Question 1

A negative supply shock may lead to:

Accepted Answer

A) an increase in real aggregate output and an increase in the price level. 
B) a reduction in real aggregate output and an increase in the price level. 
C) a reduction in real aggregate output and a decrease in the price level. 
D) an increase in real aggregate output and a decrease in price level. 
E) a reduction in the price level and no change in real aggregate output. 
A) an increase in real aggregate output and an increase in the price level. 
B) a reduction in real aggregate output and an increase in the price level. 
C) a reduction in real aggregate output and a decrease in the price level. 
D) an increase in real aggregate output and a decrease in price level. 
E) a reduction in the price level and no change in real aggregate output.

Question 2

The rational expectations theory suggests that government or central bank policies designed to change aggregate demand will be effective.

Accepted Answer

A) True 
 B)False

Question 3

When expansionary policy is anticipated, it leads to a short-run expansion in output and employment.

Accepted Answer

A) True 
 B)False

Question 4

According to the Taylor rule, the Fed should keep the federal fund rate at 4 percent if:

Accepted Answer

A) real GDP is 2 percent above potential GDP and inflation is 1 percent above target inflation of 2 percent. 
B) real GDP is 1 percent above potential GDP and inflation is equal to its target of 2 percent. 
C) real GDP is 4 percent above potential GDP and inflation is 4 percent above target inflation of 2 percent. 
D) real GDP is equal to potential GDP and inflation is 1 percent above target inflation of 2 percent. 
E) real GDP is equal to potential GDP and inflation is equal to its target of 2 percent. 
A) real GDP is 2 percent above potential GDP and inflation is 1 percent above target inflation of 2 percent. 
B) real GDP is 1 percent above potential GDP and inflation is equal to its target of 2 percent. 
C) real GDP is 4 percent above potential GDP and inflation is 4 percent above target inflation of 2 percent. 
D) real GDP is equal to potential GDP and inflation is 1 percent above target inflation of 2 percent. 
E) real GDP is equal to potential GDP and inflation is equal to its target of 2 percent.

Question 5

The figure below shows the aggregate demand curve, the long-run aggregate supply curve, and the short-run aggregate supply curve in an economy. Based on the figure, if an increase in aggregate demand from AD0 to AD1 is unanticipated, the economy will move from point A to point _____in the short run.​Figure-1

Accepted Answer

A) A 
B) B 
C) E 
D) F 
E) D 
A) A 
B) B 
C) E 
D) F 
E) D

Question 6

Critics of inflation targeting argue that _____.

Accepted Answer

A) it can lead to lower aggregate supply in the long run 
B) forecasting future inflation may be inaccurate, leading to inefficiency 
C) governments are too flexible with inflation target rates and need to be more tight 
D) targeting inflation may cause net exports to fall in the long run 
E) the government can run into a deficit as a result of targeting inflation 
A) it can lead to lower aggregate supply in the long run 
B) forecasting future inflation may be inaccurate, leading to inefficiency 
C) governments are too flexible with inflation target rates and need to be more tight 
D) targeting inflation may cause net exports to fall in the long run 
E) the government can run into a deficit as a result of targeting inflation

Question 7

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:

Accepted Answer

A) raise real interest rates, lower the price level, and reduce real GDP. 
B) raise real interest rates, lower the price level, and increase real GDP. 
C) raise nominal interest rates, raise the price level, and leave real GDP unchanged. 
D) lower real interest rates, raise the price level, and increase real GDP. 
E) lower real interest rate, lower the price level, and increase real GDP. 
A) raise real interest rates, lower the price level, and reduce real GDP. 
B) raise real interest rates, lower the price level, and increase real GDP. 
C) raise nominal interest rates, raise the price level, and leave real GDP unchanged. 
D) lower real interest rates, raise the price level, and increase real GDP. 
E) lower real interest rate, lower the price level, and increase real GDP.

Question 8

It is difficult for policy makers to adopt an expansionary policy as a response to a recession caused by a negative supply shock because an:

Accepted Answer

A) expansionary policy leads to an increase in aggregate demand, which causes aggregate output to increase, causing inflation to rise. 
B) expansionary policy results in a shift of the aggregate demand curve to the left, as a result of which real output decreases. 
C) expansionary policy leads to an increase in aggregate demand, as a result of which the price level decreases. 
D) expansionary policy results in a shift of the long-run aggregate supply curve to the left, as a result of which the price level decreases. 
E) expansionary policy results in a shift of the long-run aggregate supply curve to the right, as a result of which the price level decreases. 
A) expansionary policy leads to an increase in aggregate demand, which causes aggregate output to increase, causing inflation to rise. 
B) expansionary policy results in a shift of the aggregate demand curve to the left, as a result of which real output decreases. 
C) expansionary policy leads to an increase in aggregate demand, as a result of which the price level decreases. 
D) expansionary policy results in a shift of the long-run aggregate supply curve to the left, as a result of which the price level decreases. 
E) expansionary policy results in a shift of the long-run aggregate supply curve to the right, as a result of which the price level decreases.

Question 9

The crowding-out effect implies that an increase in government borrowing to finance deficit financing results in _____.

Accepted Answer

A) an increase in the demand for money that causes interest rate to rise 
B) a decrease in the demand for money that causes interest rate to rise 
C) an increase in private investments by businesses 
D) an increase in the demand for money that causes interest rate to fall 
E) an increase in consumption spending by households. 
A) an increase in the demand for money that causes interest rate to rise 
B) a decrease in the demand for money that causes interest rate to rise 
C) an increase in private investments by businesses 
D) an increase in the demand for money that causes interest rate to fall 
E) an increase in consumption spending by households.

Question 10

A problem associated with targeting inflation at zero is that:

Accepted Answer

A) it could lead to hyperinflation in the long run. 
B) it could lead to deflation. 
C) it could lead to a deficit in the government budget. 
D) it could reduce aggregate demand. 
E) it could reduce net exports. 
A) it could lead to hyperinflation in the long run. 
B) it could lead to deflation. 
C) it could lead to a deficit in the government budget. 
D) it could reduce aggregate demand. 
E) it could reduce net exports.

Question 11

Believers in the hypothesis of rational expectations argue that:

Accepted Answer

A) expansionary fiscal and monetary policy can reduce unemployment without creating inflation. 
B) a trade-off exists between unemployment and inflation even in the long run. 
C) the only long-run impact of a change in monetary policy is a higher price level. 
D) the long run aggregate supply curve is upward sloping. 
E) when a change is correctly anticipated, expansionary fiscal policy changes real output. 
A) expansionary fiscal and monetary policy can reduce unemployment without creating inflation. 
B) a trade-off exists between unemployment and inflation even in the long run. 
C) the only long-run impact of a change in monetary policy is a higher price level. 
D) the long run aggregate supply curve is upward sloping. 
E) when a change is correctly anticipated, expansionary fiscal policy changes real output.

Question 12

Which of the following is true?

Accepted Answer

A) Rational expectation theorists believe that an anticipated change in policies can alter real GDP in the short run. 
B) Rational expectation theorists believe that an unanticipated change in policies can alter real GDP in the long run. 
C) Rational expectation theorists believe that government economic policies designed to alter aggregate demand are effective at changing real output. 
D) Activists believe that appropriate economic policies can alter aggregate demand. 
E) Activists believe that economic policies cannot keep the rate of unemployment below the natural rate. 
A) Rational expectation theorists believe that an anticipated change in policies can alter real GDP in the short run. 
B) Rational expectation theorists believe that an unanticipated change in policies can alter real GDP in the long run. 
C) Rational expectation theorists believe that government economic policies designed to alter aggregate demand are effective at changing real output. 
D) Activists believe that appropriate economic policies can alter aggregate demand. 
E) Activists believe that economic policies cannot keep the rate of unemployment below the natural rate.

Question 13

Why is the time lag for making fiscal policy changes longer than that for making monetary policy changes?

Accepted Answer

Answers will vary. Both monetary and fis

Question 14

Before the global economic crisis, the United States had discouraged the mortgage industry by raising lending standards for low-income families.

Accepted Answer

A) True 
 B)False

A negative supply shock may lead to:

The rational expectations theory suggests that government or central bank policies designed to change aggregate demand will be effective.

When expansionary policy is anticipated, it leads to a short-run expansion in output and employment.

According to the Taylor rule, the Fed should keep the federal fund rate at 4 percent if:

Critics of inflation targeting argue that _____.

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:

It is difficult for policy makers to adopt an expansionary policy as a response to a recession caused by a negative supply shock because an:

The crowding-out effect implies that an increase in government borrowing to finance deficit financing results in _____.

A problem associated with targeting inflation at zero is that:

Believers in the hypothesis of rational expectations argue that:

Which of the following is true?

Why is the time lag for making fiscal policy changes longer than that for making monetary policy changes?

Before the global economic crisis, the United States had discouraged the mortgage industry by raising lending standards for low-income families.

The Role and Method of Economics

The Economic Way of Thinking

Supply and Demand

Using Supply and Demand

Market Failure and Public Choice

Production and Costs

Firms in Perfectly Competitive Markets

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets, Income Distribution, and Poverty

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Economic Growth

Aggregate Demand and Aggregate Supply

Fiscal Policy

Monetary Institutions

The Federal Reserve and Monetary Policy

International Economics

Filters

Exam 17: Issues in Macroeconomic Theory and Policy

A negative supply shock may lead to:

The rational expectations theory suggests that government or central bank policies designed to change aggregate demand will be effective.

When expansionary policy is anticipated, it leads to a short-run expansion in output and employment.

According to the Taylor rule, the Fed should keep the federal fund rate at 4 percent if:

Critics of inflation targeting argue that _____.

Starting from a position of macroeconomic equilibrium at the full-employment level of real GDP, in the short run, an unanticipated decrease in the money supply will:

It is difficult for policy makers to adopt an expansionary policy as a response to a recession caused by a negative supply shock because an:

The crowding-out effect implies that an increase in government borrowing to finance deficit financing results in _____.

A problem associated with targeting inflation at zero is that:

Believers in the hypothesis of rational expectations argue that:

Which of the following is true?

Why is the time lag for making fiscal policy changes longer than that for making monetary policy changes?

Before the global economic crisis, the United States had discouraged the mortgage industry by raising lending standards for low-income families.

The Role and Method of Economics

The Economic Way of Thinking

Supply and Demand

Using Supply and Demand

Market Failure and Public Choice

Production and Costs

Firms in Perfectly Competitive Markets

Monopoly

Monopolistic Competition and Oligopoly

Labor Markets, Income Distribution, and Poverty

Introduction to Macroeconomics: Unemployment, Inflation, and Economic Fluctuations

Economic Growth

Aggregate Demand and Aggregate Supply

Fiscal Policy

Monetary Institutions

The Federal Reserve and Monetary Policy

International Economics

Filters