Based on the given figure, the economy is initially at point A on the monetary policy reaction function (RF1) and the aggregate demand curve (AD1). The actual rate of inflation is ?' and the Federal Reserve's target inflation rate is ?*1. 
If the Federal Reserve raises its target inflation rate to ?*3, then the Federal Reserve's monetary policy reaction function will ________ and the aggregate demand curve will ________.
A. shift to RF3; shift to AD2
B. shift to RF2; shift to AD3
C. shift to RF2; shift to AD2
D. shift to RF3; shift to AD3
Answer: A
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An oligopolist’s effective demand curve will be kinked if the firm
A. is acting as a price leader in the industry. B. expects other firms to match price cuts but not price increases. C. expects other firms to match all price changes. D. fears new entry into the industry.
Which of the following best explains the multiplier effect as a result of a $100 million increase in govt spending on highways?
A. More money must be printed to fund govt spending. Money supply increases, interest rates decrease, consumption increases, investment spending increases. B. Change in spending will cause an increase in real GDP. Govt tax revenue increases so govt spending increases. C. Govt spending creates a demand for domestically produced goods. Income increases, consumption increases, demand increases D. Change in govt spending causes an increase in supply of jobs and stimulates production of domestically produced goods/services.
An economy experiences real growth over time with stable aggregate demand. This would likely result in
A. secular inflation. B. increasing prices. C. decreasing prices. D. increased unemployment.
Refer to the diagram. At P 3 , this firm will:
A. produce 14 units and realize an economic profit.
B. produce 62 units and earn only a normal profit.
C. produce 40 units and incur a loss.
D. shut down in the short run.