Question 1

What distinguishes the short-run real interest rate from the long-run real interest rate?

Accepted Answer

The short-run real interest rate is the

Question 2

If the economy's current level of output is below its potential level of output, the short-run aggregate supply curve:

Accepted Answer

A) will shift right. 
B) will shift left. 
C) will be vertical. 
D) does not matter; only the long-run aggregate supply curve matters in this situation. 
A) will shift right. 
B) will shift left. 
C) will be vertical. 
D) does not matter; only the long-run aggregate supply curve matters in this situation.

Question 3

In the long run, current output will:

Accepted Answer

A) equal potential output. 
B) be less than potential output. 
C) be above potential output. 
D) only equal potential output if unemployment is zero. 
A) equal potential output. 
B) be less than potential output. 
C) be above potential output. 
D) only equal potential output if unemployment is zero.

Question 4

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate.Start with the most sensitive to the least sensitive.

Accepted Answer

The most sensitive is investment demand,

Question 5

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 6

Can central bankers set short-term interest rate targets and still control inflation in the long run or are these goals mutually impossible? Explain.

Accepted Answer

They can attain both goals.The monetary

Question 7

An inflation rate below the target rate will result in:

Accepted Answer

A) a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. 
B) a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. 
C) a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve. 
D) a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve. 
A) a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. 
B) a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve. 
C) a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve. 
D) a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.

Question 8

The FOMC targets the federal funds rate, but if they are going to alter the course of the economy they must influence the:

Accepted Answer

A) real interest rate as well. 
B) long-term nominal interest rate as well. 
C) real exchange rate as well. 
D) nominal exchange rate as well. 
A) real interest rate as well. 
B) long-term nominal interest rate as well. 
C) real exchange rate as well. 
D) nominal exchange rate as well.

Question 9

A decrease in the inflation target by the central bank would:

Accepted Answer

A) have no impact on the positioning of the dynamic aggregate demand curve. 
B) cause the dynamic aggregate demand curve to shift to the left. 
C) cause the dynamic aggregate demand curve to shift to the right. 
D) be reflected by a movement down and along the existing dynamic aggregate demand curve. 
A) have no impact on the positioning of the dynamic aggregate demand curve. 
B) cause the dynamic aggregate demand curve to shift to the left. 
C) cause the dynamic aggregate demand curve to shift to the right. 
D) be reflected by a movement down and along the existing dynamic aggregate demand curve.

Question 10

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 11

Is the monetary policy reaction curve applicable only to central banks that have an explicit inflation target? Explain.

Accepted Answer

No.The monetary policy reaction curve re

Question 12

When the monetary policymakers raise the target inflation rate they:

Accepted Answer

A) raise the current real inflation rate at every level of current inflation. 
B) lower the current real interest rate at every level of current inflation. 
C) in effect shift the monetary policy reaction curve to the left. 
D) in effect move up along the current monetary policy reaction curve. 
A) raise the current real inflation rate at every level of current inflation. 
B) lower the current real interest rate at every level of current inflation. 
C) in effect shift the monetary policy reaction curve to the left. 
D) in effect move up along the current monetary policy reaction curve.

Question 13

Recent policy statements by the FOMC announce and explain its:

Accepted Answer

A) targets for money growth with no mention of interest-rate targets. 
B) short-term interest-rate and balance-sheet adjustments with no mention of money growth targets. 
C) decisions for long-term interest rates. 
D) decisions for money-growth targets but also mentioning short-term interest-rate decisions. 
A) targets for money growth with no mention of interest-rate targets. 
B) short-term interest-rate and balance-sheet adjustments with no mention of money growth targets. 
C) decisions for long-term interest rates. 
D) decisions for money-growth targets but also mentioning short-term interest-rate decisions.

Question 14

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

Accepted Answer

A) The monetary policy reaction curve shifts to the left 
B) A movement up the existing monetary policy reaction curve 
C) A movement down the existing monetary policy reaction curve 
D) The monetary policy reaction curve shifts to the right 
A) The monetary policy reaction curve shifts to the left 
B) A movement up the existing monetary policy reaction curve 
C) A movement down the existing monetary policy reaction curve 
D) The monetary policy reaction curve shifts to the right

Question 15

Why is it necessary to understand fluctuations in investment if we want to understand the fluctuations in the business cycle?

Accepted Answer

Investment is not the largest component

Question 16

Aggregate supply is the quantity of:

Accepted Answer

A) real output supplied at each level of inflation. 
B) nominal output supplied at each level of inflation. 
C) real output supplied at each level of real interest rate. 
D) output the country wants at each level of inflation. 
A) real output supplied at each level of inflation. 
B) nominal output supplied at each level of inflation. 
C) real output supplied at each level of real interest rate. 
D) output the country wants at each level of inflation.

Question 17

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 18

Which component of aggregate expenditures is the least sensitive to changes in the real interest rate?

Accepted Answer

A) Investment 
B) Consumption 
C) Net exports 
D) Government purchases 
A) Investment 
B) Consumption 
C) Net exports 
D) Government purchases

Question 19

If the axes in the model for the monetary policy reaction curve are the real interest rate (vertical axis) and the rate of inflation (horizontal axis), then the monetary policy reaction curve would:

Accepted Answer

A) have a positive slope. 
B) have a negative slope. 
C) have a zero slope. 
D) be vertical. 
A) have a positive slope. 
B) have a negative slope. 
C) have a zero slope. 
D) be vertical.

Question 20

If policymakers are not aggressive about keeping inflation close to the target rate, the slope of the monetary policy reaction curve would be:

Accepted Answer

A) steep. 
B) relatively flat. 
C) horizontal. 
D) negative. 
A) steep. 
B) relatively flat. 
C) horizontal. 
D) negative.

Exam 21: Output, Inflation, and Monetary Policy

What distinguishes the short-run real interest rate from the long-run real interest rate?

If the economy's current level of output is below its potential level of output, the short-run aggregate supply curve:

In the long run, current output will:

Rank the components of aggregate demand by their sensitivity to changes in the real interest rate.Start with the most sensitive to the least sensitive.

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

Can central bankers set short-term interest rate targets and still control inflation in the long run or are these goals mutually impossible? Explain.

An inflation rate below the target rate will result in:

The FOMC targets the federal funds rate, but if they are going to alter the course of the economy they must influence the:

A decrease in the inflation target by the central bank would:

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

Is the monetary policy reaction curve applicable only to central banks that have an explicit inflation target? Explain.

When the monetary policymakers raise the target inflation rate they:

Recent policy statements by the FOMC announce and explain its:

What would be the impact on the monetary policy reaction curve if the Fed were to raise the target inflation rate?

Why is it necessary to understand fluctuations in investment if we want to understand the fluctuations in the business cycle?

Aggregate supply is the quantity of:

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:

Which component of aggregate expenditures is the least sensitive to changes in the real interest rate?

If the axes in the model for the monetary policy reaction curve are the real interest rate (vertical axis) and the rate of inflation (horizontal axis), then the monetary policy reaction curve would:

If policymakers are not aggressive about keeping inflation close to the target rate, the slope of the monetary policy reaction curve would be:

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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