Question 1

Exhibit 24-4  
-The AD curve shifts to the left as a result of

Accepted Answer

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. 
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.

Question 2

If a firm expects the rate of inflation to be 2 percent, it will expect its competitors to

Accepted Answer

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. 
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.

Question 3

Which of the following is probably the least sensitive to changes in real interest rates?

Accepted Answer

A) Consumption expenditures 
B) Gross investment 
C) Net exports 
D) Residential investment 
E) Net investment 
A) Consumption expenditures 
B) Gross investment 
C) Net exports 
D) Residential investment 
E) Net investment

Question 4

Inflation and the rate of interest are positively correlated.

Accepted Answer

A) True 
 B)False

Question 5

If government purchases increase, the expenditure line

Accepted Answer

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. 
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.

Question 6

The purpose of the AD curve and the IA line is to

Accepted Answer

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. 
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.

Question 7

If the central bank increases the target inflation rate, then

Accepted Answer

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. 
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.

Question 8

Which of the following explains a downward shift in the expenditure line along the vertical axis?

Accepted Answer

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 
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

Question 9

Exhibit 24-5  
-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.

Accepted Answer

The monetary policy response rule is sho

Question 10

If business confidence increases,

Accepted Answer

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. 
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.

Question 11

The market interest rate the Fed focuses on is the federal funds rate.

Accepted Answer

A) True 
 B)False

Question 12

How do changes in real interest rates affect real GDP?

Accepted Answer

A change in real interest rates will cau

Question 13

The inflation adjustment line is horizontal because firms adjust output before price.

Accepted Answer

A) True 
 B)False

Question 14

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.

Accepted Answer

A stronger dollar will result in an incr

Question 15

If government purchases increase, inflation will increase, and there will be an upward movement along the AD curve.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following is NOT an element of the economic fluctuations model?

Accepted Answer

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. 
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.

Question 17

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

Accepted Answer

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. 
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.

Question 18

According to historical evidence, when real GDP is

Accepted Answer

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. 
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.

Question 19

Aggregate expenditures depend on the nominal interest rate because that is the rate that must be paid to the borrower.

Accepted Answer

A) True 
 B)False

Question 20

If firms are experiencing slow growth in demand, the inflation adjustment line is likely to shift down.

Accepted Answer

A) True 
 B)False

Exam 24: The Economic Fluctuations Model

Exhibit 24-4 -The AD curve shifts to the left as a result of

If a firm expects the rate of inflation to be 2 percent, it will expect its competitors to

Which of the following is probably the least sensitive to changes in real interest rates?

Inflation and the rate of interest are positively correlated.

If government purchases increase, the expenditure line

The purpose of the AD curve and the IA line is to

If the central bank increases the target inflation rate, then

Which of the following explains a downward shift in the expenditure line along the vertical axis?

Exhibit 24-5 -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.

If business confidence increases,

The market interest rate the Fed focuses on is the federal funds rate.

How do changes in real interest rates affect real GDP?

The inflation adjustment line is horizontal because firms adjust output before price.

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.

If government purchases increase, inflation will increase, and there will be an upward movement along the AD curve.

Which of the following is NOT an element of the economic fluctuations model?

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

According to historical evidence, when real GDP is

Aggregate expenditures depend on the nominal interest rate because that is the rate that must be paid to the borrower.

If firms are experiencing slow growth in demand, the inflation adjustment line is likely to shift down.

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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