Ch 15

Question 1

According to the dynamic aggregate supply curve, the inflation rate depends on all of the following except:

Answer 1

previously expected inflation?

Question 2

Equation: Monetary Policy Rule
it = πt + ρ + θπ(πt – π*t) + θY(Yt – )
Reference: Ref 15-1

(Equation: Monetary Policy Rule) Given the monetary policy rule of the dynamic model of aggregate demand and aggregate supply, if the inflation rate increases by 1 percentage point, by how much does the nominal interest increase:

Answer 2

1 + θπ

Question 3

According to the monetary policy rule (assuming θπ > 0) when inflation increases, the central bank increases the nominal interest rate by _____ the increase in the rate of inflation, which _____ the real interest rate.

Answer 3

more than; increases

Question 4

The dynamic aggregate supply curve will shift if any of the following changes except the:

Answer 4

current inflation rate.

Question 5

Suppose the economy begins in long-run equilibrium. Then, at time t, that equilibrium is disturbed by an ongoing negative demand shock. Which of the following would occur at time t+1?

Answer 5

the inflation rate would rise and the real interest rate would fall????

Question 6

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, which variables will equal the central bank’s target rate of inflation?

Answer 6

both the current and expected rates of inflation

Question 7

In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θπ, the responsiveness of nominal interest rates to inflation, and a small value of θY, the responsiveness of nominal interest rates to output, then the DAD curve will be relatively _____, and supply shocks will have relatively ____ impacts on inflation than output.

Answer 7

flat; smaller

Question 8

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to:

Answer 8

remain below the natural level for more than one period.

Question 9

When the central bank lowers its target inflation rate, it _____ the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _____.

Answer 9

raises; left

Question 10

In the dynamic model of aggregate demand and aggregate supply, changes in the natural level of output shift

Answer 10

both the DAD curve and the DAS curve

Question 11

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank’s inflation target, the DAS shifts downward because:

Answer 11

expectations of inflation decrease as a result of lower inflation in previous periods.

Question 12

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, output immediately decreases as a result of a one-period positive supply shock because:

Answer 12

the central bank raises the nominal and real interest rates in response to the increase in inflation.

Question 13

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a five-period positive demand shock causes output to _____ until returning to the natural level in the long run.

Answer 13

move above and then below the natural level of output

Question 14

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank’s inflation target causes the nominal interest rate to:

Answer 14

increase initially and then decline until reaching a lower level in the long run.

Question 15

The monetary policy rule specified in the dynamic model of aggregate demand indicates that the central bank adjusts interest rates in response to fluctuations in:

Answer 15

inflation and output

Question 16

Which of the following would be represented by a negative value of the random supply shock, υt?

Answer 16

oil price decreases resulting from a breakdown in the cartel

Question 17

Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate supply when:

Answer 17

there are no shocks and inflation is stable

Question 18

According to the Taylor rule, when real GDP is below its natural level, the nominal federal funds rate should be _____, and when inflation exceeds 2 percent, the nominal federal funds rate should be _____.

Answer 18

lowered; raised

Question 19

According to the monetary policy rule, when inflation is at its target level and output is at the natural level, then the real interest rate equals the:

Answer 19

natural rate of interest.

Question 20

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _____ and the DAD curve _____.

Answer 20

does not shift; shifts leftward