Question 1

Most economists attribute the Great Moderation experienced in the United States during the 1990s mainly to:

Accepted Answer

A) Good fortune 
B) Improved technology 
C) Aggressive fiscal policy 
D) Better understanding and use of monetary policy 
A) Good fortune 
B) Improved technology 
C) Aggressive fiscal policy 
D) Better understanding and use of monetary policy

Question 2

A reduction in the central bank's inflation target shifts the dynamic aggregate demand curve to the left resulting in:

Accepted Answer

A) Lower current output and higher inflation 
B) Higher current output and higher inflation 
C) Lower current output and lower inflation 
D) Higher current output and lower inflation 
A) Lower current output and higher inflation 
B) Higher current output and higher inflation 
C) Lower current output and lower inflation 
D) Higher current output and lower inflation

Question 3

Central bankers with a relatively flat monetary policy reaction curve will:

Accepted Answer

A) Move interest rates more aggressively when inflation rises, leading to more volatility in output 
B) Move interest rates more aggressively when inflation rises, leading to less volatility in output 
C) Move interest rates less aggressively when inflation rises, leading to more volatility in output 
D) Move interest rates less aggressively when inflation rises, leading to less volatility in output 
A) Move interest rates more aggressively when inflation rises, leading to more volatility in output 
B) Move interest rates more aggressively when inflation rises, leading to less volatility in output 
C) Move interest rates less aggressively when inflation rises, leading to more volatility in output 
D) Move interest rates less aggressively when inflation rises, leading to less volatility in output

Question 4

If a recession results from higher oil prices:

Accepted Answer

A) Inflation should increase as output decreases 
B) Inflation should fall as output falls 
C) Output should not change but inflation should increase 
D) An expansionary gap should occur 
A) Inflation should increase as output decreases 
B) Inflation should fall as output falls 
C) Output should not change but inflation should increase 
D) An expansionary gap should occur

Question 5

Negative supply shocks cause shifts in:

Accepted Answer

A) The short-run aggregate supply curve 
B) The dynamic aggregate demand curve 
C) The monetary policy reaction curve but only if policymakers do not change their inflation target 
D) The long-run supply curve 
A) The short-run aggregate supply curve 
B) The dynamic aggregate demand curve 
C) The monetary policy reaction curve but only if policymakers do not change their inflation target 
D) The long-run supply curve

Question 6

In practice, it is difficult to keep inflation and output from fluctuating when aggregate expenditures change because:

Accepted Answer

A) It takes time for policymakers to recognize that shifts have occurred 
B) Changes in interest rates do not have an immediate impact on the economy 
C) Changes in consumer or business confidence can be very difficult to recognize as they are occurring 
D) All of the answers given are correct 
A) It takes time for policymakers to recognize that shifts have occurred 
B) Changes in interest rates do not have an immediate impact on the economy 
C) Changes in consumer or business confidence can be very difficult to recognize as they are occurring 
D) All of the answers given are correct

Question 7

If the economy's output response to changes in current inflation is small, the slope of the dynamic aggregate demand curve will be:

Accepted Answer

A) Flat 
B) Steep 
C) Positive 
D) Zero 
A) Flat 
B) Steep 
C) Positive 
D) Zero

Question 8

Estimates of gross domestic product (GDP) are revised:

Accepted Answer

A) Quickly and often 
B) Many years after the fact 
C) In the following quarter 
D) Each month 
A) Quickly and often 
B) Many years after the fact 
C) In the following quarter 
D) Each month

Question 9

If the monetary policy reaction curve has a relatively steep slope, the dynamic aggregate demand curve is likely to have a:

Accepted Answer

A) Relatively steep slope 
B) Relatively flat slope 
C) Positive slope 
D) Zero slope 
A) Relatively steep slope 
B) Relatively flat slope 
C) Positive slope 
D) Zero slope

Question 10

The key part of the real business cycle theory model is:

Accepted Answer

A) The importance of monetary policy 
B) The short-run aggregate supply curve 
C) Changes in aggregate demand 
D) Changes in potential output 
A) The importance of monetary policy 
B) The short-run aggregate supply curve 
C) Changes in aggregate demand 
D) Changes in potential output

Question 11

Explain why changes in the central bank's inflation target will shift the dynamic aggregate demand curve.

Accepted Answer

To explain this, let us illustrate with

Question 12

Focusing on the last fifty years in U.S.history, one would say that the number of recessions has:

Accepted Answer

A) Decreased 
B) Increased but their duration has decreased 
C) Increased and their duration has increased 
D) Decreased but their duration has increased 
A) Decreased 
B) Increased but their duration has decreased 
C) Increased and their duration has increased 
D) Decreased but their duration has increased

Question 13

While monetary policymakers cannot shift the short-run aggregate supply curve following inflation shocks, they can minimize the impact that the changes in inflation have on output.Describe how they can do this through the monetary policy reaction curve.

Accepted Answer

The steepness of the monetary policy rea

Question 14

Why do negative supply shocks pose a particularly difficult dilemma for monetary policymakers?

Accepted Answer

Adverse or negative inflation shocks rai

Question 15

A reduction in the central bank's inflation target will result in:

Accepted Answer

A) An increase in potential output 
B) No change in potential output 
C) A decrease in potential output 
D) The long-run aggregate supply curve having an upward slope 
A) An increase in potential output 
B) No change in potential output 
C) A decrease in potential output 
D) The long-run aggregate supply curve having an upward slope

Question 16

Where would the economy be operating relative to the dynamic aggregate demand curve, the short-run aggregate supply curve and the long-run aggregate supply curve, if the economy is experiencing an expansionary gap?

Accepted Answer

First of all, the intersection of the dy

Question 17

Use the long-run model from Chapter 22 to describe the adjustment process the economy would go through from an increase in potential output.

Accepted Answer

The increase in potential output would s

Question 18

An increase in potential output will result in:

Accepted Answer

A) A temporary expansionary gap 
B) A higher rate of inflation eventually 
C) A temporary recessionary gap 
D) An immediate shift upward in the short-run aggregate supply curve 
A) A temporary expansionary gap 
B) A higher rate of inflation eventually 
C) A temporary recessionary gap 
D) An immediate shift upward in the short-run aggregate supply curve

Question 19

If a negative supply shock is associated with a decline in potential output, policymakers need to:

Accepted Answer

A) Raise the real interest rate by even less than they would in the case of a recessionary gap 
B) Raise the real interest rate by even more than they would in the case of a recessionary gap 
C) Raise the real interest rate by the same amount as they would in the case of a recessionary gap 
D) Not shift the monetary policy reaction curve 
A) Raise the real interest rate by even less than they would in the case of a recessionary gap 
B) Raise the real interest rate by even more than they would in the case of a recessionary gap 
C) Raise the real interest rate by the same amount as they would in the case of a recessionary gap 
D) Not shift the monetary policy reaction curve

Question 20

If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate demand curve is likely to have a:

Accepted Answer

A) Relatively steep slope 
B) Relatively flat slope 
C) Positive slope 
D) Zero slope 
A) Relatively steep slope 
B) Relatively flat slope 
C) Positive slope 
D) Zero slope

Exam 22: Understanding Business Cycle Fluctuations

Most economists attribute the Great Moderation experienced in the United States during the 1990s mainly to:

A reduction in the central bank's inflation target shifts the dynamic aggregate demand curve to the left resulting in:

Central bankers with a relatively flat monetary policy reaction curve will:

If a recession results from higher oil prices:

Negative supply shocks cause shifts in:

In practice, it is difficult to keep inflation and output from fluctuating when aggregate expenditures change because:

If the economy's output response to changes in current inflation is small, the slope of the dynamic aggregate demand curve will be:

Estimates of gross domestic product (GDP) are revised:

If the monetary policy reaction curve has a relatively steep slope, the dynamic aggregate demand curve is likely to have a:

The key part of the real business cycle theory model is:

Explain why changes in the central bank's inflation target will shift the dynamic aggregate demand curve.

Focusing on the last fifty years in U.S.history, one would say that the number of recessions has:

While monetary policymakers cannot shift the short-run aggregate supply curve following inflation shocks, they can minimize the impact that the changes in inflation have on output.Describe how they can do this through the monetary policy reaction curve.

Why do negative supply shocks pose a particularly difficult dilemma for monetary policymakers?

A reduction in the central bank's inflation target will result in:

Where would the economy be operating relative to the dynamic aggregate demand curve, the short-run aggregate supply curve and the long-run aggregate supply curve, if the economy is experiencing an expansionary gap?

Use the long-run model from Chapter 22 to describe the adjustment process the economy would go through from an increase in potential output.

An increase in potential output will result in:

If a negative supply shock is associated with a decline in potential output, policymakers need to:

If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate demand curve is likely to have a:

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

Output, Inflation, and Monetary Policy

Modern Monetary Policy and the Challenges Facing Central Bankers

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