Question 1

A Phillips curve shows the relationship between

Accepted Answer

A) the price level and the number of workers unemployed 
B) the inflation rate and the unemployment rate 
C) the unemployment rate and the level of GDP 
D) the inflation rate and the supply of money 
E) the inflation rate and the level of government spending 
A) the price level and the number of workers unemployed 
B) the inflation rate and the unemployment rate 
C) the unemployment rate and the level of GDP 
D) the inflation rate and the supply of money 
E) the inflation rate and the level of government spending

Question 2

The reason why self-correction works to close a contractionary gap is because

Accepted Answer

A) a labor shortage causes money wages to increase 
B) a labor surplus causes money wages to increase 
C) a labor shortage causes money wages to fall 
D) a labor surplus causes money wages to fall 
E) falling money wages shift the short-run aggregate supply curve to the left 
A) a labor shortage causes money wages to increase 
B) a labor surplus causes money wages to increase 
C) a labor shortage causes money wages to fall 
D) a labor surplus causes money wages to fall 
E) falling money wages shift the short-run aggregate supply curve to the left

Question 3

If we observe an economy adjusting to potential GDP as prices fall and real output increases,

Accepted Answer

A) it was experiencing an expansionary gap 
B) the correction involves a shift of the AD curve 
C) it was experiencing a contractionary gap 
D) self-correction is not the process that is occurring 
E) there are widespread labor shortages 
A) it was experiencing an expansionary gap 
B) the correction involves a shift of the AD curve 
C) it was experiencing a contractionary gap 
D) self-correction is not the process that is occurring 
E) there are widespread labor shortages

Question 4

According to the rational expectations school,

Accepted Answer

A) on average people have very little idea of what to expect from government policy makers 
B) people form expectations by focusing only on the private sector 
C) changes in the expected price level shift the aggregate demand curve 
D) people do not consider likely government policies when forming expectations, choosing to remain rationally ignorant 
E) people form expectations, in part, by considering the probable future actions of government policy makers 
A) on average people have very little idea of what to expect from government policy makers 
B) people form expectations by focusing only on the private sector 
C) changes in the expected price level shift the aggregate demand curve 
D) people do not consider likely government policies when forming expectations, choosing to remain rationally ignorant 
E) people form expectations, in part, by considering the probable future actions of government policy makers

Question 5

In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?

Accepted Answer

A) cut taxes 
B) increase government spending 
C) reduce interest rates 
D) increase the money supply 
E) do nothing 
A) cut taxes 
B) increase government spending 
C) reduce interest rates 
D) increase the money supply 
E) do nothing

Question 6

Which of the following pieces of information is not necessary for active policy to work successfully?

Accepted Answer

A) All of the following are necessary for good policy. 
B) the size of potential output or the natural rate of unemployment 
C) the speed of self-correction 
D) the slope of the short-run aggregate supply curve 
E) the size of the multiplier 
A) All of the following are necessary for good policy. 
B) the size of potential output or the natural rate of unemployment 
C) the speed of self-correction 
D) the slope of the short-run aggregate supply curve 
E) the size of the multiplier

Question 7

In general, we would expect those who favor a passive approach to policy to believe in

Accepted Answer

A) slow rather than rapid self-correction 
B) potentially incorrect rather than rational price expectations 
C) short, certain rather than long, variable policy lags 
D) a negatively sloped rather than vertical Phillips curve 
E) the natural rate hypothesis 
A) slow rather than rapid self-correction 
B) potentially incorrect rather than rational price expectations 
C) short, certain rather than long, variable policy lags 
D) a negatively sloped rather than vertical Phillips curve 
E) the natural rate hypothesis

Question 8

The time inconsistency problem occurs when

Accepted Answer

A) all of the following occur 
B) expectations are slow to adjust to reality, causing output to vary in the short run 
C) public officials' reelection goals generate short-term economic gains at the expense of long-term inflation 
D) execution lags are shorter than self-correction lags 
E) policy makers execute one type of policy after influencing the public to anticipate another type 
A) all of the following occur 
B) expectations are slow to adjust to reality, causing output to vary in the short run 
C) public officials' reelection goals generate short-term economic gains at the expense of long-term inflation 
D) execution lags are shorter than self-correction lags 
E) policy makers execute one type of policy after influencing the public to anticipate another type

Question 9

On the Phillips curve graph, the immediate effects of a discretionary increase in government spending are represented by a

Accepted Answer

A) rightward shift of the aggregate demand curve 
B) leftward shift of the aggregate demand curve 
C) rightward shift of the Phillips curve 
D) leftward shift of the Phillips curve 
E) movement along the Phillips curve 
A) rightward shift of the aggregate demand curve 
B) leftward shift of the aggregate demand curve 
C) rightward shift of the Phillips curve 
D) leftward shift of the Phillips curve 
E) movement along the Phillips curve

Question 10

The unemployment rate can remain below the natural rate, but only

Accepted Answer

A) in the long run 
B) with continuous deflation 
C) with a continuously increasing inflation rate 
D) with a series of adverse supply shocks 
E) if the money supply is constant 
A) in the long run 
B) with continuous deflation 
C) with a continuously increasing inflation rate 
D) with a series of adverse supply shocks 
E) if the money supply is constant

Question 11

Those of the rational expectations school

Accepted Answer

A) favor monetary rules because they believe we know too little about how the economy works 
B) favor monetary rules so that workers and firms do not get any unanticipated surprises from the Fed 
C) are those who favor an "active approach" to policy and therefore reject monetary rules 
D) oppose any monetary rules because they believe rules impede the natural self-correcting mechanism of the economy 
E) neither oppose nor favor monetary rules 
A) favor monetary rules because they believe we know too little about how the economy works 
B) favor monetary rules so that workers and firms do not get any unanticipated surprises from the Fed 
C) are those who favor an "active approach" to policy and therefore reject monetary rules 
D) oppose any monetary rules because they believe rules impede the natural self-correcting mechanism of the economy 
E) neither oppose nor favor monetary rules

Question 12

Suppose that in 2004 the Fed announced a policy of rapid growth in the money supply, but then put the brakes on money expansion without any announcement. If in 2005 Fed officials announce again that an expansion is planned, the most likely result is that

Accepted Answer

A) people will believe the announcement since the conditions that created a need for the expansion are probably still in effect 
B) people will believe the announcement since they will believe that having failed to implement the expansion previously, the Fed still plans to do so 
C) people will not believe the announcement since they will believe that the conditions that created a need for the expansion must have changed in the meantime 
D) people will not believe the announcement since they will believe that having failed to implement the expansion previously, the Fed will probably fail again 
E) there will be more uncertainty about the Fed following through on the policies it announces 
A) people will believe the announcement since the conditions that created a need for the expansion are probably still in effect 
B) people will believe the announcement since they will believe that having failed to implement the expansion previously, the Fed still plans to do so 
C) people will not believe the announcement since they will believe that the conditions that created a need for the expansion must have changed in the meantime 
D) people will not believe the announcement since they will believe that having failed to implement the expansion previously, the Fed will probably fail again 
E) there will be more uncertainty about the Fed following through on the policies it announces

Question 13

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) none of the above 
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) none of the above

Question 14

An economy in which actual GDP is $10 billion below potential GDP

Accepted Answer

A) is experiencing an expansionary gap 
B) will have the short run aggregate supply shifting outward, if the passive approach is correct 
C) will typically have the short-run aggregate supply curve shifting to the left 
D) will likely have falling prices but rising wages 
E) will experience stagflation (i.e., rising prices and falling output) 
A) is experiencing an expansionary gap 
B) will have the short run aggregate supply shifting outward, if the passive approach is correct 
C) will typically have the short-run aggregate supply curve shifting to the left 
D) will likely have falling prices but rising wages 
E) will experience stagflation (i.e., rising prices and falling output)

Question 15

For an economy to eliminate inflation once people have begun to anticipate inflation,

Accepted Answer

A) all of the following could occur 
B) credibility of policy is crucial to the cost of lowering inflation 
C) actual inflation must be less than anticipated inflation 
D) cold-turkey solutions will reduce inflation relatively rapidly 
E) a recession will have to be endured until expectations have been reduced 
A) all of the following could occur 
B) credibility of policy is crucial to the cost of lowering inflation 
C) actual inflation must be less than anticipated inflation 
D) cold-turkey solutions will reduce inflation relatively rapidly 
E) a recession will have to be endured until expectations have been reduced

Question 16

An important implication of the natural rate hypothesis is that regardless of concerns about __________, the government policy that results in __________ is generally the optimal long-run policy.

Accepted Answer

A) unemployment; low inflation 
B) inflation; low unemployment 
C) unemployment; low interest rates 
D) inflation; low interest rates 
E) inflation; a stable foreign exchange rate 
A) unemployment; low inflation 
B) inflation; low unemployment 
C) unemployment; low interest rates 
D) inflation; low interest rates 
E) inflation; a stable foreign exchange rate

Question 17

The short-run Phillips curve is based upon labor contracts that reflect a given expected

Accepted Answer

A) price level 
B) unemployment level 
C) money supply 
D) aggregate demand 
E) unemployment rate 
A) price level 
B) unemployment level 
C) money supply 
D) aggregate demand 
E) unemployment rate

Question 18

Which of the following did not occur during the first term of George W. Bush (2001-2005)?

Accepted Answer

A) President Bush proposed tax cuts to stimulate a weak economy 
B) Tax cuts and increased government spending offered the most fiscal stimulus in a decade 
C) Expansionary fiscal policy combined with the Fed's interest rate cuts provided the greatest stimulus of aggregate demand since World War II 
D) The unemployment rate dropped significantly in the first two years after the recession 
E) In the year before the 2004 presidential election, the economy added 2 million jobs 
A) President Bush proposed tax cuts to stimulate a weak economy 
B) Tax cuts and increased government spending offered the most fiscal stimulus in a decade 
C) Expansionary fiscal policy combined with the Fed's interest rate cuts provided the greatest stimulus of aggregate demand since World War II 
D) The unemployment rate dropped significantly in the first two years after the recession 
E) In the year before the 2004 presidential election, the economy added 2 million jobs

Question 19

In total, the lags associated with discretionary policy can extend from the time a

Accepted Answer

A) problem occurs in the economy through the time it is recognized by the government 
B) problem is recognized by the government through the time an agreed-on policy is approved 
C) policy is approved through the time the policy is implemented 
D) policy is implemented through the time its impact is felt in the economy 
E) problem occurs in the economy through the time a corrective policy has an impact on the economy 
A) problem occurs in the economy through the time it is recognized by the government 
B) problem is recognized by the government through the time an agreed-on policy is approved 
C) policy is approved through the time the policy is implemented 
D) policy is implemented through the time its impact is felt in the economy 
E) problem occurs in the economy through the time a corrective policy has an impact on the economy

Question 20

The __________ lag is typically longer for fiscal policy than monetary policy.

Accepted Answer

A) both b and d 
B) decision-making 
C) effectiveness 
D) implementation 
E) recognition 
A) both b and d 
B) decision-making 
C) effectiveness 
D) implementation 
E) recognition

Exam 17: Macro Policy Debate: Active or Passive

A Phillips curve shows the relationship between

The reason why self-correction works to close a contractionary gap is because

If we observe an economy adjusting to potential GDP as prices fall and real output increases,

According to the rational expectations school,

In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?

Which of the following pieces of information is not necessary for active policy to work successfully?

In general, we would expect those who favor a passive approach to policy to believe in

The time inconsistency problem occurs when

On the Phillips curve graph, the immediate effects of a discretionary increase in government spending are represented by a

The unemployment rate can remain below the natural rate, but only

Those of the rational expectations school

Suppose that in 2004 the Fed announced a policy of rapid growth in the money supply, but then put the brakes on money expansion without any announcement. If in 2005 Fed officials announce again that an expansion is planned, the most likely result is that

Those who favor an active approach to policy believe that

An economy in which actual GDP is $10 billion below potential GDP

For an economy to eliminate inflation once people have begun to anticipate inflation,

An important implication of the natural rate hypothesis is that regardless of concerns about __________, the government policy that results in __________ is generally the optimal long-run policy.

The short-run Phillips curve is based upon labor contracts that reflect a given expected

Which of the following did not occur during the first term of George W. Bush (2001-2005)?

In total, the lags associated with discretionary policy can extend from the time a

The __________ lag is typically longer for fiscal policy than monetary policy.

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

Filters

An important implication of the natural rate hypothesis is that regardless of concerns about , the government policy that results in is generally the optimal long-run policy.