Chapter 15. A Dynamic Model of Economic Fluctuations

Chapter 15. A Dynamic Model of Economic Fluctuations 1.In the dynamic model, the demand for goods and services will as the natural rate of output increases and as the real interest rate increases. A) increase; increase B) increase; decrease C) decrease; decrease D) decrease; increase 2.In the dynamic model, the demand for goods and services decreases as the natural rate of output or the real rate of interest . A) increases; increases B) increases; decreases C) decreases; decreases D) decreases; increases 3.In the dynamic model, changes in fiscal policy are captured in changes in the: A) natural rate of interest. B) expected rate of inflation. C) random demand shock. D) natural level of output. 4.A higher real interest rate reduces the demand for goods and services by: A) shifting the dynamic aggregate supply curve. B) decreasing the natural level of output. C) increasing inflation expectations. D) reducing investment and consumption spending. 5.Long-run growth the demand for goods and services. A) increases B) decreases C) does not change D) may either increase or decrease 6.Which of the following would be represented by a positive value of the random demand shock, t? A) an irrational wave of optimism among investors B) a decrease in government spending C) an aggressive increase in oil prices by a cartel D) an increase in the central bank's inflation target 7.Which of the following would be represented by a negative value of the random demand shock, t? A) an irrational wave of optimism among investors B) a decrease in government spending C) an aggressive increase in oil prices by a cartel D) a decrease in the central bank's inflation target 8.The real interest rate at which, in the absence of any shock, the demand for goods and services equals the natural rate of output is called the rate of interest. A) ex ante B) ex post C) natural D) nominal 9.The natural rate of interest is the real interest rate: A) at which the demand for goods and services equals the natural rate of output. B) that most people anticipate based on their expectations of inflation. C) at which the natural rate of unemployment equals the natural rate of output. D) equal to the nominal interest rate minus the natural rate of inflation. 10.According to the Fisher equation, the real interest rate equals the nominal interest rate minus the: A) natural rate of interest B) expected rate of inflation C) expected rate of interest D) ex ante rate of interest. 11.According to the Fisher equation, the real interest, rt, equals the nominal interest rate, it, minus the expected inflation rate, which is written as: A) Ett B) Ett+1 C) Et+1t D) Et + 1t + 1 12.The ex ante real interest rate that prevails at time t equals: A) it – Ett B) it – Ett + 1 C) it – t D) it – t + 1 13.The ex post real interest rate that prevails at time t equals: A) it – Ett B) it – Ett + 1 C) it – t D) it – t + 1 14.The current inflation rate, t, represents the change in the price level between periods: A) t – 1 and t B) t and t + 1 C) t – 1 and t + 1 D) t and t + 2 15.The nominal interest rate, it, is the rate of return between periods: A) t – 1 and t B) t and t + 1 C) t – 1 and t + 1 D) t and t + 2 16.According to the Phillips curve, the inflation rate depends on all of the following except: A) previously expected inflation. B) an exogenous supply shock. C) the real interest rate. D) the deviation of output from its natural rate. 17.According to the Phillips curve, inflation depends on expected inflation because: A) the real interest rate depends on the expected rate of inflation. B) the central bank sets its target inflation rate based on the expected rate of inflation. C) the natural level of output depends on the expected rate of inflation. D) when some firms set prices in advance, expected inflation influences future prices. 18.According to the Phillips curve, firms raise prices when output is the natural level of output or, equivalently, when the unemployment rate is the natural rate of unemployment. A) above; above B) above; below C) below; below D) below; above 19.According to the Phillips curve, firms prices when output is below the natural level of output, or equivalently, when the unemployment rate is the natural rate of unemployment. A) raise; above B) raise; below C) lower; above D) lower; below 20.In the dynamic model, the supply shock variable, t, is a variable appearing in which of the following equations of the model? A) Fisher equation B) Phillips curve C) monetary-policy rule D) adaptive expectations 21.Which of the following would be represented by a negative value of the random supply shock, t? A) an irrational wave of pessimism among investors B) a decrease in government spending C) oil price decreases resulting from a breakdown in the cartel D) a decrease in the central bank's inflation target 22.Which of the following would be represented by a positive value of the random supply shock, t? A) an irrational wave of optimism among investors B) an increase in government spending C) widespread drought leading to large increases in food prices. D) an increase in the central bank's inflation target 23.The dynamic model of aggregate demand and aggregate supply assumes that people form expectations of inflation based on: A) forecasts optimally using all available information. B) recently observed inflation. C) the central bank's inflation target. D) the difference between the nominal and real interest rate. 24.Expectations of inflation based on recently observed inflation is called the assumption of expectations. A) natural B) rational C) dynamic D) adaptive 25.In the specification of adaptive expectation used in the dynamic model of aggregate demand and aggregate supply, at time t the expected inflation rate at time t + 1 is: A) t – 1. B) t. C) t + 1. D) t + 2. 26.In the specification of adaptive expectation used in the dynamic model of aggregate demand and aggregate supply, people at time t – 1 forecast the inflation rate in time period t will be: A) t – 2 B) t – 1 C) t D) t + 1 27.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: A) nominal rate of interest. B) target rate of inflation. C) natural rate of interest. D) current rate of inflation. 28.According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation its target, or output its natural level. A) rises above; rises above B) rises above; falls below C) falls below; falls below D) falls below; rises above 29.According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate when inflation is above its target, and the real interest rate when output is below its natural level. A) rises; falls B) rises; rises C) falls; falls D) falls; rises 30.To follow a monetary policy rule, the central bank raises the nominal interest rate by: A) raising the inflation target. B) decreasing the money supply. C) increasing the GDP gap. D) decreasing inflation expectations. 31.In order to achieve the target for the nominal interest rate established by the monetary policy rule, the central bank adjusts: A) the inflation rate. B) the natural rate of interest. C) the money supply. D) the inflation target. 32.The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in: A) inflation expectations. B) money supply and money demand. C) inflation and output. D) nominal and real exchange rates.