Question 1

Exhibit 16-3  
-According to those who favor an active approach to policy,how can the economy shown in Exhibit 16-3 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 2

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 3

In the long run,how would an active approach to a recessionary 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 4

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

Question 5

The reason why self-correction works to close a recessionary 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 6

International evidence suggests that

Accepted Answer

A) contrary to theory,there is little relationship between inflation and money supply growth 
B) the countries with the most independent central banks are the countries with the lowest inflation rates 
C) contrary to theory,there is little relationship between central bank independence and price stability 
D) the countries with the least independent central banks are the countries with the lowest inflation rates 
E) the most independent central banks are in Spain and Italy 
A) contrary to theory,there is little relationship between inflation and money supply growth 
B) the countries with the most independent central banks are the countries with the lowest inflation rates 
C) contrary to theory,there is little relationship between central bank independence and price stability 
D) the countries with the least independent central banks are the countries with the lowest inflation rates 
E) the most independent central banks are in Spain and Italy

Question 7

If a recessionary 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 8

Exhibit 16-1  
-According to those who favor a passive approach to policy,where will the economy in Exhibit 16-1 end up when it achieves its potential output?

Accepted Answer

A) point A 
B) point B 
C) point C 
D) either point B or C 
E) unable to tell from the information given 
A) point A 
B) point B 
C) point C 
D) either point B or C 
E) unable to tell from the information given

Question 9

Which of the following lags reduces the effectiveness of active policy?

Accepted Answer

A) both d and e 
B) all of the following 
C) self-correction lag 
D) recognition lag 
E) decision-making lag 
A) both d and e 
B) all of the following 
C) self-correction lag 
D) recognition lag 
E) decision-making lag

Question 10

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 11

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 12

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 13

Which of the following is true about the long-run Phillips curve?

Accepted Answer

A) No event can shift the curve rightward; it can only be shifted leftward. 
B) No event can shift the curve leftward; it can only be shifted rightward. 
C) No event can shift the curve either rightward or leftward. 
D) Only fiscal and monetary policy can shift the curve. 
E) Demand-side policy cannot shift the curve. 
A) No event can shift the curve rightward; it can only be shifted leftward. 
B) No event can shift the curve leftward; it can only be shifted rightward. 
C) No event can shift the curve either rightward or leftward. 
D) Only fiscal and monetary policy can shift the curve. 
E) Demand-side policy cannot shift the curve.

Question 14

If self-correction works,a policy that continually increases aggregate demand will

Accepted Answer

A) have a strong impact on GDP 
B) cause permanent inflation 
C) eventually cause the SRAS curve to shift to the right 
D) have relatively large impact on GDP 
E) will cause inflation to continually diminish 
A) have a strong impact on GDP 
B) cause permanent inflation 
C) eventually cause the SRAS curve to shift to the right 
D) have relatively large impact on GDP 
E) will cause inflation to continually diminish

Question 15

In its original form,the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

Accepted Answer

A) True 
 B)False

Question 16

If we observe an economy adjusting to potential GDP as prices fall and real output increases,

Accepted Answer

A) it was experiencing an expansionary gap 
B) the correction involves a shift of the AD curve 
C) it was experiencing a recessionary gap 
D) self-correction is not the process that is occurring 
E) there are widespread labor shortages 
A) it was experiencing an expansionary gap 
B) the correction involves a shift of the AD curve 
C) it was experiencing a recessionary gap 
D) self-correction is not the process that is occurring 
E) there are widespread labor shortages

Question 17

Exhibit 16-3  
-According to those who favor a passive approach to policy,how will the economy shown in Exhibit 16-3 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 18

In general,we would expect those who favor a passive approach to policy to believe in

Accepted Answer

A) slow rather than rapid self-correction 
B) potentially incorrect rather than rational price expectations 
C) short,certain rather than long,variable policy lags 
D) a negatively sloped rather than vertical Phillips curve 
E) the natural rate hypothesis 
A) slow rather than rapid self-correction 
B) potentially incorrect rather than rational price expectations 
C) short,certain rather than long,variable policy lags 
D) a negatively sloped rather than vertical Phillips curve 
E) the natural rate hypothesis

Exam 17: Macro Policy Debate: Active or Passive

Exhibit 16-3 -According to those who favor an active approach to policy,how can the economy shown in Exhibit 16-3 attain equilibrium at potential output?

An economy in which actual GDP exceeds potential GDP means that

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

The formulation of active policy is

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

International evidence suggests that

If a recessionary gap is cured by increasing aggregate demand,

Exhibit 16-1 -According to those who favor a passive approach to policy,where will the economy in Exhibit 16-1 end up when it achieves its potential output?

Which of the following lags reduces the effectiveness of active policy?

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

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

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?

Which of the following is true about the long-run Phillips curve?

If self-correction works,a policy that continually increases aggregate demand will

In its original form,the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

If we observe an economy adjusting to potential GDP as prices fall and real output increases,

Exhibit 16-3 -According to those who favor a passive approach to policy,how will the economy shown in Exhibit 16-3 attain equilibrium at potential output?

In general,we would expect those who favor a passive approach to policy to believe in

The Art and Science of Economic Analysis

Economic Tools and Economics Systems

Economic Decision Makers

Demand, supply, and Markets

Introduction to Macroeconomics

Tracking the Useconomy

Unemployment and Inflation

Productivity and Growth

Aaggregate Expenditure and Aggregate Demand

Baggregate 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

Externalities and the Environment

International Finance

Economic Development

understanding Graphs

National Income Accounts

The Algebra of Demand-Side Equilibrium

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