SOLVED

17.4  Monetary Policy in the Dynamic Aggregate Demand and Aggregate Supply Model 1) Refer to Figure 17-6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely A) increase interest rates. B) decrease interest rates. C) not change interest rates. D) decrease the inflation rate. 2) Refer to Figure 17-6. In the dynamic model of AD-AS in the figure above, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B A) there is pressure on wages and prices to rise. B) the unemployment rate is very, very low. C) firms are operating above their normal capacity. D) the economy is below full employment. E) incomes and profits are rising. 3) Refer to Figure 17-6. In the dynamic model of AD-AS in the figure above, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in A) unemployment rates higher than what would occur if no policy had been pursued. B) inflation higher than what would occur if no policy had been pursued. C) real GDP lower than what would occur if no policy had been pursued. D) short-term interest rates higher than what would occur if no policy had been pursued. 4) Refer to Figure 17-7. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, the Federal Reserve would most likely A) increase interest rates. B) decrease interest rates. C) not change interest rates. D) increase the inflation rate. 5) Refer to Figure 17-7. In the dynamic AD-AS model, if the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues no policy, then at point B A) firms are producing above capacity. B) there is pressure on wages and prices to fall. C) the unemployment rate is greater than the natural rate of unemployment. D) incomes and profits are falling. 6) Refer to Figure 17-7. In the dynamic AD-AS model, the economy is at point A in year 1 and is expected to go to point B in year 2, and the Federal Reserve pursues policy. This will result in A) unemployment rates higher than what would occur if no policy had been pursued. B) inflation rates higher than what would occur if no policy had been pursued. C) potential real GDP levels lower than what would occur if no policy had been pursued. D) real GDP levels higher than what would occur if no policy had been pursued. 7) From an initial long-run macroeconomic equilibrium, if the Federal Reserve anticipated that next year aggregate demand would grow significantly faster than long-run aggregate supply, then the Federal Reserve would most likely A) increase income tax rates. B) decrease income tax rates. C) increase interest rates. D) decrease interest rates. 8) Contractionary monetary policy to prevent real GDP from rising above potential real GDP would cause the inflation rate to be ________ and real GDP to be ________. A) higher; higher B) higher; lower C) lower; higher D) lower; lower      9) Refer to Table 17-1. The hypothetical information in the table shows what the values for real GDP and the price level will be in 2015 if the Fed does not use monetary policy. Which of the following policies makes sense if the Fed wants to keep real GDP at its potential level in 2015? A) The trading desk should sell Treasury securities. B) The Fed should lower the target for the federal funds rate. C) The Fed should pursue contractionary policy. D) The Fed should lower capital gains taxes. 10) The dynamic aggregate demand and aggregate supply model accounts for the price level rising every year.