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

One of the reasons fiscal and monetary policy can stimulate output and employment in the short run is that nominal wages increase faster than the price level.

Accepted Answer

A) True 
 B)False

Question 3

An economy experiencing an expansionary gap

Accepted Answer

A)  operates in an environment in which labor shortages drive up money wages,real wages,and prices 
B)  results in an excess supply of labor due to rising money wages and prices 
C)  will self-correct as rising money wages decrease faster than rising prices 
D)  will experience rising money wages and prices but falling real wages 
E)  will have excessive involuntary unemployment (e.g.,cyclical unemployment) 
A)  operates in an environment in which labor shortages drive up money wages,real wages,and prices 
B)  results in an excess supply of labor due to rising money wages and prices 
C)  will self-correct as rising money wages decrease faster than rising prices 
D)  will experience rising money wages and prices but falling real wages 
E)  will have excessive involuntary unemployment (e.g.,cyclical unemployment)

Question 4

If the time for an economy to self-correct is shorter than the active policy lags,

Accepted Answer

A)  active policy should be strengthened 
B)  active policy will likely be destabilizing 
C)  the passive policy case is weakened 
D)  the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve 
E)  active policy will work better than passive policy 
A)  active policy should be strengthened 
B)  active policy will likely be destabilizing 
C)  the passive policy case is weakened 
D)  the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve 
E)  active policy will work better than passive policy

Question 5

Which of the following is consistent with an active approach to policy?

Accepted Answer

A)  The natural rate of unemployment is uncertain. 
B)  Wages and prices adjust relatively quickly. 
C)  The short-run aggregate supply curve is slow to shift in the presence of a contractionary gap. 
D)  The size of the multiplier is irrelevant. 
E)  Self-correction lags are not a problem. 
A)  The natural rate of unemployment is uncertain. 
B)  Wages and prices adjust relatively quickly. 
C)  The short-run aggregate supply curve is slow to shift in the presence of a contractionary gap. 
D)  The size of the multiplier is irrelevant. 
E)  Self-correction lags are not a problem.

Question 6

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 7

Exhibit 16-3  
-In Exhibit 16-3,the most desirable of the points shown is

Accepted Answer

A)  point a 
B)  point b 
C)  point c 
D)  point d 
E)  point e 
A)  point a 
B)  point b 
C)  point c 
D)  point d 
E)  point e

Question 8

The early Phillips curve showed a tradeoff between unemployment and inflation because it was drawn for a period in which the main source of instability was aggregate demand.

Accepted Answer

A) True 
 B)False

Question 9

One often-cited rationale for a fixed-growth-rate monetary policy is that

Accepted Answer

A)  it is too expensive to pay a staff to continually make adjustments in policy 
B)  although it's possible to determine what's happening in the economy,it's not possible to determine what to do about it 
C)  it is not possible to determine with any certainty what's happening in the economy,so it's easy to make a mistake with active policy 
D)  we know that the economy is increasing at a fixed rate year after year,so a fixed rate of growth in the money supply is justified 
E)  then the Federal Reserve would be superfluous and we could eliminate one large bureaucracy 
A)  it is too expensive to pay a staff to continually make adjustments in policy 
B)  although it's possible to determine what's happening in the economy,it's not possible to determine what to do about it 
C)  it is not possible to determine with any certainty what's happening in the economy,so it's easy to make a mistake with active policy 
D)  we know that the economy is increasing at a fixed rate year after year,so a fixed rate of growth in the money supply is justified 
E)  then the Federal Reserve would be superfluous and we could eliminate one large bureaucracy

Question 10

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 11

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 12

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

Accepted Answer

A)  It is likely that policies will be subject to time lags. 
B)  Prolonged unemployment may cause the economy's potential real GDP to fall. 
C)  Workers' skills may grow rusty during a prolonged recession. 
D)  Unemployed workers may drop out of the labor force during a prolonged recession. 
E)  Firms may neglect their capital stock during a prolonged recession. 
A)  It is likely that policies will be subject to time lags. 
B)  Prolonged unemployment may cause the economy's potential real GDP to fall. 
C)  Workers' skills may grow rusty during a prolonged recession. 
D)  Unemployed workers may drop out of the labor force during a prolonged recession. 
E)  Firms may neglect their capital stock during a prolonged recession.

Question 13

Before discovering that the short-run Phillips curve does not show the true long-run situation,policy makers were successful in trying to bring the economy to the zero-inflation,zero-unemployment point on the short-run curve.

Accepted Answer

A) True 
 B)False

Question 14

In general,the Fed has not embraced a fixed-growth-rate monetary policy because

Accepted Answer

A)  its adoption would cost them their jobs 
B)  no influential economists have yet come out in favor of it 
C)  the Fed has to answer to Congress,and Congress is not in favor of it 
D)  the Fed prefers active fiscal policy 
E)  they believe the economy is too complex and too changeable to make such a policy work consistently 
A)  its adoption would cost them their jobs 
B)  no influential economists have yet come out in favor of it 
C)  the Fed has to answer to Congress,and Congress is not in favor of it 
D)  the Fed prefers active fiscal policy 
E)  they believe the economy is too complex and too changeable to make such a policy work consistently

Question 15

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.

Accepted Answer

A) True 
 B)False

Question 16

When self-correction works to eliminate an expansionary gap,

Accepted Answer

A)  both money wages and real wages increase 
B)  money wages increase while real wages decrease 
C)  both money wages and real wages decrease 
D)  money wages decrease while real wages increase 
E)  money wages remain unchanged 
A)  both money wages and real wages increase 
B)  money wages increase while real wages decrease 
C)  both money wages and real wages decrease 
D)  money wages decrease while real wages increase 
E)  money wages remain unchanged

Question 17

Which of the following is not a potential problem with active policy for policy makers?

Accepted Answer

A)  predicting what would happen with a passive approach 
B)  lacking the tools needed to achieve the desired result quickly 
C)  not predicting the effects of an active policy on the economy's key performance measures 
D)  fiscal and monetary policy makers not working together 
E)  failing to implement the appropriate policy because of political obstacles 
A)  predicting what would happen with a passive approach 
B)  lacking the tools needed to achieve the desired result quickly 
C)  not predicting the effects of an active policy on the economy's key performance measures 
D)  fiscal and monetary policy makers not working together 
E)  failing to implement the appropriate policy because of political obstacles

Question 18

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 19

An economy that self-corrects an expansionary gap will experience stagflation.

Accepted Answer

A) True 
 B)False

Question 20

All of the following are true along a long-run Phillips curve except one.Which is the exception?

Accepted Answer

A)  unemployment is at the natural rate 
B)  employers and workers have the time and ability to adjust fully to unexpected changes in aggregate demand 
C)  the only choices for policy makers are different levels of inflation 
D)  inflation and unemployment are inversely related 
E)  changes in aggregate demand will have no effect in the long run on unemployment 
A)  unemployment is at the natural rate 
B)  employers and workers have the time and ability to adjust fully to unexpected changes in aggregate demand 
C)  the only choices for policy makers are different levels of inflation 
D)  inflation and unemployment are inversely related 
E)  changes in aggregate demand will have no effect in the long run on unemployment

Exam 17: Macro Policy Debate: Active or Passive

A Phillips curve shows the relationship between

One of the reasons fiscal and monetary policy can stimulate output and employment in the short run is that nominal wages increase faster than the price level.

An economy experiencing an expansionary gap

If the time for an economy to self-correct is shorter than the active policy lags,

Which of the following is consistent with an active approach to policy?

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.

Exhibit 16-3 -In Exhibit 16-3,the most desirable of the points shown is

The early Phillips curve showed a tradeoff between unemployment and inflation because it was drawn for a period in which the main source of instability was aggregate demand.

One often-cited rationale for a fixed-growth-rate monetary policy is that

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

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

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

Before discovering that the short-run Phillips curve does not show the true long-run situation,policy makers were successful in trying to bring the economy to the zero-inflation,zero-unemployment point on the short-run curve.

In general,the Fed has not embraced a fixed-growth-rate monetary policy because

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.

When self-correction works to eliminate an expansionary gap,

Which of the following is not a potential problem with active policy for policy makers?

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.

An economy that self-corrects an expansionary gap will experience stagflation.

All of the following are true along a long-run Phillips curve except one.Which is the exception?

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand, Supply, and Markets

Introduction to Macroeconomics

Productivity and Growth

Tracking the US Economy

Unemployment and Inflation

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

Monetary Theory and Policy

International Trade

International Finance

Developing and Transitional Economies

Understanding Graphs

National Income Accounts

Variable Net Exports

Variable Net Exports Revisited

The Algebra of Income and Expenditure

The Algebra of Demand-Side Equilibrium

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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.