1. According to the Taylor rul
1. According to the Taylor rule, if there is an expansionary gapof 2 percent of potential output and inflation is 3 percent, whatreal interest rate will the Fed set?
A) 1.5 percent B) 2 percent C) 3.5 percent D) 2.5 percent
2. The money demand curve will shift to the right if:
A) the price level decreases. B) the price level increases. C)the nominal interest rate increases. D) the nominal interest ratedecreases
3. The aggregate demand curve shifts to the right when theFed:
A) decreases its target inflation rate, reflected by an upwardshift in the Fed’s policy reaction function. B) increases itstarget inflation rate, reflected by a downward shift in the Fed’spolicy reaction function. C) decreases real interest rates inresponse to inflation, but does not change its target inflationrate or the Fed’s policy reaction function. D) increases realinterest rates in response to inflation, but does not change itstarget inflation rate or the Fed’s policy reaction function.
4. Two drawbacks in using fiscal policy as a stabilization toolare that fiscal policy can affect ________ as well as aggregatedemand and that fiscal policy is ________.
A) potential output; offset by automatic stabilizers B)consumption; offset by automatic stabilizers C) potential output;not flexible enough D) consumption; too flexible
5. According to the AD-AS diagram, policy makers face ashort-term trade-off between ________ when implementinganti-inflation policies.
A) long-term equilibrium and short-term equilibrium B) inflationand unemployment C) inflation and expansion D) recession andstagflation
6. For a fixed inflation rate target, a decrease in theinflation rate corresponds to a ________ the aggregate demand curveand a decrease in exogenous spending corresponds to a ________ theaggregate demand curve.
A) shift left of; movement up B) shift left of; shift right ofC) movement up; shift right of D) movement down; shift left of
7. In a certain economy, the components of planned spending aregiven by: C = 500 + 0.8(Y – T) –300r I P = 200 – 400r
G = 200 NX = 10 T = 150
Given the information about the economy above, which expressiongives autonomous
expenditures?
A) [790 − 700r ] B) 0.8Y C) [910 −700r ] D) [760 − 700r ]
8. In the short-run, if the Federal Reserve decreasesinterest rates, then consumption and investment
________, planned aggregate expenditure ________, and short-runequilibrium output ________.
A) increase; increases; decreases B) increase; increases;increases
C) increase; decreases; decreases D) decrease; decreases;decreases
Answer:
Answer;
1. D) 2.5 percent.
Explanation: Targeted interest rate = 0.5 (potential output) +0.5 (inflationary gap)
= 0.5 (2%) + 0.5 (3%) = 2.5%
2. D. the nominal interest rate decreases.
Explanation: Since interest rate is not measured on any of theaxes, decrease in the interest rate increases the purchasing powerof the people thus increasing the demand, due to which demand curveshifts rightward.
3. c) decreases the real interest rate in response to theinflation.
Explanation: As interest rate decreases, people can more easilyborrow money so they have more money in hand now, due to whichtheir aggregate demand increases.
4. A) potential output and offset by automatic stabilizers
Fiscal policy can affect both potential output and aggregatedemand and because of the automatic stabilizers, the effects ofpolicy is offset.
5. B) inflation and unemployment
Explanation: inflation and unemployment are inversely related toeach other. As inflation increases unempoyment decreases andvice-versa.
6. D) movement down, shift left of
Explanation: As prices are measured on y-axis, decrease ininflation rate leads to decrease in prices, leading to movementdown the demand curve whereas decrease in exogeneous spending leadsto leftward shift of the demand curve.
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