Question 1

One way of expressing the meaning of the short-run Phillips curve is to say that

Accepted Answer

A) the cost of reducing unemployment is higher inflation 
B) nothing but good comes from reducing unemployment 
C) the cost of reducing inflation is lower unemployment 
D) aggregate supply and aggregate demand will always be equal at the potential output level 
E) the best economic policy is one that attempts to make the rate of inflation equal to the rate of unemployment 
A) the cost of reducing unemployment is higher inflation 
B) nothing but good comes from reducing unemployment 
C) the cost of reducing inflation is lower unemployment 
D) aggregate supply and aggregate demand will always be equal at the potential output level 
E) the best economic policy is one that attempts to make the rate of inflation equal to the rate of unemployment

Question 2

In the early 1960s, the discovery of the Phillips curve relationship caused economists and policy makers to think that they understood the tradeoffs between

Accepted Answer

A) aggregate supply and aggregate demand 
B) excess aggregate supply and excess aggregate demand 
C) inflation and unemployment 
D) monetary and fiscal policy 
E) rule-making and discretionary policy 
A) aggregate supply and aggregate demand 
B) excess aggregate supply and excess aggregate demand 
C) inflation and unemployment 
D) monetary and fiscal policy 
E) rule-making and discretionary policy

Question 3

Which of the following is not consistent with a self-correcting economy?

Accepted Answer

A) Market forces work relatively well in pushing the economy to potential GDP. 
B) Prices and wages are flexible. 
C) A contractionary gap is corrected through falling wages and prices. 
D) The short-run aggregate supply tends to shift until it intersects aggregate demand at potential GDP. 
E) An active approach to a recession or depression. 
A) Market forces work relatively well in pushing the economy to potential GDP. 
B) Prices and wages are flexible. 
C) A contractionary gap is corrected through falling wages and prices. 
D) The short-run aggregate supply tends to shift until it intersects aggregate demand at potential GDP. 
E) An active approach to a recession or depression.

Question 4

If an economist of the rational expectations school were advising a policy maker, the advice most likely to be given would be:

Accepted Answer

A) Don't use discretionary policy if recognition lags are long. 
B) Don't use discretionary policy if activity lags are long. 
C) Don't use fiscal policy if effectiveness lags are long. 
D) Don't use monetary policy if implementation lags are long. 
E) Don't use discretionary policy. 
A) Don't use discretionary policy if recognition lags are long. 
B) Don't use discretionary policy if activity lags are long. 
C) Don't use fiscal policy if effectiveness lags are long. 
D) Don't use monetary policy if implementation lags are long. 
E) Don't use discretionary policy.

Question 5

In its original form, the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

Accepted Answer

A) True 
 B)False

Question 6

The short-run Phillips curve shows that

Accepted Answer

A) the economy can have low inflation and low unemployment simultaneously 
B) the economy can have high inflation and high unemployment simultaneously 
C) a reduction in unemployment comes at the expense of lower inflation 
D) a reduction in unemployment comes at the expense of higher inflation 
E) a reduction in inflation comes at the expense of lower unemployment 
A) the economy can have low inflation and low unemployment simultaneously 
B) the economy can have high inflation and high unemployment simultaneously 
C) a reduction in unemployment comes at the expense of lower inflation 
D) a reduction in unemployment comes at the expense of higher inflation 
E) a reduction in inflation comes at the expense of lower unemployment

Question 7

Which of the following is not a valid criticism of discretionary fiscal policy?

Accepted Answer

A) Implementation of fiscal policy is sometimes difficult. 
B) Time lags in fiscal policy are long. 
C) Fiscal policy works only during periods of stagflation. 
D) Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income. 
E) Fiscal policy might have undesirable long-term effects on aggregate supply. 
A) Implementation of fiscal policy is sometimes difficult. 
B) Time lags in fiscal policy are long. 
C) Fiscal policy works only during periods of stagflation. 
D) Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income. 
E) Fiscal policy might have undesirable long-term effects on aggregate supply.

Question 8

Exhibit 17-1  
-According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?

Accepted Answer

A) The SRAS curve will shift to the left. 
B) The SRAS curve will shift to the right. 
C) Either the money supply or government spending should be increased. 
D) Either the money supply or government spending should be decreased. 
E) Aggregate demand should be decreased. 
A) The SRAS curve will shift to the left. 
B) The SRAS curve will shift to the right. 
C) Either the money supply or government spending should be increased. 
D) Either the money supply or government spending should be decreased. 
E) Aggregate demand should be decreased.

Question 9

According to the __________ approach, __________ policy may __________ the instability of the economy.

Accepted Answer

A) passive, automatic, increase 
B) passive, discretionary, increase 
C) passive, discretionary, decrease 
D) active, discretionary, increase 
E) active, automatic, decrease 
A) passive, automatic, increase 
B) passive, discretionary, increase 
C) passive, discretionary, decrease 
D) active, discretionary, increase 
E) active, automatic, decrease

Question 10

Economists of the rational expectations school

Accepted Answer

A) have no confidence in the ability of workers and firms to observe and react to economic events 
B) believe workers and firms behave the same regardless of what the Fed does 
C) have great faith in the ability of monetary policy makers to maintain a full employment economy with stable prices 
D) believe that effective monetary policy can shift the potential level of output to the right 
E) believe workers and firms make decisions based on what they think monetary policy will be in the future 
A) have no confidence in the ability of workers and firms to observe and react to economic events 
B) believe workers and firms behave the same regardless of what the Fed does 
C) have great faith in the ability of monetary policy makers to maintain a full employment economy with stable prices 
D) believe that effective monetary policy can shift the potential level of output to the right 
E) believe workers and firms make decisions based on what they think monetary policy will be in the future

Question 11

The inflation associated with the oil embargoes of the 1970s resulted in

Accepted Answer

A) reduced unemployment because aggregate demand increased 
B) reduced unemployment because aggregate demand fell 
C) increased unemployment because aggregate demand increased 
D) increased unemployment because aggregate demand fell 
E) increased unemployment because aggregate supply fell 
A) reduced unemployment because aggregate demand increased 
B) reduced unemployment because aggregate demand fell 
C) increased unemployment because aggregate demand increased 
D) increased unemployment because aggregate demand fell 
E) increased unemployment because aggregate supply fell

Question 12

During the period __________, the short-run Phillips curve for the United States was farthest from the origin.

Accepted Answer

A) 1960 to 1964 
B) 1964 to 1969 
C) 1970 to 1973 
D) 1974 to 1983 
E) 1984 to 1989 
A) 1960 to 1964 
B) 1964 to 1969 
C) 1970 to 1973 
D) 1974 to 1983 
E) 1984 to 1989

Question 13

The natural rate hypothesis states that in the long run,

Accepted Answer

A) economic policy can reduce both inflation and unemployment 
B) the economy's natural rate of annual growth is approximately 3% 
C) monetary and fiscal policy have their greatest effect on the rate of unemployment 
D) the Phillips curve is horizontal 
E) the economy tends toward the natural rate of unemployment 
A) economic policy can reduce both inflation and unemployment 
B) the economy's natural rate of annual growth is approximately 3% 
C) monetary and fiscal policy have their greatest effect on the rate of unemployment 
D) the Phillips curve is horizontal 
E) the economy tends toward the natural rate of unemployment

Question 14

An implementation lag is the time it takes

Accepted Answer

A) policy makers to decide what to do 
B) for the chosen policy to have its full impact on the economy 
C) to identify trouble in the economy and to assess its severity 
D) to put a selected policy into action 
E) before a policy's effects on the economy are noticed by ordinary people 
A) policy makers to decide what to do 
B) for the chosen policy to have its full impact on the economy 
C) to identify trouble in the economy and to assess its severity 
D) to put a selected policy into action 
E) before a policy's effects on the economy are noticed by ordinary people

Question 15

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 16

Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP.

Accepted Answer

A) True 
 B)False

Question 17

Which of the following lags reduces the effectiveness of active policy?

Accepted Answer

A) both d and e 
B) all of the following 
C) self-correction lag 
D) recognition lag 
E) decision-making lag 
A) both d and e 
B) all of the following 
C) self-correction lag 
D) recognition lag 
E) decision-making lag

Question 18

Discretionary policy advocates believe

Accepted Answer

A) both c and d 
B) that self-correction forces work slowly 
C) that rules are effective in changing output 
D) in rational expectations 
E) none of the above 
A) both c and d 
B) that self-correction forces work slowly 
C) that rules are effective in changing output 
D) in rational expectations 
E) none of the above

Question 19

Exhibit 17-1  
-According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?

Accepted Answer

A) The SRAS curve will shift to the left. 
B) The SRAS curve will shift to the right. 
C) The Fed or the government should act to shift the aggregate demand curve to the right. 
D) Either the money supply or government spending should be decreased. 
E) Aggregate demand should be decreased. 
A) The SRAS curve will shift to the left. 
B) The SRAS curve will shift to the right. 
C) The Fed or the government should act to shift the aggregate demand curve to the right. 
D) Either the money supply or government spending should be decreased. 
E) Aggregate demand should be decreased.

Question 20

If the economy were in a recession, which of the following policies would a person who favors an active approach to policy be most likely to support?

Accepted Answer

A) The economy should be left to cure itself without government intervention. 
B) The Fed should sell U.S. government securities in its open-market operations. 
C) The Fed should raise the discount rate. 
D) Government purchases should increase. 
E) The Fed should raise the required reserve ratio. 
A) The economy should be left to cure itself without government intervention. 
B) The Fed should sell U.S. government securities in its open-market operations. 
C) The Fed should raise the discount rate. 
D) Government purchases should increase. 
E) The Fed should raise the required reserve ratio.

Exam 17: Macro Policy Debate: Active or Passive

One way of expressing the meaning of the short-run Phillips curve is to say that

In the early 1960s, the discovery of the Phillips curve relationship caused economists and policy makers to think that they understood the tradeoffs between

Which of the following is not consistent with a self-correcting economy?

If an economist of the rational expectations school were advising a policy maker, the advice most likely to be given would be:

In its original form, the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

The short-run Phillips curve shows that

Which of the following is not a valid criticism of discretionary fiscal policy?

Exhibit 17-1 -According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?

According to the __________ approach, __________ policy may __________ the instability of the economy.

Economists of the rational expectations school

The inflation associated with the oil embargoes of the 1970s resulted in

During the period __________, the short-run Phillips curve for the United States was farthest from the origin.

The natural rate hypothesis states that in the long run,

An implementation lag is the time it takes

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

Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP.

Which of the following lags reduces the effectiveness of active policy?

Discretionary policy advocates believe

Exhibit 17-1 -According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?

If the economy were in a recession, which of the following policies would a person who favors an active approach to policy be most likely to support?

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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According to the approach, policy may __ the instability of the economy.