Question 1

Disinflation is

Accepted Answer

Disinflation is a substantial reduction in the rate of inflation.

Question 2

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

Accepted Answer

The decline in potential output creates an expansionary gap in the short run as the economy is still at point A. As inflation rises, the short-run aggregate supply line shifts upward and a new long-run equilibrium is reached at point C. The long run result of a fall in potential output is a permanent decline in output and a higher inflation rate.

Question 3

Refer to the accompanying figure.  An economy is currently in long-run equilibrium at point B, at an inflation rate of π', which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ________ creating ________ gap.

Accepted Answer

In order for policymakers to reduce inflation, they must tighten monetary policy by shifting its policy reaction function upward, which shifts aggregate demand left. This new short-run equilibrium will exist at point A, where the economy is experiencing a recessionary gap.

Question 4

Based on the given figure, the economy is initially in long-run equilibrium at point A. If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then there is initially ________ gap and the short-run aggregate supply curve will ________.

Accepted Answer

The increase in potential output creates a recessionary gap in the short run as the economy is still at point A. As inflation falls, the short-run aggregate supply line shifts downward from SRAS to shift to SRAS" and a new long-run equilibrium is reached at point E. The long run result of an increase in potential output is a permanent increase in output and a lower inflation rate.

Question 5

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then there is initially ________ gap and the short-run aggregate supply curve will ________.

Accepted Answer

The decline in potential output creates an expansionary gap in the short run as the economy is still at point A. As inflation rises, the short-run aggregate supply line shifts upward from SRAS to SRAS' and a new long run equilibrium is reached at point C. The long run result of a fall in potential output is a permanent decline in output and a higher inflation rate.

Question 6

If policymakers deem inflation as being too high, then the policy response should be monetary ________, which shifts aggregate demand ________.

Accepted Answer

In order for policymakers such as the Fed to reduce inflation, they must tighten monetary policy by shifting its policy reaction function upward, which shifts aggregate demand left.

Question 7

Graphically an increase in the short-run aggregate supply line represents a(n)________, and a shift leftward of the long-run aggregate supply line represents a(n)________.

Accepted Answer

An increase or shift upward of in the short-run aggregate supply represents an adverse inflation shock; where as a decline in potential output is modeled as a leftward shift of the LRAS.

Question 8

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

Accepted Answer

A downward shift in the Fed's reaction function is equivalent to an increase in the Fed's long-term target for inflation as it leads to a permanently higher rate of inflation.

Question 9

If the Fed decides to tighten monetary policy because the inflation rate has risen to a level inconsistent with economic efficiency and long-term growth:

Accepted Answer

In the AD-AS diagram a tightening of monetary policy is seen as a shift in the AD curve left. In the short-term this inflicts pain in the form of a recession gap (a decline in output and higher unemployment).

Question 10

An upward shift in the Fed's reaction function is equivalent to:

Accepted Answer

An upward shift in the Fed's reaction function is equivalent to a decline in the Fed's long-term target for inflation as it leads to a permanently lower rate of inflation.

Question 11

According to the text, the Fed and other policymakers are concerned about:

Accepted Answer

Policymakers are concerned with both inflation rates that are too high or too low, as their goal is to help the economy achieve its potential GDP.

Question 12

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

Accepted Answer

In the AD-AS diagram we see that a tight monetary policy inflicts short-term pain in the form of higher unemployment (a decline in output)to achieve a long-term gain of a permanent reduction in inflation.

Question 13

Refer to the accompanying figure.  An economy is currently in long-run equilibrium at point B, at an inflation rate of π', which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point ________ and eventually to a long-run equilibrium at point ________.

Accepted Answer

In order for policymakers to reduce inflation, they must tighten monetary policy by shifting its policy reaction function upward, which shifts aggregate demand left. This new short-run equilibrium will exist at point A, where the economy is experiencing a recessionary gap. As a result of this recessionary gap, inflation will gradually start to decrease - shifting the SRAS line downward. When inflation has fallen enough, the economy is back in long-run equilibrium at C.

Question 14

Based on the given figure, the economy is initially in long-run equilibrium at point A. If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

Accepted Answer

The increase in potential output creates a recessionary gap in the short run as the economy is still at point A. As inflation falls, the short-run aggregate supply line shifts downward and a new long-run equilibrium is reached at point E. The long run result of an increase in potential output is a permanent increase in output and a lower inflation rate.

Question 15

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 decline in potential output, modeled as a leftward shift of the LRAS, creates an expansionary gap in the short run. As inflation rises, the short-run aggregate supply line shifts upward and a new long-run equilibrium is reached where actual output equals the new, lower level of potential output. The long run result of a fall in potential output is a permanent decline in output and a higher inflation rate.

Question 16

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

Accepted Answer

In the AD-AS diagram we see that a tight monetary policy inflicts short-term pain in the form of higher unemployment (a decline in output)to achieve a long-term gain of a permanent reduction in inflation.

Question 17

The Fed has announced it views its long term target for the inflation rate as:

Accepted Answer

Recently, the Fed announced that it views a 2 percent inflation rate as "most consistent over the longer run with the Federal Reserve's statutory mandate.

Question 18

The output losses from an adverse inflation shock are ________ and the output losses from a fall in potential output are ________.

Accepted Answer

A difference between the two types of aggregate supply shocks is that the output losses associated with an adverse inflation shock are temporary (because the economy self-corrects and will ultimately return to its initial level of potential output), but those associated with a fall in potential output are permanent.

Question 19

A substantial reduction in the rate of inflation is called:

Accepted Answer

Disinflation is a substantial reduction in the rate of inflation.

Quiz 27: Aggregate Demand, Aggregate Supply, and Inflation

Disinflation is

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

Refer to the accompanying figure. An economy is currently in long-run equilibrium at point B, at an inflation rate of π', which is too high for to sustain economic growth. If an anti-inflationary policy is enacted, the economy will be in short-run equilibrium at point creating gap.

Based on the given figure, the economy is initially in long-run equilibrium at point A. If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then there is initially gap and the short-run aggregate supply curve will .

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then there is initially gap and the short-run aggregate supply curve will .

If policymakers deem inflation as being too high, then the policy response should be monetary , which shifts aggregate demand .

Graphically an increase in the short-run aggregate supply line represents a(n) , and a shift leftward of the long-run aggregate supply line represents a(n) .

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

If the Fed decides to tighten monetary policy because the inflation rate has risen to a level inconsistent with economic efficiency and long-term growth:

An upward shift in the Fed's reaction function is equivalent to:

According to the text, the Fed and other policymakers are concerned about:

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

Based on the given figure, the economy is initially in long-run equilibrium at point A. If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

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.

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

The Fed has announced it views its long term target for the inflation rate as:

The output losses from an adverse inflation shock are and the output losses from a fall in potential output are .

A substantial reduction in the rate of inflation is called:

Quiz 27: Aggregate Demand, Aggregate Supply, and Inflation

Disinflation is

In the given figure, the economy is initially in long-run equilibrium at point A. If there is an adverse supply shock that reduces potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

If policymakers deem inflation as being too high, then the policy response should be monetary ________, which shifts aggregate demand ________.

Graphically an increase in the short-run aggregate supply line represents a(n) ________, and a shift leftward of the long-run aggregate supply line represents a(n) ________.

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

If the Fed decides to tighten monetary policy because the inflation rate has risen to a level inconsistent with economic efficiency and long-term growth:

An upward shift in the Fed's reaction function is equivalent to:

According to the text, the Fed and other policymakers are concerned about:

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

Based on the given figure, the economy is initially in long-run equilibrium at point A. If there is a favorable supply shock that increases potential output and shifts the long-run aggregate supply curve from LRAS to LRAS', then the new long-run equilibrium is reached at point:

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.

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

The Fed has announced it views its long term target for the inflation rate as:

The output losses from an adverse inflation shock are ________ and the output losses from a fall in potential output are ________.

A substantial reduction in the rate of inflation is called:

If policymakers deem inflation as being too high, then the policy response should be monetary , which shifts aggregate demand .

Graphically an increase in the short-run aggregate supply line represents a(n) , and a shift leftward of the long-run aggregate supply line represents a(n) .

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.

The output losses from an adverse inflation shock are and the output losses from a fall in potential output are .