Question 1

Given a central bank's monetary policy reaction curve, if inflation increases by 1% why would policymakers likely have to increase the nominal interest rate by more than the increase in the expected rate of inflation?

Accepted Answer

The answer of Given a central bank's monetary policy reaction...

Question 2

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

Accepted Answer

The answer of Is the monetary policy reaction curve applicable...

Question 3

Evidence points out that since the mid-1950's just about every recession was preceded by rising interest rates.This suggests that the recessions were:
A)caused in part by the actions of the Federal Reserve.
B)the result of changes in consumer confidence.
C)due to increases in oil prices and other production costs.
D)caused by simultaneous shifts in aggregate demand and aggregate supply.

Accepted Answer

The evidence suggests that rising interest rates were a common precursor to recessions, indicating that the actions of the Federal Reserve played a role in causing the economic downturns.

Question 4

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 answer of Use the equation of exchange to show...

Question 5

What are the determinants of the potential output for an economy?

Accepted Answer

The answer of What are the determinants of the potential...

Question 6

If the economy is producing a level of output that is consistent with the potential output level, and government purchases increase, describe what happens in terms of the long-run real interest rate, and why, to keep the economy at its potential output level.

Accepted Answer

The answer of If the economy is producing a level...

Question 7

If a recession were the result of monetary policy, we should observe:
A)inflation increasing as output decreases.
B)potential output decreasing.
C)inflation slowing as output falls.
D)a high rate of money growth.

Accepted Answer

If a recession was caused by contractionary monetary policy, we would expect to see inflation slow down as output falls. This is because the central bank would have decreased the money supply, which would lower aggregate demand, leading to decreased output and lower prices. Inflation would slow down as a result. Therefore, option C is the correct answer. Option A is incorrect because inflation would not be increasing if the central bank is decreasing the money supply. Option B is incorrect because potential output would not change due to monetary policy alone. Option D is also incorrect because a high rate of money growth would lead to inflation, not a recession.

Question 8

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 answer of Rank the components of aggregate demand by...

Question 9

Evidence points out that since the mid-1950's just about every recession was preceded by:
A)low interest rates.
B)rising interest rates.
C)falling interest rates.
D)negative real interest rates.

Accepted Answer

According to the evidence, rising interest rates have preceded just about every recession since the mid-1950s. This suggests that the economy may be overheating and the central bank is responding by increasing interest rates to cool down inflation and prevent an economic bubble from forming.

Question 10

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

Accepted Answer

The answer of What distinguishes the short-run real interest rate...

Question 11

In the face of constant velocity, explain what happens to aggregate demand if the growth rate of money is less than the rate of inflation.

Accepted Answer

The answer of In the face of constant velocity, explain...

Question 12

Temporary changes in inflation lead to adjustments in the price level.What causes permanent increases in inflation and why?

Accepted Answer

The answer of Temporary changes in inflation lead to adjustments...

Question 13

Use the equation of exchange to show how the level of money in the economy impacts the level of aggregate demand.

Accepted Answer

The answer of Use the equation of exchange to show...

Question 14

If changes in the nominal federal funds rate result in equal changes to the expected rate of inflation, how effective would it be for the FOMC to target the nominal federal funds rate?

Accepted Answer

The answer of If changes in the nominal federal funds...

Question 15

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

Accepted Answer

The answer of Why is it necessary to understand fluctuations...

Question 16

The debate over the causes of recessions in the U.S.in recent years has included arguments about:
A)monetary policy, but not higher oil prices.
B)decreases in exports.
C)higher oil prices, but not monetary policy.
D)both monetary policy and higher oil prices.

Accepted Answer

The debate over the causes of recessions in the U.S. in recent years has included arguments about both monetary policy and higher oil prices. Monetary policy refers to the actions taken by the Federal Reserve to influence the economy through changes in interest rates and the money supply, while higher oil prices can lead to increased costs for businesses and consumers, potentially slowing down economic growth. These factors are often cited as contributing factors to economic downturns.

Question 17

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

Accepted Answer

The answer of Why would central bankers have to pay...

Question 18

If the economy was initially at a long-run equilibrium, the short-run effects from a decrease in aggregate demand will include:
A)a recessionary gap.
B)a decrease in potential output.
C)an increase in the current inflation rate.
D)a decrease in the target rate of inflation.

Accepted Answer

A decrease in aggregate demand will lead to a decrease in output and employment in the short run, creating a recessionary gap where output is below potential. This will temporarily reduce inflationary pressures. However, potential output will not necessarily decrease as it is determined by factors such as technology, labor force size, and capital stock. The target rate of inflation is a policy choice and is not directly affected by changes in aggregate demand.

Question 19

What would you expect to happen to the price level (inflation) from a prolonged expansionary gap and why?

Accepted Answer

The answer of What would you expect to happen to...

Question 20

Discuss what happens to the monetary policy reaction curve if the Fed were to lower their inflation target and why?

Accepted Answer

The answer of Discuss what happens to the monetary policy...

Quiz 21: Output, Inflation, and Monetary Policy