Question 1

Those who favor an active approach to policy believe that:

Accepted Answer

A)  discretionary monetary policy cannot be used to help the economy since monetary policy lags are long. 
B)  discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long. 
C)  lags associated with implementing policies are too long and unstable for discretionary policy to be effective. 
D)  despite the lags involved, implementing discretionary policy is preferable to inaction. 
E)  the discretionary fiscal policy cannot be used to help the economy since it leads to inflation. 
A)  discretionary monetary policy cannot be used to help the economy since monetary policy lags are long. 
B)  discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long. 
C)  lags associated with implementing policies are too long and unstable for discretionary policy to be effective. 
D)  despite the lags involved, implementing discretionary policy is preferable to inaction. 
E)  the discretionary fiscal policy cannot be used to help the economy since it leads to inflation.

Question 2

According to the rational expectations theory, people's predictions about the future course of governmental economic policy influence the position of the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False

Question 3

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor a passive approach to policy, once the expansionary gap is eliminated, the economy will end up at:

Accepted Answer

A)  point A. 
B)  point B. 
C)  point C. 
D)  a point to the right of point A. 
E)  a point below C. 
A)  point A. 
B)  point B. 
C)  point C. 
D)  a point to the right of point A. 
E)  a point below C.

Question 4

The main policy conclusion of the rational expectations school is that:

Accepted Answer

A)  fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can be helpful. 
B)  monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can be helpful. 
C)  both monetary and fiscal policy can be helpful if policy makers correctly anticipate the plans of firms and households. 
D)  both monetary and fiscal policy can be helpful if firms and households correctly anticipate the plans of policy makers. 
E)  neither monetary nor fiscal policy can be helpful if firms and households correctly anticipate the plans of policy makers. 
A)  fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can be helpful. 
B)  monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can be helpful. 
C)  both monetary and fiscal policy can be helpful if policy makers correctly anticipate the plans of firms and households. 
D)  both monetary and fiscal policy can be helpful if firms and households correctly anticipate the plans of policy makers. 
E)  neither monetary nor fiscal policy can be helpful if firms and households correctly anticipate the plans of policy makers.

Question 5

Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation. The year of stagflation would:

Accepted Answer

A)  be represented as a move upward along the short-run Phillips curve. 
B)  be represented as a move downward along the short-run Phillips curve. 
C)  be represented as a point above the short-run Phillips curve. 
D)  be represented as a point below the short-run Phillips curve. 
E)  correspond to the origin. 
A)  be represented as a move upward along the short-run Phillips curve. 
B)  be represented as a move downward along the short-run Phillips curve. 
C)  be represented as a point above the short-run Phillips curve. 
D)  be represented as a point below the short-run Phillips curve. 
E)  correspond to the origin.

Question 6

If an active approach is followed in closing an expansionary gap, _____.

Accepted Answer

A)  the aggregate demand curve would shift rightward 
B)  the aggregate demand curve would shift leftward 
C)  the short-run aggregate supply curve would shift rightward 
D)  the short-run aggregate supply curve would shift leftward 
E)  there would be a movement up and to the left along the short-run supply curve 
A)  the aggregate demand curve would shift rightward 
B)  the aggregate demand curve would shift leftward 
C)  the short-run aggregate supply curve would shift rightward 
D)  the short-run aggregate supply curve would shift leftward 
E)  there would be a movement up and to the left along the short-run supply curve

Question 7

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor an active approach to policy, the economy can attain equilibrium at potential output if:

Accepted Answer

A)  the SRAS curve shifts to the left. 
B)  the SRAS curve shifts to the right. 
C)  money supply is increased. 
D)  government spending is decreased. 
E)  aggregate demand increases. 
A)  the SRAS curve shifts to the left. 
B)  the SRAS curve shifts to the right. 
C)  money supply is increased. 
D)  government spending is decreased. 
E)  aggregate demand increases.

Question 8

Which of the following is true of lags associated with discretionary policy?

Accepted Answer

A)  Such lags extend only from the time a problem occurs in the economy through the time it is recognized by the government. 
B)  Such lags extend only from the time a problem is recognized by the government through the time an agreed-on policy is approved of. 
C)  Such lags extend only from the time a policy is approved through the time the policy is implemented. 
D)  Such lags can be reduced by taxation. 
E)  Such lags extend only from the time a problem occurs in the economy through the time a corrective policy has an impact on the economy. 
A)  Such lags extend only from the time a problem occurs in the economy through the time it is recognized by the government. 
B)  Such lags extend only from the time a problem is recognized by the government through the time an agreed-on policy is approved of. 
C)  Such lags extend only from the time a policy is approved through the time the policy is implemented. 
D)  Such lags can be reduced by taxation. 
E)  Such lags extend only from the time a problem occurs in the economy through the time a corrective policy has an impact on the economy.

Question 9

If the time for an economy to self-correct is shorter than the active policy lags, then:

Accepted Answer

A)  active policy should be strengthened. 
B)  active policy is likely to destabilize the economy. 
C)  time is required to accumulate evidence that the economy is performing below its potential. 
D)  the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve. 
E)  active policy will work better than passive policy. 
A)  active policy should be strengthened. 
B)  active policy is likely to destabilize the economy. 
C)  time is required to accumulate evidence that the economy is performing below its potential. 
D)  the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve. 
E)  active policy will work better than passive policy.

Question 10

One implication of the Phillips curve analysis is that:

Accepted Answer

A)  unemployment rates below the natural rate are only possible in the long run. 
B)  unemployment rates below the natural rate lead to falling rates of inflation in the long run. 
C)  if inflationary expectations are accurate, the economy is on the short-run Phillips curve but not on the long-run Phillips curve. 
D)  unemployment rates below the natural rate may be achieved only with rising inflation rates. 
E)  the natural rate of unemployment is strictly a short-run phenomenon. 
A)  unemployment rates below the natural rate are only possible in the long run. 
B)  unemployment rates below the natural rate lead to falling rates of inflation in the long run. 
C)  if inflationary expectations are accurate, the economy is on the short-run Phillips curve but not on the long-run Phillips curve. 
D)  unemployment rates below the natural rate may be achieved only with rising inflation rates. 
E)  the natural rate of unemployment is strictly a short-run phenomenon.

Question 11

Ms. Jones is a professor at a university. She strongly supports the rational expectations theory. She is likely to believe that the only time active policy has an impact on aggregate output is when:

Accepted Answer

A)  an expansionary policy is implemented. 
B)  a recessionary policy is implemented. 
C)  policy changes are unannounced. 
D)  the economy has a recessionary gap. 
E)  the economy has an expansionary gap. 
A)  an expansionary policy is implemented. 
B)  a recessionary policy is implemented. 
C)  policy changes are unannounced. 
D)  the economy has a recessionary gap. 
E)  the economy has an expansionary gap.

Question 12

Current thinking on the Phillips curve suggests that it would be best for policy makers to:

Accepted Answer

A)  focus on controlling unemployment. 
B)  stimulate permanent shifts in aggregate supply. 
C)  focus on controlling inflation. 
D)  stimulate permanent shifts in aggregate demand. 
E)  develop a two-pronged policy to control both unemployment and inflation. 
A)  focus on controlling unemployment. 
B)  stimulate permanent shifts in aggregate supply. 
C)  focus on controlling inflation. 
D)  stimulate permanent shifts in aggregate demand. 
E)  develop a two-pronged policy to control both unemployment and inflation.

Question 13

An increase in the expected inflation rate will:

Accepted Answer

A)  shift the short-run Phillips curve upward and to the right. 
B)  shift the short-run Phillips curve downward and to the left. 
C)  not shift the short-run Phillips curve unless the unemployment rate changes. 
D)  cause the unemployment rate associated with each inflation rate to decrease. 
E)  tend to increase production unless the actual inflation rate also increases. 
A)  shift the short-run Phillips curve upward and to the right. 
B)  shift the short-run Phillips curve downward and to the left. 
C)  not shift the short-run Phillips curve unless the unemployment rate changes. 
D)  cause the unemployment rate associated with each inflation rate to decrease. 
E)  tend to increase production unless the actual inflation rate also increases.

Question 14

Before discovering that the short-run Phillips curve does not show the true long-run situation, policy makers were successful in trying to bring the economy to the zero-inflation, zero-unemployment point on the short-run curve.

Accepted Answer

A) True 
 B)False

Question 15

Which of the following central banks does not have an explicit inflation target?

Accepted Answer

A)  The Bank of England 
B)  The Federal Reserve 
C)  Swiss National Bank 
D)  European Central Bank 
E)  The Reserve Bank of India 
A)  The Bank of England 
B)  The Federal Reserve 
C)  Swiss National Bank 
D)  European Central Bank 
E)  The Reserve Bank of India

Question 16

The inflation associated with the oil embargoes of the 1970s illustrated the _____ of the downward-sloping Phillips curve in the long run, as unemployment _____ during this period.

Accepted Answer

A)  validity; fell 
B)  validity; rose 
C)  fallacy; rose 
D)  fallacy; fell 
E)  fallacy; did not change 
A)  validity; fell 
B)  validity; rose 
C)  fallacy; rose 
D)  fallacy; fell 
E)  fallacy; did not change

Question 17

Which of the following is true about rational expectations?

Accepted Answer

A)  People form expectations on the basis of information about past as well as future actions of policy makers. 
B)  Wage agreements do not reflect inflationary expectations if workers expect continued inflation. 
C)  Rational people cannot easily anticipate the effects of discretionary policy on the price level and output. 
D)  The role of expectations is applicable in the context of monetary policy only. 
E)  The effectiveness of a particular government policy is independent of people's expectations. 
A)  People form expectations on the basis of information about past as well as future actions of policy makers. 
B)  Wage agreements do not reflect inflationary expectations if workers expect continued inflation. 
C)  Rational people cannot easily anticipate the effects of discretionary policy on the price level and output. 
D)  The role of expectations is applicable in the context of monetary policy only. 
E)  The effectiveness of a particular government policy is independent of people's expectations.

Question 18

The figure below reflects the inverse relationship between real GDP and the price level. If the economy is initially at point c and aggregate demand is stable, in the long run, the economy will:

Accepted Answer

A)  move toward point a 
B)  move toward point b 
C)  stay at point c 
D)  move toward point d 
E)  move toward point f 
A)  move toward point a 
B)  move toward point b 
C)  stay at point c 
D)  move toward point d 
E)  move toward point f

Question 19

An economy that self-corrects a recessionary gap will experience falling nominal wages, rising real wages, and falling output.

Accepted Answer

A) True 
 B)False

Question 20

Along the long-run Phillips curve, the economy is at an unemployment level that corresponds to an output level lower than the potential output level.

Accepted Answer

A) True 
 B)False

Those who favor an active approach to policy believe that:

According to the rational expectations theory, people's predictions about the future course of governmental economic policy influence the position of the short-run aggregate supply curve.

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor a passive approach to policy, once the expansionary gap is eliminated, the economy will end up at:

The main policy conclusion of the rational expectations school is that:

Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation. The year of stagflation would:

If an active approach is followed in closing an expansionary gap, _____.

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor an active approach to policy, the economy can attain equilibrium at potential output if:

Which of the following is true of lags associated with discretionary policy?

If the time for an economy to self-correct is shorter than the active policy lags, then:

One implication of the Phillips curve analysis is that:

Ms. Jones is a professor at a university. She strongly supports the rational expectations theory. She is likely to believe that the only time active policy has an impact on aggregate output is when:

Current thinking on the Phillips curve suggests that it would be best for policy makers to:

An increase in the expected inflation rate will:

Before discovering that the short-run Phillips curve does not show the true long-run situation, policy makers were successful in trying to bring the economy to the zero-inflation, zero-unemployment point on the short-run curve.

Which of the following central banks does not have an explicit inflation target?

The inflation associated with the oil embargoes of the 1970s illustrated the _ of the downward-sloping Phillips curve in the long run, as unemployment _ during this period.

Which of the following is true about rational expectations?

The figure below reflects the inverse relationship between real GDP and the price level. If the economy is initially at point c and aggregate demand is stable, in the long run, the economy will:

An economy that self-corrects a recessionary gap will experience falling nominal wages, rising real wages, and falling output.

Along the long-run Phillips curve, the economy is at an unemployment level that corresponds to an output level lower than the potential output level.

The Art and Science of Economic Analysis

Some Tools of Economic Analysis

Economic Decision Makers

Demand, Supply, and Markets

Introduction to Macroeconomics

Tracking the U S Economy

Unemployment and Inflation

Us Productivity and Growth

Aggregate Demand

Aggregate Supply

Fiscal Policy

Federal Budgets and Public Policy

Money and the Financial System

Banking and the Money Supply

Monetary Theory and Policy

International Trade

International Finance

Economic Development

Filters

Exam 16: The Policy Debate: Active or Passive

Those who favor an active approach to policy believe that:

According to the rational expectations theory, people's predictions about the future course of governmental economic policy influence the position of the short-run aggregate supply curve.

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor a passive approach to policy, once the expansionary gap is eliminated, the economy will end up at:

The main policy conclusion of the rational expectations school is that:

Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation. The year of stagflation would:

If an active approach is followed in closing an expansionary gap, _____.

The figure below shows the price level, real GDP, and the potential output for an economy. According to those who favor an active approach to policy, the economy can attain equilibrium at potential output if:

Which of the following is true of lags associated with discretionary policy?

If the time for an economy to self-correct is shorter than the active policy lags, then:

One implication of the Phillips curve analysis is that:

Ms. Jones is a professor at a university. She strongly supports the rational expectations theory. She is likely to believe that the only time active policy has an impact on aggregate output is when:

Current thinking on the Phillips curve suggests that it would be best for policy makers to:

An increase in the expected inflation rate will:

Before discovering that the short-run Phillips curve does not show the true long-run situation, policy makers were successful in trying to bring the economy to the zero-inflation, zero-unemployment point on the short-run curve.

Which of the following central banks does not have an explicit inflation target?

The inflation associated with the oil embargoes of the 1970s illustrated the _____ of the downward-sloping Phillips curve in the long run, as unemployment _____ during this period.

Which of the following is true about rational expectations?

The figure below reflects the inverse relationship between real GDP and the price level. If the economy is initially at point c and aggregate demand is stable, in the long run, the economy will:

An economy that self-corrects a recessionary gap will experience falling nominal wages, rising real wages, and falling output.

Along the long-run Phillips curve, the economy is at an unemployment level that corresponds to an output level lower than the potential output level.

The Art and Science of Economic Analysis

Some Tools of Economic Analysis

Economic Decision Makers

Demand, Supply, and Markets

Introduction to Macroeconomics

Tracking the U S Economy

Unemployment and Inflation

Us Productivity and Growth

Aggregate Demand

Aggregate Supply

Fiscal Policy

Federal Budgets and Public Policy

Money and the Financial System

Banking and the Money Supply

Monetary Theory and Policy

International Trade

International Finance

Economic Development

Filters

The inflation associated with the oil embargoes of the 1970s illustrated the _ of the downward-sloping Phillips curve in the long run, as unemployment _ during this period.