Name: __________________________ Date: _____________
1. At long-run equilibrium in the dynamic model of aggregate demand and aggregate
supply, which variables will equal the central bank's target rate of inflation?
A) the current inflation rate, but not the expected inflation rate
B) the expected inflation rate, but not the current inflation rate
C) both the current and expected rates of inflation
D) neither the current nor the expected rates of inflation
2. 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.
A) decreases; decreases
B) decreases; increases
C) increases; increases
D) increases; decreases
3. 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, output
______ and inflation ______.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
4. 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.
5. The natural rate of interest is the real interest rate:
A) at which the demand for goods and services equals the natural level of output.
B) that most people anticipate based on their expectations of inflation.
C) at which the natural rate of unemployment equals the natural rate of output.
D) equal to the nominal interest rate minus the natural rate of inflation.
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6. 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 ______.
A) raised; raised
B) raised; lowered
C) lowered; raised
D) lowered; lowered
7. The dynamic aggregate demand curve is drawn for a given:
A) money supply.
B) real interest rate.
C) monetary policy rule.
D) inflation rate.
8. That output, Yt, and the real interest rate, rt, do not depend on the central bank's inflation
target in long-run equilibrium in the dynamic model of aggregate demand and aggregate
supply demonstrates:
A) monetary neutrality.
B) an impulse response function.
C) adaptive expectations.
D) Taylor's principle.
9. 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.
10. 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 ______.
A) lowers; right
B) lowers; left
C) raises; right
D) raises; left
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11. Of the five endogenous variables in the dynamic model of aggregate demand and
aggregate supply, which are the nominal variables that will change in long-run
equilibrium if the central bank changes its inflation target?
A) Yt , rt, and it
B) Yt, it, and Ett + 1
C) t, it, and Ett + 1
D) rt, t, and it
12. In order to achieve the target for the nominal interest rate established by the monetary
policy rule, the central banks adjusts:
A) the inflation rate.
B) the natural rate of interest.
C) the money supply.
D) the inflation target.
13. In the dynamic model of aggregate demand and aggregate supply, holding other factors
constant, increases in the natural level of output that yield long-run growth can be
experienced:
A) with rising inflation.
B) with falling inflation.
C) with stable inflation.
D) with no inflation.
14. In the dynamic model of aggregate demand and aggregate supply, one period in time is
connected to the next period through:
A) the monetary policy rule.
B) demand shocks.
C) inflation expectations.
D) the natural level of output.
15. Predetermined variables in a model are treated as if they are essentially:
A) endogenous variables.
B) exogenous variables.
C) parameters.
D) equilibrium conditions.
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16. In the dynamic model of aggregate demand and aggregate supply, if the central bank
chooses a small value of , the responsiveness of nominal interest rates to inflation, and
a large value of Y, the responsiveness of nominal interest rates to output, 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
17. Which of the following is not held constant along a dynamic aggregate demand curve?
A) the inflation target
B) the natural level of output
C) the demand shock
D) the money supply
18. 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.
19. The short-run equilibrium in the dynamic model of aggregate demand and aggregate
supply is determined by the intersection of the:
A) DADt and DASt – 1.
B) DADt and DASt.
C) Yt and DASt.
D) DADt – 1 and Yt.
20. The Taylor rule can be written as FF rate =  + 2.0 + 0.5( – 2.0) + 0.5(GDP gap),
where FF rate is the nominal federal funds rate,  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.
A) 4
B) 8
C) 10
D) 12
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21. Which of the following is an endogenous variable in the dynamic model of aggregate
demand and aggregate supply?
A) t, inflation
B) *t, central bank's inflation target
C) t, supply shock
D) t – 1, previous period's inflation
22. In the dynamic model, the demand for goods and services decreases as the natural level
of output ______ or the real rate of interest ______.
A) increases; increases
B) increases; decreases
C) decreases; decreases
D) decreases; increases
23. According to the Fisher equation the real interest, rt, equals the nominal interest rate, it,
minus the expected inflation rate, which is written as:
A) Ett.
B) Ett+1.
C) Et + 1t.
D) Et + 1t +1.
24. The interest rate at which banks make loans to other banks is called the:
A) federal funds rate.
B) prime rate.
C) Federal Reserve discount rate.
D) Treasury bill rate.
25. The dynamic aggregate supply curve shows the short-run relation between:
A) the natural level of output and inflation.
B) the natural level of output and expected rate of inflation.
C) output and inflation.
D) output and the natural rate of interest.
26. 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) random demand shock.
D) natural level of output.
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27. In the dynamic model of aggregate demand and aggregate supply, increases in the
natural level of output lead to ______ in output and ______ in inflation.
A) increases; increases
B) increases; no change
C) no change; increases
D) no change; no change
28. 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 ______.
A) shifts upward; shifts rightward
B) shifts upward; does not shift
C) does not shift; does not shift
D) shifts downward; shifts leftward
29. Increases in the natural level of output allow the economy to produce ______ goods and
services, and makes people want to buy ______ goods and services.
A) fewer; fewer
B) fewer; more
C) more; more
D) more; fewer
30. The dynamic aggregate demand curve is derived from each of the following equations
of the model of aggregate demand and aggregate supply except:
A) the Fisher equation.
B) the Phillips curve.
C) adaptive expectations.
D) the monetary policy rule.
31. Which of the following would be represented by a negative value of the random demand
shock, t?
A) an irrational wave of optimism among investors
B) a decrease in government spending
C) an aggressive increase in oil prices by a cartel
D) a decrease in the central bank's inflation target
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32. Which of the following would be represented by a negative value of the random supply
shock, t?
A) an irrational wave of pessimism among investors
B) a decrease in government spending
C) oil price decreases resulting from a breakdown in the cartel
D) a decrease in the central bank's inflation target
33. At long-run equilibrium in the dynamic model of aggregate demand and aggregate
supply, which variables will be at their natural levels?
A) inflation and output
B) real and nominal interest rates
C) inflation and the nominal interest rate
D) output and the real interest rate
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