Question 1

Use the AD curve and IA line to depict a case in which:

Accepted Answer

The answer of Use the AD curve and IA line...

Question 2

If real and potential GDP are equal, the rate of inflation will not change.

Accepted Answer

A) True 
 B)False

Question 3

When the Fed is worried that the economy is heading into a recession, it

Accepted Answer

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. 
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.

Question 4

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

Accepted Answer

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. 
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.

Question 5

The Fed adjusts interest rates by buying and selling bonds.

Accepted Answer

A) True 
 B)False

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

When interest rates decrease,

Accepted Answer

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. 
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.

Question 8

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.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following is an appropriate definition of the target inflation rate?

Accepted Answer

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 
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

Question 10

Staggered wage and price setting

Accepted Answer

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. 
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.

Question 11

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.

Accepted Answer

As a result of the switch in the policy

Question 12

When interest rates increase,

Accepted Answer

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. 
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.

Question 13

The flatter the aggregate expenditure line, the less sensitive real GDP is to changes in the interest rate.

Accepted Answer

A) True 
 B)False

Question 14

If the nominal interest rate exceeds the rate of inflation, the real interest rate will

Accepted Answer

A) not be affected. 
B) rise. 
C) be greater than zero. 
D) be less than zero. 
E) fall. 
A) not be affected. 
B) rise. 
C) be greater than zero. 
D) be less than zero. 
E) fall.

Question 15

Explain what will happen to the aggregate demand curve and real GDP in each of the following cases.

Accepted Answer

The answer of Explain what will happen to the aggregate...

Question 16

A firm increases prices only if the demand for its product has increased.

Accepted Answer

A) True 
 B)False

Question 17

Assuming constant inflation, a shift of the expenditure line will cause a shift of the AD curve.

Accepted Answer

A) True 
 B)False

Question 18

Unlike the demand for bananas in a supermarket, aggregate demand slopes upward.

Accepted Answer

A) True 
 B)False

Question 19

The equation for the real interest rate indicates that, other being things equal,

Accepted Answer

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. 
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.

Question 20

The economic fluctuations model is used

Accepted Answer

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. 
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.

Exam 24: The Economic Fluctuations Model

Use the AD curve and IA line to depict a case in which:

If real and potential GDP are equal, the rate of inflation will not change.

When the Fed is worried that the economy is heading into a recession, it

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

The Fed adjusts interest rates by buying and selling bonds.

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.

When interest rates decrease,

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.

Which of the following is an appropriate definition of the target inflation rate?

Staggered wage and price setting

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.

When interest rates increase,

The flatter the aggregate expenditure line, the less sensitive real GDP is to changes in the interest rate.

If the nominal interest rate exceeds the rate of inflation, the real interest rate will

Explain what will happen to the aggregate demand curve and real GDP in each of the following cases.

A firm increases prices only if the demand for its product has increased.

Assuming constant inflation, a shift of the expenditure line will cause a shift of the AD curve.

Unlike the demand for bananas in a supermarket, aggregate demand slopes upward.

The equation for the real interest rate indicates that, other being things equal,

The economic fluctuations model is used

The Central Idea

Observing and Explaining the Economy

The Supply and Demand Model

Subtleties of the Supply and Demand Model

The Demand Curve and the Behavior of Consumers

The Supply Curve and the Behavior of Firms

The Efficiency of Markets

Costs and the Changes at Firms Over Time

The Rise and Fall of Industries

Monopoly

Product Differentiation, Monopolistic Competition, and Oligopoly

Antitrust Policy and Regulation

Labor Markets

Taxes, Transfers, and Income Distribution

Public Goods, Externalities, and Government Behavior

Capital and Financial Markets

Macroeconomics: the Big Picture

Measuring the Production, Income, and Spending of Nations

The Spending Allocation Model

Unemployment and Employment

Productivity and Economic Growth

Money and Inflation

The Nature and Causes of Economic Fluctuations

Using the Economic Fluctuations Model

Fiscal Policy

Monetary Policy

Economic Growth Around the World

International Trade

International Finance

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