Question 1

What are the two theories about how expectations are formed? Discuss each.

Accepted Answer

The two theories are adaptive and ration

Question 2

Use the figure below to answer the following question(s).
Figure 15-1  
-In Figure 15-1, AD1 and SRAS1 indicate initial conditions in the goods and services market. In the short run, which of the following will most likely result from a shift to a more expansionary monetary policy under the adaptive expectations hypothesis?

Accepted Answer

A) price level P1 and output Y1 
B) price level P2 and output Y2 
C) price level P3 and output Y1 
D) price level P1 and output Y2 
A) price level P1 and output Y1 
B) price level P2 and output Y2 
C) price level P3 and output Y1 
D) price level P1 and output Y2

Question 3

Activists believe that

Accepted Answer

A) the M1 money supply should be increased at a steady rate annually. 
B) taxes should be increased during a recession in order to balance the federal budget. 
C) the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment. 
D) discretionary changes in macroeconomic policy can help smooth the business cycle of a market economy. 
A) the M1 money supply should be increased at a steady rate annually. 
B) taxes should be increased during a recession in order to balance the federal budget. 
C) the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment. 
D) discretionary changes in macroeconomic policy can help smooth the business cycle of a market economy.

Question 4

Use the figure below to answer the following question(s).
Figure 15-2  
-According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will temporarily fall below the natural rate of unemployment when

Accepted Answer

A) inflation turns out to be lower than what people expected. 
B) inflation turns out to be higher than what people expected. 
C) inflation turns out to be equal to what people expected. 
D) all of the above are true. 
A) inflation turns out to be lower than what people expected. 
B) inflation turns out to be higher than what people expected. 
C) inflation turns out to be equal to what people expected. 
D) all of the above are true.

Question 5

According to the rational expectations theory, expansionary monetary policy is fully effective only if

Accepted Answer

A) the policy is anticipated by workers and firms. 
B) aggregate supply shifts to the left. 
C) the economy is operating at or above its potential output level. 
D) policy makers follow through on their previously announced plans. 
E) the effects of the policy are unexpected. 
A) the policy is anticipated by workers and firms. 
B) aggregate supply shifts to the left. 
C) the economy is operating at or above its potential output level. 
D) policy makers follow through on their previously announced plans. 
E) the effects of the policy are unexpected.

Question 6

Economists who believe that policy errors are the source of economic instability argue that the crisis of 2008 was primarily the result of

Accepted Answer

A) housing regulations that undermined sound lending practices and Fed policies that generated the housing boom and bust. 
B) the stock market crash. 
C) the actions of speculators who drove up the world price of oil, the domestic price of gasoline, and other energy sources. 
D) persistently high interest rates during the decade leading up to the crisis. 
A) housing regulations that undermined sound lending practices and Fed policies that generated the housing boom and bust. 
B) the stock market crash. 
C) the actions of speculators who drove up the world price of oil, the domestic price of gasoline, and other energy sources. 
D) persistently high interest rates during the decade leading up to the crisis.

Question 7

Compared to the 1910-1960 period, economic fluctuations during the past 50 years have been less severe. Most economists believe that this increased stability is primarily the result of

Accepted Answer

A) more stable monetary policy. 
B) the smaller budget deficits of recent decades. 
C) regulations that promoted more affordable housing. 
D) greater stability of stock prices as measured by the Dow Jones Industrial Average. 
A) more stable monetary policy. 
B) the smaller budget deficits of recent decades. 
C) regulations that promoted more affordable housing. 
D) greater stability of stock prices as measured by the Dow Jones Industrial Average.

Question 8

The modern view of the Phillips curve suggests that

Accepted Answer

A) when inflation is less than anticipated, unemployment will fall below the natural rate. 
B) when inflation is steady, actual unemployment will equal the natural rate of unemployment. 
C) systematic demand stimulus policies will be unable to affect prices in the long run. 
D) there will be a trade-off between inflation and unemployment in the long run. 
A) when inflation is less than anticipated, unemployment will fall below the natural rate. 
B) when inflation is steady, actual unemployment will equal the natural rate of unemployment. 
C) systematic demand stimulus policies will be unable to affect prices in the long run. 
D) there will be a trade-off between inflation and unemployment in the long run.

Question 9

Economic analysis suggests that countercyclical macro-policy will

Accepted Answer

A) be difficult to time properly because of uncertainty about the future direction of the economy. 
B) be difficult to implement because we do not know whether monetary policy is transmitted through the interest rate, or whether it affects aggregate demand directly. 
C) reduce the natural rate of unemployment when macro-policy is persistently expansionary. 
D) help reduce economic instability if, and only if, we are willing to tolerate double-digit inflation. 
A) be difficult to time properly because of uncertainty about the future direction of the economy. 
B) be difficult to implement because we do not know whether monetary policy is transmitted through the interest rate, or whether it affects aggregate demand directly. 
C) reduce the natural rate of unemployment when macro-policy is persistently expansionary. 
D) help reduce economic instability if, and only if, we are willing to tolerate double-digit inflation.

Question 10

What are the macroeconomic policy implications of the rational expectations hypothesis? What should policy makers do and not do?

Accepted Answer

The hypothesis implies that macro-policy

Question 11

Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a more expansionary policy will increase

Accepted Answer

A) prices and unemployment in the long run. 
B) real output in the short run but not in the long run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run. 
A) prices and unemployment in the long run. 
B) real output in the short run but not in the long run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run.

Question 12

How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?

Accepted Answer

In the 1970s, expansionary policies were

Question 13

Use the figure below to answer the following question(s).
Figure 15-2  
-According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will equal the natural rate of unemployment when

Accepted Answer

A) inflation turns out to be lower than what people expected. 
B) inflation turns out to be higher than what people expected. 
C) inflation turns out to be equal to what people expected. 
D) all of the above are true. 
A) inflation turns out to be lower than what people expected. 
B) inflation turns out to be higher than what people expected. 
C) inflation turns out to be equal to what people expected. 
D) all of the above are true.

Question 14

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

Accepted Answer

A) Commodity prices are falling, and the dollar is appreciating. 
B) Commodity prices are rising, and the dollar is appreciating. 
C) Commodity prices are rising, and the dollar is depreciating. 
D) Commodity prices are falling, and the dollar is depreciating. 
A) Commodity prices are falling, and the dollar is appreciating. 
B) Commodity prices are rising, and the dollar is appreciating. 
C) Commodity prices are rising, and the dollar is depreciating. 
D) Commodity prices are falling, and the dollar is depreciating.

Question 15

The effectiveness of monetary policy as a stabilization tool is limited by

Accepted Answer

A) activist economists, who exert pressure on politicians. 
B) the inability to forecast the future and time policy changes in a stabilizing manner. 
C) Congressional attempts to offset changes in monetary policy with modifications in fiscal policy. 
D) the inability of the Federal Reserve to alter the money supply. 
A) activist economists, who exert pressure on politicians. 
B) the inability to forecast the future and time policy changes in a stabilizing manner. 
C) Congressional attempts to offset changes in monetary policy with modifications in fiscal policy. 
D) the inability of the Federal Reserve to alter the money supply.

Question 16

Which of the following was an important source of economic stability during the two decades following the recovery from the 1982 recession?

Accepted Answer

A) countercyclical fiscal policy instituted by Congress 
B) a substantial increase in government spending as a share of the economy 
C) monetary policy that kept the inflation rate low and relatively steady 
D) balanced federal budgets throughout the period 
A) countercyclical fiscal policy instituted by Congress 
B) a substantial increase in government spending as a share of the economy 
C) monetary policy that kept the inflation rate low and relatively steady 
D) balanced federal budgets throughout the period

Question 17

If monetary and fiscal policy are going to promote economic stability, they must _________ during a recession, and _________ during an economic boom. (Fill in the blank)

Accepted Answer

A) add stimulus; apply restraint 
B) apply restraint; add stimulus 
C) add stimulus; add stimulus 
D) apply restraint; apply restraint 
A) add stimulus; apply restraint 
B) apply restraint; add stimulus 
C) add stimulus; add stimulus 
D) apply restraint; apply restraint

Question 18

Under the adaptive expectations theory, people persistently

Accepted Answer

A) underestimate inflation when it is slowing down. 
B) overestimate inflation when it is accelerating. 
C) underestimate inflation when it is accelerating. 
D) adapt to the prevailing inflation rate quickly. 
A) underestimate inflation when it is slowing down. 
B) overestimate inflation when it is accelerating. 
C) underestimate inflation when it is accelerating. 
D) adapt to the prevailing inflation rate quickly.

Question 19

Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

Accepted Answer

A) higher prices and no change in real output 
B) higher prices and expansion in real output 
C) no change in prices but an expansion in real output 
D) no change in either prices or real output 
A) higher prices and no change in real output 
B) higher prices and expansion in real output 
C) no change in prices but an expansion in real output 
D) no change in either prices or real output

Question 20

Most economists agree that

Accepted Answer

A) fiscal policy is a more effective stabilization tool than monetary policy. 
B) it is difficult to time discretionary changes in macro-policy in a manner that will promote stability. 
C) monetary policy should focus on reducing unemployment, while fiscal policy should focus on the control of inflation. 
D) discretionary macro-policy can easily be instituted in a manner that will promote economic stability. 
A) fiscal policy is a more effective stabilization tool than monetary policy. 
B) it is difficult to time discretionary changes in macro-policy in a manner that will promote stability. 
C) monetary policy should focus on reducing unemployment, while fiscal policy should focus on the control of inflation. 
D) discretionary macro-policy can easily be instituted in a manner that will promote economic stability.

What are the two theories about how expectations are formed? Discuss each.

Activists believe that

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will temporarily fall below the natural rate of unemployment when

According to the rational expectations theory, expansionary monetary policy is fully effective only if

Economists who believe that policy errors are the source of economic instability argue that the crisis of 2008 was primarily the result of

Compared to the 1910-1960 period, economic fluctuations during the past 50 years have been less severe. Most economists believe that this increased stability is primarily the result of

The modern view of the Phillips curve suggests that

Economic analysis suggests that countercyclical macro-policy will

What are the macroeconomic policy implications of the rational expectations hypothesis? What should policy makers do and not do?

Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a more expansionary policy will increase

How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will equal the natural rate of unemployment when

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

The effectiveness of monetary policy as a stabilization tool is limited by

Which of the following was an important source of economic stability during the two decades following the recovery from the 1982 recession?

If monetary and fiscal policy are going to promote economic stability, they must _ during a recession, and _ during an economic boom. (Fill in the blank)

Under the adaptive expectations theory, people persistently

Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

Most economists agree that

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

Exam 15: Stabilization Policy, Output, and Employment

What are the two theories about how expectations are formed? Discuss each.

Activists believe that

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will temporarily fall below the natural rate of unemployment when

According to the rational expectations theory, expansionary monetary policy is fully effective only if

Economists who believe that policy errors are the source of economic instability argue that the crisis of 2008 was primarily the result of

Compared to the 1910-1960 period, economic fluctuations during the past 50 years have been less severe. Most economists believe that this increased stability is primarily the result of

The modern view of the Phillips curve suggests that

Economic analysis suggests that countercyclical macro-policy will

What are the macroeconomic policy implications of the rational expectations hypothesis? What should policy makers do and not do?

Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a more expansionary policy will increase

How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will equal the natural rate of unemployment when

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

The effectiveness of monetary policy as a stabilization tool is limited by

Which of the following was an important source of economic stability during the two decades following the recovery from the 1982 recession?

If monetary and fiscal policy are going to promote economic stability, they must _________ during a recession, and _________ during an economic boom. (Fill in the blank)

Under the adaptive expectations theory, people persistently

Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

Most economists agree that

The Economic Approach

Some Tools of the Economist

Demand, Supply, and the Market Process

Supply and Demand: Applications and Extensions

Difficult Cases for the Market, and the Role of Government

The Economics of Political Action

Taking the Nations Economic Pulse

Economic Fluctuations, Unemployment, and Inflation

An Introduction to Basic Macroeconomic Markets

Dynamic Change, Economic Fluctuations, and the Ad-As Model

Fiscal Policy: the Keynesian View and the Historical Development of Macroeconomics

Fiscal Policy, Incentives, and Secondary Effects

Money and the Banking System

Modern Macroeconomics and Monetary Policy

Creating an Environment for Growth and Prosperity

Institutions, Policies, and Cross-Country Differences in Income and Growth

Gaining From International Trade

International Finance and the Foreign Exchange Market

Filters

If monetary and fiscal policy are going to promote economic stability, they must _ during a recession, and _ during an economic boom. (Fill in the blank)