Chapter 21 – Output, Inflation, and Monetary Policy
Multiple Choice Questions
1. Short-run movements in inflation and output are ultimately attributed to changes in:
A. Aggregate demand
2. The Fed hopes to impact short-run inflation and output by altering:
A. The production function
Chapter 21 – Output, Inflation, and Monetary Policy
3. The aggregate demand curve shows the quantity of:
D. Real output demanded at each level of real interest rate
4. Aggregate supply is the quantity of:
D. Output the country wants at each level of inflation
5. Business cycles are viewed as:
D. Movements in the long-run equilibrium
Chapter 21 – Output, Inflation, and Monetary Policy
6. A characteristic of long-run equilibrium is, the economy is producing its potential output.
This is:
D. The level of output consistent with an unemployment rate of 7.5%
7. In the long run, the inflation rate equals the level implied by:
D. Fiscal policy
8. Potential output of the country when viewed over long periods of time:
A. Rises in spurts and then starts a downward trend that can last years
Chapter 21 – Output, Inflation, and Monetary Policy
9. Which of the following would cause an increase in the potential output of a country?
D. A decrease in the labor force
10. The potential output of a country would increase as a result of each of the following,
except:
A. An increase in population
11. Which of the following statements is most accurate?
A. Potential output is determined by current output
Chapter 21 – Output, Inflation, and Monetary Policy
12. In the long run, current output will:
D. Only equal potential output if unemployment is zero
13. In the long run, if we ignore changes in velocity, inflation will:
A. Be zero
14. Given the equation of exchange, MV = PY, when central bankers control short-term
nominal interest rates by adjusting the level of reserves in the banking system, their actions
are expected to primarily affect:
A. The rate of growth of V
Chapter 21 – Output, Inflation, and Monetary Policy
15. To an economist, the term “inflation” refers to:
D. Increases in prices of important goods like food and energy
16. To economists, inflation means all of the following except:
D. Temporary or permanent changes in a continuously rising price level
17. If inflation is very high, say 50 or 100 percent a year, monetary policymakers will shift
their focus to controlling:
A. The long-term interest rate
Chapter 21 – Output, Inflation, and Monetary Policy
18. Recent policy statements by the FOMC announce and explain its:
D. Decisions for money-growth targets but also mentioning short-term interest-rate decisions
19. The FOMC targets the federal funds rate, but if they are going to alter the course of the
economy they must influence the:
D. Nominal exchange rate as well
20. For central bankers to alter the real interest rate by changing the nominal interest rate,
D. The change in the expected rate of inflation must equal the change in the nominal interest
rate
Chapter 21 – Output, Inflation, and Monetary Policy
21. Empirical evidence suggests that over the last ten years:
D. There is no correlation between the nominal and real federal funds
22. Which of the following is not a part of aggregate expenditure?
D. Net exports
23. Which of the following would not be included in aggregate expenditures?
Chapter 21 – Output, Inflation, and Monetary Policy
24. Which of the following would not be included in aggregate expenditures?
D. The value of blue jeans produced in the U.S. and exported to Japan
25. Of all of the interest-sensitive component parts of aggregate expenditures, the most
important component is:
D. Net exports
26. Which component of aggregate expenditures is the least sensitive to changes in the real
interest rate?
A. Investment
Chapter 21 – Output, Inflation, and Monetary Policy
27. Consumption can be sensitive to changes in the real interest rate because:
D. Lower interest rates increase savings.
28. Which of the following statements is most correct?
D. When the real interest rate increases, the level of saving always decreases
29. Increases in the real interest rate in the U.S. will cause net exports to:
A. Decrease, because the dollar depreciates
Chapter 21 – Output, Inflation, and Monetary Policy
30. A decrease in the real interest rate in the U.S. will cause net exports to:
A. Increase because exports will remain constant but imports will decrease
31. What should be the impact on aggregate expenditures from an increase in the real interest
rate?
D. The impact is indeterminate
32. Which of the following would not shift the aggregate expenditures curve?
D. Changes in net exports that result from exchange rate changes
Chapter 21 – Output, Inflation, and Monetary Policy
33. If the level of current output is below the potential level of output, central bankers would:
D. Attempt to shift the aggregate expenditures curve
34. If government purchases increase and as a result push current output above potential
output, monetary policymakers are likely to:
D. Purchase Treasury securities
35. The relationship between the long-run real interest rate and potential output:
D. Depends on the actions of central bankers
Chapter 21 – Output, Inflation, and Monetary Policy
36. The federal government undertakes a large military buildup; the economy is at its
potential level of output, all other things equal, the impact on the long-run real interest rate
will be to:
D. Change at the same rate as inflation
37. It has been argued that the information technology age has greatly increased productivity
and potential output. If this is true:
38. Which of the following statements is correct?
D. The long-run real interest rate varies directly with changes in non-interest sensitive
components of aggregate demand and does not vary with potential output
Chapter 21 – Output, Inflation, and Monetary Policy
D. Investment spending actually increases though GDP decreases
40. In the U.S., most of the recessions are the result of:
A. Ill-timed fiscal policy
41. Changes in investment can usually be attributed to:
D. Changes in exports
Chapter 21 – Output, Inflation, and Monetary Policy
42. The monetary policy reaction curve:
D. Is set by Congress and given to the Fed as a guideline to follow
43. A monetary policy reaction curve requires the central bank to have a(n):
D. Growth target
44. If the axes in the model for the monetary policy reaction curve are the real interest rate
(vertical axis) and the rate of inflation (horizontal axis), then the monetary policy reaction
curve would:
D. Be vertical
Chapter 21 – Output, Inflation, and Monetary Policy
45. The point where the central bank’s target inflation rate is consistent with the long-run real
interest rate lies:
A. Above the monetary policy reaction curve
46. If policymakers are aggressive in keeping current inflation near the target inflation rate
then the monetary policy reaction curve will:
D. Be vertical
47. If a point lies on the monetary policy reaction curve, and at this point the inflation rate
equals the target rate of inflation, we know that:
D. Current output is above potential output
Chapter 21 – Output, Inflation, and Monetary Policy
48. The slope of the monetary policy reaction curve is determined by:
A. How strongly the economy reacts to changes in the nominal interest rate
49. If policymakers are not aggressive about keeping inflation close to the target rate, the
slope of the monetary policy reaction curve would be:
D. Negative
50. If the slope of the monetary policy reaction curve is relatively flat, it means that central
bankers are:
A. Very concerned about keeping inflation close to the target rate
Chapter 21 – Output, Inflation, and Monetary Policy
51. The effect on the monetary policy reaction curve resulting from policymakers increasing
their inflation target would be:
A. The monetary policy reaction curve shifting to the left
52. The effect on the monetary policy reaction curve resulting from policymakers decreasing
their inflation target would be:
D. The monetary policy reaction curve shifting to the right
D. In effect move up along the current monetary policy reaction curve
Chapter 21 – Output, Inflation, and Monetary Policy
54. What would be the impact on the monetary policy reaction curve if the Fed were to raise
the target inflation rate?
A. The monetary policy reaction curve shifts to the left
55. The dynamic aggregate demand curve illustrates that the relationship between inflation
and real output is:
D. Undefined
56. An inflation rate above the target rate will result in:
D. A movement up along the monetary policy reaction curve and a rightward shift of the
dynamic aggregate demand curve
Chapter 21 – Output, Inflation, and Monetary Policy
57. An inflation rate below the target rate will result in:
D. A movement up along the monetary policy reaction curve and a leftward shift of the
dynamic aggregate demand curve
58. Each of the following factors contribute to the slope of the dynamic aggregate demand
curve, except the:
D. Size of the response of aggregate demand to changes in the interest rate
59. The fact that central bankers tend to respond to higher rates of inflation by increasing the
real interest rate is:
D. Why the monetary policy reaction curve has a negative slope