Exam 14: Macroeconomic Policy: Challenges in a Global Economy

Rational expectations are forward looking, since they assume that people will make use of all available information.

In a global economy, a problem with using expansionary fiscal and monetary policies to fix the problems in our country is that they can lead to retaliatory actions by other nations.

Using real GDP and employment growth relative to the peak of the business cycle, the 2007-2009 recession, as compared to previous two recessions, in 1990 and 2001:

Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressures in the economy. If people form their expectations _____, then in light of the Fed's announcement, they will expect an inflation rate of _____.

One of the problems with deflation is that it:

One of the key factors leading to the Great Recession was:

The Federal Reserve undertook _____ rounds of quantitative easing (QE) after short-term interest rates were effectively lowered to 0%. The total value of all assets purchased over all rounds was _____.

According to the equation for the Phillips curve, if nominal wages and labor productivity both increase by 3%, then the inflation rate _____ and unemployment _____.

When asking for wage increases, workers:

The stagflation of the 1960s and 1970s showed policymakers that:

The 2007-2009 recession was brought on when the Federal Reserve used excessive tightening of the money supply to solve the period of stagflation from 2004 to 2007.

Rating companies gave too few collateralized debt obligations an AAA rating.

Some analysts blame the financial crisis of 2007-2009 on Federal Reserve policy. They argue that:

One of the trigger points for the financial crisis of 2007-2009 was that subprime borrowers defaulted when the interest on adjustable-rate mortgages went up.

If policymakers attempt to keep unemployment below its natural level, the unemployment rate will likely increase.

The Federal Reserve will most likely halt its quantitative easing program by:

Some argue that the financial crisis of 2007-2009 was caused by a poor understanding of risks in the economy. One reason for that thinking is that:

(Figure: Understanding Expectation Theories) Assume the economy is at point c. According to the theory of rational expectations, if the Federal Reserve announces and then starts a plan to practice contractionary policy, the economy will move from point c to point:

Increased globalization makes the practice of fiscal and monetary policy easier.

Social Security payments rise according to the rate of inflation.