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Exam 15: A Dynamic Model of Economic Fluctuations

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Question 1

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Which of the following would be represented by a positive value of the random supply shock, υ_t?

A) an irrational wave of optimism among investors
B) an increase in government spending
C) widespread drought leading to large increases in food prices
D) an increase in the central bank's inflation target

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Question 2

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Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, a one-period positive supply shock causes output to:

A) remain above the natural level for only one period.
B) remain above the natural level for more than one period.
C) remain below the natural level for only one period.
D) remain below the natural level for more than one period.

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Question 3

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The dynamic aggregate demand curve is downward sloping because as inflation falls, the central bank reduces the nominal interest rate by more than the fall in the inflation rate, which _____ the real interest rate and _____ the quantity of goods and services demanded.

Which of the following is not held constant along a dynamic aggregate demand curve?

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact on output and inflation of an exceptional weather pattern that results in a one-period glut of food worldwide that reduces food prices (a one-period negative supply shock) when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

To reduce the demand for goods and services, the central bank will _____ its target inflation rate and _____ nominal and real interest rates.

The nominal interest rate, i_t, is the nominal rate of return between periods:

In the dynamic model of aggregate demand and aggregate supply, changes in the natural level of output change:

The ex ante real interest rate that prevails at time t equals:

According to the monetary policy rule, the central bank sets the nominal interest rate so that the real interest rate increases when inflation _____ its target or output _____ its natural level.

At long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, the nominal interest rate i_t equals all of the following except:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a multi-period positive demand shock, output _____, and inflation _____.

In the dynamic model, the demand for goods and services will _____ as the natural rate of output increases and _____ as the real interest rate increases.

Use the model of dynamic aggregate demand and aggregate supply to graphically illustrate the impact of a permanent increase in the central bank's inflation target when the economy is initially at long-run equilibrium. Explain the time path of output and inflation in words.

Graphs that illustrate the time paths of endogenous variables when a shock hits the economy are called:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the first period of a four-period positive demand shock, the DAS curve _____, and the DAD curve _____.

Starting from long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, output immediately decreases as a result of a one-period positive supply shock because:

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, in the periods after a multiperiod positive demand shock occurs, the DAS shifts upward because:

Which of the following would be represented by a negative value of the random demand shock, ε_t?

Of the five endogenous variables in the dynamic model of aggregate demand and aggregate supply, which two real variables do not depend on monetary policy in long-run equilibrium?