Question 1

The Fed should be much more independent of the administration

Accepted Answer

A) if we wish to minimize the problem of dynamic inconsistency 
B) if there is a strong mandate to fight inflation 
C) if there is evidence that Congress is unable to make hard choices 
D) all of the above 
E) none of the above 
A) if we wish to minimize the problem of dynamic inconsistency 
B) if there is a strong mandate to fight inflation 
C) if there is evidence that Congress is unable to make hard choices 
D) all of the above 
E) none of the above D

Question 2

Even the most successful economic forecasters make mistakes since they

Accepted Answer

A) try to incorporate unexpected events into their forecasts 
B) have to rely on a model of the economy that may not be accurate 
C) always assume that people have rational expectations 
D) generally make unrealistic assumptions 
E) all of the above 
A) try to incorporate unexpected events into their forecasts 
B) have to rely on a model of the economy that may not be accurate 
C) always assume that people have rational expectations 
D) generally make unrealistic assumptions 
E) all of the above B

Question 3

Multiplier uncertainty is a major handicap for policy makers since it means that they don't always know

Accepted Answer

A) the potential impact of a policy measure on the economy 
B) whether a disturbance is temporary or permanent 
C) from which sector of the economy a disturbance arises 
D) how long it will take to formulate and implement a policy change 
E) how long it will take for a policy to affect the economy 
A) the potential impact of a policy measure on the economy 
B) whether a disturbance is temporary or permanent 
C) from which sector of the economy a disturbance arises 
D) how long it will take to formulate and implement a policy change 
E) how long it will take for a policy to affect the economy A

Question 4

Economists are more likely to be in favor of a strict monetary policy rule if they

Accepted Answer

A) believe that the Phillips curve is close to vertical even in the short run 
B) believe that the economy is basically self-correcting 
C) want to minimize the problem of dynamic inconsistency 
D) favor a truly independent central bank 
E) all of the above 
A) believe that the Phillips curve is close to vertical even in the short run 
B) believe that the economy is basically self-correcting 
C) want to minimize the problem of dynamic inconsistency 
D) favor a truly independent central bank 
E) all of the above

Question 5

A big advantage of automatic stabilizers is that they

Accepted Answer

A) completely eliminate the outside lag 
B) do not have any inside lag 
C) make the recognition lag negative 
D) increase the size of the fiscal policy multiplier 
E) make discretionary monetary policy obsolete 
A) completely eliminate the outside lag 
B) do not have any inside lag 
C) make the recognition lag negative 
D) increase the size of the fiscal policy multiplier 
E) make discretionary monetary policy obsolete

Question 6

Multiplier uncertainty is defined as uncertainty about

Accepted Answer

A) the structure of the economy 
B)  the length of the outside lag 
C)  the magnitude of the effects that will result from a particular policy action 
D) the accuracy of the indicators that predict the immediate impact of a policy action 
E) both 
A) and 
C)  
A) the structure of the economy 
B)  the length of the outside lag 
C)  the magnitude of the effects that will result from a particular policy action 
D) the accuracy of the indicators that predict the immediate impact of a policy action 
E) both 
A) and 
C)

Question 7

The macroeconomic forecast of the Congressional Budget Office (CBO) used to predict the two-year average growth rate in real GDP

Accepted Answer

A)  	tends to be highly inaccurate since it is based on fairly unrealistic assumptions 
B)   	accurately predicted the last three recessions in 1991/92, 2001/02, and 2007-09 
C)   overestimated the actual growth rates of GDP from 2004 - 08 
D)   was on target in predicting the high growth rates of GDP in the mid to late 1990s 
E)   		both C and D 
A)  	tends to be highly inaccurate since it is based on fairly unrealistic assumptions 
B)   	accurately predicted the last three recessions in 1991/92, 2001/02, and 2007-09 
C)   overestimated the actual growth rates of GDP from 2004 - 08 
D)   was on target in predicting the high growth rates of GDP in the mid to late 1990s 
E)   		both C and D

Question 8

A central bank that is independent of the administration is desirable since

Accepted Answer

A) independence decreases the likelihood of political cycles 
B) countries with independent central banks tend to have lower inflation rates 
C) independence mitigates the problem of dynamic inconsistency 
D) independence lends more credibility to monetary policy 
E) all of the above 
A) independence decreases the likelihood of political cycles 
B) countries with independent central banks tend to have lower inflation rates 
C) independence mitigates the problem of dynamic inconsistency 
D) independence lends more credibility to monetary policy 
E) all of the above

Question 9

Generally speaking, automatic fiscal stabilizers

Accepted Answer

A) raise the level of consumption during recessions, which offsets any decrease in investment 
B) dampen the decrease in disposable income during recessions, so disposable income as a fraction of total income actually rises 
C) increase the size of the fiscal policy multiplier 
D) cannot be relied on if a disturbance is transitory 
E) work mainly through reduction in the outside lag 
A) raise the level of consumption during recessions, which offsets any decrease in investment 
B) dampen the decrease in disposable income during recessions, so disposable income as a fraction of total income actually rises 
C) increase the size of the fiscal policy multiplier 
D) cannot be relied on if a disturbance is transitory 
E) work mainly through reduction in the outside lag

Question 10

Most economists believe that

Accepted Answer

A) the expectations of firms and consumers can be easily predicted 
B) only small disturbances require active monetary policy 
C) monetary policy has a shorter inside lag than fiscal policy 
D) monetary policy has a shorter outside lag than fiscal policy 
E) automatic stabilizers tend to make active policy largely obsolete 
A) the expectations of firms and consumers can be easily predicted 
B) only small disturbances require active monetary policy 
C) monetary policy has a shorter inside lag than fiscal policy 
D) monetary policy has a shorter outside lag than fiscal policy 
E) automatic stabilizers tend to make active policy largely obsolete

Question 11

If policy makers were convinced that the Phillips curve were close to vertical even in the short run, they would most likely advocate

Accepted Answer

A) real GDP targeting 
B) inflation targeting 
C) a policy to keep unemployment close to its natural rate 
D) very active monetary policy 
E) none of the above 
A) real GDP targeting 
B) inflation targeting 
C) a policy to keep unemployment close to its natural rate 
D) very active monetary policy 
E) none of the above

Question 12

Stabilization policy is affected by inside lags, which are

Accepted Answer

A) longer for monetary policy than for fiscal policy 
B) made up of the recognition, decision, and discretionary lags 
C) made up of the recognition, decision, and action lags 
D) the length of time it takes for a policy to affect the economy after its implementation 
E) caused by bureaucrats inside the government 
A) longer for monetary policy than for fiscal policy 
B) made up of the recognition, decision, and discretionary lags 
C) made up of the recognition, decision, and action lags 
D) the length of time it takes for a policy to affect the economy after its implementation 
E) caused by bureaucrats inside the government

Question 13

After the attack on the World Trade Center in New York on September 11, 2001, the U.S.Fed decided to

Accepted Answer

A) cautiously assess the situation and wait several days before taking any policy action 
B) lower reserve requirements for banks to signal its desire to stimulate the economy 
C) increase bank reserves to guarantee liquidity to the financial system 
D) close for a few days and therefore could not undertake any open market operations 
E) undertake large open market sales to indicate to the world that financial markets still worked 
A) cautiously assess the situation and wait several days before taking any policy action 
B) lower reserve requirements for banks to signal its desire to stimulate the economy 
C) increase bank reserves to guarantee liquidity to the financial system 
D) close for a few days and therefore could not undertake any open market operations 
E) undertake large open market sales to indicate to the world that financial markets still worked

Question 14

Formulating an appropriate policy response to an economic disturbance is difficult since policy makers are often unsure about

Accepted Answer

A) the timing and magnitude of the effects of a proposed policy measure 
B) whether a disturbance is temporary or permanent 
C) how the economy really works 
D) how a proposed policy measure affects people's expectations 
E) all of the above 
A) the timing and magnitude of the effects of a proposed policy measure 
B) whether a disturbance is temporary or permanent 
C) how the economy really works 
D) how a proposed policy measure affects people's expectations 
E) all of the above

Question 15

The concept of dynamic inconsistency implies that a central bank

Accepted Answer

A) will always do the wrong thing if it is concerned with long-run outcomes rather than current disturbances 
B) should never announce its intentions because doing so renders discretionary monetary policy useless 
C) should resist making policy changes that may endanger its stated long-run goals even though these changes could successfully address a short-run problem 
D) should always be inconsistent in its behavior so people will be less likely to profit from anticipating its policy actions 
E) none of the above 
A) will always do the wrong thing if it is concerned with long-run outcomes rather than current disturbances 
B) should never announce its intentions because doing so renders discretionary monetary policy useless 
C) should resist making policy changes that may endanger its stated long-run goals even though these changes could successfully address a short-run problem 
D) should always be inconsistent in its behavior so people will be less likely to profit from anticipating its policy actions 
E) none of the above

Question 16

Which of these economists proposed that economic policy should be confined primarily to maintaining a constant long-run money supply growth rate?

Accepted Answer

A) Stanley Fischer 
B) Milton Friedman 
C) John Maynard Keynes 
D) Paul Samuelson 
E) John Taylor 
A) Stanley Fischer 
B) Milton Friedman 
C) John Maynard Keynes 
D) Paul Samuelson 
E) John Taylor

Question 17

The outside lag is defined as the length of time it takes

Accepted Answer

A) to recognize whether a disturbance is permanent or temporary 
B) to come up with the appropriate policy response to a disturbance 
C) to account for the recognition, decision, and action lags 
D) for a policy to affect the economy after its implementation 
E) for the public to form expectations about a newly announced policy change 
A) to recognize whether a disturbance is permanent or temporary 
B) to come up with the appropriate policy response to a disturbance 
C) to account for the recognition, decision, and action lags 
D) for a policy to affect the economy after its implementation 
E) for the public to form expectations about a newly announced policy change

Question 18

Imposing policy rules

Accepted Answer

A) reduces the risk that policy makers will react to disturbances in unpredictable ways 
B) appeals to economists who assume the economy is very unstable 
C) always implies that the growth rate of money supply has to be kept constant 
D) only works if there is a large tradeoff between unemployment and inflation 
E) all of the above 
A) reduces the risk that policy makers will react to disturbances in unpredictable ways 
B) appeals to economists who assume the economy is very unstable 
C) always implies that the growth rate of money supply has to be kept constant 
D) only works if there is a large tradeoff between unemployment and inflation 
E) all of the above

Question 19

If a central bank believes that an economic disturbance will negatively affect GDP in the current quarter but will have little permanent effect, then it should

Accepted Answer

A) sharply lower interest rates to mitigate the effects of the disturbance 
B) lower interest rates immediately and let financial markets know that they will be raised again next quarter 
C) undertake large open market sales now with the intention of making open market purchases later on 
D) sit on its hands since any policy action would destabilize the economy further 
E) none of the above 
A) sharply lower interest rates to mitigate the effects of the disturbance 
B) lower interest rates immediately and let financial markets know that they will be raised again next quarter 
C) undertake large open market sales now with the intention of making open market purchases later on 
D) sit on its hands since any policy action would destabilize the economy further 
E) none of the above

Question 20

Designing successful economic stabilization policy is difficult since policy makers

Accepted Answer

A)   	never assume that an economic disturbance is temporary 
B) 	do not have enough policy tools to deal with economic disturbances 
C) 	do not know the expectations of consumers and firms or how they may react 
D)   	cannot adjust the automatic stabilizers 
E)   	all of above 
A)   	never assume that an economic disturbance is temporary 
B) 	do not have enough policy tools to deal with economic disturbances 
C) 	do not know the expectations of consumers and firms or how they may react 
D)   	cannot adjust the automatic stabilizers 
E)   	all of above

Exam 18: Policy

The Fed should be much more independent of the administration

Even the most successful economic forecasters make mistakes since they

Multiplier uncertainty is a major handicap for policy makers since it means that they don't always know

Economists are more likely to be in favor of a strict monetary policy rule if they

A big advantage of automatic stabilizers is that they

Multiplier uncertainty is defined as uncertainty about

The macroeconomic forecast of the Congressional Budget Office (CBO) used to predict the two-year average growth rate in real GDP

A central bank that is independent of the administration is desirable since

Generally speaking, automatic fiscal stabilizers

Most economists believe that

If policy makers were convinced that the Phillips curve were close to vertical even in the short run, they would most likely advocate

Stabilization policy is affected by inside lags, which are

After the attack on the World Trade Center in New York on September 11, 2001, the U.S.Fed decided to

Formulating an appropriate policy response to an economic disturbance is difficult since policy makers are often unsure about

The concept of dynamic inconsistency implies that a central bank

Which of these economists proposed that economic policy should be confined primarily to maintaining a constant long-run money supply growth rate?

The outside lag is defined as the length of time it takes

Imposing policy rules

If a central bank believes that an economic disturbance will negatively affect GDP in the current quarter but will have little permanent effect, then it should

Designing successful economic stabilization policy is difficult since policy makers

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Consumption and saving

Investment spending

The demand for money

The fed, money, and credit

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

Advanced topics

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