Question 1

Why would central bankers have to pay attention to forecasts regarding consumer sentiment and expectations of business owners and managers?

Accepted Answer

Central bankers realize that they can im

Question 2

Former Bank of England Governor Mervyn King, commenting on a speech given by then Fed Chairman Greenspan, said "any (coherent) monetary policy can be written as an inflation target plus a response to supply shocks." What do these comments mean and what insight do they provide us to the focus of central banks?

Accepted Answer

Governor King is pointing to the fact th

Question 3

In the short run, the aggregate supply curve is:

Accepted Answer

A)  vertical. 
B)  horizontal. 
C)  upward sloping. 
D)  downward sloping. 
A)  vertical. 
B)  horizontal. 
C)  upward sloping. 
D)  downward sloping.

Question 4

The conditions for long-run equilibrium include each of the following, except:

Accepted Answer

A)  imports equal exports. 
B)  current inflation is steady and equals target inflation. 
C)  current output equals potential output. 
D)  current inflation equals expected inflation. 
A)  imports equal exports. 
B)  current inflation is steady and equals target inflation. 
C)  current output equals potential output. 
D)  current inflation equals expected inflation.

Question 5

Is the actual amount of output that corresponds to the long-run aggregate supply curve fixed? Explain.

Accepted Answer

No. The long-run supply curve is vertica

Question 6

Output and inflation movements can arise from either demand or supply shifts. How can we tell them apart?

Accepted Answer

While shifts in either the dynamic aggre

Question 7

Which of the following would not be included in aggregate expenditures?

Accepted Answer

A)  Your purchase of a new car 
B)  The value of 100 shares of Microsoft stock you purchased 
C)  The purchase of new textbooks by your local school district 
D)  The value of blue jeans produced in the U.S. and exported to Japan 
A)  Your purchase of a new car 
B)  The value of 100 shares of Microsoft stock you purchased 
C)  The purchase of new textbooks by your local school district 
D)  The value of blue jeans produced in the U.S. and exported to Japan

Question 8

The aggregate demand curve shows the quantity of:

Accepted Answer

A)  nominal output demanded at each level of inflation. 
B)  real output demanded at each level of inflation. 
C)  output made available at each level of inflation. 
D)  real output demanded at each level of real interest rate. 
A)  nominal output demanded at each level of inflation. 
B)  real output demanded at each level of inflation. 
C)  output made available at each level of inflation. 
D)  real output demanded at each level of real interest rate.

Question 9

A decrease in taxes would cause:

Accepted Answer

A)  the dynamic aggregate demand curve to shift to the left. 
B)  a movement down and along the existing dynamic aggregate demand curve. 
C)  a movement up and along the existing dynamic aggregate demand curve. 
D)  the dynamic aggregate demand curve to shift to the right. 
A)  the dynamic aggregate demand curve to shift to the left. 
B)  a movement down and along the existing dynamic aggregate demand curve. 
C)  a movement up and along the existing dynamic aggregate demand curve. 
D)  the dynamic aggregate demand curve to shift to the right.

Question 10

Which of the following statements is incorrect?

Accepted Answer

A)  The point where the short-run and long-run supply curves intersect corresponds to the potential level of output. 
B)  Any point on the short-run aggregate supply curve reflects current inflation equals target inflation. 
C)  Inflation and output are unrelated in the long run. 
D)  In the long run, inflation is determined by monetary policy. 
A)  The point where the short-run and long-run supply curves intersect corresponds to the potential level of output. 
B)  Any point on the short-run aggregate supply curve reflects current inflation equals target inflation. 
C)  Inflation and output are unrelated in the long run. 
D)  In the long run, inflation is determined by monetary policy.

Question 11

If monetary policymakers fear a recession resulting from increased pessimism on the part of business people, and they want to avoid the recession, they would:

Accepted Answer

A)  shift the monetary policy reaction curve to the right. 
B)  shift the monetary policy reaction curve to the left. 
C)  likely lower their target rate for inflation. 
D)  encourage fiscal policymakers to act. 
A)  shift the monetary policy reaction curve to the right. 
B)  shift the monetary policy reaction curve to the left. 
C)  likely lower their target rate for inflation. 
D)  encourage fiscal policymakers to act.

Question 12

If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to:

Accepted Answer

A)  lower the real interest rate. 
B)  raise the real interest rate. 
C)  keep the real interest rate constant and focus on only changing the nominal interest rate. 
D)  purchase Treasury securities. 
A)  lower the real interest rate. 
B)  raise the real interest rate. 
C)  keep the real interest rate constant and focus on only changing the nominal interest rate. 
D)  purchase Treasury securities.

Question 13

If policymakers are aggressive in keeping current inflation near the target inflation rate then the monetary policy reaction curve will:

Accepted Answer

A)  be steep. 
B)  be flat. 
C)  have an undefined slope. 
D)  be vertical. 
A)  be steep. 
B)  be flat. 
C)  have an undefined slope. 
D)  be vertical.

Question 14

Use the equation of exchange to show that in the long run, inflation must equal money growth less the growth of potential output.

Accepted Answer

The equation of exchange is MV = PY; if

Question 15

Consumption can be sensitive to changes in the real interest rate because:

Accepted Answer

A)  higher interest rates can increase the cost of durable goods like automobiles. 
B)  higher interest rates will result in less saving. 
C)  lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods. 
D)  lower interest rates increase savings. 
A)  higher interest rates can increase the cost of durable goods like automobiles. 
B)  higher interest rates will result in less saving. 
C)  lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods. 
D)  lower interest rates increase savings.

Question 16

Of all of the components of aggregate demand, the most interest sensitive is:

Accepted Answer

A)  investment. 
B)  government purchases. 
C)  consumption. 
D)  net exports. 
A)  investment. 
B)  government purchases. 
C)  consumption. 
D)  net exports.

Question 17

In the long run the inflation rate equals the level implied by:

Accepted Answer

A)  the rate of money growth. 
B)  aggregate demand. 
C)  the exchange rate. 
D)  fiscal policy. 
A)  the rate of money growth. 
B)  aggregate demand. 
C)  the exchange rate. 
D)  fiscal policy.

Question 18

The potential output of a country would increase as a result of each of the following, except:

Accepted Answer

A)  an increase in population. 
B)  an increase in capital per worker. 
C)  technological innovation that increases labor productivity. 
D)  depreciation of the capital stock. 
A)  an increase in population. 
B)  an increase in capital per worker. 
C)  technological innovation that increases labor productivity. 
D)  depreciation of the capital stock.

Question 19

If a point lies on the monetary policy reaction curve, and at this point the inflation rate equals the target rate of inflation, we know that:

Accepted Answer

A)  the real interest rate corresponding to this point is above the long-run real interest rate. 
B)  the real interest rate corresponding to this point is equal to the long-run real interest rate. 
C)  the real interest rate corresponding to this point is below the long-run real interest rate. 
D)  current output is above potential output. 
A)  the real interest rate corresponding to this point is above the long-run real interest rate. 
B)  the real interest rate corresponding to this point is equal to the long-run real interest rate. 
C)  the real interest rate corresponding to this point is below the long-run real interest rate. 
D)  current output is above potential output.

Question 20

For central bankers to alter the real interest rate by changing the nominal interest rate, which of the following must be true?

Accepted Answer

A)  The rate of inflation has to remain constant. 
B)  Inflation expectations are quite stable. 
C)  The expected rate of inflation has to change. 
D)  The change in the expected rate of inflation must equal the change in the nominal interest rate. 
A)  The rate of inflation has to remain constant. 
B)  Inflation expectations are quite stable. 
C)  The expected rate of inflation has to change. 
D)  The change in the expected rate of inflation must equal the change in the nominal interest rate.

Exam 21:Output, Inflation, and Monetary Policy

Why would central bankers have to pay attention to forecasts regarding consumer sentiment and expectations of business owners and managers?

In the short run, the aggregate supply curve is:

The conditions for long-run equilibrium include each of the following, except:

Is the actual amount of output that corresponds to the long-run aggregate supply curve fixed? Explain.

Output and inflation movements can arise from either demand or supply shifts. How can we tell them apart?

Which of the following would not be included in aggregate expenditures?

The aggregate demand curve shows the quantity of:

A decrease in taxes would cause:

Which of the following statements is incorrect?

If monetary policymakers fear a recession resulting from increased pessimism on the part of business people, and they want to avoid the recession, they would:

If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to:

If policymakers are aggressive in keeping current inflation near the target inflation rate then the monetary policy reaction curve will:

Use the equation of exchange to show that in the long run, inflation must equal money growth less the growth of potential output.

Consumption can be sensitive to changes in the real interest rate because:

Of all of the components of aggregate demand, the most interest sensitive is:

In the long run the inflation rate equals the level implied by:

The potential output of a country would increase as a result of each of the following, except:

If a point lies on the monetary policy reaction curve, and at this point the inflation rate equals the target rate of inflation, we know that:

For central bankers to alter the real interest rate by changing the nominal interest rate, which of the following must be true?

An Introduction to Money and the Financial System

Money and the Payments System

Financial Instruments, Financial Markets, and Financial Institutions

Future Value, Present Value and Interest Rates

Understanding Risk

Bonds, Bond Prices, and the Determination of Interest Rates

The Risk and Term Structure of Interest Rates

Stocks, Stock Markets and Market Efficiency

Derivatives: Futures, Options, and Swaps

Foreign Exchange

The Economics of Financial Intermediation

Depository Institutions: Banks and Bank Management

Financial Industry Structure

Regulating the Financial System

Central Banks in the World Today

The Structure of Central Banks: The Federal Reserve and the European Central Bank

The Central Bank Balance Sheet and the Money Supply Process

Monetary Policy: Stabilizing the Domestic Economy

Exchange Rate Policy and the Central Bank

Money Growth, Money Demand and Modern Monetary Policy

Understanding Business Cycle Fluctuations

Modern Monetary Policy and the Challenges Facing Central Bankers

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