1. Of all of the components of aggregate demand, the most interest sensitive is:
a- net exports.
b- consumption.
c- government purchases.
d- investment.
2. The fact that central bankers tend to respond to higher rates of inflation by increasing the real interest rate is:
a- one reason the dynamic aggregate demand curve slopes downward.
b- why the monetary policy reaction curve has a negative slope.
c- one reason the dynamic aggregate demand curve shifts left.
d- one reason the dynamic aggregate demand curve shifts right.
3. The self-correcting mechanism to return the economy to potential output from output gaps is the change in:
a- potential output.
b- short-run aggregate supply.
c- aggregate demand.
d- the real interest rate by the central bank.
4. A characteristic of long-run equilibrium is the economy is producing its potential output. This is:
a- the maximum level of output the economy could produce at any time.
b- defined as using 80 percent of the economy's resources at any time.
c- the level of output consistent with an unemployment rate of 7.5%.
d- the level of output the economy produces when its resources are used at normal rates.
5. Which of the following statements is most accurate?
a- During a recessionary gap, current output is below potential output.
b- Potential output is determined by current output.
c- Current output cannot exceed potential output.
d- When an expansionary gap exists, current output is below potential output.
6. If government purchases increase and as a result push current output above potential output, monetary policymakers are likely to:
a- lower the real interest rate.
b- keep the real interest rate constant and focus on only changing the nominal interest rate.
c- raise the real interest rate.
d- purchase Treasury securities.