Question 1

Changes in aggregate demand can cause inflation to rise above or fall below the expected rate of inflation.

Accepted Answer

A) True 
 B)False

Question 2

An inflation target is

Accepted Answer

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. 
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.

Question 3

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?

Accepted Answer

The AD curve identifies possible equilib

Question 4

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.

Accepted Answer

If real interest rates are relatively hi

Question 5

If real GDP is less than potential GDP,

Accepted Answer

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. 
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.

Question 6

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.

Accepted Answer

A) True 
 B)False

Question 7

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.

Accepted Answer

As shown in the figure below,

Question 8

If the slope of the monetary policy rule line is 2, then when inflation rises by 1 percent, the

Accepted Answer

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. 
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.

Question 9

During an economic recovery, the rate of inflation is

Accepted Answer

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. 
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.

Question 10

Which of the following best explains what will happen if government purchases decline?

Accepted Answer

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. 
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.

Question 11

The IA line will move up if there is a(n)

Accepted Answer

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. 
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.

Question 12

The inflation adjustment line IA will shift down if

Accepted Answer

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 
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

Question 13

The real rate of interest is

Accepted Answer

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. 
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.

Question 14

Exhibit 24-3  
-If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3,

Accepted Answer

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. 
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.

Question 15

Suppose that, as a result of accelerated growth in the European countries, the demand for U.S. exports increases.

Accepted Answer

The answer of Suppose that, as a result of accelerated...

Question 16

Explain why the inflation adjustment line is flat.

Accepted Answer

Short-run inflation

Question 17

The inflation adjustment line is upward-sloping.

Accepted Answer

A) True 
 B)False

Question 18

The aggregate demand curve shows the relationship between

Accepted Answer

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. 
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.

Question 19

When inflation is rising, the Fed will

Accepted Answer

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. 
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.

Question 20

According to the aggregate demand curve, there is a(n)

Accepted Answer

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. 
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.

Exam 24: The Economic Fluctuations Model

Changes in aggregate demand can cause inflation to rise above or fall below the expected rate of inflation.

An inflation target is

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?

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.

If real GDP is less than potential GDP,

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.

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.

If the slope of the monetary policy rule line is 2, then when inflation rises by 1 percent, the

During an economic recovery, the rate of inflation is

Which of the following best explains what will happen if government purchases decline?

The IA line will move up if there is a(n)

The inflation adjustment line IA will shift down if

The real rate of interest is

Exhibit 24-3 -If the central bank changes its monetary policy rule from A to B as shown in Exhibit 24-3,

Suppose that, as a result of accelerated growth in the European countries, the demand for U.S. exports increases.

Explain why the inflation adjustment line is flat.

The inflation adjustment line is upward-sloping.

The aggregate demand curve shows the relationship between

When inflation is rising, the Fed will

According to the aggregate demand curve, there is a(n)

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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