Question 1

Which of the following best explains what will happen in the short run if government purchases increase?

Accepted Answer

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 
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

Question 2

The inflation adjustment line is used to

Accepted Answer

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. 
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.

Question 3

If the economy is in an expansion, it is likely that

Accepted Answer

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. 
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.

Question 4

The aggregate demand curve slopes downward because

Accepted Answer

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. 
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.

Question 5

Unlike business investment, housing investment declines when the real interest rate falls.

Accepted Answer

A) True 
 B)False

Question 6

The aggregate demand curve and the inflation adjustment line intersect where real GDP is

Accepted Answer

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. 
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.

Question 7

Expectations of steady inflation and staggered wage and price setting are two reasons why

Accepted Answer

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. 
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.

Question 8

A change in the rate of inflation causes a movement along the AD curve.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

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. 
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.

Question 10

The AD curve slopes down because there is more spending when inflation is lower.

Accepted Answer

A) True 
 B)False

Question 11

A rise in world real interest rates relative to U.S. interest rates

Accepted Answer

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. 
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.

Question 12

During a recession, the rate of inflation is

Accepted Answer

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. 
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.

Question 13

A lower real interest rate in the United States relative to the rest of the world will tend to

Accepted Answer

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. 
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.

Question 14

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.

Accepted Answer

A) True 
 B)False

Question 15

The housing boom that took place during the first half of the 2000s best illustrates how

Accepted Answer

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. 
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.

Question 16

The Federal Reserve cannot directly control interest rates.

Accepted Answer

A) True 
 B)False

Question 17

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.

Accepted Answer

The Fed will want to increase

Question 18

The slope of the monetary policy rule line shows that the Fed will seek to change the nominal rate of interest

Accepted Answer

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. 
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.

Question 19

When real and potential GDP are equal,

Accepted Answer

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. 
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.

Question 20

Does the Fed have an explicit inflation target? If not, does this mean that the Fed is not concerned with inflation? Explain.

Accepted Answer

The Fed does not have an explicit inflat

Exam 24: The Economic Fluctuations Model

Which of the following best explains what will happen in the short run if government purchases increase?

The inflation adjustment line is used to

If the economy is in an expansion, it is likely that

The aggregate demand curve slopes downward because

Unlike business investment, housing investment declines when the real interest rate falls.

The aggregate demand curve and the inflation adjustment line intersect where real GDP is

Expectations of steady inflation and staggered wage and price setting are two reasons why

A change in the rate of inflation causes a movement along the AD curve.

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

The AD curve slopes down because there is more spending when inflation is lower.

A rise in world real interest rates relative to U.S. interest rates

During a recession, the rate of inflation is

A lower real interest rate in the United States relative to the rest of the world will tend to

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.

The housing boom that took place during the first half of the 2000s best illustrates how

The Federal Reserve cannot directly control interest rates.

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.

The slope of the monetary policy rule line shows that the Fed will seek to change the nominal rate of interest

When real and potential GDP are equal,

Does the Fed have an explicit inflation target? If not, does this mean that the Fed is not concerned with inflation? Explain.

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

Filters