Question 1

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 2

Unemployment cannot be maintained below the natural rate,no matter what inflation rate is tolerated.

Accepted Answer

A) True 
 B)False

Question 3

The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflation expectations change.

Accepted Answer

A) True 
 B)False

Question 4

When self-correcting forces cure a contractionary gap,

Accepted Answer

A)  money wages and real wages both increase 
B)  money wages remain constant while real wages fall 
C)  money wages and real wages both decrease 
D)  money wages fall while real wages increase 
E)  real wages must increase regardless of what happens to money wages 
A)  money wages and real wages both increase 
B)  money wages remain constant while real wages fall 
C)  money wages and real wages both decrease 
D)  money wages fall while real wages increase 
E)  real wages must increase regardless of what happens to money wages

Question 5

Exhibit 16-1  
-According to those who favor an active approach to policy,how can the economy shown in Exhibit 16-1 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 6

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 7

Suppose we observe several years of falling inflation rates for an economy.Which of the following would best explain this phenomenon?

Accepted Answer

A)  Unemployment is probably at the natural rate. 
B)  The unemployment rate must be rising. 
C)  The unemployment rate must be below the natural rate. 
D)  The unemployment rate is probably above the natural rate. 
E)  Aggregate output must be increasing. 
A)  Unemployment is probably at the natural rate. 
B)  The unemployment rate must be rising. 
C)  The unemployment rate must be below the natural rate. 
D)  The unemployment rate is probably above the natural rate. 
E)  Aggregate output must be increasing.

Question 8

Those who favor a passive approach to policy believe that

Accepted Answer

A)  discretionary monetary policy can be used to help the economy since monetary policy lags are short 
B)  discretionary fiscal policy can be used to help the economy since fiscal policy lags are short 
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 can be used to help the economy since monetary policy lags are short 
B)  discretionary fiscal policy can be used to help the economy since fiscal policy lags are short 
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 9

One implication of the Phillips curve analysis is that

Accepted Answer

A)  unemployment rates below the natural rate are only possible in the long run 
B)  unemployment rates below the natural rate lead to falling rates of inflation in the long run 
C)  if inflationary expectations are accurate,the economy is on the short-run Phillips curve but not on the long-run Phillips curve 
D)  unemployment rates below the natural rate may be achieved only with rising inflation rates 
E)  the natural rate of unemployment is strictly a short-run phenomenon 
A)  unemployment rates below the natural rate are only possible in the long run 
B)  unemployment rates below the natural rate lead to falling rates of inflation in the long run 
C)  if inflationary expectations are accurate,the economy is on the short-run Phillips curve but not on the long-run Phillips curve 
D)  unemployment rates below the natural rate may be achieved only with rising inflation rates 
E)  the natural rate of unemployment is strictly a short-run phenomenon

Question 10

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 11

According to the natural rate hypothesis,the natural rate of unemployment is

Accepted Answer

A)  largely independent of the level of aggregate supply stimulus provided by fiscal or monetary policy 
B)  largely independent of the level of aggregate demand stimulus provided by fiscal or monetary policy 
C)  dependent on the level of aggregate supply stimulus provided by fiscal or monetary policy 
D)  dependent on the level of aggregate demand stimulus provided by fiscal or monetary policy 
E)  dependent on the size of the federal budget deficit or surplus 
A)  largely independent of the level of aggregate supply stimulus provided by fiscal or monetary policy 
B)  largely independent of the level of aggregate demand stimulus provided by fiscal or monetary policy 
C)  dependent on the level of aggregate supply stimulus provided by fiscal or monetary policy 
D)  dependent on the level of aggregate demand stimulus provided by fiscal or monetary policy 
E)  dependent on the size of the federal budget deficit or surplus

Question 12

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 13

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

Accepted Answer

A) True 
 B)False

Question 14

If a contractionary gap is cured by increasing aggregate demand,

Accepted Answer

A)  both c and e are correct 
B)  both d and e are correct 
C)  real wages fall because prices rise 
D)  prices rise causing real wages to increase 
E)  money wages decrease as prices decrease 
A)  both c and e are correct 
B)  both d and e are correct 
C)  real wages fall because prices rise 
D)  prices rise causing real wages to increase 
E)  money wages decrease as prices decrease

Question 15

An important implication of the natural rate hypothesis is that the government policy that results in low inflation is generally the optimal long-run policy

Accepted Answer

A)  only if there is no cyclical unemployment in the short run 
B)  only if there is no structural unemployment in the short run 
C)  regardless of concerns about unemployment 
D)  regardless of concerns about currency exchange rates 
E)  only if the dollar's exchange rate is stable 
A)  only if there is no cyclical unemployment in the short run 
B)  only if there is no structural unemployment in the short run 
C)  regardless of concerns about unemployment 
D)  regardless of concerns about currency exchange rates 
E)  only if the dollar's exchange rate is stable

Question 16

According to the rational expectations school,a correctly anticipated expansionary monetary policy will

Accepted Answer

A)  increase prices and real output 
B)  increase real output in the short run only 
C)  have no effect on prices or real output 
D)  decrease prices and real output 
E)  lead only to a higher price level 
A)  increase prices and real output 
B)  increase real output in the short run only 
C)  have no effect on prices or real output 
D)  decrease prices and real output 
E)  lead only to a higher price level

Question 17

Probably the most significant implication of the natural rate of unemployment hypothesis is that

Accepted Answer

A)  the natural rate of inflation tends toward zero 
B)  long-run policy should be directed toward controlling inflation rather than unemployment 
C)  the natural rate of unemployment can be reduced by accepting worsening inflation 
D)  the natural rate of unemployment is consistent only with a zero inflation rate in the long run 
E)  tax cuts stimulate the economy and lower inflation 
A)  the natural rate of inflation tends toward zero 
B)  long-run policy should be directed toward controlling inflation rather than unemployment 
C)  the natural rate of unemployment can be reduced by accepting worsening inflation 
D)  the natural rate of unemployment is consistent only with a zero inflation rate in the long run 
E)  tax cuts stimulate the economy and lower inflation

Question 18

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 19

According to the rational expectations school,people base their expectations about inflation on

Accepted Answer

A)  the announcement of a change in policy 
B)  weighted averages of previous inflation rates,with the most distant getting the heaviest weight 
C)  all information available to them 
D)  changes in monetary policy only 
E)  changes in both monetary and fiscal policy 
A)  the announcement of a change in policy 
B)  weighted averages of previous inflation rates,with the most distant getting the heaviest weight 
C)  all information available to them 
D)  changes in monetary policy only 
E)  changes in both monetary and fiscal policy

Question 20

The formulation of active policy is

Accepted Answer

A)  made easier if the natural unemployment rate can be easily calculated 
B)  made easier if the natural unemployment rate cannot be easily calculated 
C)  made more difficult if the natural unemployment rate can be easily calculated 
D)  made more difficult if the natural unemployment rate cannot be easily calculated 
E)  done without considering the natural unemployment rate because such a policy focuses on rules to follow in any unemployment situation 
A)  made easier if the natural unemployment rate can be easily calculated 
B)  made easier if the natural unemployment rate cannot be easily calculated 
C)  made more difficult if the natural unemployment rate can be easily calculated 
D)  made more difficult if the natural unemployment rate cannot be easily calculated 
E)  done without considering the natural unemployment rate because such a policy focuses on rules to follow in any unemployment situation

Exam 17: Macro Policy Debate: Active or Passive

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

Unemployment cannot be maintained below the natural rate,no matter what inflation rate is tolerated.

The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflation expectations change.

When self-correcting forces cure a contractionary gap,

Exhibit 16-1 -According to those who favor an active approach to policy,how can the economy shown in Exhibit 16-1 attain equilibrium at potential output?

Those who favor an active approach to policy believe that

Suppose we observe several years of falling inflation rates for an economy.Which of the following would best explain this phenomenon?

Those who favor a passive approach to policy believe that

One implication of the Phillips curve analysis is that

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

According to the natural rate hypothesis,the natural rate of unemployment is

The natural rate hypothesis states that in the long run,

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

If a contractionary gap is cured by increasing aggregate demand,

An important implication of the natural rate hypothesis is that the government policy that results in low inflation is generally the optimal long-run policy

According to the rational expectations school,a correctly anticipated expansionary monetary policy will

Probably the most significant implication of the natural rate of unemployment hypothesis is that

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

According to the rational expectations school,people base their expectations about inflation on

The formulation of active policy is

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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