Chapter 22 – Understanding Business Cycle Fluctuations
60. Consider the period from 1995 to 1999. The U.S. economy:
A. Experienced the great productivity slowdown
61. Which of the following statements best describes the level of potential output in the U.S.?
A. It never changes year to year
62. Real business cycle theory seeks to explain business cycle fluctuations by focusing on:
D. Changes in monetary policy
Chapter 22 – Understanding Business Cycle Fluctuations
63. The key part of the real business cycle theory model is:
A. The importance of monetary policy
64. Real business cycle theory explains fluctuations in output through:
D. Changes in monetary policy
65. Increases in productivity result in:
A. Higher inflation as output increases
Chapter 22 – Understanding Business Cycle Fluctuations
66. If prices were to adjust quickly:
D. The short-run aggregate supply curve would not shift
67. If prices and wages are slow to adjust (“sticky,” rather than flexible):
A. Inflation would adjust rapidly
68. The assumption that prices and wages are flexible implies that the:
D. Long-run aggregate supply curve could not shift
Chapter 22 – Understanding Business Cycle Fluctuations
69. Globalization and trade:
A. Can be seen as a source of productivity enhancing technological progress
70. Globalization and trade:
D. Reduce inflation in the short run but increase inflation in the long run
71. The effect of a decrease in import prices on overall inflation can be best described as:
A. Nonexistent
Chapter 22 – Understanding Business Cycle Fluctuations
72. If a recession results from higher oil prices:
D. An expansionary gap should occur
73. If a negative supply shock is associated with a decline in potential output, keeping
inflation at its target requires:
D. A rightward shift in the monetary policy reaction curve because there is an recessionary
gap
74. If a negative supply shock is associated with a decline in potential output, policymakers
D. Not shift the monetary policy reaction curve
Chapter 22 – Understanding Business Cycle Fluctuations
75. Policymakers can neutralize:
A. Supply shocks, but only in the short run
76. In which situation would policymakers be unable to neutralize the effect on the economy?
D. Consumer confidence declines
77. Policymakers could neutralize all of the following except:
D. A decrease in business confidence
Chapter 22 – Understanding Business Cycle Fluctuations
78. To set the target interest rate, central banks need to know the size of the output gap. This
requires measuring:
A. Only the level of current gross domestic product
79. Estimates of gross domestic product (GDP) are revised:
D. Each month
80. If the economy’s output response to changes in current inflation is small, the slope of the
dynamic aggregate demand curve will be:
D. Zero
Chapter 22 – Understanding Business Cycle Fluctuations
81. If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate
demand curve is likely to have a:
D. Zero slope
82. If the monetary policy reaction curve has a relatively steep slope, the dynamic aggregate
demand curve is likely to have a:
D. Zero slope
83. If monetary policymakers respond aggressively to current inflation above the target
inflation rate, the:
A. Monetary policy reaction curve would be flat
Chapter 22 – Understanding Business Cycle Fluctuations
84. Central bankers with a relatively steep monetary policy reaction curve will:
D. Move interest rates less aggressively when inflation rises, leading to less volatility in
output
85. Central bankers with a relatively flat monetary policy reaction curve will:
A. Move interest rates more aggressively when inflation rises, leading to more volatility in
output
Chapter 22 – Understanding Business Cycle Fluctuations
86. Which of the following is true?
D. A flat dynamic aggregate demand curve corresponds to a flat monetary policy reaction
curve and means that supply shocks will create small changes in current output
87. In which situation will inflation fall the fastest?
A. A negative supply shock occurs, the dynamic aggregate demand curve is steep and so is
the monetary policy reaction curve
Chapter 22 – Understanding Business Cycle Fluctuations
22–31
88. If monetary policymakers are more concerned about output fluctuations than inflation
fluctuations:
D. They will choose a relatively flat monetary policy reaction curve in which movements in
the real interest rates are large
89. Monetary policymakers face a tradeoff between:
D. High unemployment and low inflation
90. When faced with negative supply shocks, policymakers:
A. Will stabilize both inflation and output
Short Answer Questions
Chapter 22 – Understanding Business Cycle Fluctuations
91. Explain why understanding short-run fluctuations in output and inflation requires that we
study shifts in dynamic aggregate demand and short-run aggregate supply.
92. Explain why changes in the central bank’s inflation target will shift the dynamic aggregate
demand curve.
Chapter 22 – Understanding Business Cycle Fluctuations
93. Describe the immediate short-run effect to the economy from an increase in government
purchases, as well as the self-correcting mechanism that will restore long-run equilibrium.
94. If monetary policymakers do not want the current inflation rate to increase, yet they
observe increasing aggregate demand from higher government purchases, will they have to
accept a higher inflation target? Explain.