__________________________________________ Name: ECO 2020 (902) 11656 Jinghua Huang QUIZ 6
Date: _________________
Wayne State University Instructor: Fall 2011
Multiple Choice: Identify the letter of the choice that best completes the statement or answers the question. 1. The intersection of the inflation adjustment line and the aggregate demand curve is used to predict A) real GDP and the real rate of interest. B) where real and potential GDP are equal. C) real GDP and inflation. D) where real GDP equals nominal GDP. E) where potential and nominal GDP are equal.
2. In order for the aggregate demand (AD) curve to be downward-sloping, A) there has to be an inverse relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. B) there has to be a positive relationship between the real interest rate and real GDP and a negative relationship between inflation and the real interest rate. C) there has to be an inverse relationship between the real interest rate and real GDP and an inverse relationship between inflation and the real interest rate. D) there has to be a positive relationship between the real interest rate and real GDP and a positive relationship between inflation and the real interest rate. E) there has to be an inverse relationship between the real interest rate and real GDP but there cannot be a relationship between inflation and the real interest rate.
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3. When interest rates decrease, A) investment will decrease, and consumption and net exports will increase, causing expenditures to increase. B) government purchases will increase to offset the decline in consumption, investment, and net exports. C) investment and consumption will increase, and net exports will decrease, causing expenditures to increase. D) investment will decrease. E) investment, consumption, and net exports will increase, causing expenditures to increase.
4. If the nominal interest rate exceeds the rate of inflation, the real interest rate will A) not be affected. B) rise. C) be greater than zero. D) be less than zero. E) fall.
5. Which of the following is probably the most sensitive to changes in real interest rates? A) Government purchases B) Exports C) Consumption D) Imports E) Investment
6. A lower real interest rate in the United States relative to the rest of the world will tend to A) increase the value of the dollar and increase net exports. B) decrease the value of the dollar and have an indeterminate effect on net exports. C) decrease the value of the dollar and increase net exports. D) increase the value of the dollar and decrease net exports. E) decrease the value of the dollar and decrease net exports.
7. An increase in real interest rates leads to A) a decrease in exports and an increase in imports. B) an increase in both exports and imports. C) a decrease in both exports and imports. D) an in increase exports and a decrease in imports. E) no change in either exports or imports.
8. When inflation is rising, the Fed will A) lower nominal interest rates to increase potential GDP and bring it in line with aggregate demand. B) raise nominal interest rates to reduce aggregate demand. C) raise nominal interest rates to stimulate spending. D) lower nominal interest rates to stimulate production and bring it in line with aggregate demand. E) raise nominal interest rates to stimulate production.
9. If the economy is in a recession, inflation will be ______ , and the Fed will want to ______ the interest rate in order to ______ real GDP. A) rising; increase; decrease B) rising; increase; increase C) falling; increase; increase D) falling; decrease; increase E) falling; decrease; decrease
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10. The text defines the monetary policy rule as the systematic response of the real interest rate to the A) exchange rate as decided by the Treasury. B) rate of inflation as decided by the central bank. C) rate of inflation as decided by the Treasury. D) exchange rate as decided by the central bank. E) exchange rate as decided by the banking system.
11. If government purchases increase, the expenditure line A) will shift up and the AD curve will shift to the left. B) will shift up and the AD curve will shift to the right. C) will not shift and the AD curve will shift to the right. D) will shift up and there will be an upward movement along the AD curve. E) will shift up and there will be a downward movement along the AD curve.
Use the following to answer question 12:
Table 24.3 12. If the central bank changes its monetary policy rule from A to B as shown in Table 24.3, A) the AD curve will shift to the left. B) there will be a downward movement along the AD curve. C) there will be no change since the real rate of interest does not change. D) the AD curve will shift to the right. E) there will be an upward movement along the AD curve.
13. An increase in the target inflation rate will A) have no effect on the AD curve. B) cause a rightward shift of the AD curve. C) cause a leftward shift of the AD curve. D) cause a downward movement along the AD curve. E) cause an upward movement along the AD curve.
14. If the central bank increases the target inflation rate, then A) the monetary policy rule line will become steeper. B) there will be movement along the monetary policy rule line. C) the monetary policy rule line will shift down. D) the monetary policy rule line will shift up. E) the monetary policy rule line will become flatter.
15. The inflation adjustment line IA will shift down if A) the local currency depreciates against foreign currencies. B) real GDP rises above potential GDP. C) real GDP falls below potential GDP. D) All of the above E) None of the above
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Answer Key
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. C A E C E C A B D B B A B C C