Chapter 21 – Output, Inflation, and Monetary Policy
60. Inflation reduces aggregate demand mainly by:
A. Increasing nominal GDP
61. The dynamic aggregate demand curve has a negative slope for all of the following reasons
except:
D. Higher current inflation leads policy makers to increase the real interest rate, which
depresses various components of aggregate expenditures
62. Rising domestic inflation rates can be contributing to the downward sloping dynamic
aggregate demand curve through net exports because:
A. Foreign goods may cost more relative to domestic goods
Chapter 21 – Output, Inflation, and Monetary Policy
63. A rightward shift in the dynamic aggregate demand curve could result from:
A. A decrease in government purchases
64. A decrease in taxes would cause:
A. The dynamic aggregate demand curve to shift to the left
65. A decrease in the inflation target by the central bank would:
D. Be reflected by a movement down and along the existing dynamic aggregate demand curve
Chapter 21 – Output, Inflation, and Monetary Policy
66. If monetary policymakers fear a recession resulting from increased pessimism on the part
of business people, and they want to avoid the recession, they would:
D. Encourage fiscal policymakers to act
67. In the short run, the point on the aggregate demand curve where an economy will end up
depends on:
A. The money supply
68. In the short run, the aggregate supply curve is:
A. Vertical
Chapter 21 – Output, Inflation, and Monetary Policy
69. If the economy’s current level of output rises above its potential level of output, the short-
run aggregate supply curve will:
D. Become vertical
70. If the economy’s current level of output is below its potential level of output, the short-run
aggregate supply curve:
D. Does not matter; only the long-run aggregate supply curve matters in this situation
71. If current output deviates from potential output, the short-run aggregate supply curve may
shift because:
D. The economy’s long-run growth rate will have to adjust
Chapter 21 – Output, Inflation, and Monetary Policy
72. Businesses successfully lobby Congress into passing legislation that eliminates the
minimum wage law. The impact of this change would:
A. Shift the short-run aggregate supply curve to the left
73. If most people expect the inflation rate will increase, the:
A. Long-run aggregate supply curve would shift right
74. If output and inflation are unrelated in the long run, the long-run aggregate supply curve
D. Non-existent
Chapter 21 – Output, Inflation, and Monetary Policy
75. Which of the following statements seems to be verified by economic data?
A. Inflation tends to rise during recessions
76. The long-run aggregate supply curve intersects the horizontal axis at the:
D. Actual rate of inflation
77. One reason the long-run aggregate supply curve has the slope it does is due to the fact
that:
D. Over long periods of time the economy moves to its potential level of output with lower
inflation
Chapter 21 – Output, Inflation, and Monetary Policy
78. Select the answer which best completes the following statement: “at any point along the
long-run aggregate supply curve”
A. Expected inflation equals current inflation and current output is below potential output
79. Which of the following statements is incorrect?
D. In the long run, inflation is determined by monetary policy
80. An output gap occurs when:
A. Aggregate demand does not equal short-run aggregate supply
Chapter 21 – Output, Inflation, and Monetary Policy
81. The intersection of the aggregate demand curve and the short-run aggregate supply curve
determines:
A. Current inflation, but not current output
82. The economy is in both a short- and long-run equilibrium if:
D. The short-run aggregate supply curve intersects the long-run aggregate supply curve at
potential output
83. If the economy is in long-run equilibrium:
A. Inflation should be increasing at its long-term trend rate
Chapter 21 – Output, Inflation, and Monetary Policy
84. The self-correcting mechanism to return the economy to potential output from output gaps
is the change in:
A. Potential output
85. The conditions for long-run equilibrium include each of the following, except:
D. Current inflation equals expected inflation
86. The short-run effects from an increase in aggregate demand will include:
D. A recessionary gap
Chapter 21 – Output, Inflation, and Monetary Policy
87. If the economy was initially at a long-run equilibrium, the short-run effects from a
decrease in aggregate demand will include:
C. An increase in the current inflation rate
D. A decrease in the target rate of inflation
88. The debate over the causes of recessions in the U.S. in recent years has included
arguments about:
A. Monetary policy, but not higher oil prices
89. If a recession were the result of monetary policy, we should observe:
A. Inflation increasing as output decreases
Chapter 21 – Output, Inflation, and Monetary Policy
90. Evidence points out that since the mid-1950s just about every recession was preceded by:
D. Negative real interest rates
91. Evidence points out that since the mid-1950s just about every recession was preceded by
rising interest rates. This suggests that the recessions were:
D. Caused by simultaneous shifts in aggregate demand and aggregate supply
Short Answer Questions
92. What are the determinants of the potential output for an economy?
Chapter 21 – Output, Inflation, and Monetary Policy
93. What would you expect to happen to the price level (inflation) from a prolonged
expansionary gap and why?
94. Use the equation of exchange to show that in the long run, inflation must equal money
growth less the growth of potential output.
Chapter 21 – Output, Inflation, and Monetary Policy
95. Use the equation of exchange to show how the level of money in the economy impacts the
level of aggregate demand.
96. In the face of constant velocity, explain what happens to aggregate demand if the growth
rate of money is less than the rate of inflation.
Chapter 21 – Output, Inflation, and Monetary Policy
97. Temporary changes in inflation lead to adjustments in the price level. What causes
permanent increases in inflation and why?
98. Explain why the FOMC in recent years has been able to focus almost exclusively on
short-term interest rate targets without having to announce money growth targets.
99. If changes in the nominal federal funds rate result in equal changes to the expected rate of
inflation, how effective would it be for the FOMC to target the nominal federal funds rate?