53. Since 1950, the U.S. economy has likely experienced:
a. more periods of deflation than disinflation.
b. more periods of disinflation than deflation.
c. an equal number of periods of deflation and disinflation since they are synonymous.
d. none of the answers provided is correct.
54. Consider the period from 1995 to 1999. The U.S. economy:
a. experienced the great productivity slowdown.
b. experienced increases in productivity that allowed the Fed the opportunity to raise the
inflation rate.
c. experienced increases in productivity that allowed the Fed the opportunity to let the inflation
rate fall.
d. saw its potential level of output decrease.
55. Which of the following statements best describes the level of potential output in the U.S.?
a. It never changes year to year b.
It is very erratic year to year
c. It usually increases year to year
d. It has been decreasing since 1999
56. Real business cycle theory seeks to explain business cycle fluctuations by focusing on:
a. shifts in potential output.
b. the inflexibility of prices and wages.
c. aggregate demand.
d. changes in monetary policy.
57. The key part of the real business cycle theory model is:
a. the importance of monetary policy.
b. the short-run aggregate supply curve.
c. changes in aggregate demand.
d. changes in potential output.
58. Real business cycle theory explains fluctuations in output through:
a. changes in aggregate demand.
b. changes in productivity.
c. shifts of the short-run aggregate supply curve.
d. changes in monetary policy.
59. Increases in productivity result in:
a. higher inflation as output increases.
b. lower inflation as output decreases.
c. opportunities for policymakers to reduce their inflation target without inducing a recession.
d. none of the answers provided is correct.
60. The assumption that prices and wages are flexible implies that the:
a. short-run aggregate supply curve is irrelevant.
b. short-run aggregate supply curve shifts slowly in response to deviations of current output from
potential output.
c. long-run aggregate supply curve is irrelevant.
d. long-run aggregate supply curve could not shift.
61. Globalization and trade:
a. expands economic potential in a similar fashion to productivity enhancing technological
progre
ss.
b. shifts both the short-run and long-run aggregate supply curves to the right.
c. provide an opportunity to reduce inflation permanently.
d. all of the answers provided are correct.
62. Globalization and trade:
a. reduce inflation in the short run but not in the long run.
b. reduce inflation in the short run and in the long run.
c. increase inflation in the short run but not in the long run.
d. reduce inflation in the short run but increase inflation in the long run.
63. In an economy like the United States, the impact of a decrease in import prices on overall
inflation can be best described as:
a. nonexistent.
b. a modest increase.
c. a modest decrease.
d. a significant decrease, particularly as globalization and trade increase.
64. Policymakers can neutralize:
a. supply shocks, but only in the short run.
b. supply shocks, but only in the long run.
c. supply shocks in both the short run and the long run.
d. only demand shocks.
65. In which situation would policymakers be unable to neutralize the effect on the economy?
a. The federal government runs a deficit
b. An increase in the price of oil
c. Imports exceed exports
d. Consumer confidence declines
66. Policymakers could neutralize all of the following except:
a. an increase in federal government spending on defense.
b. an increase in the price of oil.
c. a trade deficit.
d. a decrease in business confidence.
67. Estimates of gross domestic product (GDP) are revised:
a. quickly and often.
b. for many years after the fact.
c. only in the following quarter.
d. each month.
68. If the economy‘s output response to changes in current inflation is small, the slope of the
dynamic aggregate demand curve will be:
a. flat.
b. steep.
c. positive.
d. zero.
69. If the monetary policy reaction curve has a relatively flat slope, the dynamic aggregate
demand curve is likely to have a:
a. relatively steep slope.
b. relatively flat slope.
c. positive slope.
d. zero slope.
70. If the monetary policy reaction curve has a relatively steep slope, the dynamic aggregate
demand curve is likely to have a:
a. relatively steep slope.
b. relatively flat slope.
c. positive slope.
d. zero slope.
71. If monetary policymakers respond aggressively to current inflation above the target inflation
rate, the:
a. monetary policy reaction curve would be flat.
b. dynamic aggregate demand curve would have a steep slope.
c. monetary policy reaction curve would have a positive and steep slope.
d. dynamic aggregate demand curve would shift rightward.
72. Central bankers with a relatively steep monetary policy reaction curve will:
a. move interest rates more aggressively when inflation rises, leading to more volatility in output.
b. move interest rates more aggressively when inflation rises, leading to less volatility in
output.
c
. move interest rates less aggressively when inflation rises, leading to more volatility in
output.
d. move interest rates less aggressively when inflation rises, leading to less volatility in output.
73. 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.
b. move interest rates more aggressively when inflation rises, leading to less volatility in
output.
c
. move interest rates less aggressively when inflation rises, leading to more volatility in
output.
d. move interest rates less aggressively when inflation rises, leading to less volatility in output.
74. Which of the following is true?
a. A flat dynamic aggregate demand curve corresponds to a steep monetary policy reaction curve
and means that supply shocks will create large changes in current output.
b. A flat dynamic aggregate demand curve corresponds to a flat monetary policy reaction curve
and means that supply shocks will create large changes in current output.
c. A flat dynamic aggregate demand curve corresponds to a steep monetary policy reaction curve
and means that supply shocks will create small changes in current output.
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.
75. 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
b. A negative supply shock occurs, the dynamic aggregate demand curve is flat and so is the
monetary policy reaction curve
c. A negative supply shock occurs, the dynamic aggregate demand curve is flat, and the
monetary policy reaction curve is steep
d. A negative supply shock occurs, the dynamic aggregate demand curve is steep, and the
monetary policy reaction curve is flat
76. If monetary policymakers are more concerned about output fluctuations than inflation
fluctuations:
a. they will choose a relatively steep monetary policy reaction curve in which movements in the
real interest rates are small.
b. they will choose a relatively flat monetary policy reaction curve in which movements in the
real interest rates are small.
c. they will choose a relatively steep monetary policy reaction curve in which movements in the
real interest rates are large.
d. they will choose a relatively flat monetary policy reaction curve in which movements in the
real interest rates are large.
77. Monetary policymakers face a tradeoff between:
a. the level of output and the rate of inflation.
b. the volatility in output and the volatility in inflation.
c. low unemployment and high inflation.
d. high unemployment and low inflation.
78. When faced with negative supply shocks, policymakers:
a. will stabilize both inflation and output.
b. will always focus on stabilizing output.
c. cannot stabilize output so they tend to focus on inflation.
d. face a trade-off because they cannot simultaneously stabilize both output and inflation.
Short Answer Questions
79. Explain why understanding short-run fluctuations in output and inflation requires that we
study shifts in dynamic aggregate demand and short-run aggregate supply.
80. Explain why changes in the central bank’s inflation target will shift the dynamic aggregate
demand curve.
81. 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.
82. 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.
83. Discuss the short- and long-run output responses resulting from an increase in money growth
when the economy is producing a current level of output that equals potential output, all other
factors constant.
84. Why could it be effectively argued that the temporary increase in inflation from the spending
for the Vietnam War was made permanent by the Fed?
85. In 2001 a combination of tax cuts and increased defense spending did not have the same
inflationary effect as the similar policy in the 1960s. Explain the difference.
86. Use the long-run model presented in Chapter 22 to answer this question. If there is a decrease
in aggregate demand, and monetary policymakers counter the decrease in aggregate
dema
nd, w
hat
will be the impact on output and inflation? Explain.
87. Why does it take so long for the declaration of the beginning and end of recessions in the
U.S. and why is there a lack of clarity as to what is and is not a recession?
88. Why can monetary policymakers neutralize demand shocks but not supply shocks?
89. Neutralizing demand shocks is easier in theory than in practice. Why?
90. What is meant by saying that automatic fiscal policy is countercyclical?
91. Fiscal policy can act just like monetary policy to offset shifts in the dynamic aggregate
demand curve and stabilize inflation and output. Explain how the two policies could have the
same effect.
92. Why would most economists default usually first to monetary policy for stabilization before
using fiscal policy?
93. What is opportunistic disinflation and what provides the opportunity? Explain how the
process works.
94. What explanations have been offered to account for the Great Moderation?
95. Use the long-run model to describe the adjustment process the economy would go through
from an increase in potential output.
96. Why do increases in potential output allow monetary policymakers to think
“opportunistically” about disinflation?
97. Explain the view called real business cycle theory.
98. Explain why real business cycle theory renders the short-run aggregate supply curve
irrelevant.
99. Explain how globalization impacts inflation in both the short run and the long run.
100. Does an increase in the rate of inflation always imply that aggregate demand is increasing?
Explain.
101. In recent years the discussions of the causes of recessions have focused on monetary policy
and higher oil prices as the likely causes. Discuss how we can get insight into the likely cause by
focusing on macroeconomic variables.
102. While monetary policymakers cannot shift the short-run aggregate supply curve following
inflation shocks, they can minimize the impact that the changes in inflation have on output.
Describe how they can do this through the monetary policy reaction curve.
Essay Questions
103. More than once in our history government officials tried to slow rapidly rising inflation by
instituting wage and price controls, in essence, making it illegal to raise prices. In terms of the
model, which includes aggregate demand, short-run aggregate supply and long-run aggregate
supply, describe what the intended result of the officials would be and what the likely result may
be.