Question 1

When a recessionary gap exists, actual output ________ potential output and the rate of inflation will tend to ________.

Accepted Answer

A) exceeds; increase 
B) exceeds; decrease 
C) is less than; decrease 
D) is less than; increase 
A) exceeds; increase 
B) exceeds; decrease 
C) is less than; decrease 
D) is less than; increase

Question 2

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the ________ shifts ________.

Accepted Answer

A) aggregate demand curve; right 
B) short-run aggregate supply line; downward 
C) aggregate demand curve; left 
D) short-run aggregate supply line; upward 
A) aggregate demand curve; right 
B) short-run aggregate supply line; downward 
C) aggregate demand curve; left 
D) short-run aggregate supply line; upward

Question 3

The long-run aggregate supply line is:

Accepted Answer

A) downward sloping. 
B) vertical at the economy's potential output. 
C) upward sloping. 
D) vertical at the economy's actual output. 
A) downward sloping. 
B) vertical at the economy's potential output. 
C) upward sloping. 
D) vertical at the economy's actual output.

Question 4

If the Fed's monetary policy reaction function does not change, then when inflation increases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.

Accepted Answer

A) increasing; increases; increases 
B) increasing; increases; decreases 
C) increasing; decreases; decreases 
D) decreasing; decreases; decreases 
A) increasing; increases; increases 
B) increasing; increases; decreases 
C) increasing; decreases; decreases 
D) decreasing; decreases; decreases

Question 5

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

Accepted Answer

A) shifts upward to the left; shifts to the right 
B) shifts downward to the right; shifts to the right 
C) shifts upward to the left; shifts to the left 
D) shifts downward to the right; shifts to the left 
A) shifts upward to the left; shifts to the right 
B) shifts downward to the right; shifts to the right 
C) shifts upward to the left; shifts to the left 
D) shifts downward to the right; shifts to the left

Question 6

According to the AD-AS diagram, policy makers face a short-term trade-off between ________ when implementing anti-inflation policies.

Accepted Answer

A) long-term equilibrium and short-term equilibrium 
B) inflation and expansion 
C) recession and stagflation 
D) inflation and unemployment 
A) long-term equilibrium and short-term equilibrium 
B) inflation and expansion 
C) recession and stagflation 
D) inflation and unemployment

Question 7

Starting from a long-run equilibrium, an increase in potential output leads to ________ gap in the short run and to ________ rates of inflation in the long run.

Accepted Answer

A) an expansionary; higher 
B) an expansionary; lower 
C) a recessionary; lower 
D) a recessionary; higher 
A) an expansionary; higher 
B) an expansionary; lower 
C) a recessionary; lower 
D) a recessionary; higher

Question 8

At long-run equilibrium inflation ________ and output equals ________.

Accepted Answer

A) equals the value determined by past expectations and pricing decisions; potential 
B) equals the value determined by part expectations and pricing decisions; the level of short-run equilibrium output consistent with that inflation rate 
C) equals the value consistent with potential output; the level of output consistent with zero inflation 
D) is stable; potential 
A) equals the value determined by past expectations and pricing decisions; potential 
B) equals the value determined by part expectations and pricing decisions; the level of short-run equilibrium output consistent with that inflation rate 
C) equals the value consistent with potential output; the level of output consistent with zero inflation 
D) is stable; potential

Question 9

Starting from long-run equilibrium, the long-run impact of an increase in autonomous investment, compared to the original equilibrium, is:

Accepted Answer

A) higher inflation and the same output. 
B) lower inflation and lower output. 
C) lower inflation and the same output. 
D) higher inflation and higher output. 
A) higher inflation and the same output. 
B) lower inflation and lower output. 
C) lower inflation and the same output. 
D) higher inflation and higher output.

Question 10

At a constant rate of exchange between currencies, higher inflation makes domestic goods sold abroad ________ expensive and hence, ________ short-run equilibrium output.

Accepted Answer

A) more; increases 
B) less; increases 
C) less; decreases 
D) more; decreases 
A) more; increases 
B) less; increases 
C) less; decreases 
D) more; decreases

Question 11

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.

Accepted Answer

A) aggregate demand curve; right 
B) short-run aggregate supply line; downward 
C) aggregate demand curve; left 
D) short-run aggregate supply line; upward 
A) aggregate demand curve; right 
B) short-run aggregate supply line; downward 
C) aggregate demand curve; left 
D) short-run aggregate supply line; upward

Question 12

When actual output equals potential output there is ________ output gap and the rate of inflation will tend to ________.

Accepted Answer

A) an expansionary; increase 
B) an expansionary; decrease 
C) no; remain the same 
D) a recessionary; increase 
A) an expansionary; increase 
B) an expansionary; decrease 
C) no; remain the same 
D) a recessionary; increase

Question 13

A vertical line showing the economy's potential is called the:

Accepted Answer

A) aggregate demand curve. 
B) long-run aggregate supply line. 
C) short-run equilibrium output line. 
D) short-run aggregate supply line. 
A) aggregate demand curve. 
B) long-run aggregate supply line. 
C) short-run equilibrium output line. 
D) short-run aggregate supply line.

Question 14

According to the AD-AS diagram, short-term, an anti-inflation policy creates:

Accepted Answer

A) higher output. 
B) higher inflation. 
C) lower inflation. 
D) higher unemployment. 
A) higher output. 
B) higher inflation. 
C) lower inflation. 
D) higher unemployment.

Question 15

Starting from a long-run equilibrium, a reduction in potential output leads to ________ gap in the short run and to a ________ rate of inflation in the long run.

Accepted Answer

A) an expansionary; higher 
B) an expansionary; lower 
C) a recessionary; lower 
D) a recessionary; higher 
A) an expansionary; higher 
B) an expansionary; lower 
C) a recessionary; lower 
D) a recessionary; higher

Question 16

A downward shift in the Fed's reaction function is equivalent to:

Accepted Answer

A) a decline in the Fed's long-term target for inflation. 
B) an increase in the Fed's long-term target for inflation. 
C) an upward shift of short-run aggregate supply. 
D) a downward shift of short-run aggregate supply. 
A) a decline in the Fed's long-term target for inflation. 
B) an increase in the Fed's long-term target for inflation. 
C) an upward shift of short-run aggregate supply. 
D) a downward shift of short-run aggregate supply.

Question 17

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

Accepted Answer

A) Income taxes are raised. 
B) The government increases spending on education. 
C) Consumers become pessimistic about the future. 
D) Business managers become pessimistic about the future. 
A) Income taxes are raised. 
B) The government increases spending on education. 
C) Consumers become pessimistic about the future. 
D) Business managers become pessimistic about the future.

Question 18

All else equal, an increase in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

Accepted Answer

A) increases; increases 
B) decreases; increases 
C) increases; decreases 
D) decreases; decreases 
A) increases; increases 
B) decreases; increases 
C) increases; decreases 
D) decreases; decreases

Question 19

A downward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

Accepted Answer

A) shift left of; movement up 
B) shift left of; shift right of 
C) shift right of; shift left of 
D) movement up; shift right of 
A) shift left of; movement up 
B) shift left of; shift right of 
C) shift right of; shift left of 
D) movement up; shift right of

Question 20

Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n)________ gap in the short run and ________ output and ________ inflation in the long run.

Accepted Answer

A) recessionary; lower; higher 
B) expansionary; lower; higher 
C) expansionary; higher; higher 
D) recessionary; potential; higher 
A) recessionary; lower; higher 
B) expansionary; lower; higher 
C) expansionary; higher; higher 
D) recessionary; potential; higher

Exam 27: Aggregate Demand, Aggregate Supply, and Inflation

When a recessionary gap exists, actual output ________ potential output and the rate of inflation will tend to ________.

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the ________ shifts ________.

The long-run aggregate supply line is:

If the Fed's monetary policy reaction function does not change, then when inflation increases the Fed responds by ________ the real interest rate, which ________ consumption and investment spending, which ________ output.

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function ________ and the aggregate demand curve ________.

According to the AD-AS diagram, policy makers face a short-term trade-off between ________ when implementing anti-inflation policies.

Starting from a long-run equilibrium, an increase in potential output leads to ________ gap in the short run and to ________ rates of inflation in the long run.

At long-run equilibrium inflation ________ and output equals ________.

Starting from long-run equilibrium, the long-run impact of an increase in autonomous investment, compared to the original equilibrium, is:

At a constant rate of exchange between currencies, higher inflation makes domestic goods sold abroad ________ expensive and hence, ________ short-run equilibrium output.

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the ________ shifts ________.

When actual output equals potential output there is ________ output gap and the rate of inflation will tend to ________.

A vertical line showing the economy's potential is called the:

According to the AD-AS diagram, short-term, an anti-inflation policy creates:

Starting from a long-run equilibrium, a reduction in potential output leads to ________ gap in the short run and to a ________ rate of inflation in the long run.

A downward shift in the Fed's reaction function is equivalent to:

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

All else equal, an increase in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

A downward shift in the Fed's policy reaction function corresponds to a ________ the aggregate demand curve and a decrease in exogenous spending corresponds to a ________ the aggregate demand curve.

Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n)________ gap in the short run and ________ output and ________ inflation in the long run.

Thinking Like an Economist

Comparative Advantage

Supply and Demand

Elasticity

Demand

Perfectly Competitive Supply

Efficiency, Exchange, and the Invisible Hand in Action

Monopoly, Oligopoly, and Monopolistic Competition

Games and Strategic Behavior

An Introduction to Behavioral Economics

Externalities, Property Rights, and the Environment

The Economics of Information

Labor Markets, Poverty, and Income Distribution

Public Goods and Tax Policy

International Trade and Trade Policy

Macroeconomics: The Birds Eye View of the Economy

Measuring Economic Activity: GDP and Unemployment

Measuring the Price Level and Inflation

Economic Growth, Productivity, and Living Standards

The Labor Market: Workers, Wages, and Unemployment

Saving and Capital Formation

Money Prices and the Federal Reserve

Financial Markets and International Capital Flows

Short-Term Economic Fluctuations: An Introduction

Spending and Output in the Short Run

Stabilizing the Economy: The Role of the Fed

Exchange Rates and the Open Economy

Filters

When a recessionary gap exists, actual output potential output and the rate of inflation will tend to .

For a given level of inflation, if bright prospects for the future of the economy cause businesses to increase their investment in new capital, then the shifts .

If the Fed's monetary policy reaction function does not change, then when inflation increases the Fed responds by the real interest rate, which consumption and investment spending, which output.

If the Federal Reserve raises its target inflation rate, the monetary policy reaction function and the aggregate demand curve .

Starting from a long-run equilibrium, an increase in potential output leads to gap in the short run and to rates of inflation in the long run.

At long-run equilibrium inflation and output equals .

At a constant rate of exchange between currencies, higher inflation makes domestic goods sold abroad expensive and hence, short-run equilibrium output.

For a given level of inflation, if a resolution of international disputes leads to a cutback in government military spending, then the shifts .

When actual output equals potential output there is output gap and the rate of inflation will tend to .

Starting from a long-run equilibrium, a reduction in potential output leads to gap in the short run and to a rate of inflation in the long run.

All else equal, an increase in the rate of inflation planned spending and short-run equilibrium output.

A downward shift in the Fed's policy reaction function corresponds to a the aggregate demand curve and a decrease in exogenous spending corresponds to a the aggregate demand curve.

Compared to an initial long-run equilibrium, an aggregate supply shock that reduces potential output results in a(n) gap in the short run and output and inflation in the long run.