Quiz 11- Macroeconomic Policy

1. Shocks to aggregate demand _____ require the Fed to choose between inflation and output stability, while shocks to aggregate supply ____ require the Fed to choose between inflation and output stability. 
A. do; do
B. do; do not
C. may or may not; may or may not
D. do not; do

2. To accommodate an adverse inflation shock, the Fed must ____, while to offset the effect of an increase in aggregate demand, the Fed must _____. 
A. lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long-run
B. raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long-run
C. maintain the inflation rate target; maintain the real interest rate target
D. adjust the real interest rate target to the level at which saving equals investment in the long-run; lower the inflation rate target

3. The speed at which an economy returns to potential following an adverse inflation shock depends on: 
A. the Federal Reserve's target inflation rate.
B. the Federal Reserve's target real interest rate.
C. the level of potential output.
D. the public's expectations of how the Federal Reserve will act.

4. In order to determine whether a temporary bulge in inflation has shifted inflationary expectation, the Federal Reserve can monitor: 
A. real interest rates.
B. nominal interest rates.
C. the core rate of inflation.
D. the unemployment rate.

5. Suppose the economy is initially in long-run equilibrium. What effect would the Fed lowering its inflation target have on the AD curve?

A. It would shift the AD curve to the left.
B. It would have no effect on the AD curve.
C. It would shift the AD curve to the right.
D. The effect is unknown; it could shift to the right or to the left.

6. Refer to the figure above. Suppose this economy had been at a long-run equilibrium in which AS1 and AD1 were the prevailing functions. Then suppose AD shifted to AD2 . How would long-run equilibrium be restored? 
A. LRAS would shift to the left and output would be Y1.
B. a reduction in inflationary expectations would cause AS to shift to AS2 and output would be Y2.
C. an increase in inflationary expectations would cause AD to shift back to AD1 and output would be Y2.
D. the Fed's monetary policy rule would cause AS to shift to AS2 and output would be Y2.

7. Suppose the economy is initially in long-run equilibrium and an increase in government purchases occurs. What will happen to output and inflation in the short-run if the Fed chooses not to alter monetary policy?

A. Output will decrease and inflation will increase.
B. Output will increase and inflation will increase.
C. Output will increase and inflation will decrease.
D. Output will decrease and inflation will decrease.

8. Suppose the economy is initially in long-run equilibrium and an increase in net exports occurs. What type of policy should the Fed take in order keep inflation at its original long-run equilibrium levels?

A. It should tighten monetary policy by decreasing the real interest rate at every level of inflation.
B. It should loosen monetary policy by raising the real interest rate at every level of inflation.

C.  It should tighten monetary policy by raising the real interest rate at every level of inflation.
D. It should loosen monetary policy by decreasing the real interest rate at every level of inflation.

9. Suppose the economy is initially in long-run equilibrium and a negative aggregate supply shock occurs. What will happen to output and inflation if the Fed decides to accommodate the shock?

A. Output will continually rise and inflation will fall.
B. Output will return to potential and inflation will fall.
C. Output will continually fall and inflation will rise.
D. Output will return to potential and inflation will rise.

10. If the Fed wanted to maintain long-term inflation targets, how should it respond to a negative aggregate supply shock?

A. Loosen monetary policy.
B. Tighten monetary policy.
C. Maintain current monetary policy.
D. Randomly tighten and loosen monetary policy.

11. In order to maintain stable inflation and output in the event of a permanent increase in exogenous spending, the Federal Reserve must increase its target real interest rate to the level at which: 
A. the real rate of interest equals the target rate of inflation.
B. potential output has increased.
C. saving equals investment in the long run.
D. the real interest rate equals the nominal interest rate.

12. In the long run the principal difference in outcomes between accommodating and blocking policies by the Federal Reserve in the face of a permanent increase in exogenous spending is that: 
A. inflation will be permanently higher if the Fed raises its target real interest rate, but will be stable if the Federal Reserve accommodates the shock.
B. inflation will be stable if the Fed raises its target real interest rate, but will be permanently higher if the Federal Reserve accommodates the shock.
C. output will remain permanently above potential if the Fed raises its target real interest rate, but will equal potential if the Federal Reserve accommodates the shock.
D. output will equal potential if the Fed raises its target real interest rate, but will be permanently higher than potential if the Federal Reserve accommodates the shock.

13. Starting from full employment at the initial target inflation rate, if there is an adverse inflation shock, then the Federal Reserve must _____ in order to avoid a recession. 
A. increase the target inflation rate.
B. decrease the target inflation rate.
C. maintain the initial target inflation rate.
D. shift the short-run aggregate supply curve up.

14. To accommodate an adverse inflation shock the Fed must ____, while to offset the effect of an increase in aggregate demand the Fed must _____. 
A. lower the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.
B. raise the inflation rate target; adjust the real interest rate target to the level at which saving equals investment in the long run.
C. maintain the inflation rate target; maintain the real interest rate target
D. adjust the real interest rate target to the level at which saving equals investment in the long run; lower the inflation rate target.

15. The credibility of monetary policy is the: 
A. recognition that open market purchases increase the money supply, even though banks and the public affect the money multiplier.
B. degree to which the public believes the central bank's promises to keep inflation low, even if doing so may impose short-run costs.
C. pace at which monetary policy can return an economy to potential when inflationary expectations are anchored.
D. practice of the Federal Reserve of relying primarily on open market operations rather than discount rate lending or changes in reserve requirements.