ch 15 lc Flashcards
Lagged inflation, which is endogenous last period but is known this period, is called a(n) _____ variable.
predetermined
In the dynamic AD-AS model, the curve that shifts in order to bring the economy back to its long-run equilibrium is the _____ curve.
dynamic aggregate supply
Because the Federal Reserve is supposed to stabilize both employment and prices, it is said to:
have a dual mandate.
In the dynamic AD-AS model, the central bank implements monetary policy by setting a target for the:
nominal interest rate.
In the dynamic model for aggregate demand and aggregate supply, which is NOT an endogenous variable?
wages
Stagflation is caused by:
a supply shock.
A central bank _____ implement policy that yields both low output variability and low inflation variability.
cannot
In the monetary-policy rule, a higher natural rate of interest will cause the nominal federal funds rate to:
increase.
The long-run equilibrium for the dynamic AD-AS model exhibits all of the following EXCEPT:The long-run equilibrium for the dynamic AD-AS model exhibits all of the following EXCEPT:
hysteresis.
In the dynamic AD-AS model, a decrease in the natural rate of output will shift the DAS curve to the _____, and the DAD curve to the _____.
left; left
The proposition that, for inflation to be stable, the central bank must respond to an increase in inflation with an even greater increase in the nominal interest rate is called:
the Taylor principle.
If Bob only uses last year’s inflation rate to formulate this year’s inflation rate, then his predictions are formed using _____ expectations.
adaptive
The aggregate supply curve and the dynamic aggregate supply curve are drawn using:
a different x-y axes diagram.
If Θπ is negative, then the aggregate demand curve has _____ slope.
a positive
In the monetary-policy rule: it = πt + ρ + Θπ(πt - πt*) + ΘY(Yt - Ȳt), the parameter that represents the responsiveness of the central bank to the deviation in inflation from its target value is:
Θπ.
The lag of a variable such as inflation, which is endogenous in the past, but is known in the current period, is called a(n):
predetermined variable.
Beginning from long-run equilibrium, following an adverse one-period shock to aggregate supply, the level of output:
remains below its natural level for some time as the economy gradually adjusts.
In theory, in conducting monetary policy, the Federal Reserve is primarily concerned about:
output, inflation, and interest rates.
The key relationship in the aggregate demand equation is the _____ correlation between _____.
negative; the real interest rate and total demand for goods and services
In the dynamic aggregate demand and supply model, the inflation rate and output are _____ variables.
endogenous
In the dynamic model of aggregate demand and aggregate supply, beginning from long-run equilibrium, if a demand shock occurs and lasts for n periods, then output is _____ the natural level in the first n period, and _____ the natural level on the n + 1 period.
above; below
A central bank that does not follow the Taylor principle may experience _____ that is unstoppable.
inflation
According to some economists, if people have _____ expectations, then they optimally use all available information when forecasting the future.
rational
The dynamic aggregate supply curve is drawn holding constant all of the following variables EXCEPT:
output.
In the dynamic AD-AS model, beginning from long-run equilibrium, an adverse one-period shock to aggregate supply leads to an initial:
rise in inflation and a decline in output.
In which time period in the United States do economists suspect that the Taylor principle was not followed in the conduct of monetary policy?
before Paul Volcker was appointed chair of the Federal Reserve
In the aggregate demand equation, an increase in investment spending will _____ εt, and so _____ aggregate demand.
increase; increase
The dynamic aggregate supply and the aggregate supply curve have _____ slopes.
incomparable
In the dynamic AD-AS model, the curve that shifts in order to bring the economy back to its long-run equilibrium is the _____ curve.
dynamic aggregate supply
In theory, in conducting monetary policy, the European Central bank is primarily concerned about:
inflation.
Suppose that the Federal Reserve adopts the Taylor rule: Nominal Federal Funds Rate = Inflation + 2.0 + 0.5 (Inflation - 2.0) + 0.5 (GDP gap). If the U.S. economy goes into a recession, and the gross domestic product falls 2 percentage points from full employment output, then, according to the Taylor rule, the Federal Reserve should respond by:
decreasing the federal funds rate by 1 percentage point.
In the dynamic model for aggregate demand and aggregate supply, _____ is an exogenous variable.
the money supply
In the Taylor rule, Nominal Federal Funds Rate = Inflation + 2.0 + 0.5 (Inflation - 2.0) + 0.5 (GDP gap), the Federal Reserve’s responsiveness to deviations of the inflation from its target value is:
0.5.
Suppose that the Federal Reserve adopts the Taylor rule: Nominal Federal Funds Rate = Inflation + 2.0 + 0.5 (Inflation - 2.0) + 0.5 (GDP gap). If the U.S. economy is fully employed and the inflation rate is 8 percent, then the nominal federal funds rate should be _____ percent.
13
In the dynamic AD-AS model, an increase in the natural rate of output will shift:
the dynamic aggregate demand curve and the dynamic aggregate supply curve.
The dynamic aggregate demand curve is drawn with _____ on the x-axis and inflation on the y-axis.
gross domestic product
Which is not an exogenous variable in the dynamic aggregate demand curve?
the inflation rate, πt
In the dynamic model for aggregate demand and aggregate supply, _____ is a predetermined variable.
last period’s inflation rate
Suppose that the Federal Reserve adopts the Taylor rule: Nominal Federal Funds Rate = Inflation + 2.0 + 0.5 (Inflation - 2.0) + 0.5 (GDP gap). If the U.S. economy is fully employed and the inflation rate is 4 percent, then the nominal federal funds rate should be _____ percent.
7
In the dynamic AD-AS model, beginning from long-run equilibrium, a positive demand shock in period t that lasts for four periods will cause output to:
first move above, and then move below, the natural level of output in period t + 4.
In the dynamic AD-AS model, when the monetary-policy rule indicates that the central bank needs to raise the nominal interest rate, the central bank
sells government bonds to the public and so reduces the money supply.
In the dynamic AD-AS model, when the short-run equilibrium puts the economy above the natural level of output, then the DAS curve shifts _____ in order to bring the economy back to its long-run equilibrium.
to the left
In the dynamic aggregate supply model, supply shocks will produce _____ the dynamic aggregate supply curve.
a shift in t
The dynamic aggregate supply curve is:
upward sloping.
In the dynamic AD-AS model, a decrease in the target inflation rate will:
shift the DAD curve rightwards.
In the dynamic AD-AS model, which MOST likely causes the aggregate supply curve to shift upward after an aggregate demand shock that shifts the dynamic aggregate demand curve rightward?
Agents in the economy expect higher inflation in the future.
One way for the economy to experience growth with stable inflation is for _____ to continuously _____.
the natural level of output; increase
In the dynamic AD-AS model, beginning from long-run equilibrium, a reduction in the target rate for inflation will eventually cause the inflation to _____, and the output to be _____ the natural level.
decrease; at
According to the text, the _____ BEST explains the adjustment of the economy over time in response to economic shocks.
dynamic model of aggregate demand and aggregate supply
In the dynamic AD-AS model, in the long run, output is _____ the natural level of output.
always at
According to the text, the dynamic AD-AS model assumes that expectations are:
adaptive.
In the dynamic AD-AS model, beginning from long-run equilibrium, an adverse supply shock in period t causes output to _____ in period t, and inflation to _____ in period t.
decrease; increase
In the dynamic AD-AS model, which is MOST likely to cause the aggregate supply curve to shift down after the central bank implements a reduction in the target rate for inflation?
Agents in the economy expect lower inflation in the future
Changes in the money supply _____ the dynamic aggregate demand curve.
may shift
