Question 1

If the price level increases by more than expected,output can be expected to decrease as a result.

Accepted Answer

A) True 
 B)False

Question 2

Advocates of policy rules rather than discretion believe that self-correction forces work too slowly when discretionary policy is used.

Accepted Answer

A) True 
 B)False

Question 3

According to the rational expectations model,the only time active policy has an impact on aggregate output is when

Accepted Answer

A)  it is expansionary 
B)  it is contractionary 
C)  it is unannounced 
D)  the economy has a contractionary gap 
E)  the economy has an expansionary gap 
A)  it is expansionary 
B)  it is contractionary 
C)  it is unannounced 
D)  the economy has a contractionary gap 
E)  the economy has an expansionary gap

Question 4

In the long run,how would an active approach to a contractionary gap differ from a passive approach to policy?

Accepted Answer

A)  Both the price level and the level of real GDP would be higher in the long run with the activist solution. 
B)  Both the price level and the level of real GDP would be lower in the long run with the activist solution. 
C)  The price level would be higher and the level of real GDP would be lower in the long run with the activist solution. 
D)  Only the price level would be lower in the long run with the activist solution. 
E)  Only the price level would be higher in the long run with the activist solution. 
A)  Both the price level and the level of real GDP would be higher in the long run with the activist solution. 
B)  Both the price level and the level of real GDP would be lower in the long run with the activist solution. 
C)  The price level would be higher and the level of real GDP would be lower in the long run with the activist solution. 
D)  Only the price level would be lower in the long run with the activist solution. 
E)  Only the price level would be higher in the long run with the activist solution.

Question 5

When policy makers have an incentive to announce one policy to shape expectations but then pursue a different policy once those expectations have been formed and acted on,there is

Accepted Answer

A)  no problem; this is normal behavior 
B)  policy credibility 
C)  a time-inconsistency problem 
D)  rational expectation 
E)  None of the answers is correct 
A)  no problem; this is normal behavior 
B)  policy credibility 
C)  a time-inconsistency problem 
D)  rational expectation 
E)  None of the answers is correct

Question 6

One reason that long time lags hamper the effectiveness of economic policy is that

Accepted Answer

A)  people don't want to wait for economic recovery 
B)  the longer unemployment lasts the more intense inflation becomes 
C)  by the time the impact of a policy is felt,a new problem may have come along that requires a different policy,which may make the economic situation even worse 
D)  if inflation is allowed to continue for too long,it becomes immune to policy interference 
E)  if unemployment is allowed to continue for too long,it becomes immune to policy interference 
A)  people don't want to wait for economic recovery 
B)  the longer unemployment lasts the more intense inflation becomes 
C)  by the time the impact of a policy is felt,a new problem may have come along that requires a different policy,which may make the economic situation even worse 
D)  if inflation is allowed to continue for too long,it becomes immune to policy interference 
E)  if unemployment is allowed to continue for too long,it becomes immune to policy interference

Question 7

For those who favor an active approach,public policy changes are necessary to cure a contractionary gap because

Accepted Answer

A)  the short-run aggregate supply curve will otherwise shift quickly to the right 
B)  prices and wages are flexible downward but not upward 
C)  the required decrease in output can be achieved only by shifting the AD curve 
D)  real wages must fall through price increases rather than waiting for money wages to fall 
E)  falling money wages will cause the AD curve to shift leftward unless policy counters this movement 
A)  the short-run aggregate supply curve will otherwise shift quickly to the right 
B)  prices and wages are flexible downward but not upward 
C)  the required decrease in output can be achieved only by shifting the AD curve 
D)  real wages must fall through price increases rather than waiting for money wages to fall 
E)  falling money wages will cause the AD curve to shift leftward unless policy counters this movement

Question 8

Exhibit 16-4  
-If the economy in Exhibit 16-4 is initially at point c and aggregate demand decreases,the economy will (in the long run)

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 9

In general,the faster inflationary expectations adjust,

Accepted Answer

A)  the less macro policy can influence unemployment 
B)  the better discretionary policy can be expected to work 
C)  the slower the adjustment of the short-run Phillips curve 
D)  the stronger the case for active policy 
E)  none of the above 
A)  the less macro policy can influence unemployment 
B)  the better discretionary policy can be expected to work 
C)  the slower the adjustment of the short-run Phillips curve 
D)  the stronger the case for active policy 
E)  none of the above

Question 10

An economy in which actual GDP exceeds potential GDP means that

Accepted Answer

A)  wages and prices must fall 
B)  self-correcting forces will shift the SRAS curve to the left 
C)  self-correcting forces will shift the AD curve to the left 
D)  inflation will occur when AD shifts to the left 
E)  unemployment is likely to be unusually high 
A)  wages and prices must fall 
B)  self-correcting forces will shift the SRAS curve to the left 
C)  self-correcting forces will shift the AD curve to the left 
D)  inflation will occur when AD shifts to the left 
E)  unemployment is likely to be unusually high

Question 11

If an economy is at potential GDP and an expansionary policy is correctly anticipated,the result will be

Accepted Answer

A)  both c and e 
B)  little or no increase in GDP 
C)  an increase in wages along with a dramatically falling price level 
D)  a rapidly expanding economy 
E)  a severe recession 
A)  both c and e 
B)  little or no increase in GDP 
C)  an increase in wages along with a dramatically falling price level 
D)  a rapidly expanding economy 
E)  a severe recession

Question 12

The rational expectations school advocates the passive rule of a fixed-growth-rate monetary policy because

Accepted Answer

A)  we don't have enough information to pursue an active policy 
B)  the economy is not in bad enough shape to require active intervention 
C)  then the Federal Reserve Board would be superfluous and we could eliminate a large bureaucracy 
D)  people render active policy ineffective by figuring out what it's going to be and taking actions to offset it 
E)  they prefer to put their major emphasis on an active fiscal policy 
A)  we don't have enough information to pursue an active policy 
B)  the economy is not in bad enough shape to require active intervention 
C)  then the Federal Reserve Board would be superfluous and we could eliminate a large bureaucracy 
D)  people render active policy ineffective by figuring out what it's going to be and taking actions to offset it 
E)  they prefer to put their major emphasis on an active fiscal policy

Question 13

If a passive approach to policy was followed,how would an expansionary gap eventually close?

Accepted Answer

A)  Restrictive fiscal policy would be used. 
B)  Restrictive monetary policy would be used. 
C)  Both restrictive fiscal policy and restrictive monetary policy would be used. 
D)  Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected. 
E)  Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected. 
A)  Restrictive fiscal policy would be used. 
B)  Restrictive monetary policy would be used. 
C)  Both restrictive fiscal policy and restrictive monetary policy would be used. 
D)  Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected. 
E)  Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected.

Question 14

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 15

The effectiveness lag for monetary policy is short.

Accepted Answer

A) True 
 B)False

Question 16

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

Accepted Answer

A)  cyclical unemployment hypothesis 
B)  full employment hypothesis 
C)  natural rate hypothesis 
D)  economic stability hypothesis 
E)  policy ineffectiveness hypothesis 
A)  cyclical unemployment hypothesis 
B)  full employment hypothesis 
C)  natural rate hypothesis 
D)  economic stability hypothesis 
E)  policy ineffectiveness hypothesis

Question 17

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 18

According to the passive policy maker's position,an expansionary gap will be eliminated because

Accepted Answer

A)  the short-run aggregate supply will shift to the left 
B)  the short-run aggregate supply will shift to the right 
C)  rising prices will shift the aggregate demand to the left 
D)  wages will fall relatively quickly 
E)  aggregate demand will shift to the right as wages increase 
A)  the short-run aggregate supply will shift to the left 
B)  the short-run aggregate supply will shift to the right 
C)  rising prices will shift the aggregate demand to the left 
D)  wages will fall relatively quickly 
E)  aggregate demand will shift to the right as wages increase

Question 19

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 20

If the actual inflation rate exceeds the expected inflation rate,

Accepted Answer

A)  the economy is on the long-run Phillips curve 
B)  unemployment exceeds the natural rate 
C)  maintaining the existing unemployment rate will require increasing inflation in the long run 
D)  the actual rate will tend to fall toward the expected rate 
E)  unemployment will tend to decrease in the long run 
A)  the economy is on the long-run Phillips curve 
B)  unemployment exceeds the natural rate 
C)  maintaining the existing unemployment rate will require increasing inflation in the long run 
D)  the actual rate will tend to fall toward the expected rate 
E)  unemployment will tend to decrease in the long run

Exam 17: Macro Policy Debate: Active or Passive

If the price level increases by more than expected,output can be expected to decrease as a result.

Advocates of policy rules rather than discretion believe that self-correction forces work too slowly when discretionary policy is used.

According to the rational expectations model,the only time active policy has an impact on aggregate output is when

In the long run,how would an active approach to a contractionary gap differ from a passive approach to policy?

When policy makers have an incentive to announce one policy to shape expectations but then pursue a different policy once those expectations have been formed and acted on,there is

One reason that long time lags hamper the effectiveness of economic policy is that

For those who favor an active approach,public policy changes are necessary to cure a contractionary gap because

Exhibit 16-4 -If the economy in Exhibit 16-4 is initially at point c and aggregate demand decreases,the economy will (in the long run)

In general,the faster inflationary expectations adjust,

An economy in which actual GDP exceeds potential GDP means that

If an economy is at potential GDP and an expansionary policy is correctly anticipated,the result will be

The rational expectations school advocates the passive rule of a fixed-growth-rate monetary policy because

If a passive approach to policy was followed,how would an expansionary gap eventually close?

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

The effectiveness lag for monetary policy is short.

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

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?

According to the passive policy maker's position,an expansionary gap will be eliminated because

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

If the actual inflation rate exceeds the expected inflation rate,

The Art and Science of Economic Analysis

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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

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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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