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Exam 15: A Dynamic Model of Economic Fluctuations

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Question 31

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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.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

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Question 32

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Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period of the change output _____ and inflation _____.

A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases

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Question 33

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According to the Taylor rule, when real GDP is above its natural level, the nominal federal funds rate should be _____, and when inflation is below 2 percent, the nominal federal funds rate should be _____.

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.

In the dynamic model of aggregate demand and aggregate supply, increases in the natural level of output lead to _____ in output and ______ in inflation.

Fill in the blanks: As a dynamic response to demand shock in the short run, the DAD curve shifts (say in period t) ___________, causing inflation to___________ and output to ___________, while in next period (t+1) causing the aggregate supply curve to __________ .

According to the Taylor principle, for inflation to be stable, the central bank must respond to an increase in inflation with ____ increase in the nominal interest rate.

Which of the following would be represented by a negative value of the random supply shock, $\nu$ _t?

When the central bank lowers its target inflation rate, it _____ the nominal and real interest rate, which shifts the dynamic aggregate demand curve to the _____.

The Taylor rule can be written as FF rate = $\pi$ + 2.0 + 0.5 ( $\pi$ - 2.0) + 0.5(GDP gap) , where FF rate is the nominal federal funds rate, $\pi$ is the inflation rate, and the GDP gap is the percentage deviation of real GDP from its natural level. If inflation is 4 percent and the GDP gap is 2 percent, then according to the Taylor rule, the Fed should set the nominal federal funds rate at _____ percent.

Long-run equilibrium occurs in the dynamic model of aggregate demand and aggregate supply when:

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

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

Beginning at long-run equilibrium in the dynamic model of aggregate demand and aggregate supply, if the central bank permanently reduces its inflation target, then in the initial period the DAS curve _____ and the DAD curve _____.

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

In the dynamic model of aggregate demand and aggregate supply, holding other factors constant, when the natural level of output increases, then inflation:

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

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.

Long-run growth ____ the demand for goods and services.

Predetermined variables in a model are treated as if they are essentially: