Deck 17: The New Normative Macroeconomics

Question 1

The public's view of the cost of inflation seems to be based on

A) inflation's undesirable and random influence on a unit of measure.
B) inflation's unfair and random identification of winners and losers.
C) inflation's ability to unfairly distort tax burdens.
D) a myopic focus on price inflation without noting that incomes rise to compensate.
E) all of the above but b.

Answer 1

all of the above but b.

Question 2

Which of the following accurately represents a fundamental proposition derived from modern macroeconomic theory?

A) Economies are generally stable over the long term with long-term growth driven by the sources of growth of potential GDP.
B) Macroeconomic policy, in the short run, should be targeted at keeping inflation low and minimizing fluctuation in major macroeconomic variables.
C) People form expectations about the future based on accurate processing of unbiased information gleaned from their personal and collective experiences.
D) All of the above.
E) None of the above.

Answer 2

All of the above.

Question 3

The ra m i fic ations of a reduction in GDP of for example) $10 billion incl u d e s

A) an immediate reduction in disposable income of about $5 billion.
B) some significant reduction in retained corporate earnings.
C) diminished tax collections by federal, state, and local governments.
D) a contraction of government services created by the fiscal austerity of state and local governments that must balance their budgets.
E) all of the above.

Answer 3

all of the above.

Question 4

A social welfare function that is to be germane to the evaluation of macroeconomic policy should be constructed to depend on

A) instrumental variables.
B) final target variables.
C) intermediate target variables.
D) some combination of final and intermediate target variables.
E) all of the above.

Question 5

Any positive price shock affecting an economy initially operating at full potential

A) can be expected to cause some increase in inflation unless the economy is willing to accept some unemployment above the natural rate.
B) can be expected to cause some immediate increase in unemployment above the natural rate regardless of the policy response.
C) need not cause any increase in inflation, but only if the economy commits itself to a credible policy of maintaining output at potential GDP.
D) need not cause any increase in unemployment above the natural rate, but only if the economy commits itself to a credible policy of increased aggregate demand.
E) none of the above.

Question 6

Any non-policy-induced increase in aggregate demand affecting an economy initially operating at full potential

A) can be expected to cause an immediate episode of increased inflation regardless of the policy response.
B) can be expected to cause an immediate episode of unemployment above the natural rate regardless of the policy response.
C) might not cause inflation to rise if policy directed at reducing aggregate demand were enacted swiftly.
D) might not cause inflation to rise if policy directed at increasing aggregate demand further were enacted slowly.
E) none of the above.

Question 7

The Tinbergen principle of matching policy instruments to target variables states that trade-offs necessarily have to be judged whenever

A) the number of independently operating policy instruments exceeds the number of target variables.
B) the number of independently operating policy instruments equals the number of target variables.
C) the number of independently operating policy instruments falls short of the number of target variables.
D) a and b only.
E) c or b only.

Question 8

The economic costs of inflation include

A) the "shoe-leather costs" involved in getting to money held in interest- bearing accounts.
B) the tax distortions it creates within a progressive income tax and across the board.
C) an unfair distribution of gains and losses generated by "who owns what and when."
D) the difficulties that some institutions must endure as they try unsuccessfully to adapt.
E) all of the above.

Question 9

Based on 1996 levels, the typical recession in the United States costs roughly

A) $100 billion.
B) $200 billion.
C) $600 billion.
D) $800 billion.
E) $1 trillion.

Question 10

Suppose GDP in the United States were to fall by $8 billion. You would expect to see an immediate reduction in disposable income of

A) something over $8 billion depending on the size of the multiplier.
B) something under $1 billion if there were no response by the Federal Reserve Board.
C) some insignificant amount because demand from abroad would fill the gap in aggregate demand.
D) approximately $6 billion.
E) none of the above.

Question 11

Which of the following should not be included in a list of fundamental results derived from modern macroeconomic theory?

A) People form expectations of the future based on unbiased processing of all available information gleaned from their individual and collective experiences.
B) It is useful to describe macroeconomic policy as a set of policy rules: active, passive, and in some cases) discretionary.
C) Policy effectiveness depends on its credibility.
D) All of the above should be included in a list of fundamental propositions.
E) None of the above should be included in a list of fundamental propositions.

Question 12

The marginal social cost of unemployment

A) increases during recession.
B) declines during recession.
C) increases during a boom.
D) is irrelevant during a boom.
E) a and d only.

Question 13

The argument based on the Tinbergen principle that points to fiscal and monetary policy as two instruments directed at two target variables unemployment and inflation) to conclude that there is no implicit trade-off between the twin objectives of low inflation and low unemployment

A) is correct because fiscal and monetary policy are set independently by two different branches of government.
B) is incorrect because both fiscal and monetary policy work by manipulating aggregate demand.
C) is incorrect because neither type of policy is effective in a world accurately described by a rational-expectations model.
D) b and c only.
E) none of the above.

Question 14

Which of the following is a good reason not to rely too heavily on the matching of policy instruments to target variables in evaluating the likely severity of social trade-offs among policy objectives?

A) Policy instruments may not be set independently.
B) Policy instruments may not operate independently even if they are specified independently.
C) Uncertainty can undermine our ability to evaluate i) policy effectiveness and ii) policy independence.
D) There is generally no synchronization of the benefits and costs of a given policy instrument.
E) All of the above.

Question 15

The value of leisure time

A) is lower during a boom for people working too hard than it is during a recession for people who are unemployed.
B) must be the same, according to microeconomic theory, during a boom for people working too hard as it is during a recession for people who are unemployed.
C) is higher during a boom for people working too hard than it is during a recession for people who are unemployed.
D) is different during a boom for people working too hard than it is during a recession for people who are unemployed, but in an unspecified direction.
E) none of the above because the value of leisure time is an individualistic measure.

Question 16

It is the popular perception that inflation is politically unacceptable in the United States

A) even if the cost of reducing it is enduring a large recession.
B) only when it runs at a rate significantly over 10 percent for a long period of time.
C) unless it can be shown to maintain the rate of unemployment below the natural rate.
D) if it is observed to be significantly above the worldwide average.
E) none of the above.

Question 17

Which of the following should not be included in a list of fundamental results derived from modern macroeconomic theory?

A) People form expectations about the future based on accurate processing of only accurate information gleaned from their own individual and collective experiences.
B) Policy effectiveness depends highly on its credibility.
C) The economy is generally stable over the long term with long-term growth driven by the sources of growth of potential GDP.
D) All of the above.
E) None of the above.

Question 18

The squared deviation of inflation from its target value perhaps zero) is employed as a measure of "inflation loss" because

A) both positive deviations and negative deviations are costly.
B) we need to square the measured deviations to produce appropriate units for the necessary comparison with "unemployment loss."
C) it is a convenient measure routinely reported as output from statistical studies.
D) all of the above.
E) none of the above.

Question 19

The typical recession in the United States, if there is such a thing,

A) lasts for less than one year but costs roughly 10 percent of annual GDP.
B) sees GDP fall 5 percent below its potential for an average of two years.
C) lasts for almost exactly one year and costs roughly 10 percent of potential GDP.
D) sees GDP fall 10 percent below its potential for an average of almost three years.
E) none of the above.

Question 20

The squared deviation of unemployment from the natural rate is used as a measure of "output loss" because

A) both positive deviations and negative deviations are costly.
B) policy can influence only the degree of fluctuation of an economy around potential GDP and thus of unemployment around the natural rate; squared deviations are a measure of that fluctuation.
C) it is a convenient measure that is routinely reported as output from statistical investigations.
D) all of the above.
E) none of the above.

Question 21

Suggestions advanced to bring the policy frontier closer to the origin by improving the sensitivity of wages to conditions in the labor market include

A) improvement in the system that tries to match individuals' skills with employers' needs.
B) the elimination of government wage and price fixing through regulation.
C) reform in the unemployment compensation system to remove some of the incentive to become or stay unemployed.
D) integration of a scheme that would tie labor's compensation to a share of a firm's total revenue.
E) all of the above.

Question 22

Which of the following correctly states a fundamental result of modern macroeconomic theory?

A) Aggregate demand shocks can be nullified by policy-induced adjustments in aggregate demand of equal size in the opposite direction.
B) Price shocks require the policy maker to weigh the social costs of inflation and unemployment to select the appropriate mix.
C) Aggregate demand shocks require the policy maker to weigh the social costs of inflation and unemployment to select the appropriate mix.
D) Price shocks can be nullified completely by appropriate manipulation of aggregate demand by monetary and fiscal policy.
E) a and b only.

Question 23

When the Fed pursues a nonaccommodative monetary policy, its response to a price shock is to

A) raise interest rates sharply.
B) increase the output sensitivity of the aggregate demand inflation curve.
C) increase the money supply significantly.
D) both a and b.
E) both b and c.

Question 24

Which of the following statements is true?

A) Both quotas and tariffs have direct and immediate effects on domestic prices regardless of the reactions of foreign sellers.
B) Neither quotas nor tariffs have direct or indirect effects on domestic prices unless foreign sellers absorb some of the demand loss.
C) Quotas have direct and immediate effects on domestic prices, but tariffs do not unless foreign sellers choose not to absorb their full value in the pretariff export price.
D) Tariffs have direct and immediate effects on domestic prices, but quotas do not unless foreign sellers choose to absorb their full impact on demand.
E) All of the above are true depending on the elasticities of demand.

Question 25

Which of the following might be effective in bringing the policy frontier closer to the origin?

A) Any policy option that could reduce the size and frequency of shocks to aggregate demand
B) Any policy option that could reduce the size and frequency of shocks to potential GDP
C) Any policy option that could reduce the size and frequency of shocks to aggregate supply
D) Any policy option that could reduce the size and frequency of outside price shocks from materials, wages, government policy, or foreign markets
E) All of the above

Question 26

Because of uncertainty in the choice policy of instruments, economists prefer to minimize risk by

A) sticking with a proven policy instrument.
B) implementing policy only when long-term costs have been determined.
C) using a mix of policy instruments.
D) outsourcing the choice of policy instruments.
E) using only expansionary policy during recessions and letting expansions run their course.

Question 27

Altering indexing schemes to control for their including 100 percent of materials and other external price shocks could

A) move the policy frontier in closer to the origin by reducing the momentum of those shocks throughout the economy.
B) make positive shocks to aggregate demand far less troublesome in terms of the unemployment-inflation trade-off that they create.
C) make negative shocks to aggregate demand far less troublesome in terms of the unemployment-overreaction trade-off that they create.
D) make actual GDP less sensitive to fluctuation in potential GDP.
E) increase the variance of unemployment around the natural rate during a demand-deficient recession.

Question 28

Which of the following directly influences the distance between the origin and the policy frontier?

A) the effectiveness of fiscal policy
B) the strength of the links between the intermediate targets of monetary policy and the corresponding final targets
C) inefficiency in the labor market and the reflection of labor surplus in wage inflation
D) the degree to which rational expectations cause policy options to become more or less effective in the long run
E) none of the above

Question 29

What effect do protectionist measures have on the rate of inflation?

A) Permanent increases
B) Temporary increases
C) Permanent reductions
D) Temporary reductions
E) Temporary or permanent increases depending on i) whether quotas or tariffs are used and ii) the market power of domestic suppliers in the import-competing industry.

Question 30

The imposition of a protectionist measure should produce

A) a one-time shock to inflation even if not accommodated by fiscal or monetary policy.
B) a permanent shock to inflation even if not accommodated by fiscal or monetary policy.
C) a one-time shock to inflation only if accommodated by fiscal and monetary policies.
D) a permanent shock to inflation only if accommodated by fiscal and monetary policies.
E) a one-time shock to inflation if accommodated by monetary policy alone.

Question 31

The net loss to the economy as a result of a recession

A) includes some measure of the deviation of GDP from its potential.
B) must take into account the value of leisure time, which increases in recessions.
C) must take into account that taxes lead to a bias against market work and in favor of nonmarket activities.
D) all of the above.
E) a and b only.

Question 32

Which of the following influence the slope of the policy frontier?

A) How effective fiscal policy is in manipulating actual GDP in the short run without generating price and wage effects
B) The degree to which adjustments in fiscal policy designed to manipulate actual GDP in the short run are reflected in changes in prices and wages
C) How effective monetary policy is in manipulating actual GDP in the short run without price and wage effects
D) The degree to which adjustments in monetary policy designed to manipulate actual GDP in the short run are reflected in changes in prices and wages
E) Any, and perhaps all, of the above depending on circumstances

Question 33

A policy that aggressively counters price shocks

A) results in larger fluctuations in output.
B) results in higher levels of unemployment.
C) tends to increase the output sensitivity of the aggregate demand inflation curve.
D) all of the above.
E) both a and c.