Exam 17: Issues in Macroeconomic Theory and Policy

How do you think each of the following would affect the unemployment rate? a. The Fed increases the money supply and engineers an unexpected increase in the rate of inflation from 2 percent to 5 percent. b. As expected, the rate of inflation remains stable at 2 percent over a five-year period. c. There is an unexpected decrease in the rate of inflation from 10 percent to 3 percent.

When the economy operates at levels significantly lower than the full-employment level, input prices are flexible.

Why is a stagflation caused by a negative supply shock worse than a recession caused by a negative demand shock?

What is quantitative easing?

Why is indexing not commonly adopted in spite of the fact that it eliminates most of the wealth transfers associated with unexpected inflation?

Why does a larger government budget deficit increase the magnitude of the crowding-out effect?

If policy makers choose to use a contractionary fiscal policy as a response to the recession caused by a negative supply shock, _____.

If policy makers' ability to forecast the future is limited, their ability to stabilize the economy with fiscal and monetary policy is compromised.

A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve to the right will:

Critics of targeting a zero inflation rate believe that achieving zero inflation is almost impossible and the costs are too high.

The time span between the beginning of a downturn and the time taken to gather enough data to indicate a downturn is called _____.

What do rational expectations theorists believe? What is their critics' point of view?

According to the Taylor rule, the Fed should raise the federal funds rate by 0.5% relative to the inflation rate _____.

Which of the following contributed to the global economic crisis of 2008?

A positive supply shock causes a leftward shift in the short-run aggregate supply curve.

The rational expectations theory implies that an accurately anticipated change in aggregate demand:

Is it possible for monetary policy to be more effective during an expansion than during a recession? If yes, why?

When a commercial bank purchases government securities from the Fed, _____.

When the crowding-out effect of an increase in government purchases is included when analyzing the impact of the increase in government purchases, _____.

According to the Taylor rule, if real GDP rises 1.0 % over potential GDP, the Fed should, _____.