BADM 7200 PRACTICE TEST EXAM WITH
BEST SOLUTIONS
Why might inflation be inertial? - answer-When we use
adaptive expectations, this year's expected inflation is
equal to last year's actual inflation. This implies that
inflation has inertia.
1. What is the key difference between the short run and
the long run? - answer-The assumption about price
rigidity. We assume that prices are rigid in the short run
and flexible in the long run.
How do shocks to AD affect P and Y in the short run and
in the long run? - answer-Shocks to AD affect Y, but
have no effect on P in the short run when SRAS is
horizontal due to rigidity in prices; Shocks to AD affect P
in the long run, but Y returns to its natural level.
How do shocks to AS affect P and Y in the short-run and
in the long run? - answer-Shocks to AS affect P and Y
, both in the short and long run; The short-run aggregate
supply curve shifts upward. If AD is held constant the
economy moves from point A to B. Price level rises and
output falls below its natural level.
Why does the AD curve slope downward? - answer-
(Wealth effect, Interest rate effect, Exchange rate
effect) At a lower price level, consumers are more likely
to have higher disposable income & therefore spend
more; At a lower price level, interest rates usually fall
causing higher Aggregate Demand.
Why is it easier for the Fed to deal with AD shocks than
with AS shocks? - answer-Demand shocks can be
mitigated with monetary policy: decrease M to
decrease AD, maintain full employment and price level;
There is no way for the Fed to adjust AD to maintain
both full employment & a stable price level.
What does the IS curve show? Why does it have a
negative slope? - answer-The IS curve shows the
combinations of r and Y consistent with equilibrium in
the market for goods and services. It is negatively
BEST SOLUTIONS
Why might inflation be inertial? - answer-When we use
adaptive expectations, this year's expected inflation is
equal to last year's actual inflation. This implies that
inflation has inertia.
1. What is the key difference between the short run and
the long run? - answer-The assumption about price
rigidity. We assume that prices are rigid in the short run
and flexible in the long run.
How do shocks to AD affect P and Y in the short run and
in the long run? - answer-Shocks to AD affect Y, but
have no effect on P in the short run when SRAS is
horizontal due to rigidity in prices; Shocks to AD affect P
in the long run, but Y returns to its natural level.
How do shocks to AS affect P and Y in the short-run and
in the long run? - answer-Shocks to AS affect P and Y
, both in the short and long run; The short-run aggregate
supply curve shifts upward. If AD is held constant the
economy moves from point A to B. Price level rises and
output falls below its natural level.
Why does the AD curve slope downward? - answer-
(Wealth effect, Interest rate effect, Exchange rate
effect) At a lower price level, consumers are more likely
to have higher disposable income & therefore spend
more; At a lower price level, interest rates usually fall
causing higher Aggregate Demand.
Why is it easier for the Fed to deal with AD shocks than
with AS shocks? - answer-Demand shocks can be
mitigated with monetary policy: decrease M to
decrease AD, maintain full employment and price level;
There is no way for the Fed to adjust AD to maintain
both full employment & a stable price level.
What does the IS curve show? Why does it have a
negative slope? - answer-The IS curve shows the
combinations of r and Y consistent with equilibrium in
the market for goods and services. It is negatively
