Tutorial 10
Chapter 13: Aggregate demand and aggregate supply
Multiple choice questions
Question 1
In a closed economy, which one of the following factors would NOT shift the AD
curve?
a. The central bank’s target inflation rate ( π ).
b. The price level.
c. The central bank’s natural rate of interest ( i ).
d. The inflation expectation (πe ) in Fisher equation.
Question 2
For a closed economy that begins in period 0 at the long-run equilibrium point A, a
monetary policy expansion from a change in the target inflation rate in the Taylor rule
shifts aggregate demand from AD to AD´. The new long-run equilibrium for this
economy will be at which of the following points?
a. Point A.
b. Point B.
c. Point C.
d. Point D.
Question 3
For a closed economy that begins in a long-run equilibrium at point A, there is an
adverse supply shock that shifts the short-run aggregate supply curve from AS to AS´.
If wage negotiators know that there will be a strong anti-inflation policy response to
the supply shock and its aftermath, then the ultimate path of the economy will look
like a movement from which ONE of the following?
a. A to B to A.
b. A to E to A.
c. A to D to A.
d. A to D to C.
Question 4
The output cost of disinflation drops when which ONE of the following is true?
a. The AS curve is flatter.
b. The AS curve shifts down faster.
c. The AD curve is flatter.
d. If inflation expectations adjust slowly.
Question 5
For a closed economy that begins in a long-run equilibrium at point A, there is a
ONE-PERIOD, positive demand shock that shifts the short-run demand curve from
AD to AD´. Which ONE of the flowing time path captures completely the adjustment
of the economy?
a. A to B to A.
b. A to B to C.
c. A to B to D.
d. A to B to D to A.
Open questions:
Question 1: Use the AD-AS model to trace out the short-term effect, in a closed
economy, of: (1) a one-off increase in government spending; (2) a permanent increase
in the inflation target of the central bank.
Question 2: Consider the AD-AS model where the economy is not in long-run
equilibrium, in particular assume there is a negative output gap (that is, the economy
is in a recession.) Describe the adjustment in a closed economy if there is no
government intervention.
Extra questions: Exercises 6 and 12 from the book. Consider only the case of a
closed economy.
Chapter 16: Demand management policies
Multiple choice questions
Question 1
‘Macroeconomic policy is plagued by recognition, decision, implementation and
effectiveness lags.’ Neoclassic macroeconomists conclude from this which ONE of
the following?
a. That governments require better information than other economic actors.
b. That aggressive use of macroeconomic policy will work to further destabilize the
economy.
c. That the macroeconomy is essentially unstable.
d. That underlying inflation shifts only slowly.
Question 2
Assume that the ECB implements an expansionary demand policy in order to increase
employment. If Europe is characterized by Keynesian assumptions with
unemployment in the initial situation, this policy has the following macroeconomic
consequences:
a. AD–curve shifts outwards, unemployment increases, aggregate production
increases and the price level increases.
b. AD–curve shifts outwards, unemployment decreases, aggregate production
increases and the price level increases.
c. AD–curve shifts inwards, unemployment decreases, aggregate production increases
and the price level increases.
d. AD–curve shifts outwards, unemployment decreases, aggregate production
increases and the price level decreases.
Open question: Exercise 10 from the book.
Note that it should be ‘increase’ instead of ‘adjust’ in the 4th line of question 10.
Extra questions: Exercises 1, 2 (skip the last question), and 3 from the book.