QUESTION 1

1. From Boilercast lecture 2-1: Back in 1974 real GDP decreased by 0.5% and the inflation rate increased to 11%. Which aggregate demand or aggregate supply shift could explain this change?

Increase in aggregate demand.

Decrease in aggregate demand.

Increase in aggregate supply.

Decrease in aggregate supply.

3 points  

QUESTION 2

1. Boilercast Lecture 2-2: Here is a table showing the macro measurements for the U.S. economy from 2007 to 2009.
2. Which of the following best describes what happened in the Goods Market of the U.S. economy in 2009?

a.Aggregate demand increased, output and the price level increased, and output was above potential.

b.Aggregate demand decreased, output and the price level decreased, and output was above potential.

c.Aggregate demand decreased, output and the price level decreased, and output was below potential.

d.Aggregate supply increased, output and the price level decreased, and output was above potential.

e.Aggregate supply decreased, output and the price level decreased, and output was below potential.

3 points  

QUESTION 3

1. Boilercast Lecture 2-3: What policy could the Federal Reserve have used to speed the recovery from the recession of 1907-08?

a.Increase the discount rate to increase the money supply.

b.Decrease the discount rate to increase the money supply.

c.Increase the discount rate to decrease the money supply.

d.Decrease the discount rate to decrease the money supply.

3 points  

QUESTION 4

1. Consider the goods market in our macroeconomic model. Which two changes could both cause a decrease in unemployment and an increase in real GDP?

a.A fall in oil prices and a decrease in government purchases.

b.An increase in investment spending and perfect weather for agriculture.

c.An increase in import spending and a decrease in export spending.

d.A rise in oil prices and an increase in consumer spending.

1 points  

QUESTION 5

1. Consider second shift #1, where changes in aggregate demand can cause shifts in aggregate supply in the goods market. Suppose the unemployment rate was higher than 5%, meaning it was more than the unemployment rate at potential output.  Think carefully about whether equilibrium output is higher or lower than potential output! According to second shift #1, what could happen as a result?

a.Aggregate demand will increase.

b.Aggregate demand will decrease.

c.Aggregate supply will increase.

d.Aggregate supply will decrease.

1 points  

QUESTION 6

1. Consider second shift #2, where changes in the money market affect the goods market. Which changes in the money market could cause a decrease in real GDP in the goods market?

a.An increase in the bank reserve ratio leading to an increase in the money supply.

b.An increase in the bank reserve ratio leading to a decrease in the money supply.

c.A decrease in the bank reserve ratio leading to a decrease in the money supply .

d.A decrease in the bank reserve ratio leading to an increase in the money supply.

1 points  

QUESTION 7

1. Consider second shift #3, where changes in the goods market affect the money market. Suppose real GDP and inflation increased. What changes would occur in the money market?

a.An increase in money supply.

b.A decrease in money supply.

c.An increase in money demand.

d.A decrease in money demand. 

1 points  

QUESTION 8

1. Consult the worksheet for this question. Here’s a link: Online Project Quiz Worksheet, Module 2
2. Federal government purchases increased during World War I. What does our macro model predict would happen in the U.S. economy?

a.Output decreases below potential, prices decrease, interest rate decreases.

b.Output decreases below potential, prices increase, interest rate unchanged.

c.Output increases above potential, prices decrease, interest rate increases.

d.Output increases above potential, prices increase, interest rate increases.

2 points  

QUESTION 9

1. Consult the worksheet data table for this question. What happened in the goods market in 1920?  

a.Input costs increased, aggregate supply decreased, and output fell to potential.

b.Input costs decreased, aggregate supply increased, and output rose further above potential.

c.The interest rate spread increased, aggregate demand decreased, and output fell to potential.

d.The interest rate spread decreased, aggregate demand increased, and output rose further above potential.

2 points  

QUESTION 10

1. What policy could the Federal Reserve have used to bring down inflation after World War I?

a.Increase the discount rate to increase the money supply.

b.Decrease the discount rate to increase the money supply.

c.Increase the discount rate to decrease the money supply.

d.Decrease the discount rate to decrease the money supply.

2 points  

QUESTION 11

1. Consult the data table in the worksheet. What happened in the money market in 1921?

a.Money demand increased, money supply was unchanged.

b.Money demand was unchanged, money supply decreased.

c.Money demand decreased, money supply decreased more.

d.Money demand was unchanged, money supply increased.

2 points  

QUESTION 12

1. Consider the worksheet table showing the four economic indicators for the 1960’s. Choose the paragraph that best describes the data for your whole decade.

a.The decade saw an unstable economy. In several years output grew rapidly, but there was a recession at the decade’s beginning and a severe recession in the middle. Unemployment dropped early in the decade, then soared to high rates during the recession. Lenders became very pessimistic during the mid-decade recession, so riskier corporations had trouble borrowing. And, to top it all off, the decade saw the highest inflation of the past fifty years. There were some years when inflation and unemployment were both above average, the worst of all possible worlds.

b.The decade saw one of the longest expansions in U.S. history. After a mild recession at the start, output grew steadily, at above average rates towards the end of the decade. Unemployment peaked early, then declined to low levels by the end of the decade. In the money market lenders were confident through most of the decade, after a bit of trouble early. Inflation was troublesome early in the decade. Remarkably, though, despite steady growth and falling unemployment, inflation declined and remained below average during most of the decade.

c.The decade saw one of the longest expansions in U.S. history. After a mild recession at the beginning of the decade, output grew steadily, often rapidly. Unemployment rates declined to very low levels by the end of the decade. The money market was settled, as lenders remained confident throughout the decade. All was not as well as it seemed, though. Inflation was under control at the beginning of the decade. After a steady rise, by the end of the decade it had become a problem.

d.The decade began with the worst recession since the Great Depression. Output fell substantially and unemployment rose to the highest levels in decades. Inflation was high as well, the worst of all possible worlds. Money markets became severely pessimistic with the downturn, and lenders remained gloomy throughout most of the decade.  The recovery saw rapid growth at first, but the unemployment rate fell to acceptable levels only by decade’s end. The recession helped bring down inflation, though, to very low levels by mid-decade. Inflation crept up again by the decade’s end, however. 

2 points  

QUESTION 13

1. Now use the 1960’s data table and apply our macroeconomic model to analyze the data for 1964 to 1968.  
2. •         Assume that Q on the horizontal axis of the goods market represents real GDP.
3. •         Assume that changes in P on the vertical axis of the goods market represent changes in the inflation rate (so a fall in P represents a decrease of the inflation rate).  
4. •         Assume that unemployment is represented by the difference between equilibrium output and potential output, and that the unemployment rate at potential is 5%.
5. •         Assume that changes in r on the vertical axis of the money market represent changes in the interest rate spread (so a rise in r means a bigger spread). Changes of less than 0.1% are not important.
6. •         When in doubt, compare the first year to the last year, and ignore the years between. That identifies the trend of the whole period.
7. Which shift best describes this time period in the goods market during 1964 to 1968?

a.Aggregate supply was increasing.

b.Aggregate supply was decreasing.

c.Aggregate demand was increasing.

d.Aggregate demand was decreasing.

2 points  

QUESTION 14

1. Which shift best describes this time period in the money market during 1964 to 1968? Use the 1960’s data table.

a.Money demand was increasing.

b.Money demand was decreasing.

c.Money demand was increasing but money supply was increasing more.

d.Money demand was decreasing but money supply was decreasing more.

2 points  

QUESTION 15

1. What counter-cyclical monetary policy should the Federal Reserve have followed during this period, in order to stabilize the economy at potential output during 1964 to 1968?

a.There was no clear counter-cyclical monetary policy, because output rose above potential but the inflation rate was falling.

b.Increase the money supply to decrease the real interest rate, and so increase aggregate demand.

c.There was no clear counter-cyclical monetary policy, because output fell below potential but the inflation rate was rising.

d.Decrease the money supply to increase the real interest rate, and so decrease aggregate demand.

2 points  

QUESTION 16

1. Choose a “story” that best matches the data and the analysis from the model for the years 1964 to 1968. (The names of wars and policymakers have been removed so as not to give away the answer to those who know U.S. history.)

a.The effects of a severe recession early in the decade were still being felt at the beginning of this period. Output was less than potential, and financial markets remained pessimistic. As financial markets gained confidence, however, borrowing costs fell for more-risky businesses, which increased investment spending. Tax cuts for households added to consumer spending, and the government increased spending on military purchases.

b.At the beginning of this period the economy was expanding and output approached potential. Then a war helped cause large increases in oil prices, which increased business costs. Businesses cut back on production and passed higher costs to consumers in higher prices, as much as they could. High inflation increased money demand, and financial markets became pessimistic, which further contributed to the economy’s problems.

c.The effects of recession early in the decade had faded by the beginning of this period. Rapid technological advance helped cause steady growth in output. These new technologies along with falling oil prices caused inflation to decrease, even though output rose above potential. Financial markets were optimistic throughout this period. They increased lending enough to hold interest rates stable despite rising incomes.

d.At the beginning of this period the U.S. President decided to expand Federal social spending and fight a war against U.S. enemies at the same time. A large tax reduction that had been proposed by a previous President took effect. After that, consumer and government spending increased rapidly. Financial markets were generally optimistic, but increasing demand for money raised borrowing costs, especially for more-risky businesses.

4 points  

QUESTION 17

1. Consider the worksheet table showing the four economic indicators for the 1990’s. Choose the paragraph that best describes the data for your whole decade.

a.The decade saw an unstable economy. In several years output grew rapidly, but there was a recession at the decade’s beginning and a severe recession in the middle. Unemployment dropped early in the decade, then soared to high rates during the recession. Lenders became very pessimistic during the mid-decade recession, so riskier corporations had trouble borrowing. And, to top it all off, the decade saw the highest inflation of the past fifty years. There were some years when inflation and unemployment were both above average, the worst of all possible worlds.

b.The decade saw one of the longest expansions in U.S. history. After a mild recession at the start, output grew steadily, at above average rates towards the end of the decade. Unemployment peaked early, then declined to low levels by the end of the decade. In the money market lenders were confident through most of the decade, after a bit of trouble early. Inflation was troublesome early in the decade. Remarkably, though, despite steady growth and falling unemployment, inflation declined and remained below average during most of the decade.

c.The decade saw one of the longest expansions in U.S. history. After a mild recession at the beginning of the decade, output grew steadily, often rapidly. Unemployment rates declined to very low levels by the end of the decade. The money market was settled, as lenders remained confident throughout the decade. All was not as well as it seemed, though. Inflation was under control at the beginning of the decade. After a steady rise, by the end of the decade it had become a problem.

d.The decade began with the worst recession since the Great Depression. Output fell substantially and unemployment rose to the highest levels in decades. Inflation was high as well, the worst of all possible worlds. Money markets became severely pessimistic with the downturn, and lenders remained gloomy throughout most of the decade.  The recovery saw rapid growth at first, but the unemployment rate fell to acceptable levels only by decade’s end. The recession helped bring down inflation, though, to very low levels by mid-decade. Inflation crept up again by the decade’s end, however. 

2 points  

QUESTION 18

1. Now let’s apply our macroeconomic model to analyze the data in the above table for 1994 to 1998. 
2. •         Assume that Q on the horizontal axis of the goods market represents real GDP.
3. •         Assume that changes in P on the vertical axis of the goods market represent changes in the inflation rate (so a fall in P represents a decrease of the inflation rate).  
4. •         Assume that unemployment is represented by the difference between equilibrium output and potential output, and that the unemployment rate at potential is 5%.
5. •         Assume that changes in r on the vertical axis of the money market represent change in the interest rate spread (so a rise in r means a bigger spread). Changes of less than 0.1% are not important.
6. •         When in doubt, compare the first year to the last year, and ignore the years between. That identifies the trend of the whole period.
7. Which of the above goods market graphs best describes the 1994-1998 period?

a.A

b.B

c.C

d.D

2 points  

QUESTION 19

1. Which of the above money market graphs best describes the 1994-1998 period?

a.E

b.F

c.G

d.H

2 points  

QUESTION 20

1. What counter-cyclical monetary policy should the Federal Reserve have followed during this period, in order to stabilize the economy at potential output during 1994 to 1998?

a.There was no clear counter-cyclical monetary policy, because output rose above potential but the inflation rate was falling.

b.Increase the money supply to decrease the real interest rate, and so increase aggregate demand.

c.There was no clear counter-cyclical monetary policy, because output fell below potential but the inflation rate was rising.

d.Decrease the money supply to increase the real interest rate, and so decrease aggregate demand.

2 points  

QUESTION 21

1. Choose a “story” that best matches the data and the analysis from the model for the years 1994 to 1998. (The names of wars and policymakers have been removed so as not to give away the answer to those who know U.S. history.)
2. a.The effects of a severe recession early in the decade were still being felt at the beginning of this period. Output was less than potential, and financial markets remained pessimistic. As financial markets gained confidence, however, borrowing costs fell for more-risky businesses, which increased investment spending. Tax cuts for households added to consumer spending, and the government increased spending on military purchases.
3. b.At the beginning of this period the economy was expanding and output approached potential. Then a war helped cause large increases in oil prices, which increased business costs. Businesses cut back on production and passed higher costs to consumers in higher prices, as much as they could. High inflation increased money demand, and financial markets became pessimistic, which further contributed to the economy’s problems.
4. c.The effects of recession early in the decade had faded by the beginning of this period. Rapid technological advance helped cause steady growth in output. These new technologies along with falling oil prices caused inflation to decrease, even though output rose above potential. Financial markets were optimistic throughout this period. They increased lending enough to hold interest rates stable despite rising incomes.
5. d.At the beginning of this period the U.S. President decided to expand Federal social spending and fight a war against U.S. enemies at the same time. A large tax reduction that had been proposed by a previous President took effect. After that, consumer and government spending increased rapidly. Financial markets were generally optimistic, but increasing demand for money raised borrowing costs, especially for more-risky businesses.

Here is the macro mode! so far. Use these diagrams to sketch changes in the goods and money markets, Ifthat hefiosyon answer questions. Goods Market P AS aggregate Demand l (r, exp) 3X6) aggregate Suggly Input oosts (labor, machinery, materials}TechnologyNatural conditions Second Shifts1. Goods to goods, when outputdiffers from potential, aggregate Money Market supply shifts towards potentialoutput 2. Money to goods, through realMoney Demand interest rate effects on investment ‘“90’113 3. Goods to money, through inoome Prices (output) and price changes tomoney demand Money Supply Lender Expectations Federal Reserve Policy QM Here are some data fiom three periods of U.S. economic history. You ’1’! need these data to answer thequestions 3 through 2}. After World War I BAA-AAA CPI InterestReal GDP Unemploy- Inflation Rate Year Growth ment Rate Rate Spread1919 0.4% 2.3% 14.6% 1.8%1920 -1.5% 5.2% 15.6% 2.1%1921 -2.4% 11.3% 40.5% 2.4%1922 6.0% 8.6% -6.1% 2.0%