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Homework 14
1. What impact would tighter monetary policy have on output?
A. Tighter monetary policy reduces output.
B. Tighter monetary policy increases output.
C. Tighter monetary policy has no impact on output.
D. Tighter monetary policy has an indeterminate impact on output.
Answer: A
2. If the Federal Reserve were to over-stimulate the economy, what impact would this most likely have
on inflation?
A. inflation would rise
B. inflation would fall
C. inflation would not change
D. inflation would turn negative
Answer: A
3. What impact would radical disinflation have on unemployment?
A. unemployment would rise
B. unemployment would fall
C. unemployment would not change
D. The effect on unemployment would be indeterminate.
Answer: A
4. A typical monetary rule would set target ranges for
A. M1 or M2.
B. GDP.
C. unemployment.
D. fiscal spending.
Answer: A
5. In terms of the aggregate demand model, how do we observe an increase in the demand for cash?
A. a decrease in v
B. an increase in v
C. a decrease in M
D. an increase in M
Answer: A
6. In the aggregate demand model, if wages or other prices are sticky, what effect does this have on
the SRAS curve?
A. the SRAS shifts to the left
B. the SRAS shifts to the right
C. the SRAS does not move at all
D. the SRAS tilts on its axis
Answer: C
7. ______________ occurs when it is expected that a central bank will stick with its policy.
A. Credible monetary policy
B. Predictable monetary policy
C. Predictable monetary policy
D. Stable monetary policy
Answer: A
8. Real shocks and aggregate demand shocks are
A. always mixed and not easy to disentangle.
B. never mixed and not easy to disentangle.
C. always mixed but easy to disentangle.
D. not related.
Answer: A
9. ______________ is the Federal Reserve's ability to influence expectations.
A. Market confidence
B. Stable monetary policy
C. Stable conetary policy
D. Market prognostication
Answer: A
10. ______________ may generate booms that can become bubbles in asset prices.
A. Positive real shocks
B. Negative real shocks
C. Positive nominal shocks
D. Negative nominal shocks
Answer: A
11. A decrease in AD
A. shifts the AD curve inward.
B. shifts the AD curve outward.
C. has an indeterminate impact on the AD curve.
D. does not shift the AD curve.
Answer: A
12. What impact would a negative real shock have on the Solow growth curve?
A. The curve would shift to the left.
B. The curve would shift to the right.
C. The curve would not shift at all.
D. The curve would tilt on its axis.
Answer: A
13. Which of the following best describes the Federal Reserve's control of aggregate demand?
A. The Fed's control of aggregate demand is of certain magnitude and timing.
B. The Fed's control of aggregate demand is of uncertain magnitude, but certain of timing.
C. The Fed's control of aggregate demand is of uncertain magnitude and timing.
D. The Fed cannot affect or influence aggregate demand.
Answer: C
14. When it is expected that a central bank will stick with its policy, this is referred to by economists
as
A. credible monetary policy.
B. predictable monetary policy.
C. predictable fiscal policy.
D. stable monetary policy.
Answer: A
15. Suppose that the economy is hit by a negative real shock such as a rapid oil price increase. What
impact will this have on the price level?
A. There will be a higher rate of inflation.
B. There will be a lower rate of inflation.
C. There will be no change in inflation.
D. There will be an indeterminate impact on inflation.
Answer: A
16. If the central bank expands M, what impact could this have on a negative Aggregate Demand
shock?
A. It may be able to lessen or reverse the AD shock.
B. It would have no impact on the AD shock.
C. It would definitely make the shock slightly worse.
D. It would definitely make the shock much worse.
Answer: A
17. Monetary policy
A. can influence aggregate demand, but it can't push the demand for housing down and, at
the same time, keep the demand for everything else up.
B. cannot influence aggregate demand, and it can't push the demand for housing down and,
at the same time, keep the demand for everything else up.
C. can influence aggregate demand, but it can push the demand for housing down and keep
the demand for everything else up.
D. cannot influence aggregate demand, or push the demand for housing down, but it can keep
the demand for everything else up.
Answer: A
18. The Federal Reserve's control of the money supply is
A. incomplete, and subject to uncertain lags.
B. complete, but subject to uncertain lags.
C. incomplete, but not subject to uncertain lags.
D. complete, but not subject to uncertain lags.
Answer: A
19. Which Federal Reserve Chairman decreased the inflation rate from 13.5% to 3%?
A. Paul Volker
B. Alan Greenspan
C. William McDonough
D. Ben Bernanke
Answer: A
20. Fill in the blanks for this situation: Suppose that inflation is running at 10 percent and the central
banker would like to lower inflation to 2 percent without reducing real growth. The central banker
should tell the public that she is aiming at an inflation rate of ____ percent and she should set the
money growth at a rate of ____ percent. The central banker knows that velocity shocks are zero
and that the Solow growth rate is 3 percent.
A. 10 percent; 3 percent
B. 2 percent; 5 percent
C. 5 percent; 2 percent
D. 3 percent; 3 percent
Answer: B
21. We saw that real shocks and AD shocks often occur simultaneously. When this happens, we can't
be sure of the effect on both inflation and real growth (unless we know the exact size of each
shock). We'll only know one or the other for sure. In the following case, which change can we
confidently predict: Biologists learn how to use computer simulations to rapidly search for
molecules that would make promising medicines, and investors become optimistic about future
profit opportunities.. This will cause a positive real shock and a positive velocity shock to occur
simultaneously.
A. inflation will fall
B. inflation will rise
C. a fall in real growth
D. a rise in real growth
Answer: D
22. If you were a central banker trying to cut inflation, and you wanted to keep the real growth rate
as close as possible to the Solow growth rate, what would you prefer: a steep SRAS or a flatter
SRAS?
A. A steep SRAS because with flexible wages and prices the SRAS will shift to the left but not
passed the Solow growth curve.
B. A steep SRAS because with flexible wages and prices the SRAS will shift to the left and
passed the Solow growth curve.
C. A flatter SRAS because with sticky wages and prices the SRAS will shift to the left but not
passed the Solow growth curve.
D. A flatter SRAS because with flexible wages and prices the SRAS will shift to the left but not
passed the Solow growth curve.
Answer: A
23. Let's re-enact a simplified version of the 1981-1982 Volcker disinflation. The expected inflation
rate and actual inflation rate are both 10 percent. The real growth rate is 3 percent. To keep it
simple assume that the velocity growth rate is zero. Thus, we have: AD: Money growth = Inflation
+ Real growth. Now let's define a simple SRAS curve: SRAS: Inflation = Expected inflation + 1X
(Real Growth rate – Solow growth rate). In the short run, if Volcker cuts money growth to 7
percent what will real growth and inflation be? Hint: in the short run the economy won't grow at
the Solow rate. Instead, real output will grow at the short run equilibrium point where SRAS
intersects AD.
A. 7 percent real growth and 7 percent inflation
B. 7 percent real growth and 3 percent inflation
C. 0 percent real growth and 3 percent inflation
D. 0 percent real growth and 7 percent inflation
Answer: D
24. Complete the following sentences: When a financial bubble collapses, the ________ curve will
shift to the _______. This will cause inflation to ______.
A. AD; left; fall.
B. AD; right; fall
C. Solow growth curve; right; increase
D. Solow growth curve; left; decrease
Answer: A
25. Central banks and voters alike usually want higher real growth and lower inflation. What kind of
shock makes that happen?
A. a financial bubble collapsing
B. widespread consumer pessimism
C. a positive Solow growth shock
D. a negative Solow growth shock
Answer: C
26. When talking about the economy, people often make a distinction between policies that work “only
in theory” compared to those that work “in practice.” In theory, a fall in money growth slows down
the economy in the short run. In the six episodes since World War II when, as discussed in the
chapter, the Fed deliberately put the brakes on money growth, did this theory work “in practice”?
A. This theory failed all the time.
B. This theory failed most of the time.
C. This theory worked most of the time but not all of the time.
D. This theory worked every single time.
Answer: D
27. Which of the following would be methods that the Fed could use to “maintain market confidence”
when a negative AD shock hits: i = Slow the growth rate of the monetary base. ii = Raise the
interest rate on “discount window” loans. iii = promise to increase the growth rate of money if the
economy worsens further. iv = Sell Treasury bills and buy bank reserves through open market
operations. v = Raise the reserve requirements for banks.
A. i and ii
B. iii and iv
C. v
D. iii
Answer: D
28. All of the following are called “rules.” Which of the following so-called rules are actually like “rules”
and which are more like “discretion”? i = Congress passes a law providing automatic cost of living
increases to Social Security every year. ii = Congress follows a rule to vote every few years on
how much to increase Social Security payments-votes that usually occur just before an election. iii
= The Federal Reserve follows the famous “Taylor rule” for setting the federal funds rate: Nominal
Rate = 2% + Inflation + 0.5 X (Real growth – Solow growth rate) iv = The Federal Reserve
follows a rule of “doing whatever seems right at the time.”
A. The following sound like “rules”: i, ii, and iii. The following sounds like “discretion”: iv.
B. The following sound like “rules”: i and ii. The following sound like “discretion”: iii and iv.
C. The following sound like “rules”: i and iii. The following sound like “discretion”: ii and iv.
D. The following sounds like “rules”: ii. The following sound like “discretion”: i, iii, and iv.
Answer: C
29. How would a positive Solow growth shock affect the figure below? Ignore the possible effect of
sticky wages and prices.
A. The Solow growth curve would shift to the left.
B. The Solow growth curve would shift to the right. And The SRAS curve would shift down and
to the right by the same amount as the Solow growth curve, in the absence of sticky wages
and prices.
C. The AD curve would shift to down and to the left.
D. The AD curve would shift up and to the right.
Answer: B
30. Let's review the quantity theory, and remember that in the quantity theory, inflation does all of
the adjusting. Recall that
Inflation + Real growth. Consider the nation of
Friedmania. Before the shock to Friedmania's economy,
real growth = 3 percent. What is the inflation rate?
A. -2 percent
B. 3 percent
C. 2 percent
D. 0 percent
Answer: A
1 percent,
0 percent,
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