Question

1.

What occurs during a negative demand shock?
	Output increases and the price level decreases. Output and price level decrease. Output and price level increase. Output decreases and the price level increases.

2.

In the equation of exchange, the term P × Q is the same as:
	the money supply. nominal GDP. national income. real GDP.

3.

Expansionary monetary policy shifts the _____ curve to the _____.
	AD; right SRAS; left SRAS; right AD; left

4.

The Taylor rule suggests that:

the money supply should be targeted so that the value of the dollar is fixed with respect to the price of gold. the Federal Reserve should target a federal funds rate that will ensure a 1% rate of unemployment. the Federal Reserve should always increase the money supply at exactly the rate of inflation. the federal funds target rate should be equal to 2% plus the inflation rate plus one-half the inflation gap plus one-half the output gap.

5.

The idea that a change in the money supply would affect prices but not real GDP is associated with the:
	monetary equivalence theory. GDP impossibility rule. classical monetary transmission mechanism. law of unintended consequences.

Answer 1

1):-B is right option

Demand Shock is defined as an event that shifts the aggregate demand curve.

A positive demand shock is associated with higher demand for aggregate output at any price level and shifts the curve to the right.

A negative demand shock is associated with lower demand for aggregate output at any price level and shifts the curve to the left.

2):-Equation of exchange is an identity stating that the money supply (M) times velocity (V) must be equal to the price level (P) times Real GDP (Q): MV = PQ.

This equation is a rearrangement of the definition of velocity: V = PQ / M.

3) :-A is right option

expansionary monetary policy shifts the AD curve to the right.

Expansionary monetary policy is designed to counteract the effect of recession and return the economy to full employment; increases money supply; decreases interest rates and it tends to increase both investment and output

4) :--D is right option

The Taylor rule specifies that the target federal fund rates should be set to equal the equilibrium real federal funds rate, plus the rate of inflation (for the Fisher effect), plus one-half times the output gap, plus one-half times the inflation gap. The formula is

Federal funds rate target = equilibrium real federal funds rate + inflation rate + 1/2(output gap) + 1/2(inflation gap)

The output gap is the percentage deviation of real GDP from potential full-employment real GDP. The inflation gap is the difference between actual inflation and the central bank's target rate of inflation. The equilibrium real federal funds rate is the real rate consistent with full employment in the long run. The inflation rate is the actual rate of inflation. The Taylor rule sets the federal funds rate recognizing the goals of low inflation and full employment (or equilibrium long-run economic growth).