Practice Quiz

A central bank can control the real interest rate precisely, so long as ________ remains constant.

• the nominal interest rate

• monetary policy

• expected inflation

• none of the above

Changes in liquidity in the banking system affect ________.

• the nominal interest rate

• the real interest rate

• the federal funds rate

• all of the above

The MP curve indicates the relationship between ________ and the ________.

• taxes; price level

• the real interest rate; inflation rate

• monetary policy; IS curve

• all of the above

Which of the following is true about the Taylor principle?

• it explains the link between higher inflation and higher real interest rates

• it is the foundation for an upward sloping MP curve

• it reflects the practice of monetary policy

• all of the above

If the central bank did not follow the Taylor principle, an increase in inflation would lead to a decrease in ________.

• the nominal interest

• the real interest rate

• aggregate output

• all of the above

A movement along the MP curve ________.

• implies an automatic adjustment of the interest rate

• implies an autonomous adjustment to the interest rate

• implies an autonomous adjustment of aggregate demand

• all of the above

A shift of the MP curve ________.

• implies an automatic adjustment of the interest rate

• implies a direct policy action of the Federal Reserve

• does not alter the relationship between inflation and the interest rate

• all of the above

The AD Curve ________.

• demonstrates how central banks respond to changes in interest rates by changing the inflation rate

• shows how changes in equilibrium output affect the inflation rate

• explains long run fluctuations in output and inflation

• none of the above

The IS Curve ________.

• demonstrates how central banks respond to changes in inflation with changes in the interest rate

• shows how changes in interest rates affect equilibrium output

• explains short run fluctuations in output and inflation

• all of the above

The AD Curve ________.

• indicates the level of aggregate output corresponding to different goods-market-clearing levels of the interest rate

• is downward sloping, because with higher inflation comes higher interest rates and lower spending, so equilibrium aggregate output declines

• explains how inflation affects output in the short run

• all of the above