will cause international investors to decrease their demand for dollar-denominated assets. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Analysis | AACSB: Analytic
34. A higher value of the domestic currency
a. | means cheaper exports and more expensive imports. |
b. | means more expensive exports and cheaper imports. |
c. | means cheaper exports and cheaper imports. |
d. | means more expensive exports and more expensive imports. |
e. | has no effect on exports and imports. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Net Exports and Value of the Domestic Currencies
MSC: Bloom's: Analysis | AACSB: Analytic
35. An increase in real interest rates leads to
a. | a decrease in exports and an increase in imports. |
b. | an increase in both exports and imports. |
c. | a decrease in both exports and imports. |
d. | an increase in exports and a decrease in imports. |
e. | no change in either exports or imports. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Analysis | AACSB: Analytic
36. Which of the following is probably the least sensitive to changes in real interest rates?
a. | Consumption expenditures |
b. | Gross investment |
c. | Net exports |
d. | Residential investment |
e. | Net investment |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Consumption
MSC: Bloom's: Knowledge
37. Which of the following best explains why consumption expenditures are affected by real interest rates?
a. | Higher real interest rates make it more expensive to finance the purchase of a new home. |
b. | When interest rates are high, banks stop lending to households. |
c. | An increase in real interest rates encourages people to save a larger proportion of their income, which means there is less income for consumption. |
d. | When real interest rates are low, it is more difficult for households to borrow money because the supply of savings is low. |
e. | When real interest rates are high, it is more difficult for households to borrow money because the supply of savings is low. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Consumption
MSC: Bloom's: Analysis | AACSB: Analytic
38. If real interest rates increase, the expenditure line
a. | does not change. |
b. | becomes steeper. |
c. | becomes flatter. |
d. | shifts down in a parallel way. |
e. | shifts up in a parallel way. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rates and the Expenditure Line
MSC: Bloom's: Knowledge
39. Which of the following explains a downward shift in the expenditure line along the vertical axis?
a. | A decrease in the MPC |
b. | An increase in real interest rates |
c. | A decrease in taxes |
d. | A decrease in real interest rates |
e. | A weaker value of the domestic currency |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rates and the Expenditure Line
MSC: Bloom's: Knowledge
40. If real interest rates in the rest of the world increase relative to the United States, the expenditure line will
a. | become flatter. |
b. | shift up. |
c. | shift down. |
d. | become steeper. |
e. | not be affected. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: The Value of the Domestic Currency and the Expenditure Line
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 24-2
41. Which of the following is a valid explanation of the expenditure line shift from E1 to E2 in Exhibit 24-2?
a. | A decline in government purchases |
b. | An increase in taxes |
c. | An increase in the interest rate |
d. | A decline in the value of the dollar |
e. | A fall in world interest rates |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Value of the Domestic Currencies and Aggregate Expenditure
MSC: Bloom's: Knowledge | AACSB: Analytic
42. Which of the following factors cannot explain the rise in income from Ya to Yb in Exhibit 24-2?
a. | An increase in investment |
b. | A weaker value of the domestic currency |
c. | A decline in household savings |
d. | An increase in interest rates |
e. | A decline in taxes |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rates and Spending
MSC: Bloom's: Knowledge | AACSB: Analytic
/
43. When interest rates increase, the opportunity cost of borrowing will decrease.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Investment
MSC: Bloom's: Knowledge | AACSB: Analytic
44. Consumption expenditures are sensitive to interest rates mainly because the decision to purchase a new home depends on the mortgage rate.
Basic
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Residential Investment
MSC: Bloom's: Knowledge
45. Ceteris paribus, a rise in U.S. interest rates will cause exports to increase.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Knowledge | AACSB: Analytic
46. If net exports become less sensitive to changes in the value of the domestic currency, they will be less sensitive to changes in interest rates.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Analysis | AACSB: Analytic
47. If interest rates increase, savings will increase, and the marginal propensity to consume will decrease.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Consumption
MSC: Bloom's: Analysis | AACSB: Analytic
48. The flatter the aggregate expenditure line, the less sensitive real GDP is to changes in the interest rate.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Aggregate Expenditure
MSC: Bloom's: Analysis | AACSB: Analytic
49. Aggregate expenditures depend on the nominal interest rate because that is the rate that must be paid to the borrower.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Aggregate Expenditure
MSC: Bloom's: Knowledge | AACSB: Analytic
50. Unlike business investment, housing investment declines when the real interest rate falls.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Investment
MSC: Bloom's: Knowledge
51. Higher real interest rates in the United States compared with other countries increases the demand for U.S. dollar bank accounts and other American interest-bearing assets.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Net Exports
MSC: Bloom's: Analysis | AACSB: Analytic
52. When the rate of inflation is low and stable, the real and nominal interest rates are not very different.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Real Interest Rate
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
53. A rise in inflation will
a. | reduce interest rates and increase real GDP. |
b. | decrease interest rates and real GDP. |
c. | increase interest rates and increase spending. |
d. | increase interest rates and reduce real GDP. |
e. | increase interest rates and real GDP. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Inflation
MSC: Bloom's: Knowledge
54. When inflation is rising, the Fed will
a. | lower nominal interest rates to increase potential GDP and bring it in line with aggregate demand. |
b. | raise nominal interest rates to reduce aggregate demand. |
c. | raise nominal interest rates to stimulate spending. |
d. | lower nominal interest rates to stimulate production and bring it in line with aggregate demand. |
e. | raise nominal interest rates to stimulate production. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
55. The positive correlation between real interest rates and inflation is best explained by examining
a. | the behavior of the government. |
b. | forces of supply and demand. |
c. | the behavior of the market. |
d. | the behavior of central banks. |
e. | equilibrium in the economic fluctuations model. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Inflation
MSC: Bloom's: Knowledge | AACSB: Analytic
56. The central bank's monetary policy rule shows that
a. | the real interest rate must increase to match the increase in inflation. |
b. | the nominal interest rate must increase to match the increase in inflation. |
c. | the nominal interest rate must increase by more than the increase in inflation. |
d. | the real interest rate must increase by less than the increase in inflation. |
e. | the nominal interest rate must increase by less than the increase in inflation. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
57. In the United States, inflation is the responsibility of
a. | the market. |
b. | the president. |
c. | the Federal Reserve. |
d. | Congress. |
e. | the U.S. Treasury. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Inflation
MSC: Bloom's: Knowledge
58. When inflation rises, the Federal Reserve will
a. | act to decrease interest rates. |
b. | recommend that the Treasury raise interest rates. |
c. | recommend that Congress raise interest rates. |
d. | do nothing. |
e. | act to increase interest rates. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge
59. When the rate of inflation rises, the central bank should
a. | raise the real rate of interest. |
b. | raise the nominal rate of interest. |
c. | lower the nominal rate of interest. |
d. | increase aggregate expenditures. |
e. | lower the real rate of interest. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
60. If inflation increases, the central bank acts to raise interest rates in order to
a. | increase the money supply. |
b. | reduce real GDP. |
c. | increase real GDP. |
d. | increase potential GDP. |
e. | reduce potential GDP. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
61. If the economy is in a recession, inflation will be ____, and the Fed will want to ____ the interest rate in order to ____ real GDP.
a. | rising; increase; decrease |
b. | rising; increase; increase |
c. | falling; increase; increase |
d. | falling; decrease; increase |
e. | falling; decrease; decrease |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
62. When the Fed raises interest rates, it expects
a. | a decrease in potential GDP. |
b. | a decrease in the growth rate of real GDP. |
c. | an increase in the growth rate of real GDP. |
d. | an increase in potential GDP. |
e. | no change in either potential or real GDP. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge
63. The text defines the monetary policy rule as the systematic response of the real interest rate to the
a. | exchange rate as decided by the Treasury. |
b. | rate of inflation as decided by the central bank. |
c. | rate of inflation as decided by the Treasury. |
d. | exchange rate as decided by the central bank. |
e. | exchange rate as decided by the banking system. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge
64. When the Fed wants to raise nominal interest rates, it
a. | increases bank reserves. |
b. | orders all banks to increase interest rates. |
c. | recommends that Congress raise the federal funds rate. |
d. | recommends that Congress conduct open market operations. |
e. | sells government bonds. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Open Market Operation
MSC: Bloom's: Analysis| AACSB: Analytic
65. When the Fed is worried that the economy is heading into a recession, it
a. | decreases bank reserves. |
b. | buys government bonds. |
c. | orders all banks to decrease interest rates. |
d. | recommends that Congress lower the federal funds rate. |
e. | recommends that Congress conduct open market operations. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Open Market Operation
MSC: Bloom's: Analysis | AACSB: Analytic
66. When the Fed takes action to change nominal interest rates, it does so by
a. | buying and selling bonds. |
b. | mandating that banks change the prime rate. |
c. | recommending that the president change the interest rate. |
d. | recommending that Congress change the interest rate. |
e. | increasing the required reserve ratio. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate Policy
MSC: Bloom's: Knowledge
67. Which of the following is an appropriate definition of the target inflation rate?
a. | The inflation rate at which unemployment is zero |
b. | The central bank's goal for the average rate of inflation over the short run |
c. | The central bank's goal for the average rate of inflation over the long run |
d. | The inflation rate at which net exports are maximized |
e. | None of these |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation
MSC: Bloom's: Knowledge
68. The inflation rate the central bank tries to maintain, on average, over the long run is referred to as the
a. | nominal inflation rate. |
b. | target inflation rate. |
c. | quantity inflation rate. |
d. | real inflation rate. |
e. | natural inflation rate. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Knowledge
69. The slope of the monetary policy rule line when the nominal interest rate is measured on the vertical axis is
a. | less than 1. |
b. | zero. |
c. | greater than 1. |
d. | equal to 1. |
e. | equal to 1. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule Line
MSC: Bloom's: Knowledge | AACSB: Analytic
70. If the slope of the monetary policy rule line is 2, then when inflation rises by 1 percent, the
a. | nominal interest rate rises by 2 percent. |
b. | nominal interest rate rises by 1 percent. |
c. | nominal interest rate rises by 3 percent. |
d. | real interest rate rises by 2 percent. |
e. | real interest rate rises by 3 percent. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Application | AACSB: Analytic
71. In order for the Fed to respond correctly to changes in the inflation rate, the slope of the monetary policy rule line (showing the relationship between the inflation rate and the real interest rate) must be
a. | greater than 1. |
b. | less than 1. |
c. | greater than zero. |
d. | equal to 1. |
e. | negative. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
72. The slope of the monetary policy rule line shows that the Fed will seek to change the nominal rate of interest
a. | by less than the change in the rate of inflation. |
b. | only when there is an increase in the rate of inflation. |
c. | by more than the change in the rate of inflation. |
d. | by an amount equal to the change in the rate of inflation. |
e. | only when there is a decrease in the rate of inflation. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule Line
MSC: Bloom's: Knowledge | AACSB: Analytic
73. An inflation target is
a. | the difference between the current federal funds rate and the current real interest rate. |
b. | what the rate of inflation equals when the real interest rate equals zero. |
c. | what the rate of inflation equals when the nominal interest rate equals zero. |
d. | the rate of inflation the central bank tries to maintain, on average, over the long run. |
e. | what the rate of inflation equals when the real and nominal interest rates equal each other. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule Line
MSC: Bloom's: Knowledge | AACSB: Analytic
74. The target inflation rate for many central banks is about
a. | 10 percent. |
b. | 2 percent. |
c. | 8 percent. |
d. | 0 percent. |
e. | 5 percent. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Knowledge
75. Suppose that at the target inflation rate of 2.5 percent the nominal interest rate is 4 percent. This means that at the target inflation rate, the central bank wants the real interest rate to equal
a. | 6.5 percent. |
b. | 4.0 percent. |
c. | 2.5 percent. |
d. | 1.5 percent. |
e. | Not enough information is given to answer this question. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Application | AACSB: Analytic
76. Of the Fed, the Bank of England, and the Reserve Bank of New Zealand, which of the following statements is ?
a. | Only the Fed does not have an explicit inflation target. |
b. | None of these three central banks have an explicit inflation target. |
c. | All of these three central banks have an explicit inflation target. |
d. | Only the Reserve Bank of New Zealand does not have an explicit inflation target. |
e. | Only the Bank of England does not have an explicit inflation target. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Analysis | AACSB: Analytic
77. If the central bank determines that aggregate demand is not very sensitive to changes in the interest rate,
a. | the monetary policy rule line will shift up. |
b. | the monetary policy rule line will become steeper. |
c. | the monetary policy rule line will shift down. |
d. | there will be movement along the monetary policy rule line. |
e. | the monetary policy rule line will become flatter. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Analysis | AACSB: Analytic
78. The Fed uses the term target when it announces how it intends to change the federal funds rate because
a. | the change in the interest rate is a new law that all banks must adhere to. |
b. | the Fed has no influence over the federal funds rate. |
c. | the Fed can control the real interest rate but has no control over the nominal interest rate. |
d. | the Fed expects the U.S. Treasury to conform with its monetary policy. |
e. | the Fed has no direct control over interest rates and can only influence rates toward a target value. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Target Federal Funds Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
79. According to the monetary policy rule, the Fed raises interest rates only when
a. | inflation is high. |
b. | the rate of inflation is above its target inflation rate. |
c. | the interest rate is below its target rate of interest. |
d. | the rate of inflation is rising. |
e. | real GDP is greater than potential GDP. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
/
80. Inflation and the rate of interest are positively correlated.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Inflation and Interest Rates
MSC: Bloom's: Knowledge
81. If a change in interest rates will affect real GDP, the Fed should focus on the change in the nominal interest rate.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Real Interest Rate
MSC: Bloom's: Analysis| AACSB: Analytic
82. The Federal Reserve cannot directly control interest rates.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
83. The market interest rate the Fed focuses on is the federal funds rate.
Basic
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate Policy
MSC: Bloom's: Knowledge
84. The Fed adjusts interest rates by buying and selling bonds.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate Policy
MSC: Bloom's: Knowledge | AACSB: Analytic
85. If the rate of inflation increased by 2 percent, we would expect the Fed to increase interest rates by more than 2 percent.
Basic
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge
86. Because of various shocks to the economy, the central bank cannot control the inflation rate perfectly, particularly in the short run.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation
MSC: Bloom's: Knowledge
87. The Federal Reserve has an explicit inflation target.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
88. A change in the personal style and preferences of the Federal Reserve's chairman can cause a change in the target inflation rate.
Moderate
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Knowledge | AACSB: Analytic
89. When inflation rises, the Fed normally lowers interest rates (through a more than proportional decrease in the nominal interest rate).
Basic
OBJ: conceptual | factual
SEC: 1. The Aggregate Demand Curve
TOP: Fed; Monetary Policy
MSC: Bloom's: Knowledge
90. The Fed considers what is happening to the inflation rate only when deciding whether to change the target federal funds rate.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
91. The Fed has direct control over the federal funds rate.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
Multiple Choice
92. Which of the following best explains the slope of the AD curve?
a. | A change in inflation causes the real interest rate to change, which results in a change in spending. |
b. | A change in potential GDP causes the rate of inflation to change, which leads to a change in the real interest rate. |
c. | A change in the real interest rate causes the rate of inflation to change, which results in potential GDP changing. |
d. | A change in real GDP causes potential GDP to change, which results in the rate of inflation changing. |
e. | A change in inflation causes spending to change, which causes a change in the real interest rate. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
93. There is an inverse relationship between real GDP and inflation because
a. | an increase in inflation leads to a higher interest rate, which leads to an increase in real GDP. |
b. | an increase in inflation leads to a higher interest rate, which leads to a decrease in potential GDP that causes real GDP to decline. |
c. | an increase in inflation leads to a higher interest rate, which leads to a decrease in real GDP. |
d. | an increase in inflation leads to a lower interest rate, which leads to a decrease in real GDP. |
e. | a decrease in inflation leads to a higher interest rate, which leads to a decrease in real GDP. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge
94. Suppose an economy existed in which investment, net exports, and consumption were not sensitive to changes in interest rates. For this economy, the AD curve would
a. | have a slope less than 1 but greater than zero. |
b. | be horizontal. |
c. | have a negative slope. |
d. | be vertical. |
e. | have a slope equal to 1. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
95. The aggregate demand curve slopes downward because
a. | when inflation is lower, the Fed will lower the interest rate and potential GDP will increase. |
b. | when inflation is lower, consumers want to buy more goods and services. |
c. | when inflation is lower, the real interest rate is higher and firms will invest less. |
d. | when inflation is lower, the Fed will lower the interest rate and spending will increase. |
e. | when prices are lower, consumers want to buy more goods and services. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge
96. When inflation increases,
a. | the Fed lowers interest rates and the aggregate demand curve shifts to the left. |
b. | there is an upward movement along the aggregate demand curve. |
c. | the Fed raises interest rates and the aggregate demand curve shifts to the right. |
d. | there is a downward movement along the aggregate demand curve. |
e. | the Fed raises interest rates and the aggregate demand curve shifts to the left. |
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Movement along the Aggregate Demand Curve
MSC: Bloom's: Knowledge
97. If the target inflation rate is 3 percent and the actual rate of inflation falls below the target rate,
a. | the AD curve will shift to the left. |
b. | the AD curve will shift to the right. |
c. | there will be an upward movement along the AD curve. |
d. | there will be a downward movement along the AD curve. |
e. | the AD will not shift, nor will there be a movement along the AD curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Movement along the Aggregate Demand Curve
MSC: Bloom's: Knowledge
98. If the target inflation rate is 3 percent and the actual rate of inflation increases above the target rate,
a. | the Fed increases interest rates and the aggregate demand curve shifts to the right. |
b. | the Fed lowers interest rates and there is an upward movement along the aggregate demand curve. |
c. | the Fed increases interest rates and the aggregate demand curve shifts to the left. |
d. | the Fed increases interest rates and there is an upward movement along the aggregate demand curve. |
e. | the Fed increases interest rates and there is a downward movement along the aggregate demand curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Movement along the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
99. Which of the following would cause the AD curve to shift to the right?
a. | An increase in the real rate of interest |
b. | A decrease in government purchases |
c. | An increase in government purchases |
d. | An increase in the rate of inflation |
e. | A decrease in the rate of inflation |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in Government Purchases
MSC: Bloom's: Knowledge
100. Which of the following would cause the AD curve to shift to the left?
a. | A decrease in the real rate of interest |
b. | A decrease in the rate of inflation |
c. | An increase in government purchases |
d. | A decision by the Fed to decrease the nominal interest rate |
e. | None of these |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand
MSC: Bloom's: Analysis | AACSB: Analytic
101. Which of the following best explains what will happen if government purchases decline?
a. | For any given rate of inflation, real GDP will decrease. |
b. | For any given rate of inflation, real GDP will increase. |
c. | For any given rate of inflation, potential GDP will increase. |
d. | There will be an upward movement along the AD curve. |
e. | There will be a downward movement along the AD curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Knowledge
102. Which of the following statements concerning a change in government purchases is ?
a. | The slope of the expenditure line and the magnitude of the AD curve's shift are negatively correlated. |
b. | The slope of the expenditure line does not affect the magnitude of the AD curve's shift. |
c. | The slope of the expenditure line and the magnitude of the AD curve's shift are positively correlated. |
d. | The correlation between the slope of the expenditure line and the magnitude of the AD curve's shift depends negatively on the rate of inflation. |
e. | The correlation between the slope of the expenditure line and the magnitude of the AD curve's shift depends positively on the rate of inflation. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in Government Purchases
MSC: Bloom's: Analysis | AACSB: Analytic
103. Which of the following best explains what will happen in the short run if government purchases increase?
a. | Real GDP, consumption, and investment will increase. |
b. | Potential GDP will increase. |
c. | Real GDP and consumption will increase. |
d. | Real GDP will increase. |
e. | All of these |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
104. If government purchases increase, the expenditure line
a. | will shift up and the AD curve will shift to the left. |
b. | will shift up and the AD curve will shift to the right. |
c. | will not shift and the AD curve will shift to the right. |
d. | will shift up and there will be an upward movement along the AD curve. |
e. | will shift up and there will be a downward movement along the AD curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 24-3
105. If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3,
a. | the monetary policy rule line will shift to the right. |
b. | there will be no change in the real rate of interest. |
c. | the real rate of interest will decline. |
d. | there has been an increase in the target inflation rate. |
e. | the monetary policy rule line will shift to the left. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in the Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
106. If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3,
a. | the AD curve will shift to the left. |
b. | there will be a downward movement along the AD curve. |
c. | there will be no change since the real rate of interest does not change. |
d. | the AD curve will shift to the right. |
e. | there will be an upward movement along the AD curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in the Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
107. If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3, what will happen to net exports?
a. | The effect on net exports is ambiguous. |
b. | Net exports will increase. |
c. | Net exports will decrease. |
d. | Net exports will not be affected. |
e. | None of these |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in the Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
Exhibit 24-4
108. If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-4,
a. | the AD curve will shift to the right. |
b. | there will be a downward movement along the AD curve. |
c. | the AD curve will shift to the left. |
d. | there will be an upward movement along the AD curve. |
e. | there will be no change since the real rate of interest does not change. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in the Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
109. The AD curve shifts to the left as a result of
a. | an increase in government purchases. |
b. | a decrease in taxes. |
c. | an upshift in foreign demand. |
d. | a downshift in consumption. |
e. | a monetary policy shift to a higher inflation target. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
110. The AD curve shifts to the right as a result of
a. | an increase in government purchases. |
b. | an increase in taxes. |
c. | a downshift in foreign demand. |
d. | a downshift in consumption. |
e. | a monetary policy shift to a lower inflation target. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
111. An increase in the target inflation rate will
a. | have no effect on the AD curve. |
b. | cause a rightward shift of the AD curve. |
c. | cause a leftward shift of the AD curve. |
d. | cause a downward movement along the AD curve. |
e. | cause an upward movement along the AD curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
112. If the central bank increases the target inflation rate, then
a. | the monetary policy rule line will become steeper. |
b. | there will be movement along the monetary policy rule line. |
c. | the monetary policy rule line will shift down. |
d. | the monetary policy rule line will shift up. |
e. | the monetary policy rule line will become flatter. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Analysis | AACSB: Analytic
113. An increase in imports will
a. | cause a downward movement along the AD curve. |
b. | cause an upward movement along the AD curve. |
c. | shift the AD curve to the right. |
d. | shift the AD curve to the left. |
e. | have no effect on the AD curve. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in Exports
MSC: Bloom's: Knowledge | AACSB: Analytic
114. If business confidence increases,
a. | there will be an upward movement along the AD curve. |
b. | there will be a downward movement along the AD curve. |
c. | the AD curve will not be affected. |
d. | the AD curve will shift to the left. |
e. | the AD curve will shift to the right. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in Autonomous Consumption
MSC: Bloom's: Analysis | AACSB: Analytic
/
115. When inflation rises, the Fed typically raises interest rates to reduce spending.
Basic
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge
116. The AD curve slopes down because there is more spending when inflation is lower.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
117. The AD curve slopes upward because interest rates and inflation are positively correlated.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
118. A change in the rate of inflation causes a movement along the AD curve.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Movement along the Aggregate Demand Curve
MSC: Bloom's: Knowledge
119. If government purchases increase, inflation will increase, and there will be an upward movement along the AD curve.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in Government Purchases
MSC: Bloom's: Analysis | AACSB: Analytic
120. Assuming constant inflation, a shift of the expenditure line will cause a shift of the AD curve.
Basic
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in Aggregate Expenditure
MSC: Bloom's: Knowledge
121. If, for any given rate of inflation, the real rate of interest declines, the AD curve will shift to the left.
Challenging
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Change in the Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
122. A decrease in the target inflation rate will cause a downward movement along the AD curve.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
123. The Fed issues a statement right after every FOMC meeting whether the interest rate changes or not. Economists and financial analysts study the wording of the statements carefully, trying to ascertain what the Fed's next move is going to be.
Moderate
OBJ: conceptual | factual
SEC: 1. The Aggregate Demand Curve
TOP: FOMC; Fed
MSC: Bloom's: Analysis | AACSB: Analytic
Short Answer
124. Explain how real interest rates affect investment expenditures.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Investment
MSC: Bloom's: Comprehension
125. Explain how an increase in the level of real interest rates in the rest of the world relative to the United States is likely to affect U.S. net exports.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rate and Net Export
MSC: Bloom's: Knowledge | AACSB: Analytic
126. How do changes in real interest rates affect real GDP?
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Interest Rates and Real GDP
MSC: Bloom's: Comprehension | AACSB: Analytic
127. If the Fed aims to influence economic activity, should it target the real interest rate or the nominal interest rate? If inflation changes by 2 percent, how large should the change in the nominal interest rate be?
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Real versus Nominal Interest Rate
MSC: Bloom's: Knowledge
128. What does it mean to claim that the Fed has a policy rule pertaining to inflation?
OBJ: factual
SEC: 1. The Aggregate Demand Curve
TOP: Policy Rule
MSC: Bloom's: Knowledge | AACSB: Analytic
129. Suppose the inflation rate has increased. Explain what the Fed is likely to do to the interest rate and how it would cause such a change in the interest rate.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy
MSC: Bloom's: Analysis | AACSB: Analytic
130. According to the spending allocation model, what would cause the real interest rate to increase? According to the monetary policy rule, what causes the real interest rate to increase? Are the two models compatible?
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
131. Does the Fed have an explicit inflation target? If not, does this mean that the Fed is not concerned with inflation? Explain.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Target Inflation Rate
MSC: Bloom's: Analysis | AACSB: Analytic
132. Explain clearly why the AD curve slopes downward.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
Exhibit 24-5
133. The data in Exhibit 24-5 depicts the monetary policy response to inflation by a central bank. Use the values in this table to plot the monetary policy response rule line, and explain whether this is a valid response rule or not.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule Line
MSC: Bloom's: Analysis| AACSB: Analytic
134. Suppose the central bank decides to switch from policy rule A to policy rule B as shown in the table below. Use the analysis presented in the text to explain what will happen to the AD curve.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
135. Suppose, because of a foreign crisis, the foreign exchange value of the dollar increases. Use the analysis developed in the text to show how the AD curve will be affected.
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: The Aggregate Demand Curve and a Change in Net Exports
MSC: Bloom's: Analysis| AACSB: Analytic
136. Explain what will happen to the aggregate demand curve and real GDP in each of the following cases.
(A) | Foreign preference for U.S. goods increases. |
(B) | The marginal propensity to save increases. |
(C) | The Fed lowers the target inflation rate. |
(D) | Taxes increase. |
(E) | World interest rates rise relative to domestic interest rates. |
(A) | Exports will increase, and the AD curve will shift to the right. Real GDP will increase. |
(B) | Consumer spending will fall, and the AD curve will shift to the left. Real GDP will decrease. |
(C) | Inflation is now above target, so the interest rate will increase, and the AD curve will shift to the left. Spending will fall, and real GDP will fall. |
(D) | Spending will fall, and the AD curve will shift to the left. Real GDP will fall. |
(E) | The value of the dollar will fall, and net exports will rise. The AD curve will shift right, and real GDP will increase. |
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
137. The IA line shows
a. | the rate of change in the rate of inflation. |
b. | the change in the rate of inflation needed to reach the target inflation rate. |
c. | the point where real and potential GDP are equal. |
d. | the price level in the economy at any point in time. |
e. | the level of inflation in the economy at any point in time. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge
138. The inflation adjustment line is used to
a. | describe how the government adjusts fiscal policy to influence prices and wages in the economy. |
b. | describe the Fed's target inflation rate. |
c. | describe how the Fed adjusts interest rates to control inflation. |
d. | describe how firms and workers act to set prices and wages in the economy. |
e. | explain the instability of price adjustments. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge
/
139. The inflation adjustment line is a flat line showing the level of inflation in the economy at a given point in time.
Basic
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge
140. The inflation adjustment line (IA) shows the level of inflation in an economy. If the IA line intersects the vertical axis at 5 percent, the inflation in the economy is 5 percent at that time.
Moderate
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
141. The inflation adjustment line is flat because
a. | firms cannot change prices in the short run. |
b. | prices are not responsive to changes in real GDP. |
c. | the Fed cannot change monetary policy in the short run. |
d. | prices are not responsive to changes in aggregate demand. |
e. | firms adjust output first and price later. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Inflation Adjustment Line
MSC: Bloom's: Knowledge | AACSB: Analytic
142. Expectations of steady inflation and staggered wage and price setting are two reasons why
a. | the IA line is usually upward-sloping. |
b. | inflation is highly variable during the short run. |
c. | inflation does not change very much in the short run. |
d. | inflation changes immediately after a change in real GDP. |
e. | the IA line is usually downward-sloping. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
143. If a firm expects the rate of inflation to be 2 percent, it will expect its competitors to
a. | do anything, since firms operate under limited information. |
b. | increase prices by 2 percent unless circumstances change. |
c. | not raise prices unless there is a change in circumstances. |
d. | increase prices by more than 2 percent unless circumstances change. |
e. | increase prices by less than 2 percent unless circumstances change. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Expected Inflation and Pricing Decisions
MSC: Bloom's: Analysis | AACSB: Analytic
144. The inflation adjustment line IA will shift down if
a. | the local currency depreciates against foreign currencies. |
b. | real GDP rises above potential GDP. |
c. | real GDP falls below potential GDP. |
d. | All of the above |
e. | None of the above |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
145. A firm expects inflation to remain at 4 percent for the next year. If the firm has been losing sales to competitors, it is most likely to
a. | increase wages by 4 percent and keep prices constant. |
b. | increase prices and wages by 4 percent. |
c. | increase prices by 4 percent and keep wages constant. |
d. | increase prices and wages by more than 4 percent. |
e. | increase prices and wages by less than 4 percent. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Expected Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
146. Wage setting
a. | is based only on wages expected to be paid elsewhere. |
b. | depends on both expected inflation and relative wages. |
c. | occurs without regard to inflation or wages being paid by other firms. |
d. | is based only on expected inflation. |
e. | is based only on the previous period's wages. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Expectations and Wage-Setting Behavior
MSC: Bloom's: Knowledge
147. Staggered wage and price setting
a. | slows down the speed of wage and price adjustment. |
b. | accelerates the adjustment of prices and wages in the economy. |
c. | does not affect the speed of wage and price adjustment. |
d. | has an uncertain effect on the speed of wage and price adjustment. |
e. | is why wages and prices throughout the economy never adjust in the short run. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Staggered Wage and Price Setting
MSC: Bloom's: Knowledge
148. Staggered price and wage setting means that
a. | inflation tends to increase over time. |
b. | inflation tends to decrease over time. |
c. | prices are adjusted at a different time of the year than wages. |
d. | at any given time the majority of prices and wages are fixed. |
e. | past changes in wages and prices have no impact on current changes in wages and prices. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Staggered Wage and Price Setting
MSC: Bloom's: Knowledge
149. The flat inflation adjustment line reflects the idea that
a. | inflation occurs only when real GDP exceeds potential GDP. |
b. | prices usually remain constant. |
c. | current prices and wages do not depend on what has happened in the past. |
d. | prices and wages are as likely to decline as they are to increase. |
e. | inflation is partly due to inertia. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Inertia
MSC: Bloom's: Knowledge | AACSB: Analytic
/
150. The inflation adjustment line is horizontal because firms adjust output before price.
Moderate
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
151. When real GDP is above potential GDP, the inflation adjustment line IA shifts up.
Basic
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge
152. The inflation adjustment line is upward-sloping.
Basic
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge
153. A firm increases prices only if the demand for its product has increased.
Moderate
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Pricing Decisions by Individual Firms
MSC: Bloom's: Analysis | AACSB: Analytic
154. Changes in aggregate demand can cause inflation to rise above or fall below the expected rate of inflation.
Moderate
OBJ: conceptual
SEC: 1. The Aggregate Demand Curve
TOP: Price and Wage Decisions by Individual Firms
MSC: Bloom's: Analysis | AACSB: Analytic
155. Current price and wage behavior is dependent on past wage and price behavior.
Basic
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Staggered Wage and Price Setting
MSC: Bloom's: Knowledge
156. Staggered wage and price setting speeds up the adjustment of wages and prices.
Basic
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Staggered Wage and Price Setting
MSC: Bloom's: Knowledge
157. The flat inflation adjustment line describes the tendency for the inflation rate to remain at its current level, barring some persistent or major change in the economy.
Basic
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Staggered Wage and Price Setting
MSC: Bloom's: Knowledge
Multiple Choice
158. The IA line will move down if
a. | potential GDP decreases. |
b. | real GDP falls below potential GDP. |
c. | real GDP increases relative to potential GDP. |
d. | real GDP equals potential GDP. |
e. | the rate of inflation increases. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
159. When real and potential GDP are equal,
a. | prices will stop changing. |
b. | the rate of inflation will equal zero. |
c. | the rate of inflation will fall. |
d. | the rate of inflation will remain constant. |
e. | the price level will decline. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
160. If real GDP is less than potential GDP,
a. | the price level will not change. |
b. | the rate of inflation will not change. |
c. | the rate of inflation will increase. |
d. | the rate of inflation will decrease. |
e. | the price level will fall. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Change in Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
161. If real GDP is greater than potential GDP,
a. | the rate of inflation will not change. |
b. | the price level will not change. |
c. | the rate of inflation will decrease. |
d. | the price level will fall. |
e. | the rate of inflation will increase. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Change in Inflation
MSC: Bloom's: Analysis | AACSB: Analytic
/
162. Prices only change if real GDP moves away from potential GDP.
f; Moderate
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Shift in IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
163. If firms are experiencing slow growth in demand, the inflation adjustment line is likely to shift down.
Moderate
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Shift in IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
164. Which of the following would be most likely to result in an upward shift of the inflation adjustment line?
a. | A fall in the target interest rate |
b. | An increase in taxes |
c. | A fall in consumer confidence |
d. | An increase in imports |
e. | An increase in commodity prices |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Shift in IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
165. The IA line will move up if there is a(n)
a. | increase in potential GDP. |
b. | decrease in commodity prices. |
c. | decrease in real GDP. |
d. | increase in expected inflation. |
e. | decrease in expected inflation. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line and Expected Inflation
MSC: Bloom's: Knowledge
166. The inflation adjustment line will shift down if there is
a. | an increase in energy prices. |
b. | a decrease in potential GDP. |
c. | an increase in the strength of expectations concerning a recession next year. |
d. | an increase in real GDP. |
e. | news of the auto industry meeting the wage demands of workers. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Shift in IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
/
167. If real and potential GDP are equal, the rate of inflation will not change.
Moderate
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Changes in Expectations and Raw Material Prices
MSC: Bloom's: Analysis | AACSB: Analytic
168. If firms and workers expect prices to rise significantly, they are likely to raise wages and prices by a large amount to keep pace with the expected inflation.
Basic
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Inflation
MSC: Bloom's: Knowledge
Multiple Choice
169. According to historical evidence, when real GDP is
a. | below potential GDP, the price level declines. |
b. | below potential GDP, the rate of inflation decreases. |
c. | above potential GDP, the rate of inflation declines. |
d. | equal to potential GDP, there will be no change in the price level. |
e. | equal to nominal GDP, there will be no change in the rate of inflation. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line and Historical Evidence
MSC: Bloom's: Knowledge | AACSB: Analytic
Exhibit 24-6
170. According to Exhibit 24-6, what should have happened to the rate of inflation between 2009 and 2012?
a. | It should have increased. |
b. | It should have decreased. |
c. | Not enough information is given to answer this question. |
d. | It should have been negative. |
e. | It should have remained constant. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Fluctuations in Inflation and Real GDP
MSC: Bloom's: Analysis | AACSB: Analytic
171. According to Exhibit 24-6, what should have happened to the rate of inflation between 2005 and 2007?
a. | Not enough information is given to answer this question. |
b. | It should have decreased. |
c. | It should have been negative. |
d. | It should have increased. |
e. | It should have remained constant. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Fluctuations in Inflation and Real GDP
MSC: Bloom's: Analysis | AACSB: Analytic
/
172. Historically, there has been a positive correlation between changes in the rate of inflation and the percentage difference between real and potential GDP.
Basic
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line and Historical Evidence
MSC: Bloom's: Knowledge
Short Answer
173. Explain why the inflation adjustment line is flat.
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
174. Explain how expectations and the level of demand affect a firm's wage and price decision.
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Expectations
MSC: Bloom's: Knowledge | AACSB: Analytic
175. Why do wages and prices exhibit inertia?
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: Staggered Wage and Price Setting
MSC: Bloom's: Analysis | AACSB: Analytic
176. Name three factors that cause the IA line to shift.
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
177. The figure below plots real and potential GDP between 1971 and 1977. Given the data in the corresponding table, can changes in the rate of inflation over this period be explained by the percent deviation between real and potential GDP? Do these data support or refute the validity of the assumptions about the IA line?
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
178. Explain what happens to the inflation adjustment line in the long run in each of the following cases.
(A) | The economy sinks into a recession. |
(B) | Firms expect the Fed will adjust monetary policy and allow inflation to rise from 2 percent to 4 percent. |
(C) | OPEC successfully doubles the price of oil on the market. |
(D) | Congress cuts taxes. |
(E) | Potential GDP increases. |
(A) | In a recession, real GDP is below potential, demand is low, and firms will increase prices more slowly than the expected inflation rate. The IA line will shift down. |
(B) | Firms will increase prices by a larger amount. The IA line will shift up. |
(C) | The IA line will shift up. |
(D) | Real GDP will increase. The IA line will shift up. |
(E) | If real GDP does not change, real GDP will be below potential. The IA line will shift down. |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: Shift in IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
179. The table below shows the price level for 2002 through 2010.
Year | GDP Deflator |
2002 | 92.12 |
2003 | 94.10 |
2004 | 96.77 |
2005 | 100.00 |
2006 | 103.26 |
2007 | 106.30 |
2008 | 108.62 |
2009 | 109.61 |
2010 | 110.66 |
(A) | Show what happened to the IA line between 2002 and 2005. |
(B) | Show what happened to the IA line between 2006 and 2009. |
(A) | The annual rates of inflation for 2002 through 2010 are shown in the following table. The IA line should shift up between 2002 and 2005. |
(B) | The annual rates of inflation for 2002 through 2010 are shown in the following table. The IA line should shift down between 2006 and 2009. |
Year | Percent Rate of Inflation |
2002 | -- |
2003 | 2.15 |
2004 | 2.84 |
2005 | 3.34 |
2006 | 3.26 |
2007 | 2.94 |
2008 | 2.19 |
2009 | 0.92 |
2010 | 0.95 |
OBJ: conceptual
SEC: 2. The Inflation Adjustment Line
TOP: IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
Multiple Choice
180. The intersection of the inflation adjustment line and the aggregate demand curve determines the level of
a. | real GDP and inflation in the long run. |
b. | real GDP and inflation in the short run. |
c. | potential GDP and inflation at any given time. |
d. | potential GDP and the price level at any given time. |
e. | real GDP and inflation at any given time. |
OBJ: factual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge
181. Any point along the aggregate demand curve represents
a. | a possible equilibrium combination of potential GDP and inflation. |
b. | the inflation rate at any point in time. |
c. | an equilibrium combination of real GDP and inflation. |
d. | a possible equilibrium combination of real GDP and inflation. |
e. | an equilibrium combination of potential GDP and inflation. |
OBJ: factual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge
182. If the economy is in a recession, it is likely that
a. | the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is higher than potential GDP. |
b. | aggregate expenditures are unequal to real GDP. |
c. | the aggregate demand curve and the inflation adjustment line do not intersect. |
d. | the economy is not in equilibrium and is therefore not on the aggregate demand curve. |
e. | the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is less than potential GDP. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
183. If the economy is in an expansion, it is likely that
a. | the economy is not in equilibrium and is therefore not on the aggregate demand curve. |
b. | the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is less than potential GDP. |
c. | the aggregate demand curve and the inflation adjustment line do not intersect. |
d. | the aggregate demand curve intersects the inflation adjustment line at a level of real GDP that is higher than potential GDP. |
e. | aggregate expenditures are unequal to real GDP. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
184. Which of the following statements is ?
a. | The IA line describes the behavior of firms and consumers when a change in the inflation rate causes interest rates to change. |
b. | The IA line identifies inflation at any given time. |
c. | The IA line identifies all possible points of spending balance. |
d. | The AD curve identifies the rate of inflation at any given time. |
e. | The IA line identifies real GDP at any given time. |
OBJ: factual
SEC: 2. The Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
185. During an economic recovery, there is
a. | a rightward shift of the AD curve. |
b. | movement along the IA line and the AD curve. |
c. | movement along the AD curve. |
d. | movement along the IA line. |
e. | a leftward shift of the AD curve. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Economic Recovery
MSC: Bloom's: Knowledge | AACSB: Analytic
186. During an economic recovery, the rate of inflation is
a. | decreasing, and real GDP is increasing relative to potential GDP. |
b. | increasing, and real GDP is increasing relative to potential GDP. |
c. | increasing, and real GDP is decreasing relative to potential GDP. |
d. | constant, and real GDP is decreasing relative to potential GDP. |
e. | decreasing, and real GDP is decreasing relative to potential GDP. |
OBJ: factual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Economic Recovery
MSC: Bloom's: Knowledge | AACSB: Analytic
187. During an economic boom, the rate of inflation
a. | and the percentage deviation of real GDP from potential GDP are both increasing. |
b. | and the percentage deviation of real GDP from potential GDP are both decreasing. |
c. | is increasing, and the percentage deviation of real GDP from potential GDP is decreasing. |
d. | is decreasing, and the percentage deviation of real GDP from potential GDP is increasing. |
e. | is constant, and the percentage deviation of real GDP from potential GDP is increasing. |
OBJ: factual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Economic Booms
MSC: Bloom's: Knowledge | AACSB: Analytic
188. During a recession, the rate of inflation is
a. | decreasing while real GDP is increasing relative to potential GDP. |
b. | increasing while real GDP is falling relative to potential GDP. |
c. | decreasing while real GDP is falling relative to potential GDP. |
d. | increasing while real GDP is increasing relative to potential GDP. |
e. | constant while real GDP is falling relative to potential GDP. |
OBJ: factual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Recession
MSC: Bloom's: Knowledge | AACSB: Analytic
189. The aggregate demand curve and the inflation adjustment line intersect where real GDP is
a. | less than, equal to, or greater than potential GDP. |
b. | less than potential GDP. |
c. | greater than or equal to potential GDP. |
d. | greater than potential GDP. |
e. | equal to potential GDP. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
/
190. If, at the prevailing rate of inflation, real GDP is greater than potential GDP, the economy has not fully recovered from a recession.
Basic
OBJ: conceptual
3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge
191. If, at the prevailing rate of inflation, real GDP is less than potential GDP, the economy has not fully recovered from a recession.
Basic
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge
192. The intersection of the inflation adjustment line and the aggregate demand curve may give values of real GDP that may be above potential GDP, but never below.
Moderate
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: IA Line; Aggregate Demand; Potential GDP
MSC: Bloom's: Knowledge | AACSB: Analytic
193. When real GDP is above potential GDP, inflation will increase.
Moderate
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Real GDP and Inflation
MSC: Bloom's: Knowledge | AACSB: Analytic
Short Answer
194. What is the difference between the AD curve and the IA line? Why do we need both to determine real GDP at any given time?
OBJ: factual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge
195. Explain the relationship between the intersection of the AD curve and the IA line and the level of potential GDP.
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Knowledge | AACSB: Analytic
196. Use the AD curve and IA line to depict a case in which:
(A) | the economy has not recovered from a recession. |
(B) | the economy has not completely adjusted from a boom. |
(A) | Point A in the figure below shows the case in which the economy has not yet recovered from a recession. |
| |
(B) | Point B in the figure below depicts the case in which the economy has not yet recovered from a boom. |
|
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
197. Suppose the current rate of inflation is 4 percent. However, if real and potential GDP are to be equal, inflation will need to be at 6 percent. Show, using the AD curve and the IA line, where real GDP is relative to potential GDP under these circumstances.
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
198. Suppose the current rate of inflation is 4 percent. However, if real and potential GDP are to be equal, inflation will need to be at 2 percent. Show, using the AD curve and the IA line, where real GDP is relative to potential GDP under these circumstances.
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Analysis | AACSB: Analytic
199. Is the price adjustment described in this chapter the same as the price adjustment in the microeconomic supply and demand models? Explain.
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Price Adjustment
MSC: Bloom's: Knowledge | AACSB: Analytic
200. Which of the following statements are and which are ? Briefly explain your answers.
(A) | The dollar value of the domestic currency will increase when U.S. interest rates decline. |
(B) | When the rate of inflation falls, the central bank typically raises the interest rate. |
(C) | A lower interest rate typically leads to higher net exports because a lower interest rate lowers the value of the dollar. |
(D) | A decline in the interest rate will reduce investment. |
(A) | False. The dollar will get weaker when U.S. interest rates decline. A decline in U.S. interest rates will make dollar-denominated assets less attractive to foreign investors. Therefore, the demand for dollars will decline, and, in turn, so will the value of the domestic currency. |
(B) | False. Typically, the central bank will lower the interest rate. Otherwise, the real rate of interest would rise and stymie economic activity. |
(C) | True. The lower interest rate makes the dollar less attractive to foreign investors, which in turn reduces the dollar value of the domestic currency. The smaller dollar value of the domestic currency normally causes the demand for U.S. exports to increase because the lower value of the domestic currency lowers the foreign price of these goods and services. The smaller dollar value of the domestic currency normally reduces the demand for imports because the lower value of the domestic currency increases the dollar value of these goods and services. |
(D) | False. A decline in interest rates reduces the opportunity cost of investment. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Interest Rate and Aggregate Expenditure
MSC: Bloom's: Knowledge | AACSB: Analytic
201. Suppose inflation has been increasing in Europe, and as a result, the central bank has increased interest rates. Explain what, if any, effect this will have on U.S. net exports.
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Interest Rate and Net Export
MSC: Bloom's: Analysis | AACSB: Analytic
202. Suppose the Fed is considering three different policy rules, as shown in the following table.
(A) | What is the difference between Rule 1 and Rules 2 and 3? |
(B) | What is the difference in the target inflation rate between Rules 2 and 3? |
(C) | Suppose the Fed is currently following Rule 2 and shifts to Rule 3. Which way will the AD curve shift? Why would the Fed make such a change in policy? |
(A) | According to Rule 1, when inflation increases, the nominal interest rate increases by the same amount, and there is no change in the real interest rate. According to Rules 2 and 3, when the inflation rate increases, the nominal interest rate increases by more than the increase in inflation, and the real interest rate increases. According to Rule 1, the Fed's behavior will not influence real interest rates and hence spending. |
(B) | Rule 3 has a lower level of target inflation rate because interest rates are higher for any given level of inflation. |
(C) | The AD curve will shift to the left with the increase in interest rates, resulting in a lower level of spending. The Fed might do this if it is worried that the economy is growing too rapidly and/or inflation is too high. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
203. Consider the following monetary policy rules for two countries, A and B:
A: interest rate = 1.8 (inflation 3) + 3
B: interest rate = 2 (inflation 3) + 4
(A) | Graph the policy rules. If the inflation rate is 2 percent in both countries, what is the interest rate in each country? |
(B) | Which of the two countries has a higher tolerance for inflation? Explain. |
(A) | The graph of the two monetary policy rules is shown in the diagram below. If the inflation rate is 2 percent in both countries, then the interest rate in Country A will be 1 percent and the interest rate in Country B will be 2 percent. |
| |
(B) | Country A's tolerance of inflation is higher since, for any rate of inflation, it sets a lower interest rate. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Monetary Policy Rule
MSC: Bloom's: Analysis | AACSB: Analytic
204. The following table gives a numerical example of an aggregate demand/inflation curve.
(A) | Sketch the curve in a graph. |
(B) | What is the average rate of inflation in the long run? |
(C) | Suppose the central bank decreases the target rate of inflation to 2 percent. Sketch a new AD curve corresponding to the new lower money supply growth rate. How does the new curve compare with the old curve? |
(D) | What will happen to the average rate of inflation in the long run (assuming potential GDP growth does not change)? |
(A) | See graph below. |
| |
(B) | The long-run rate of inflation is 5 percent, the rate of inflation that corresponds to potential GDP. |
(C) | The aggregate demand/inflation curve shifts to the left. This is illustrated in the diagram below: |
| |
(D) | As shown in the above diagram, the rate of inflation corresponding to potential GDP will decline. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Aggregate Demand Curve
MSC: Bloom's: Application | AACSB: Analytic
205. Suppose that, as a result of accelerated growth in the European countries, the demand for U.S. exports increases.
(A) | If U.S. imports are unaffected, which way will the expenditure line shift? |
(B) | What will happen to the aggregate demand curve and the level of real GDP? |
(C) | If the U.S. economy was initially at potential GDP, is the economy now in a recession or an expansion? |
(A) | When exports increase, the E line will shift upward in a parallel fashion, and real GDP will increase. |
(B) | The increase in real GDP is represented by a rightward shift of the aggregate demand curve. At the current level of inflation, real GDP will be higher. |
(C) | The economy is now in an expansion because real GDP is above potential GDP. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Net Exports and the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
206. State which of the following changes causes the aggregate demand curve to shift and which is a movement along it.
(A) | A shift to a higher inflation target |
(B) | An increase in wealth |
(C) | A successful Buy American campaign to reduce U.S. imports |
(D) | An increase in taxes |
(E) | A decline in Japanese interest rates |
(F) | An unexpected increase in oil prices |
(A) | The aggregate demand curve shifts to the left. |
(B) | The aggregate demand curve shifts to the right. |
(C) | The aggregate demand curve shifts to the right. |
(D) | The aggregate demand curve shifts to the left. |
(E) | The aggregate demand curve shifts to the left. |
(F) | An upward movement occurs along the aggregate demand curve. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Aggregate Demand Curve
MSC: Bloom's: Knowledge | AACSB: Analytic
207. Since changes in both monetary policy and fiscal policy can shift the aggregate demand curve, it doesn't matter whether we reduce income taxes or reduce the target inflation rate to increase real GDP. Both policies will have the same effect on consumption, net exports, and investment. Please answer or and explain.
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: Shift of the Aggregate Demand Curve
MSC: Bloom's: Analysis | AACSB: Analytic
208. The following table gives a numerical example of the inflation adjustment line in the year 2017.
(A) | Sketch the line in a graph. |
(B) | If real GDP is below potential GDP in the year 2017, will the inflation adjustment line shift up or down in the year 2018? |
(C) | In the same graph as part (A), sketch an aggregate demand curve. Find the equilibrium level of inflation and real GDP in the year 2018. |
(D) | What will happen to the inflation adjustment line if oil prices suddenly increase? |
(A) | The inflation adjustment (IA) line is shown in the diagram below. |
| |
(B) | The IA line will shift down. |
(C) | The diagram above shows that, in equilibrium, the rate of inflation is 5 percent, and real GDP equals potential GDP. |
(D) | A sudden increase in oil prices will cause the IA line to shift up. |
OBJ: conceptual
SEC: 3. Combining the Aggregate Demand Curve and the Inflation Adjustment Line
TOP: The Aggregate Demand Curve and the IA Line
MSC: Bloom's: Analysis | AACSB: Analytic