Question 1

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 2

According to the __________ approach, __________ policy may __________ the instability of the economy.

Accepted Answer

A) passive, automatic, increase 
B) passive, discretionary, increase 
C) passive, discretionary, decrease 
D) active, discretionary, increase 
E) active, automatic, decrease 
A) passive, automatic, increase 
B) passive, discretionary, increase 
C) passive, discretionary, decrease 
D) active, discretionary, increase 
E) active, automatic, decrease

Question 3

Opponents of inflation targets say that

Accepted Answer

A) such targets encourage workers to plan on a low and stable inflation rate and hold down demands for wage increases 
B) the Fed will pay less attention to jobs and economic growth 
C) such targets encourage firms to plan on a low and stable inflation rate and hold down price increases 
D) such targets encourage investors to plan on a low and stable inflation rate and hold down demands for interest rate increases 
E) None of the answers is correct 
A) such targets encourage workers to plan on a low and stable inflation rate and hold down demands for wage increases 
B) the Fed will pay less attention to jobs and economic growth 
C) such targets encourage firms to plan on a low and stable inflation rate and hold down price increases 
D) such targets encourage investors to plan on a low and stable inflation rate and hold down demands for interest rate increases 
E) None of the answers is correct

Question 4

To favor a passive approach to policy is to believe that the private sector is

Accepted Answer

A) relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor 
B) basically unstable, although both wages and prices adjust quickly to eliminate excess supply or excess demand for labor 
C) relatively stable, although both wages and prices tend to be very sticky downward 
D) basically unstable and both wages and prices tend to be very sticky downward 
E) so stable that wages and prices rarely change 
A) relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor 
B) basically unstable, although both wages and prices adjust quickly to eliminate excess supply or excess demand for labor 
C) relatively stable, although both wages and prices tend to be very sticky downward 
D) basically unstable and both wages and prices tend to be very sticky downward 
E) so stable that wages and prices rarely change

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

The economy may turn around on its own before a new policy registers its full impact primarily because of the

Accepted Answer

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

Question 7

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 8

Exhibit 17-2
  
-According to those who favor an active approach to policy, where will the economy in Exhibit 17-2 end up once the expansionary gap is eliminated?

Accepted Answer

A) point A 
B) point B 
C) point C 
D) either point B or C 
E) cannot tell from the information given 
A) point A 
B) point B 
C) point C 
D) either point B or C 
E) cannot tell from the information given

Question 9

If an active approach to policy is followed, how would an expansionary 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 up and to the left along the short-run supply 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 up and to the left along the short-run supply curve.

Question 10

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 11

The short-run Phillips curve shows that

Accepted Answer

A) the economy can have low inflation and low unemployment simultaneously 
B) the economy can have high inflation and high unemployment simultaneously 
C) a reduction in unemployment comes at the expense of lower inflation 
D) a reduction in unemployment comes at the expense of higher inflation 
E) a reduction in inflation comes at the expense of lower unemployment 
A) the economy can have low inflation and low unemployment simultaneously 
B) the economy can have high inflation and high unemployment simultaneously 
C) a reduction in unemployment comes at the expense of lower inflation 
D) a reduction in unemployment comes at the expense of higher inflation 
E) a reduction in inflation comes at the expense of lower unemployment

Question 12

One way of expressing the meaning of the short-run Phillips curve is to say that

Accepted Answer

A) the cost of reducing unemployment is higher inflation 
B) nothing but good comes from reducing unemployment 
C) the cost of reducing inflation is lower unemployment 
D) aggregate supply and aggregate demand will always be equal at the potential output level 
E) the best economic policy is one that attempts to make the rate of inflation equal to the rate of unemployment 
A) the cost of reducing unemployment is higher inflation 
B) nothing but good comes from reducing unemployment 
C) the cost of reducing inflation is lower unemployment 
D) aggregate supply and aggregate demand will always be equal at the potential output level 
E) the best economic policy is one that attempts to make the rate of inflation equal to the rate of unemployment

Question 13

Exhibit 17-2
  
-According to those who favor a passive approach to policy, where will the economy in Exhibit 17-2 end up once the expansionary gap is eliminated?

Accepted Answer

A) point A 
B) point B 
C) point C 
D) either point B or C 
E) cannot tell from the information provided 
A) point A 
B) point B 
C) point C 
D) either point B or C 
E) cannot tell from the information provided

Question 14

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 15

Exhibit 17-2
  
-According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-2 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 increased. 
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 increased.

Question 16

When self-correcting forces cure a recessionary 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 17

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 18

Contrary to what the Phillips curve would have predicted, the U.S. economy in the 1970s experienced simultaneous increases in inflation and unemployment.

Accepted Answer

A) True 
 B)False

Question 19

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 20

The effectiveness lag for monetary policy is short.

Accepted Answer

A) True 
 B)False

Exam 18: Macro Policy Debate: Active or Passive

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

According to the __________ approach, __________ policy may __________ the instability of the economy.

Opponents of inflation targets say that

To favor a passive approach to policy is to believe that the private sector is

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

The economy may turn around on its own before a new policy registers its full impact primarily because of the

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

Exhibit 17-2 -According to those who favor an active approach to policy, where will the economy in Exhibit 17-2 end up once the expansionary gap is eliminated?

If an active approach to policy is followed, how would an expansionary gap eventually close?

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

The short-run Phillips curve shows that

One way of expressing the meaning of the short-run Phillips curve is to say that

Exhibit 17-2 -According to those who favor a passive approach to policy, where will the economy in Exhibit 17-2 end up once the expansionary gap is eliminated?

One implication of the Phillips curve analysis is that

Exhibit 17-2 -According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-2 attain equilibrium at potential output?

When self-correcting forces cure a recessionary 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.

Contrary to what the Phillips curve would have predicted, the U.S. economy in the 1970s experienced simultaneous increases in inflation and unemployment.

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.

The effectiveness lag for monetary policy is short.

The Art and Science of Economic Analysis

Understanding Graphs-Appendix

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

Aaggregate Expenditure and Agregate Demand

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

Economic Development

Filters

According to the approach, policy may __ the instability of the economy.