1. If the axes in the model for the monetary policy reaction curve are the real interest rate (vertical axis) and the rate of inflation (horizontal axis), then the monetary policy reaction curve would:

a- have a negative slope.

b- be vertical.

c- have a zero slope.

d- have a positive slope.

2. An inflation rate below the target rate will result in:

a- a movement up along the monetary policy reaction curve and a leftward shift of the dynamic aggregate demand curve.

b- a movement down along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.

c- a movement up along the monetary policy reaction curve and a rightward shift of the dynamic aggregate demand curve.

d- a movement up along the monetary policy reaction curve and a movement down the dynamic aggregate demand curve.

3. Consumption can be sensitive to changes in the real interest rate because:

a- lower real interest rates will decrease spending on durable goods and increase spending on non-durable goods.

b- lower interest rates increase savings.

c- higher interest rates can increase the cost of durable goods like automobiles.

d- higher interest rates will result in less saving.

4. If the economy is in long-run equilibrium:

a- inflation should be accelerating.

b- current output should be greater than potential output.

c- current inflation should equal expected inflation.

d- current inflation should be less than expected inflation.

5. Empirical evidence suggests that over the last several decades:

a- the nominal and real federal funds rates are related inversely.

b- there is no correlation between the nominal and real federal funds.

c- the nominal and real federal funds rates are highly positively correlated.

d- while the FOMC has had a lot of influence over the nominal federal funds rate, they have been less successful at changing the real federal funds rate.

6. If the level of current output suddenly falls below the potential level of output, central bankers would:

a- keep the real interest rate constant and focus on only changing the nominal interest rate.

b- attempt to shift the aggregate expenditures curve.

c- lower the real interest rate.

d- raise the real interest rate.