Question

QUESTION 7

The long-run aggregate supply curve intersects the horizontal axis at the:

		a- potential level of output.
		b- expected rate of inflation.
		c- current level of output.
		d- actual rate of inflation.

QUESTION 8

If inflation is very high, say 50 or 100 percent a year, monetary policymakers wishing to lower it will shift their focus to controlling:

		a- the short-term interest rate.
		b- the exchange rate.
		c- the long-term interest rate.
		d- money growth.

QUESTION 9

Which of the following statements is correct?

		a- The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and directly with potential output.
		b- The long-run real interest rate varies inversely with changes in non-interest sensitive components of aggregate demand and inversely with potential output.
		c- The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and does not vary with potential output.
		d- The long-run real interest rate varies directly with changes in non-interest sensitive components of aggregate demand and inversely with potential output.

QUESTION 10

In the short run, the point on the aggregate demand curve where an economy will end up depends on:

		a- potential output.
		b- the short-run aggregate supply curve.
		c- the money supply.
		d- the long-run rate of inflation.

QUESTION 11

In the long run the inflation rate equals the level implied by:

		a- the rate of money growth.
		b- fiscal policy.
		c- the exchange rate.
		d- aggregate demand.

Answer 1

(7) (a)

The LRAS curve is a vertical straight line, intersecting horizontal axis at potential output level.

(8) (d)

Monetary policymakers will aim to decrease money supply growth rate which will increase interest rate and lower investment, thus reducing aggregate demand and inflation rate.

(9) (d)

The higher (lower) the changes in non-interest sensitive components of aggregate demand, the higher (lower) the long run interest rate, and the higher (lower) the potential output, the lower (higher) the long run interest rate.

(10) (b)

Short run equilibrium is at intersection of aggregate demand and short run aggregate supply curves.

(11) (a)

As per money neutrality concept, long run inflation rate equals the long run change in money supply.