Question 1

If an economy adjusts to potential GDP accompanied by a rising price level and a falling output level,

Accepted Answer

A)  all of the following are correct 
B)  an active approach to correcting a contractionary gap is being used 
C)  an active approach to correcting an expansionary gap is being used 
D)  a passive approach to correcting a contractionary gap is being used 
E)  a passive approach to correcting an expansionary gap is being used 
A)  all of the following are correct 
B)  an active approach to correcting a contractionary gap is being used 
C)  an active approach to correcting an expansionary gap is being used 
D)  a passive approach to correcting a contractionary gap is being used 
E)  a passive approach to correcting an expansionary gap is being used

Question 2

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 3

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

Accepted Answer

A) True 
 B)False

Question 4

If self-correction works,a policy that continually increases aggregate demand will

Accepted Answer

A)  have a strong impact on GDP 
B)  cause permanent inflation 
C)  eventually cause the SRAS curve to shift to the right 
D)  have relatively large impact on GDP 
E)  will cause inflation to continually diminish 
A)  have a strong impact on GDP 
B)  cause permanent inflation 
C)  eventually cause the SRAS curve to shift to the right 
D)  have relatively large impact on GDP 
E)  will cause inflation to continually diminish

Question 5

The time it takes to identify and examine the nature and seriousness of an economic problem is the

Accepted Answer

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

Question 6

If the advice of those who favor a passive approach to policy is correct,how would a contractionary gap eventually close?

Accepted Answer

A)  The aggregate demand curve would shift rightward. 
B)  The aggregate demand curve would shift leftward. 
C)  The short-run aggregate supply curve would shift rightward. 
D)  The short-run aggregate supply curve would shift leftward. 
E)  There would be a movement upward along the aggregate demand curve. 
A)  The aggregate demand curve would shift rightward. 
B)  The aggregate demand curve would shift leftward. 
C)  The short-run aggregate supply curve would shift rightward. 
D)  The short-run aggregate supply curve would shift leftward. 
E)  There would be a movement upward along the aggregate demand curve.

Question 7

According to the natural rate hypothesis,

Accepted Answer

A)  government policy makers can influence the tradeoff between inflation and unemployment in the long run but not in the short run 
B)  government policy makers can target both stable interest rates and a stable money supply in the long run but not in the short run 
C)  government policy makers can target both stable interest rates and a stable money supply in the short run but not in the long run 
D)  the economy tends toward the natural rate of unemployment only when the government provides the appropriate demand stimulus 
E)  government policy makers can influence the tradeoff between inflation and unemployment in the short run but not in the long run 
A)  government policy makers can influence the tradeoff between inflation and unemployment in the long run but not in the short run 
B)  government policy makers can target both stable interest rates and a stable money supply in the long run but not in the short run 
C)  government policy makers can target both stable interest rates and a stable money supply in the short run but not in the long run 
D)  the economy tends toward the natural rate of unemployment only when the government provides the appropriate demand stimulus 
E)  government policy makers can influence the tradeoff between inflation and unemployment in the short run but not in the long run

Question 8

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?

Accepted Answer

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

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

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 11

Exhibit 16-4  
-If the economy in Exhibit 16-4 is initially at point c and aggregate demand is stable,the economy will

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 12

Exhibit 16-3  
-In Exhibit 16-3,the natural rate of unemployment is

Accepted Answer

A)  2 percent because it occurs at the intersection of the curves 
B)  4 percent because it is the midpoint of the short-run curve 
C)  4 percent because it is on the long-run curve 
D)  8 percent because it is the most the economy can attain with high inflation 
E)  10 percent because it is the most the economy can attain 
A)  2 percent because it occurs at the intersection of the curves 
B)  4 percent because it is the midpoint of the short-run curve 
C)  4 percent because it is on the long-run curve 
D)  8 percent because it is the most the economy can attain with high inflation 
E)  10 percent because it is the most the economy can attain

Question 13

The natural rate hypothesis claims that policy makers can have considerable success in reducing unemployment through monetary and fiscal policy.

Accepted Answer

A) True 
 B)False

Question 14

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 15

The long-run Phillips curve

Accepted Answer

A)  represents the fact that inflation is consistent with many unemployment rates 
B)  represents the fact that inflation will not influence unemployment in the long run 
C)  has a negative slope because the short-run Phillips curve shifts up and to the left 
D)  shows that expected inflation can never equal actual inflation 
E)  shows that unemployment is a short run,but not a long run,phenomenon 
A)  represents the fact that inflation is consistent with many unemployment rates 
B)  represents the fact that inflation will not influence unemployment in the long run 
C)  has a negative slope because the short-run Phillips curve shifts up and to the left 
D)  shows that expected inflation can never equal actual inflation 
E)  shows that unemployment is a short run,but not a long run,phenomenon

Question 16

Economists of the rational expectations school believe that expansionary monetary policy is fully effective only if

Accepted Answer

A)  the policy is anticipated by workers and firms 
B)  aggregate supply shifts to the left 
C)  the economy is operating at or above its potential output level 
D)  policy makers follow through on their previously announced plans 
E)  the policy is totally unexpected 
A)  the policy is anticipated by workers and firms 
B)  aggregate supply shifts to the left 
C)  the economy is operating at or above its potential output level 
D)  policy makers follow through on their previously announced plans 
E)  the policy is totally unexpected

Question 17

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 18

The long-run Phillips curve is

Accepted Answer

A)  downward-sloping 
B)  vertical 
C)  upward-sloping 
D)  horizontal 
E)  U-shaped 
A)  downward-sloping 
B)  vertical 
C)  upward-sloping 
D)  horizontal 
E)  U-shaped

Question 19

Exhibit 16-3  
-In Exhibit 16-3,if the economy started near point b,and government purchases increased,we would expect the economy in the short run to move to

Accepted Answer

A)  point a 
B)  point e 
C)  point c 
D)  point d 
E)  none of the above; the economy would remain at point b 
A)  point a 
B)  point e 
C)  point c 
D)  point d 
E)  none of the above; the economy would remain at point b

Question 20

According to the rational expectations school,when monetary policy makers do exactly what is expected of them,their efforts to stimulate the economy will have no effect either on output or employment.

Accepted Answer

A) True 
 B)False

Exam 17: Macro Policy Debate: Active or Passive

If an economy adjusts to potential GDP accompanied by a rising price level and a falling output level,

Economists of the rational expectations school

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

If self-correction works,a policy that continually increases aggregate demand will

The time it takes to identify and examine the nature and seriousness of an economic problem is the

If the advice of those who favor a passive approach to policy is correct,how would a contractionary gap eventually close?

According to the natural rate hypothesis,

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?

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

Those of the rational expectations school

Exhibit 16-4 -If the economy in Exhibit 16-4 is initially at point c and aggregate demand is stable,the economy will

Exhibit 16-3 -In Exhibit 16-3,the natural rate of unemployment is

The natural rate hypothesis claims that policy makers can have considerable success in reducing unemployment through monetary and fiscal policy.

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

The long-run Phillips curve

Economists of the rational expectations school believe that expansionary monetary policy is fully effective only if

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

The long-run Phillips curve is

Exhibit 16-3 -In Exhibit 16-3,if the economy started near point b,and government purchases increased,we would expect the economy in the short run to move to

According to the rational expectations school,when monetary policy makers do exactly what is expected of them,their efforts to stimulate the economy will have no effect either on output or employment.

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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