Question 1

If the price level increases more rapidly than expected,

Accepted Answer

A) output will fall 
B) output will increase 
C) output will not change 
D) real wages will increase 
E) none of the above 
A) output will fall 
B) output will increase 
C) output will not change 
D) real wages will increase 
E) none of the above B

Question 2

According to the active policy position, eliminating a contractionary gap

Accepted Answer

A) can only be achieved by decreasing wages 
B) requires a public policy of wage and price controls 
C) should be accomplished by stimulating aggregate demand 
D) will increase unemployment 
E) will cause a recession 
A) can only be achieved by decreasing wages 
B) requires a public policy of wage and price controls 
C) should be accomplished by stimulating aggregate demand 
D) will increase unemployment 
E) will cause a recession C

Question 3

An effective policy of governmental intervention in the economy requires all of the following except one. Which is the exception?

Accepted Answer

A) the will to reject sound policy if it gets in the way of political considerations 
B) the ability to estimate the economy's potential level of output 
C) the ability to predict what would happen without intervention 
D) an assortment of effective tools of discretionary policy 
E) the ability to achieve effective cooperation between fiscal and monetary policy makers 
A) the will to reject sound policy if it gets in the way of political considerations 
B) the ability to estimate the economy's potential level of output 
C) the ability to predict what would happen without intervention 
D) an assortment of effective tools of discretionary policy 
E) the ability to achieve effective cooperation between fiscal and monetary policy makers A

Question 4

If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent,

Accepted Answer

A) real wages would fall 
B) output would fall 
C) output would increase 
D) output would increase, but only if nominal wages were increased more rapidly than prices 
E) the expected inflation rate was less than the actual rate 
A) real wages would fall 
B) output would fall 
C) output would increase 
D) output would increase, but only if nominal wages were increased more rapidly than prices 
E) the expected inflation rate was less than the actual rate

Question 5

Suppose a recession surprises economic forecasters, who did not see it coming. Which type of lag is that?

Accepted Answer

A) cyclical lag 
B) recognition lag 
C) decision-making lag 
D) implementation lag 
E) effectiveness lag 
A) cyclical lag 
B) recognition lag 
C) decision-making lag 
D) implementation lag 
E) effectiveness lag

Question 6

The average U.S. recession (after World War II) has lasted

Accepted Answer

A) a few months 
B) about half a year 
C) just under a year 
D) about three weeks 
E) about two years 
A) a few months 
B) about half a year 
C) just under a year 
D) about three weeks 
E) about two years

Question 7

The long-run Phillips curve suggests that changing the rate of unemployment in the economy has no impact on the inflation rate.

Accepted Answer

A) True 
 B)False

Question 8

International evidence suggests that

Accepted Answer

A) contrary to theory, there is little relationship between inflation and money supply growth 
B) the countries with the most independent central banks are the countries with the lowest inflation rates 
C) contrary to theory, there is little relationship between central bank independence and price stability 
D) the countries with the least independent central banks are the countries with the lowest inflation rates 
E) the most independent central banks are in Spain and Italy 
A) contrary to theory, there is little relationship between inflation and money supply growth 
B) the countries with the most independent central banks are the countries with the lowest inflation rates 
C) contrary to theory, there is little relationship between central bank independence and price stability 
D) the countries with the least independent central banks are the countries with the lowest inflation rates 
E) the most independent central banks are in Spain and Italy

Question 9

To say that the Fed has some independence means that it

Accepted Answer

A) accepts deposits from whomever it desires 
B) can ignore the macroeconomic goals of the United States 
C) can adopt policies without the approval of the Congress and the president 
D) is a private commercial bank 
E) does not have to report its monetary policy to Congress 
A) accepts deposits from whomever it desires 
B) can ignore the macroeconomic goals of the United States 
C) can adopt policies without the approval of the Congress and the president 
D) is a private commercial bank 
E) does not have to report its monetary policy to Congress

Question 10

Those who favor an active approach to policy and those who favor a passive approach disagree not only on how quickly the government can act but also on how stable the economy basically is.

Accepted Answer

A) True 
 B)False

Question 11

According to the rational expectations school, if the Fed announces a policy of rapid growth in the money supply, but then puts the brakes on money expansion without any announcement, the short-run result is likely to be

Accepted Answer

A) an unexpected surge in aggregate demand 
B) an unexpected drop in aggregate demand 
C) an anticipated surge in aggregate demand 
D) an anticipated drop in aggregate demand 
E) no change in aggregate demand 
A) an unexpected surge in aggregate demand 
B) an unexpected drop in aggregate demand 
C) an anticipated surge in aggregate demand 
D) an anticipated drop in aggregate demand 
E) no change in aggregate demand

Question 12

Time required __________ is not a time lag associated with using discretionary policy to correct an economic problem.

Accepted Answer

A) to recognize the problem 
B) to decide how to handle the problem 
C) to set a policy change in action 
D) for a policy to affect economic variables 
E) to coordinate monetary and fiscal policy 
A) to recognize the problem 
B) to decide how to handle the problem 
C) to set a policy change in action 
D) for a policy to affect economic variables 
E) to coordinate monetary and fiscal policy

Question 13

According to the passive policy maker's position, an expansionary gap will be eliminated because

Accepted Answer

A) the short-run aggregate supply will shift to the left 
B) the short-run aggregate supply will shift to the right 
C) rising prices will shift the aggregate demand to the left 
D) wages will fall relatively quickly 
E) aggregate demand will shift to the right as wages increase 
A) the short-run aggregate supply will shift to the left 
B) the short-run aggregate supply will shift to the right 
C) rising prices will shift the aggregate demand to the left 
D) wages will fall relatively quickly 
E) aggregate demand will shift to the right as wages increase

Question 14

Economist A. W. Phillips believed that

Accepted Answer

A) the Fed should follow a policy rule because it does not know the lag structure 
B) the Fed should follow a policy rule to avoid monetary surprises 
C) there is an inverse relationship between inflation and unemployment 
D) private sector spending is inherently unstable 
E) government spending is inherently unstable 
A) the Fed should follow a policy rule because it does not know the lag structure 
B) the Fed should follow a policy rule to avoid monetary surprises 
C) there is an inverse relationship between inflation and unemployment 
D) private sector spending is inherently unstable 
E) government spending is inherently unstable

Question 15

If a contractionary gap is cured by increasing aggregate demand,

Accepted Answer

A) both c and e are correct 
B) both d and e are correct 
C) real wages fall because prices rise 
D) prices rise causing real wages to increase 
E) money wages decrease as prices decrease 
A) both c and e are correct 
B) both d and e are correct 
C) real wages fall because prices rise 
D) prices rise causing real wages to increase 
E) money wages decrease as prices decrease

Question 16

The active approach to monetary policy involves predetermined rules that are followed virtually without exception.

Accepted Answer

A) True 
 B)False

Question 17

Those who favor a passive approach to policy believe that

Accepted Answer

A) discretionary monetary policy can be used to help the economy since monetary policy lags are short 
B) discretionary fiscal policy can be used to help the economy since fiscal policy lags are short 
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) none of the above 
A) discretionary monetary policy can be used to help the economy since monetary policy lags are short 
B) discretionary fiscal policy can be used to help the economy since fiscal policy lags are short 
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) none of the above

Question 18

In the long run, how would an active approach to a contractionary gap differ from a passive approach to policy?

Accepted Answer

A) Both the price level and the level of real GDP would be higher in the long run with the activist solution. 
B) Both the price level and the level of real GDP would be lower in the long run with the activist solution. 
C) The price level would be higher and the level of real GDP would be lower in the long run with the activist solution. 
D) Only the price level would be lower in the long run with the activist solution. 
E) Only the price level would be higher in the long run with the activist solution. 
A) Both the price level and the level of real GDP would be higher in the long run with the activist solution. 
B) Both the price level and the level of real GDP would be lower in the long run with the activist solution. 
C) The price level would be higher and the level of real GDP would be lower in the long run with the activist solution. 
D) Only the price level would be lower in the long run with the activist solution. 
E) Only the price level would be higher in the long run with the activist solution.

Question 19

Exhibit 17-4  
-Consider Exhibit 17-4. If the economy is initially at point c and aggregate demand increases, the economy will (in the long run)

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 20

Those who favor a passive approach to policy often argue that changes in prices and wages will shift the short-run aggregate supply curve

Accepted Answer

A) before active policy shifts the aggregate demand curve 
B) only after active policy shifts the aggregate demand curve 
C) more than active policy shifts the aggregate demand curve 
D) less than active policy shifts the aggregate demand curve 
E) in a direction opposite to the shift in the aggregate demand curve caused by active policy 
A) before active policy shifts the aggregate demand curve 
B) only after active policy shifts the aggregate demand curve 
C) more than active policy shifts the aggregate demand curve 
D) less than active policy shifts the aggregate demand curve 
E) in a direction opposite to the shift in the aggregate demand curve caused by active policy

Exam 17: Macro Policy Debate: Active or Passive

If the price level increases more rapidly than expected,

According to the active policy position, eliminating a contractionary gap

An effective policy of governmental intervention in the economy requires all of the following except one. Which is the exception?

If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent,

Suppose a recession surprises economic forecasters, who did not see it coming. Which type of lag is that?

The average U.S. recession (after World War II) has lasted

The long-run Phillips curve suggests that changing the rate of unemployment in the economy has no impact on the inflation rate.

International evidence suggests that

To say that the Fed has some independence means that it

Those who favor an active approach to policy and those who favor a passive approach disagree not only on how quickly the government can act but also on how stable the economy basically is.

According to the rational expectations school, if the Fed announces a policy of rapid growth in the money supply, but then puts the brakes on money expansion without any announcement, the short-run result is likely to be

Time required __________ is not a time lag associated with using discretionary policy to correct an economic problem.

According to the passive policy maker's position, an expansionary gap will be eliminated because

Economist A. W. Phillips believed that

If a contractionary gap is cured by increasing aggregate demand,

The active approach to monetary policy involves predetermined rules that are followed virtually without exception.

Those who favor a passive approach to policy believe that

In the long run, how would an active approach to a contractionary gap differ from a passive approach to policy?

Exhibit 17-4 -Consider Exhibit 17-4. If the economy is initially at point c and aggregate demand increases, the economy will (in the long run)

Those who favor a passive approach to policy often argue that changes in prices and wages will shift the short-run aggregate supply curve

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand Supply and Markets

Introduction to Macroeconomics

Tracking the Us Economy

Unemployment and Inflation

Productivity and Growth

Aggregate Expenditure

Aggregate Expenditure and Aggregate Demand

Aggregate Supply

Fiscal Policy

Federal Budgets and Public Policy

Money and the Financial System

Banking and the Money Supply

The Algebra of Income and Expenditure

Monetary Theory and Policy

The Algebra of Demand-Side Equilibrium

International Trade

International Finance

Economic Development

National Income Accounts

Understanding Graphs

Variable Net Exports

Variable Net Exports Revisited

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