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The dynamic model of aggregate demand and aggregate supply assumes that people form expectations of inflation based on:


A) forecasts optimally using all available information.
B) recently observed inflation.
C) the central bank's inflation target.
D) the difference between the nominal and real interest rate.

E) None of the above
F) A) and B)

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What is stagflation? How does it occur as a result of a shock to the aggregate supply curve?

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Stagflation is the situation in which an...

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In the dynamic model of aggregate demand and aggregate supply, if the central bank chooses a large value of θπ and a small value of θY, then the DAD curve will be relatively _____, and supply shocks will have relatively _____ impacts on inflation than output.


A) flat; larger
B) flat; smaller
C) steep; larger
D) steep; smaller

E) A) and C)
F) B) and D)

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What is the difference between the ex ante real interest rate and the real interest rate? Explain the Fisher equation used by the AD-AS model in light of this difference.

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The ex ante real interest rate is the re...

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According to the Phillips curve, inflation depends on expected inflation because:


A) the real interest rate depends on the expected rate of inflation.
B) the central bank sets its target inflation rate based on the expected rate of inflation.
C) the natural level of output depends on the expected rate of inflation.
D) when some firms set prices in advance, expected inflation influences future prices.

E) None of the above
F) A) and B)

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Use the model of dynamic aggregate demand and aggregate supply to compare the time paths of output and inflation in response to a one-period positive demand shock versus a one-period positive supply shock.

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In response to a one-period positive sup...

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Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a permanent reduction in the central bank's inflation target, the DAS shifts downward because:


A) the natural level of output increases in response to the lower rates of inflation.
B) the deviation of output from the natural level of output increases as a result of lower rates of inflation.
C) lower rates of inflation generate negative supply shocks.
D) expectations of inflation decrease as a result of lower inflation in previous periods.

E) None of the above
F) A) and B)

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At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the demand and supply shocks εt and υt equal _____, and current inflation πt equals _____.


A) 0; 0
B) 0; πt - 1
C) πt; 0
D) ρ

E) A) and B)
F) B) and D)

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In the dynamic model, changes in fiscal policy are captured in changes in the:


A) natural rate of interest.
B) expected rate of inflation.
C) demand shock.
D) natural level of output.

E) A) and D)
F) A) and C)

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In the dynamic model, the supply shock variable, υt, is a variable appearing in which of the following equations of the model?


A) Fisher equation
B) Phillips curve
C) monetary-policy rule
D) adaptive expectations

E) None of the above
F) A) and B)

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Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a permanent reduction in the central bank's inflation target causes the nominal interest rate to:


A) decline continuously until reaching a lower level in the long run.
B) increase initially and then decline until reaching a lower level in the long run.
C) decline immediately to a lower level in the long run.
D) fall below and then rise continuously to long-run level below the initial level.

E) All of the above
F) A) and B)

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The upward slope of the dynamic aggregate supply curve indicates that, holding other factors constant, high levels of economic activity are associated with:


A) the natural level of output.
B) the inflation target.
C) positive supply shocks.
D) high inflation.

E) All of the above
F) C) and D)

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The monetary policy rule specified in the dynamic model of aggregate demand and aggregate supply indicates that the central bank adjusts interest rates in response to fluctuations in:


A) inflation expectations.
B) money supply and money demand.
C) inflation and output.
D) nominal and real exchange rates.

E) None of the above
F) B) and C)

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Central Bank A conducts monetary policy according to the following monetary policy rule: i = π + 2.0 + 0.90 (π - 2.0) + 0.10 (Y - 100), and Central Bank B conducts monetary according to the following monetary policy rule: i = π + 2.0 + 0.10 (π - 2.0) +0 .90 (Y - 100), where i is the nominal interest rate measured in percent, π is the inflation rate measured in percent, and Y is output measured as a percentage of the natural level of output. The economies of the two countries are otherwise identical and operate as described by the dynamic model of aggregate demand and aggregate supply. a. In which country will the dynamic aggregate demand curve be steeper? Explain. b. If a positive supply shock of the same magnitude hits both countries, which country will experience the greatest variability in output? Explain.

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a.Country B will have the steeper DAD cu...

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A higher real interest rate reduces the demand for goods and services by:


A) shifting the dynamic aggregate supply curve.
B) decreasing the natural level of output.
C) increasing inflation expectations.
D) reducing investment and consumption spending.

E) None of the above
F) A) and B)

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The dynamic aggregate demand curve will shift if any of the following changes except the:


A) current inflation rate.
B) inflation target.
C) natural level of output.
D) demand shock.

E) C) and D)
F) B) and D)

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According to the Phillips curve, firms raise prices when output is _____ the natural level of output or, equivalently, when the unemployment rate is _____ the natural rate of unemployment.


A) above; above
B) above; below
C) below; below
D) below; above

E) A) and B)
F) B) and D)

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To follow a monetary policy rule, the central bank raises the nominal interest rate by:


A) raising the inflation target.
B) decreasing the money supply.
C) increasing the GDP gap.
D) decreasing inflation expectations.

E) A) and B)
F) B) and C)

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The dynamic aggregate supply curve is derived from:


A) the Fisher equation and adaptive expectations.
B) the Phillips curve and adaptive expectations.
C) the monetary policy rule and the Fisher equation.
D) the Phillips curve and the monetary policy rule.

E) A) and C)
F) None of the above

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A central bank that chooses a small value of θπ and a large value of θY is choosing less _____ at the expense of more _____.


A) inflation; output
B) output; inflation
C) inflation variability; output variability
D) output variability; inflation variability

E) A) and B)
F) A) and C)

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