Exam 17: Macro Policy Debate: Active or Passive

Some economists believe that in the long run the unemployment rate is independent of the inflation rate and so the Phillips curve becomes a vertical line.

Those who favor a passive approach to policy think that all of the following conditions will allow the economy to bring itself out of a contractionary gap except one. Which is the exception?

In general, the faster inflationary expectations adjust,

An increase in price expectations shifts the long-run Phillips curve, but not the short-run Phillips curve.

If inflationary expectations increase, we can infer that

If high unemployment lasts a long time, it could cause potential real GDP to fall.

According to the rational expectations school, when the economy is operating at the potential output level, a temporary decrease in unemployment is possible through appropriate monetary policy--but only if workers and employers are aware in advance of the Fed's intentions.

Policy makers may not know that the economy is in a recession until six months after the recession starts; this is a phenomenon known as the

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

The long-run Phillips curve

Which of the following statements supports the passive approach to a contractionary gap?

Opponents of inflation targets say that

Exhibit 17-2 -According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-2 attain equilibrium at potential output?

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

According to the natural rate hypothesis, unemployment can

To favor a passive approach to policy is to believe that the private sector is

Suppose that policy makers are concerned about a shortage of long-term capital investment. To remedy the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan is called the

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

Advocates of the passive approach to government economic policy believe that the government should lower tax rates when there is a contractionary gap.

The hypothesis that the economy tends toward the natural rate of unemployment in the long run is known as the