Question 1

If a policy is carried out by a rule, then we have an example of

Accepted Answer

A) active policy making. 
B) discretionary policy making. 
C) nondiscretionary policy making. 
D) natural policy making. 
A) active policy making. 
B) discretionary policy making. 
C) nondiscretionary policy making. 
D) natural policy making.

Question 2

Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is

Accepted Answer

A) an increased price level in the short run, but no effect on price level in the long run. 
B) decreased real Gross Domestic Product (GDP)in the short run, but increased real Gross Domestic Product (GDP)in the long run. 
C) increased real Gross Domestic Product (GDP)and increased employment in the long run. 
D) an increased price level, but no change in real Gross Domestic Product (GDP)in the long run. 
A) an increased price level in the short run, but no effect on price level in the long run. 
B) decreased real Gross Domestic Product (GDP)in the short run, but increased real Gross Domestic Product (GDP)in the long run. 
C) increased real Gross Domestic Product (GDP)and increased employment in the long run. 
D) an increased price level, but no change in real Gross Domestic Product (GDP)in the long run.

Question 3

The rational expectations hypothesis is a theory that states that

Accepted Answer

A) individuals can predict the future perfectly, at least with respect to macroeconomic variables like the interest rate and inflation. 
B) people make their economic plans by using all available past and present information and their understanding about how the economy operates. 
C) people make their economic plans in an irrational, intuitive manner. 
D) people make their economic plans by relying on the policy statements made by the President and by leaders in Congress. 
A) individuals can predict the future perfectly, at least with respect to macroeconomic variables like the interest rate and inflation. 
B) people make their economic plans by using all available past and present information and their understanding about how the economy operates. 
C) people make their economic plans in an irrational, intuitive manner. 
D) people make their economic plans by relying on the policy statements made by the President and by leaders in Congress.

Question 4

Under the assumption of rational expectations, real GDP is determined by

Accepted Answer

A) the economy's aggregate demand curve. 
B) the Fed. 
C) a combination of monetary and fiscal policy. 
D) the nation's long-run aggregate supply curve. 
A) the economy's aggregate demand curve. 
B) the Fed. 
C) a combination of monetary and fiscal policy. 
D) the nation's long-run aggregate supply curve.

Question 5

Actions on the part of monetary and fiscal policy makers that are undertaken in response to some change in the overall economy are known as

Accepted Answer

A) nondiscretionary policy making. 
B) passive policy making. 
C) creative policy making. 
D) active policy making. 
A) nondiscretionary policy making. 
B) passive policy making. 
C) creative policy making. 
D) active policy making.

Question 6

Suppose the economy is initially operating at point A in the above figure. Which of the following statements is TRUE?

Accepted Answer

A) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the long run. 
B) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the short run. 
C) An unexpected reduction in aggregate demand will cause the economy to move from point A to point C in the short run. 
D) none of the above 
A) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the long run. 
B) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the short run. 
C) An unexpected reduction in aggregate demand will cause the economy to move from point A to point C in the short run. 
D) none of the above

Question 7

If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy?

Accepted Answer

A) Consumers do not understand the workings of monetary policy, so discretionary and nondiscretionary policies are equally effective. 
B) Individuals do understand how monetary policy works, so consistency and predictability are the keys to effective policy making. 
C) Individuals base their economic expectations solely on current information, so repeating policy decisions that have worked in the past is the most effective path to take. 
D) Only unanticipated policies will be effective once individuals understand how monetary policy works. 
A) Consumers do not understand the workings of monetary policy, so discretionary and nondiscretionary policies are equally effective. 
B) Individuals do understand how monetary policy works, so consistency and predictability are the keys to effective policy making. 
C) Individuals base their economic expectations solely on current information, so repeating policy decisions that have worked in the past is the most effective path to take. 
D) Only unanticipated policies will be effective once individuals understand how monetary policy works.

Question 8

According to the policy irrelevance proposition, monetary policy can affect real variables

Accepted Answer

A) in both the short run and the long run. 
B) in the long run only. 
C) in the short run only, and then only if the policy was unanticipated. 
D) in the short run only, and then only if the policy was fully anticipated. 
A) in both the short run and the long run. 
B) in the long run only. 
C) in the short run only, and then only if the policy was unanticipated. 
D) in the short run only, and then only if the policy was fully anticipated.

Question 9

Which of the following is NOT an inference of the rational expectations hypothesis?

Accepted Answer

A) Government policy actions have no real effects in the short run unless the actions are unanticipated. 
B) Government policy actions have no real effects in the long run. 
C) Government policy actions that are anticipated have no real effects in the short run. 
D) Government policy actions that are unanticipated have no monetary effects in the short run. 
A) Government policy actions have no real effects in the short run unless the actions are unanticipated. 
B) Government policy actions have no real effects in the long run. 
C) Government policy actions that are anticipated have no real effects in the short run. 
D) Government policy actions that are unanticipated have no monetary effects in the short run.

Question 10

At one time, many economists believed that

Accepted Answer

A) the government could determine what the Phillips curve should be. 
B) the government could determine the slope of the Phillips curve. 
C) the government could make the Phillips curve vertical. 
D) the government could decide at which point on the Phillips curve the economy should be. 
A) the government could determine what the Phillips curve should be. 
B) the government could determine the slope of the Phillips curve. 
C) the government could make the Phillips curve vertical. 
D) the government could decide at which point on the Phillips curve the economy should be.

Question 11

According to the new Keynesian theory, the widespread importance of small menu costs results in variations in aggregate demand causing both

Accepted Answer

A) greater short-run adjustments in real GDP and delayed adjustment in the price level. 
B) greater short-run adjustments in the real GDP and immediate adjustment in the price level. 
C) smaller short-run adjustments in real GDP and delayed adjustment in the price level. 
D) smaller short-run adjustments in real GDP and immediate adjustment in the price level. 
A) greater short-run adjustments in real GDP and delayed adjustment in the price level. 
B) greater short-run adjustments in the real GDP and immediate adjustment in the price level. 
C) smaller short-run adjustments in real GDP and delayed adjustment in the price level. 
D) smaller short-run adjustments in real GDP and immediate adjustment in the price level.

Question 12

Which of the following is NOT a possible cause of structural unemployment?

Accepted Answer

A) individuals take the time to search for the best job opportunities 
B) a mismatch of worker training and skills with requirements of employers 
C) government-imposed minimum wage laws 
D) union activity that sets wages above the equilibrium level 
A) individuals take the time to search for the best job opportunities 
B) a mismatch of worker training and skills with requirements of employers 
C) government-imposed minimum wage laws 
D) union activity that sets wages above the equilibrium level

Question 13

An unexpected increase in aggregate demand typically causes

Accepted Answer

A) frictional unemployment to increase but structural unemployment to decrease. 
B) the price level to increase but has no effect on the unemployment rate. 
C) the price level to increase and the unemployment rate to fall. 
D) the price level to increase and the unemployment rate to increase. 
A) frictional unemployment to increase but structural unemployment to decrease. 
B) the price level to increase but has no effect on the unemployment rate. 
C) the price level to increase and the unemployment rate to fall. 
D) the price level to increase and the unemployment rate to increase.

Question 14

The rational expectations hypothesis suggests that

Accepted Answer

A) unanticipated fiscal policy actions are more powerful than monetary policy actions. 
B) anticipated monetary policy actions are more powerful than fiscal policy actions. 
C) fiscal policy actions only work when accompanied by changes in the money supply. 
D) anticipated fiscal and monetary policy actions are not likely to achieve their stated aims. 
A) unanticipated fiscal policy actions are more powerful than monetary policy actions. 
B) anticipated monetary policy actions are more powerful than fiscal policy actions. 
C) fiscal policy actions only work when accompanied by changes in the money supply. 
D) anticipated fiscal and monetary policy actions are not likely to achieve their stated aims.

Question 15

Suppose there is an oil supply shock to the U.S. economy due to an embargo by major oil producing nations. According to the real business cycle theory, the supply shock will, other things being equal

Accepted Answer

A) push real Gross Domestic Product (GDP)upward in the short run but downward in the long run. 
B) push the economy into an expansionary phase of the business cycle. 
C) cause real Gross Domestic Product (GDP)to decline both in the short run and in the long run. 
D) cause economy-wide deflation. 
A) push real Gross Domestic Product (GDP)upward in the short run but downward in the long run. 
B) push the economy into an expansionary phase of the business cycle. 
C) cause real Gross Domestic Product (GDP)to decline both in the short run and in the long run. 
D) cause economy-wide deflation.

Question 16

When "stagflation" occurs

Accepted Answer

A) the economy experiences higher inflation rates and lower unemployment rates at the same time. 
B) the economy experiences lower inflation rates and higher unemployment rates at the same time. 
C) the economy experiences lower inflation rates and lower unemployment rates at the same time. 
D) the economy experiences higher inflation rates and higher unemployment rates at the same time. 
A) the economy experiences higher inflation rates and lower unemployment rates at the same time. 
B) the economy experiences lower inflation rates and higher unemployment rates at the same time. 
C) the economy experiences lower inflation rates and lower unemployment rates at the same time. 
D) the economy experiences higher inflation rates and higher unemployment rates at the same time.

Question 17

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

Accepted Answer

A) expansionary monetary policy will be effective in combating recessions. 
B) contractionary monetary policy will be effective in combating inflation. 
C) only predictable policy actions by the Fed will have an effect on the real economy. 
D) only unpredictable policy actions by the Fed will have an effect on the real economy. 
A) expansionary monetary policy will be effective in combating recessions. 
B) contractionary monetary policy will be effective in combating inflation. 
C) only predictable policy actions by the Fed will have an effect on the real economy. 
D) only unpredictable policy actions by the Fed will have an effect on the real economy.

Question 18

Suppose there was an unexpected increase in aggregate demand. We would expect to observe

Accepted Answer

A) frictional unemployment to increase. 
B) the duration of unemployment and the amount of unemployment to decrease. 
C) higher wages, with the duration of unemployment and the amount of unemployment unchanged. 
D) a decrease in aggregate demand. 
A) frictional unemployment to increase. 
B) the duration of unemployment and the amount of unemployment to decrease. 
C) higher wages, with the duration of unemployment and the amount of unemployment unchanged. 
D) a decrease in aggregate demand.

Question 19

The shorter is the interval between firms' price adjustments,

Accepted Answer

A) the greater is the scope for activist policies to stabilize the economy. 
B) the smaller is the scope for activist policies to stabilize the economy. 
C) a given unexpected increase in aggregate demand will cause a larger increase in output. 
D) a given unexpected increase in aggregate demand will cause a smaller increase in the price level in the short run. 
A) the greater is the scope for activist policies to stabilize the economy. 
B) the smaller is the scope for activist policies to stabilize the economy. 
C) a given unexpected increase in aggregate demand will cause a larger increase in output. 
D) a given unexpected increase in aggregate demand will cause a smaller increase in the price level in the short run.

Question 20

The Phillips curve is thought to reflect the relationship between

Accepted Answer

A) unemployment and real GDP. 
B) unemployment and inflation. 
C) inflation and real GDP. 
D) the price level and inflation. 
A) unemployment and real GDP. 
B) unemployment and inflation. 
C) inflation and real GDP. 
D) the price level and inflation.

If a policy is carried out by a rule, then we have an example of

Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is

The rational expectations hypothesis is a theory that states that

Under the assumption of rational expectations, real GDP is determined by

Actions on the part of monetary and fiscal policy makers that are undertaken in response to some change in the overall economy are known as

Suppose the economy is initially operating at point A in the above figure. Which of the following statements is TRUE?

If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy?

According to the policy irrelevance proposition, monetary policy can affect real variables

Which of the following is NOT an inference of the rational expectations hypothesis?

At one time, many economists believed that

According to the new Keynesian theory, the widespread importance of small menu costs results in variations in aggregate demand causing both

Which of the following is NOT a possible cause of structural unemployment?

An unexpected increase in aggregate demand typically causes

The rational expectations hypothesis suggests that

Suppose there is an oil supply shock to the U.S. economy due to an embargo by major oil producing nations. According to the real business cycle theory, the supply shock will, other things being equal

When "stagflation" occurs

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

Suppose there was an unexpected increase in aggregate demand. We would expect to observe

The shorter is the interval between firms' price adjustments,

The Phillips curve is thought to reflect the relationship between

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Money Banking and Central Banking

Domestic and International Dimensions of Monetary Policy

Policies and Prospects for Global Economic Growth

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters

Exam 16: Stabilization in an Integrated World Economy

If a policy is carried out by a rule, then we have an example of

Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is

The rational expectations hypothesis is a theory that states that

Under the assumption of rational expectations, real GDP is determined by

Actions on the part of monetary and fiscal policy makers that are undertaken in response to some change in the overall economy are known as

Suppose the economy is initially operating at point A in the above figure. Which of the following statements is TRUE?

If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy?

According to the policy irrelevance proposition, monetary policy can affect real variables

Which of the following is NOT an inference of the rational expectations hypothesis?

At one time, many economists believed that

According to the new Keynesian theory, the widespread importance of small menu costs results in variations in aggregate demand causing both

Which of the following is NOT a possible cause of structural unemployment?

An unexpected increase in aggregate demand typically causes

The rational expectations hypothesis suggests that

Suppose there is an oil supply shock to the U.S. economy due to an embargo by major oil producing nations. According to the real business cycle theory, the supply shock will, other things being equal

When "stagflation" occurs

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

Suppose there was an unexpected increase in aggregate demand. We would expect to observe

The shorter is the interval between firms' price adjustments,

The Phillips curve is thought to reflect the relationship between

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Money Banking and Central Banking

Domestic and International Dimensions of Monetary Policy

Policies and Prospects for Global Economic Growth

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters