1. If the Fed's monetary policy rule does not change, then, when inflation decreases, the Fed responds by _____ the real interest rate, which _____ consumption and investment spending, which _____ output. 
A. increasing; increases; increases
B. increasing; increases; decreases
C. increasing; decreases; decreases
D. decreasing; increases; increases

 

2. For a given level of inflation, if concerns about future weakness in the economy cause businesses to reduce their spending on new capital, then the _____ shifts _____. 
A. aggregate demand curve; right
B. aggregate demand curve; left
C. short-run aggregate supply line; upward
D. short-run aggregate supply line; downward

 

3. An upward shift in the Fed's monetary policy rule reaction is a monetary _____, and the aggregate demand curve _______. 
A. tightening; shifts right
B. tightening; shifts left
C. easing; shifts left
D. easing; shifts right

 

4. The economy moves down a stationary aggregate demand curve when the Fed: 
A. increases its target inflation rate.
B. decreases its target inflation rate.
C. increases real interest rates in response to inflation, but does not change its target inflation rate.
D. decreases real interest rates in response to lower inflation, but does not change its target inflation rate.

 

5. A circle of low expected inflation leads to ____ increases in wages and costs and to ____ actual inflation. 
A. large; high
B. large; low
C. small; low
D. small; high

 

 

 

 

6. When actual output equals potential output and the inflation rate is stable, the economy is said to be in ____ equilibrium. Graphically, long-run equilibrium occurs at the intersection of the aggregate demand curve and the ­­­­­­____
A. long-run; short-run aggregate supply line and the long-run aggregate supply line.
B. recessionary; PAE line.
C. expansionary; short-run aggregate supply line only.
D. short-run; long-run aggregate supply line only.

 

 

 

7. Refer to the figure above. The economy pictured in the figure has a(n) ____ gap with a short-run equilibrium combination of inflation and output indicated by point ____.
A. recessionary; A
B. recessionary; B
C. expansionary; C
D. expansionary; A

 

8. Refer to the figure above. If the Fed does not change its monetary policy rule, long-run equilibrium in this economy
A. will be impossible to achieve.
B. will occur when AD shifts downward and to the left to point B.
C. will occur when AS shifts upward and to the left to point C.
D. will occur when LRAS shifts to the right to point A.

 

9. The self-correcting tendency of the economy means that recessionary gaps are eventually eliminated by: 
A. rising inflation.
B. falling inflation.
C. increasing potential output.
D. government policy.

 

 

 

 

10. Policymakers' use of stabilization policy to eliminate output gaps is more appropriate when an economy self corrects very ____ and when the output gap is very ____. 
A. rapidly; large
B. rapidly; small
C. slowly; small
D. slowly; large

 

 

11.  Refer to the figure above. Suppose that the economy is initially in equilibrium with output Y2 and inflation of  3. An increase in military spending will ______ and lead to a(n) ­­­­­______.
A. shift AD from AD2 to AD1; expansionary gap
B. shift AD from AD1 to AD2; recessionary gap
C. shift AS from AS2 to AS1; disinflation
D. shift AS from AS1 to AS2; deflation

 

12.  Refer to the figure above. Suppose that the economy had been initially in equilibrium with output Y2 and inflation of  3 when there was an increase in military spending. If the MPRF stays the same, the long-run equilibrium will be
A. output Y2 and inflation of 3.
B. output Y3 and inflation of 2.
C. output Y2 and inflation of 1.
D. output Y3 and inflation of 3.

 

 

 

 

 

 

 

 

 

 

13. Refer to the figure above. Suppose the economy began at a long-run equilibrium characterized by ASI and AD1. If there were an adverse inflation shock followed by accommodating policy by the Fed, output would
A. Permanently increase from Y2 to Y3.
B. Temporarily increase from Y2 to Y3 then return to Y2.
C. Permanently decrease from Y2 to Y1.
D. Temporarily decrease from Y2 to Y1 then return to Y2. 

 

14.  Refer to the figure above. Suppose the economy began at a long-run equilibrium characterized by ASI and AD1. If there were an adverse inflation shock followed by followed by a do-nothing-policy by the Fed, inflation would
A.  initially increase from 1 to 2 and then return to 1.
B.  initially increase from 2 to 3 and then return to 2.
C.  initially increase from 1 to 3 and then decrease to 2.
D.  initially increase from 1 to 2 and then increase to 3.

 

15. The aggregate demand curve shifts when there are changes in: 
A. inflation inertia and aggregate supply shocks.
B. exogenous spending and the Fed's monetary policy rule.
C. exogenous spending and inflation inertia.
D. potential output and exogenous spending.