Question

1. The aggregate demand curve shifts to the right when the Fed:

a. increases its target inflation rate, reflected by a downward shift in the Fed’s policy reaction function.

b. decreases its target inflation rate, reflected by an upward shift in the Fed’s policy reaction function.

c. increases real interest rates in response to inflation, but does not change its target inflation rate or the Fed’s policy reaction function.

d. decreases real interest rates in response to inflation, but does not change its target inflation rate or the Fed’s policy reaction function.

2. When inflation equals the value determined by past expectations and pricing decisions and output equals the level of short-run equilibrium output consistent with that inflation, the economy is said to be in ____ equilibrium.

a. potential

b. short-run

c. long-run

d. full-employment

3. The self-correcting property of the economy means that output gaps are eventually eliminated by:

a. increasing or decreasing inflation.

b. decreasing inflation only.

c. increasing or decreasing potential output.

d. government policy.

4. Starting from long-run equilibrium, a decrease in autonomous investment results in ____ output in the short run and _____ output in the long run.

a. higher; higher

b. higher; potential

c. lower; potential

d. lower; higher

Answer 1

1) option A is correct. if aggregate demand is shifting to the right it means that the central bank is aiming for easy monetary policy. This implies that it is allowing the target rate of inflation to increase which will shift the monetary policy reaction function down to the right.

2) option B is correct. if output is equal to the level of short run equilibrium level then economy will be in short run equilibrium

3) option A is correct. This is because if there are output gaps, there is change in price expectation and aggregate supply shifts accordingly to adjust the rate of inflation

4) option C is correct.