Macro Exam 3 (CH. 13, 16, & 18)

Monetary policy affects the economy by shifting the:
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Monetary policy affects the economy by shifting the:
AD Curve
Imagine that consumers borrow and spend less, thus shifting the AD curve inward. Which of the following is the best response by the Fed?
Increase the rate of money growth
Why it is difficult for the Fed to shift the aggregate demand curve by just the right amount following a demand shock?
- The Fed's control of the money supply is incomplete
- The Fed's control of the AD curve is uncertain
- The Fed's control of bank lending and borrowing is incomplete
Why is it difficult to get the timing of monetary policy just right?
It takes time to collect accurate data on the current state of the economy
What does it mean to say that the Fed has "overshot" with its use of policy?
The Fed shifted the AD curve too much
If the Fed overshoots, what will be the effect?
The economy will have a higher than desirable inflation rate, and a growth rate that is high but unsustainable in the long run
If the Fed doesn't shift the AD curve out enough, what will be the effect?
Growth will be below the "full employment" rate
If the Fed makes lots of mistakes with monetary policy, what will be the result?
More business cycle volatility
If the economy is hit by a negative real shock and the Fed tries to boost growth, what effect will monetary policy have?
It will cause higher inflation
If monetary policy intended to stabilize the economy mostly leads to higher inflation and not to more output growth, that means the recession is most likely caused by a:
Negative real shock
If the economy is hit by a negative real shock and the Fed tries to reduce inflation, what will be the effect of monetary policy?- It will reduce growth further - It will cause higher unemployment - It will delay recovery from recessionIf the Fed wishes to reduce the inflation rate in the economy, it would need to:Decrease money growthA policy to reduce inflation presents a dilemma for the Fed because:It will reduce the economy's growth rate and possibly cause a recessionThe Fed's "credibility" is important when it tries to reduce inflation because:"Expected" inflation must decline in order for the policy to be successfulThe Fed rarely tries to deflate asset price bubbles because:- It is hard to know when a bubble has formed until it is too late - It is hard to target monetary policy to affect specific markets - Using monetary policy to burst bubbles would negatively affect the entire economy1. The AD-AS model is most useful for explaining what causes: a. the economy's long-run growth rate. b. inflation. c. stock market fluctuations. d. movements in GDP growth above and below its trend rateD2. In the AD-AS model, business fluctuations are caused by: a. aggregate demand shocks. b. real shocks. c. both demand shocks and real shocks. d. neither demand shocks nor real shocks.CWhen drawing the AD-AS graph, what is measured on the vertical axis? a. prices b. GDP c. employment d. inflation rateD4. When drawing the AD-AS graph, what is measured on the horizontal axis? a. inflation b. expected inflation c. GDP d. GDP growth rateD5. Which of the following would shift the long-run aggregate supply (LRAS) curve? a. a severe earthquake b. expectations c. changes in the money supply d. animal spiritsA6. Which of the following would shift the aggregate demand (AD) curve? a. a severe hurricane season b. new technology c. increase in oil supplies d. an increase in government purchasesD7. The long-run aggregate supply (LRAS) curve is vertical because: a. the economy's long-run potential growth rate does not depend on inflation. b. prices and wages are flexible in the long run. c. money is "neutral"in the long run. d. All of the answers are correctD8. The short-run aggregate supply (SRAS) curve is upward sloping because: a. labor markets quickly adjust to equilibrium. b. wages and prices are fully flexible in the short run. c. prices and wages are sticky in the short run. d. None of the answers is correct; the SRAS curve is vertical.C9. If nominal spending growth is 5%, and the economy is in recession at a −1% real growth rate, what is the inflation rate? a. 6% b. 5% c. 4% d. There is not enough information to determine the answer.ASticky wages and prices are incorporated in the AD-AS model by the: a. long-run aggregate supply (LRAS) curve. b. short-run aggregate supply (SRAS) curve. c. aggregate demand (AD) curve. d. All of the answers are correct.BWhich of the following scenarios could result in a recession? a. Aggregate demand decreases and wages are flexible. b. Aggregate demand decreases and wages are sticky. c. Aggregate demand increases and wages are flexible. d. Aggregate demand increases and wages are sticky.B12. The AD-AS model predicts that unexpected changes in money growth will have an effect on the economy's real growth rate: a. only in the short run. b. only in the long run. c. in both the short run and the long run. d. in neither the short run nor the long run; money is always neutral.A13. A change in expected inflation causes: a. a shift of the LRAS curve. b. a movement along the SRAS curve. c. a shift of the SRAS curve. d. a shift of both the LRAS curve and the SRAS curve.C14. If the economy is in a recession that has decreased real growth and increased inflation, such a situation would be caused by: a. an inward shift of the LRAS curve. b. an outward shift of the LRAS curve. c. an inward shift of the AD curve. d . an outward shift of the AD curveA15. New technology has an immediate effect on which of these curves? a. short-run aggregate supply curve b. aggregate demand curve c. long-run aggregate supply curve d. None of the answers is correctC16. The economy's long-run response to an unexpected increase in money growth by the Fed involves: a. a shift in the AD curve. b. a shift in the LRAS curve. c. a shift in the SRAS curve. d. a movement along the SRAS curve.CIf nominal spending growth equals 6%,and the real growth rate equals 4%, what is the inflation rate? a. 4% b. 10% c. 2% d. 2/3%C18. If there is a positive demand shock, which of the following scenarios would occur in the short run? a. The inflation rate would increase and real growth would decrease. b. The inflation rate would increase and real growth would increase. c. The inflation rate would decrease and real growth would decrease. d. The inflation rate would decrease and real growth would increase.B19. If fear causes individuals to spend less and firms to invest less,it would have which of the following effects? a. AD would shift in. b. AD would shift out. c. SRAS would shift in. d. LRAS would shift inA20. The Great Depression was the result of: a. neither AD shocks nor real shocks. b. mostly AD shocks but also some real shocks. c. AD shocks but not real shocks. d. real shocks but not AD shocksBFiscal policy shifts which of the following curves in the AD-AS model?Aggregate Demand curve2. In the best-case scenario for fiscal policy, recessions are caused by a fall in ___, and a recovery can be achieved by using fiscal policy to increase____ .𝐶⃗; 𝐺⃗When fiscal policy shifts the AD curve by more than the initial increase in government spending, that is known as the:Multiplier effect. Which of the following answers lists the four limits to fiscal policy?. crowding out, drop in the bucket, timing issues, and real shocks instead of demand shocks. If 𝐺⃗ increases by 5% and AD shifts a total of 3%,then the economy has experienced: a. a crowding out effect that outweighs the multiplier effect.a crowding out effect that outweighs the multiplier effect.Which of the following would be an appropriate fiscal policy during a recession?. an increase in government spending growth. If the economy is operating at full employment and the government engages in $100million worth of fiscal policy, which of the following is likely to be TRUE?. The crowding out effect is likely to be larger than the multiplier effect.According to the crowding out effect, an increase in 𝐺⃗ financed through bond sales will decrease____both 𝐶⃗ and 𝐼 ⃗If the government is currently running a budget deficit and there is an increase in government spending without an increase incurrent taxes, then:the government will have to issue bonds, the government's budget deficit will increase, the national debt will increase. A tax cut would be an example of:expansionary fiscal policy. The crowding out effect means that increases in government spending:cause a decrease in private spendingIf government gives a one-time tax rebate to stimulate the economy (with no change in government spending) and consumers save MOST (but not all) of the rebate, then the policy will cause:A small shift in AD to the rightRicardian equivalence is an extreme form of:crowding outPresident Obama's $780 billion stimulus in2008 amounted to about 2% of GDP in the three years after the plan was passed. This is an example of:the drop in the bucket effectPolicy makers face a dilemma when trying to reduce government deficits and the national debt because the policy that is needed causes:slower growth in the economy and possibly recessionAccording to the Ricardian equivalence hypothesis, a tax cut (with no change in government spending) will be:fully saved by consumersWhat is the effect of fiscal policy when there has been a negative real shock?a small increase in gdp growthSuppose fiscal policy is used during a recession that is caused by a negative real shock. What is the likely effect on inflation?There will be more inflation when fiscal policy is used with a real shock than with a demand shockWhich of the following scenarios would imply that fiscal policy might be successful?the country has a negative demand shock and unemployment is quite highWhich of the following problems could cause fiscal policy to make business cycle fluctuations worse, not better?recognition lag, legislative lag, implementation lagfiscal policyfederal government policy on taxes, spending, and borrowing that is designed to influence business fluctuationsmultiplier effectthe additional increase in AD caused when expansionary fiscal policy increases income and thus consumer spendingCrowding outthe decrease in private spending that occurs when government increases spendingRicardian equivalencewhat occurs when people see that lower taxes today mean higher taxes in the future; so instead of spending their tax cut, they save it to pay future taxes. When Ricardian equivalence holds, a tax cut doesn't increase aggregate demand even in the short runAutomatic Stabilizerschanges in fiscal policy that stimulate AD in a recession without the need for explicit action by policymakers