Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

Refer to the accompanying figure. Starting from long-run equilibrium at point C, an adverse inflation shock that increases inflation from π to π¹ will lead to a short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________, if left to self-correcting tendencies.

Increases in inflation redistribute resources from ________-spending to ________-spending households and hence, ________ short-run equilibrium output.

Refer to the accompanying figure. Starting from long-run equilibrium at point C, a decrease in government spending that decreases aggregate demand from AD¹ to AD will lead to a short-run equilibrium at ________ creating ________ gap.

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then there is initially ________ gap and the short-run aggregate supply curve will ________.

If policymakers attempt to offset a favorable inflation shock with monetary ________, the resulting long-run equilibrium will be at ________ inflation rate compared to allowing the self-correcting mechanism return the economy to potential output.

Refer to the accompanying figure. An economy in short-run equilibrium at point A has a(n)________ gap. The gap could be eliminated by the self-correcting mechanism of the economy and eventually achieve long-run equilibrium at point ________ or the central bank could intervene with monetary easing and the long-run equilibrium would be at point ________.

Which of the following will shift the aggregate demand curve to the left?

A horizontal line showing the current rate of inflation, as determined by past expectations and pricing decisions is called the:

Graphically long-run equilibrium occurs at the intersection of the aggregate demand curve and the:

At a short-run equilibrium output equals ________, while at a long-run equilibrium output equals ________.

When the Federal Reserve increases its target rate of inflation, it will set a ________ real interest rate at every inflation rate and the aggregate demand curve will ________.

Because decreases in inflation increase planned spending and short-run equilibrium output:

A downward shift in the Fed's policy reaction function is a(n)________ of monetary policy, and the aggregate demand curve ________.

Graphically inflation shocks shift the ________ and shocks to potential shift the ________.

The aggregate demand curve is downward sloping for all of the following reasons EXCEPT for the:

As inflation decreases, households become ________ uncertain leading to ________ spending.

When inflation equals the value determined by past expectations and pricing decisions and output equals the level of short-run equilibrium output consistent with that inflation, the economy is said to be in ________ equilibrium.

Starting from long-run equilibrium, a large decrease in government purchases will result in a(n)________ gap in the short-run and ________ inflation and ________ output in the long-run.

The output losses from an adverse inflation shock are ________ and the output losses from a fall in potential output are ________.

When the economy is in short-run equilibrium, there will be ________ output gap.