Question 1

The aggregate demand (ADI)curve shows the relationship between short-run equilibrium output and the __________ rate.
A) nominal interest
B) real interest
C) unemployment
D) inflation
E) exchange

Accepted Answer

The ADI curve shows the relationship between short-run equilibrium output and the inflation rate. As the price level rises, the demand for goods and services will fall, which will result in a decrease in equilibrium output. Conversely, a decrease in the price level will cause an increase in aggregate demand and output. Therefore, the ADI curve slopes downward from left to right, indicating that as the price level decreases, aggregate output increases, and vice versa.

Question 2

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: 
If inflation is 2%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.
A) 1;20,000
B) 2;20,000
C) 2;19,200
D) 3;18,800
E) 3;18,000

Accepted Answer

D

Question 3

Changes in autonomous aggregate demand and the Bank of Canada's reaction function shift the
A) inflation adjustment (IA)line.
B) long-run aggregate supply line
C) potential output line.
D) aggregate demand (ADI)curve.
E) 45º linE.

Accepted Answer

Changes in autonomous aggregate demand would shift the aggregate demand curve, and the Bank of Canada's reaction function would also affect the aggregate demand curve. Therefore, the correct choice is D, which is the aggregate demand (ADI) curve. None of the other options are directly affected by shifts in autonomous aggregate demand or the Bank of Canada's reaction function.

Question 4

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: 
If inflation is 1%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.
A) 0;20,000
B) 1;20,000
C) 1;19,600
D) 2;15,000
E) 2;19,200

Accepted Answer

The answer of Suppose that,in an economy,ADI = 5,000 +...

Question 5

All else being equal,a decrease in the rate of inflation ________ planned spending and ________ short-run equilibrium output.
A) increases;increases
B) increases;decreases
C) does not change;does not change
D) decreases;increases
E) decreases;decreases

Accepted Answer

A decrease in the rate of inflation increases planned spending because lower inflation typically leads to lower interest rates, which encourages borrowing and spending. This increase in spending can lead to an increase in short-run equilibrium output.

Question 6

The aggregate demand (ADI)curve shifts when there are changes in
A) inflation inertia and aggregate supply shocks.
B) autonomous aggregate demand and the Bank of Canada's reaction function.
C) autonomous aggregate demand and inflation inertia.
D) the Bank of Canada's reaction function and inflation inertia.
E) potential output and autonomous aggregate demand.

Accepted Answer

The aggregate demand curve shifts due to changes in autonomous aggregate demand and the central bank's reaction function, which affects interest rates and monetary policy.

Question 7

Based on the Bank of Canada's monetary policy rule,when inflation falls,the Bank of Canada ________ interest rates,hence _________ short-run equilibrium output.
A) increases;increasing
B) increases;decreasing
C) does not change;increasing
D) decreases;increasing
E) decreases;decreasing

Accepted Answer

According to the Bank of Canada's monetary policy rule, when inflation falls, the Bank of Canada decreases interest rates to encourage borrowing and investment, which leads to an increase in short-run equilibrium output.

Question 8

If,for any given inflation rate,the Bank of Canada raises interest rates more than normal,this is called a monetary _________ and the aggregate demand (ADI)curve shifts to the __________.
A) "tightening";right
B) "tightening";left
C) gap;right
D) "easing";right
E) "easing";left

Accepted Answer

When the Bank of Canada raises interest rates more than normal, it is referred to as "tightening" monetary policy, which typically leads to a decrease in aggregate demand, causing the ADI curve to shift to the left.

Question 9

Which of the following will shift the aggregate demand (ADI)curve to the left?
A) Income taxes are lowered.
B) The government increases spending on education.
C) Consumers become optimistic about the future.
D) A new technology is developed that will increase profits.
E) Foreign economies fall into recession,reducing their demand for domestic exports.

Accepted Answer

A decrease in demand for domestic exports will result in a decrease in net exports, leading to a decrease in aggregate demand.

Question 10

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: 
If inflation is 4%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.
A) 3;18,800
B) 4;20,000
C) 4;18,800
D) 5;18,000
E) 5;18,400

Accepted Answer

The answer of Suppose that,in an economy,ADI = 5,000 +...

Question 11

Which of the following will shift the aggregate demand (ADI)curve to the right?
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.
E) Foreign economies fall into recession,reducing their demand for domestic exports.

Accepted Answer

Government increasing spending on education will increase the disposable income of individuals, which will increase consumption and shift the ADI curve to the right. The rest of the options will either decrease consumption or investment, and thus shift the ADI curve to the left.

Question 12

Based on the Bank of Canada's monetary policy rule,when inflation rises,the Bank of Canada ________ interest rates,hence _________ short-run equilibrium output.
A) increases;increasing
B) increases;decreasing
C) does not change;increasing
D) decreases;increasing
E) decreases;decreasing

Accepted Answer

When inflation rises, the Bank of Canada typically increases interest rates to reduce spending and borrowing, which in turn decreases short-run equilibrium output.

Question 13

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: 
If inflation is 3%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.
A) 2;19,200
B) 3;20,000
C) 3;18,800
D) 4;18,000
E) 4;18,400

Accepted Answer

The answer of Suppose that,in an economy,ADI = 5,000 +...

Question 14

Because decreases in inflation increase planned spending and short-run equilibrium output,the
A) inflation adjustment (IA)line is downward-sloping.
B) inflation adjustment (IA)line is upward-sloping.
C) aggregate demand (ADI)curve is horizontal.
D) aggregate demand (ADI)curve is downward-sloping.
E) aggregate demand (ADI)curve is upward-sloping.

Accepted Answer

The answer of Because decreases in inflation increase planned spending...

Question 15

The aggregate demand (ADI)curve shows the relationship between inflation and the
A) nominal interest rate.
B) real interest rate.
C) unemployment rate.
D) exchange rate.
E) short-run equilibrium output.

Accepted Answer

The ADI curve shows the relationship between the price level (inflation) and the level of output (equilibrium output) in the short run, holding all other factors constant. The curve slopes downwards, indicating that as the price level rises, the level of output falls due to the higher costs of production and reduced purchasing power of consumers. The other choices (nominal interest rate, real interest rate, unemployment rate, and exchange rate) are not directly related to the ADI curve but may have an indirect effect on it through their impact on other factors such as consumer spending, investment, and net exports.

Question 16

All else being equal,an increase in the rate of inflation ________ planned spending and ________ short-run equilibrium output.
A) increases;increases
B) increases;decreases
C) does not change;does not change
D) decreases;increases
E) decreases;decreases

Accepted Answer

An increase in the rate of inflation generally decreases planned spending because higher prices reduce purchasing power. This, in turn, decreases short-run equilibrium output as demand falls.

Question 17

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: 
If inflation is 0%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.
A) 0;20,000
B) 1;20,000
C) 1;19,600
D) 1;15,000
E) 2;19,200

Accepted Answer

When inflation is 0%, the central bank will set the real interest rate to 1% (according to the given monetary policy rule).

To find the short-run equilibrium output, we need to set ADI equal to potential output (which is assumed to be constant in this question). To do this, we need to solve for Y when ADI = Y:

Y = 5,000 + 0.75 Y - 10,000r

Substituting r = 1%, we get:

Y = 5,000 + 0.75 Y - 10,000(0.01)

Y = 19,600

Therefore, the short-run equilibrium output is 19,600.

The correct answer is C).

Question 18

Because increases in inflation reduce planned spending and short-run equilibrium output,the
A) inflation adjustment (IA)line is downward-sloping.
B) inflation adjustment (IA)line is upward-sloping.
C) aggregate demand (ADI)curve is horizontal.
D) aggregate demand (ADI)curve is downward-sloping.
E) aggregate demand (ADI)curve is upward-sloping.

Accepted Answer

Increases in inflation lead to a decrease in planned spending, shifting the ADI curve downward. As a result, short-run equilibrium output decreases. This is why the IA line is downward-sloping as well.

Question 19

Which of the following will shift the aggregate demand (ADI)curve to the right?
A) Income taxes are raised.
B) The government reduces purchases to balance the budget.
C) Consumers become pessimistic about the future.
D) A new technology is developed that will increase profits.
E) Foreign economies fall into recession,reducing their demand for domestic exports.

Accepted Answer

A new technology that increases profits will lead to increased investment and consumption, which will shift the ADI curve to the right.

Question 20

Which of the following will shift the aggregate demand (ADI)curve to the left?
A) Income taxes are raised.
B) The government increases spending on education.
C) Consumers become optimistic about the future.
D) A new technology is developed that will increase profits.
E) Foreign economies boom,increasing their demand for domestic exports.

Accepted Answer

When income taxes are raised, consumers have less disposable income, leading to lower consumption expenditure, and a decrease in ADI, causing the ADI curve to shift to the left.

Quiz 12: The Production Function Approach to Understanding Growth

The aggregate demand (ADI) curve shows the relationship between short-run equilibrium output and the __________ rate.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 2%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

Changes in autonomous aggregate demand and the Bank of Canada's reaction function shift the

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 1%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

All else being equal,a decrease in the rate of inflation planned spending and short-run equilibrium output.

The aggregate demand (ADI) curve shifts when there are changes in

Based on the Bank of Canada's monetary policy rule,when inflation falls,the Bank of Canada interest rates,hence _ short-run equilibrium output.

If,for any given inflation rate,the Bank of Canada raises interest rates more than normal,this is called a monetary _ and the aggregate demand (ADI) curve shifts to the __.

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

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 4%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

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

Based on the Bank of Canada's monetary policy rule,when inflation rises,the Bank of Canada interest rates,hence _ short-run equilibrium output.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 3%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

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

The aggregate demand (ADI) curve shows the relationship between inflation and the

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

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 0%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

Because increases in inflation reduce planned spending and short-run equilibrium output,the

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

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

Quiz 12: The Production Function Approach to Understanding Growth

The aggregate demand (ADI) curve shows the relationship between short-run equilibrium output and the __________ rate.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 2%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

Changes in autonomous aggregate demand and the Bank of Canada's reaction function shift the

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 1%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

All else being equal,a decrease in the rate of inflation ________ planned spending and ________ short-run equilibrium output.

The aggregate demand (ADI) curve shifts when there are changes in

Based on the Bank of Canada's monetary policy rule,when inflation falls,the Bank of Canada ________ interest rates,hence _________ short-run equilibrium output.

If,for any given inflation rate,the Bank of Canada raises interest rates more than normal,this is called a monetary _________ and the aggregate demand (ADI) curve shifts to the __________.

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

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 4%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

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

Based on the Bank of Canada's monetary policy rule,when inflation rises,the Bank of Canada ________ interest rates,hence _________ short-run equilibrium output.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 3%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

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

The aggregate demand (ADI) curve shows the relationship between inflation and the

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

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 0%,the central bank will set a real interest rate of ________%,and short-run equilibrium output will be equal to _________.

Because increases in inflation reduce planned spending and short-run equilibrium output,the

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

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

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 2%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 1%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

All else being equal,a decrease in the rate of inflation planned spending and short-run equilibrium output.

Based on the Bank of Canada's monetary policy rule,when inflation falls,the Bank of Canada interest rates,hence _ short-run equilibrium output.

If,for any given inflation rate,the Bank of Canada raises interest rates more than normal,this is called a monetary _ and the aggregate demand (ADI) curve shifts to the __.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 4%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

Based on the Bank of Canada's monetary policy rule,when inflation rises,the Bank of Canada interest rates,hence _ short-run equilibrium output.

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 3%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.

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

Suppose that,in an economy,ADI = 5,000 + 0.75 Y - 10,000r,and the central bank acts according to the following monetary policy rule: If inflation is 0%,the central bank will set a real interest rate of %,and short-run equilibrium output will be equal to _.