Question 1

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

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Question 2

In 2001 a combination of tax cuts and increased defense spending did not have the same inflationary effect as the similar policy in the 1960s.Explain the difference.

Accepted Answer

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Question 3

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

Accepted Answer

Central bankers with a steeper monetary policy reaction curve will respond more aggressively to changes in inflation by raising interest rates more quickly. This can cause more volatility in output as the economy adjusts to the change in borrowing costs.

Question 4

If monetary policymakers do not want the current inflation rate to increase, yet they observe increasing aggregate demand from higher government purchases, will they have to accept a higher inflation target? Explain.

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Question 5

Monetary policymakers face a tradeoff between:
A)The level of output and the rate of inflation
B)The volatility in output and the volatility in inflation
C)Low unemployment and high inflation
D)High unemployment and low inflation

Accepted Answer

Monetary policymakers often face a tradeoff between stabilizing output and controlling inflation, which can lead to a tradeoff between the volatility in output and the volatility in inflation.

Question 6

Which of the following is true?
A)A flat dynamic aggregate demand curve corresponds to a steep monetary policy reaction curve and means that supply shocks will create large changes in current output
B)A flat dynamic aggregate demand curve corresponds to a flat monetary policy reaction curve and means that supply shocks will create large changes in current output
C)A flat dynamic aggregate demand curve corresponds to a steep monetary policy reaction curve and means that supply shocks will create small changes in current output
D)A flat dynamic aggregate demand curve corresponds to a flat monetary policy reaction curve and means that supply shocks will create small changes in current output

Accepted Answer

The answer of Which of the following is true?
A)A flat...

Question 7

Use the long-run model presented in Chapter 22 to answer this question.If there is a decrease in aggregate demand, and monetary policymakers counter the decrease in aggregate demand, what will be the impact on output and inflation? Explain.

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Question 8

Why does it take so long for the declaration of the beginning and end of recessions in the U.S.and why is there a lack of clarity as to what is and is not a recession?

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Question 9

Why could it be effectively argued that the temporary increase in inflation from the spending for the Vietnam War was made permanent by the Fed?

Accepted Answer

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Question 10

If the monetary policy reaction curve has a relatively steep slope, the dynamic aggregate demand curve is likely to have a:
A)Relatively steep slope
B)Relatively flat slope
C)Positive slope
D)Zero slope

Accepted Answer

The answer of If the monetary policy reaction curve has...

Question 11

Discuss the short- and long-run output responses resulting from an increase in money growth when the economy is producing a current level of output that equals potential output, all other factors constant.

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Question 12

Explain why understanding short-run fluctuations in output and inflation requires that we study shifts in dynamic aggregate demand and short-run aggregate supply.

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Question 13

Describe the immediate short-run effect to the economy from an increase in government purchases, as well as the self-correcting mechanism that will restore long-run equilibrium.

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Question 14

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

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Question 15

In which situation will inflation fall the fastest?
A)A negative supply shock occurs, the dynamic aggregate demand curve is steep and so is the monetary policy reaction curve
B)A negative supply shock occurs, the dynamic aggregate demand curve is flat and so is the monetary policy reaction curve
C)A negative supply shock occurs, the dynamic aggregate demand curve is flat, and the monetary policy reaction curve is steep
D)A positive supply shock occurs, the dynamic aggregate demand curve is flat, and the monetary policy reaction curve is steep

Accepted Answer

The answer of In which situation will inflation fall the...

Question 16

When faced with negative supply shocks, policymakers:
A)Will stabilize both inflation and output
B)Will always focus on stabilizing output
C)Cannot stabilize output so they tend to focus on inflation
D)Face a trade-off because they cannot simultaneously stabilize both output and inflation

Accepted Answer

Negative supply shocks such as sharp increases in oil prices or a natural disaster reducing production capacity can lead to both higher inflation and lower output. Policymakers face a trade-off because they cannot simultaneously stabilize both output and inflation. They may focus on stabilizing output, but this can lead to higher inflation, or they may focus on stabilizing inflation, but this can lead to a further decline in output. The best policymakers can do is to choose a policy response that balances the trade-offs between maintaining stable inflation and output levels.

Question 17

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

Accepted Answer

Central bankers with a relatively flat monetary policy reaction curve are less responsive to changes in inflation and are more willing to tolerate some inflation without raising interest rates aggressively. As a result, they are likely to move interest rates less aggressively when inflation rises, leading to less volatility in output.

Question 18

If monetary policymakers are more concerned about output fluctuations than inflation fluctuations:
A)They will choose a relatively steep monetary policy reaction curve in which movements in the real interest rates are small
B)They will choose a relatively flat monetary policy reaction curve in which movements in the real interest rates are small
C)They will choose a relatively steep monetary policy reaction curve in which movements in the real interest rates are large
D)They will choose a relatively flat monetary policy reaction curve in which movements in the real interest rates are large

Accepted Answer

If monetary policymakers are more concerned about output fluctuations than inflation fluctuations, they will prioritize stabilizing output over keeping inflation low. This means that the monetary policy reaction curve would be relatively flat, as even small movements in the real interest rate can have large impacts on output. A flat curve would mean that policymakers are willing to tolerate small changes in inflation in order to achieve greater stability in output.

Question 19

If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate demand curve is likely to have a:
A)Relatively steep slope
B)Relatively flat slope
C)Positive slope
D)Zero slope

Accepted Answer

The answer of If the monetary policy reaction curve has...

Question 20

If monetary policymakers respond aggressively to current inflation above the target inflation rate, the:
A)Monetary policy reaction curve would be flat
B)Dynamic aggregate demand curve would have a steep slope
C)Monetary policy reaction curve would have a positive and steep slope
D)Dynamic aggregate demand curve would shift rightward

Accepted Answer

If monetary policymakers respond aggressively to current inflation above the target inflation rate, it means they would implement contractionary monetary policy by increasing interest rates and reducing the money supply. This would result in a positive and steep slope on the monetary policy reaction curve, indicating that a larger change in interest rates is required to achieve a given reduction in inflation. It does not affect the dynamic aggregate demand curve, which represents the relationship between overall economic activity and the price level.

Quiz 22: Understanding Business Cycle Fluctuations

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?

In 2001 a combination of tax cuts and increased defense spending did not have the same inflationary effect as the similar policy in the 1960s.Explain the difference.

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

If monetary policymakers do not want the current inflation rate to increase, yet they observe increasing aggregate demand from higher government purchases, will they have to accept a higher inflation target? Explain.

Monetary policymakers face a tradeoff between:

Which of the following is true?

Use the long-run model presented in Chapter 22 to answer this question.If there is a decrease in aggregate demand, and monetary policymakers counter the decrease in aggregate demand, what will be the impact on output and inflation? Explain.

Why does it take so long for the declaration of the beginning and end of recessions in the U.S.and why is there a lack of clarity as to what is and is not a recession?

Why could it be effectively argued that the temporary increase in inflation from the spending for the Vietnam War was made permanent by the Fed?

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

Discuss the short- and long-run output responses resulting from an increase in money growth when the economy is producing a current level of output that equals potential output, all other factors constant.

Explain why understanding short-run fluctuations in output and inflation requires that we study shifts in dynamic aggregate demand and short-run aggregate supply.

Describe the immediate short-run effect to the economy from an increase in government purchases, as well as the self-correcting mechanism that will restore long-run equilibrium.

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

In which situation will inflation fall the fastest?

When faced with negative supply shocks, policymakers:

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

If monetary policymakers are more concerned about output fluctuations than inflation fluctuations:

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

If monetary policymakers respond aggressively to current inflation above the target inflation rate, the: