Deck 18: Policy

Question 1

Automatic stabilizers

A)prolong the inside lag but reduce the outside lag
B)mitigate the multiplier effect of disturbances on aggregate demand
C)render any active fiscal policy unnecessary
D)work when there is a demand disturbance but not when there is a supply shock
E)automatically coordinate fiscal and monetary policy

Answer 1

mitigate the multiplier effect of disturbances on aggregate demand

Question 2

Economic forecasts tend to be

A)difficult to make since the structure of the economy is not well-known
B)inaccurate since economic data are hard to come by
C)accurate since major economic disturbances can be easily predicted
D)fairly accurate since consumer expectations can be easily predicted
E)inaccurate since forecasters most often misread the economy

Answer 2

difficult to make since the structure of the economy is not well-known

Question 3

If it is unknown whether a disturbance is temporary or permanent,

A)an attempt should be made to keep both unemployment and inflation constant by fine-tuning the economy
B)strong measures should be employed immediately to leave no doubt about the government's commitment to full employment
C)large changes in taxes, government purchases, or money supply should be undertaken to get quick policy responses
D)only modest policy changes should be made to avoid creating unnecessary fluctuations in the economy
E)short-term interest rates should be changed quickly through monetary policy actions

Answer 3

only modest policy changes should be made to avoid creating unnecessary fluctuations in the economy

Question 4

Even the most successful economic forecasters make mistakes since they

A)try to incorporate unexpected events into their forecasts
B)have to rely on a model of the economy that may not be accurate
C)always assume that people have rational expectations
D)generally make unrealistic assumptions
E)all of the above

Question 5

Automatic stabilizers reduce the size of economic fluctuations since they

A)affect aggregate demand and aggregate supply at the same time
B)reduce the outside lag to practically zero
C)reduce the recognition lag to practically zero
D)reduce the fiscal policy multiplier to 1
E)ensure that disposable income falls by less than income after a disturbance

Question 6

A big advantage of automatic stabilizers is that they

A)completely eliminate the outside lag
B)do not have any inside lag
C)make the recognition lag negative
D)increase the size of the fiscal policy multiplier
E)make discretionary monetary policy obsolete

Question 7

If a central bank believes that an economic disturbance will negatively affect GDP in the current quarter but will have little permanent effect, then it should

A)sharply lower interest rates to mitigate the effects of the disturbance
B)lower interest rates immediately and let financial markets know that they will be raised again next quarter
C)undertake large open market sales now with the intention of making open market purchases later on
D)sit on its hands since any policy action would destabilize the economy further
E)none of the above

Question 8

Economic disturbances are likely to be caused by

A)wars
B)changes in government spending or tax policies
C)economic policies designed to win elections
D)major innovations that require large amounts of investment
E)all of the above

Question 9

Generally speaking, automatic fiscal stabilizers

A)raise the level of consumption during recessions, which offsets any decrease in investment
B)dampen the decrease in disposable income during recessions, so disposable income as a fraction of total income actually rises
C)increase the size of the fiscal policy multiplier
D)cannot be relied on if a disturbance is transitory
E)work mainly through reduction in the outside lag

Question 10

Stabilization policy is affected by inside lags, which are

A)longer for monetary policy than for fiscal policy
B)made up of the recognition, decision, and discretionary lags
C)made up of the recognition, decision, and action lags
D)the length of time it takes for a policy to affect the economy after its implementation
E)caused by bureaucrats inside the government

Question 11

Designing successful economic stabilization policy is difficult since policy makers

A) never assume that an economic disturbance is temporary
B) do not have enough policy tools to deal with economic disturbances
C) do not know the expectations of consumers and firms or how they may react
D) cannot adjust the automatic stabilizers
E) all of above

Question 12

Economic forecasters

A)almost always time their proposed policy actions accurately
B)almost always misread the state of the economy
C)always have an accurate economic model to work with
D)cannot always accurately predict how a policy change will affect the expectations and actions of households and firms
E)none of the above

Question 13

Policies designed to stabilize economic activity are handicapped by

A)incomplete information about the way the economy works
B)uncertainty about the length or magnitude of a disturbance
C)lags or delays between the time a decision is made and the time it begins to affect economic behavior
D)incomplete information about the way expectations are formed and how expectations affect responses to policies
E)all of the above

Question 14

Formulating an appropriate policy response to an economic disturbance is difficult since policy makers are often unsure about

A)the timing and magnitude of the effects of a proposed policy measure
B)whether a disturbance is temporary or permanent
C)how the economy really works
D)how a proposed policy measure affects people's expectations
E)all of the above

Question 15

If it is clear that a disturbance is only transitory, the best policy response often is to

A)react moderately or not at all because any policy action may itself be destabilizing
B)use only monetary policy since its effects are less powerful than fiscal policy
C)act quickly and vigorously since another disturbance may follow soon
D)use only fiscal policy since its impact is more direct and immediate
E)use an expansionary fiscal/restrictive monetary policy mix to avoid inflationary pressure

Question 16

The inside lag is defined as the length of time it takes

A)to recognize that a disturbance has occurred
B)for automatic stabilizers to mitigate a disturbance
C)for a policy to affect the economy after its implementation
D)to recognize that a disturbance has occurred and then formulate and implement an appropriate policy response to it
E)for a policy measure to be implemented after the administration decided on this policy

Question 17

Most economists believe that

A)the expectations of firms and consumers can be easily predicted
B)only small disturbances require active monetary policy
C)monetary policy has a shorter inside lag than fiscal policy
D)monetary policy has a shorter outside lag than fiscal policy
E)automatic stabilizers tend to make active policy largely obsolete

Question 18

The outside lag is defined as the length of time it takes

A)to recognize whether a disturbance is permanent or temporary
B)to come up with the appropriate policy response to a disturbance
C)to account for the recognition, decision, and action lags
D)for a policy to affect the economy after its implementation
E)for the public to form expectations about a newly announced policy change

Question 19

The best policy response to a disturbance may be to do nothing if,

A)there are long and variable outside lags
B)a disturbance is short-lived
C)the inside and outside lags are both short
D)the recognition lag is negative
E)both A)and B

Question 20

If an economic disturbance is known to be transitory,

A)discretionary monetary policy should be undertaken because of its short outside lag
B)discretionary fiscal policy should be undertaken because of its short inside lag
C)consumption is likely to be significantly affected
D)policy makers should proceed cautiously, since there is always the possibility that any policy action may itself be destabilizing
E)none of the above

Question 21

Multiplier uncertainty is a major handicap for policy makers since it means that they don't always know

A)the potential impact of a policy measure on the economy
B)whether a disturbance is temporary or permanent
C)from which sector of the economy a disturbance arises
D)how long it will take to formulate and implement a policy change
E)how long it will take for a policy to affect the economy

Question 22

Active stabilization policy may actually destabilize the economy since policy makers

A)do not know the exact length of policy lags
B)often do not know whether a disturbance is permanent or transitory
C)base their decisions on incomplete information about the economy
D)cannot take into account how individuals' expectations are affected by policy changes
E)all of the above

Question 23

If we have more information about the precise values of the parameters within a given economic model, then

A)multiplier uncertainty decreases
B)policies can be more easily implemented
C)the length of the outside lag becomes less important
D)the inside lag becomes shorter
E)all of the above

Question 24

Policy makers should use a variety of fiscal and monetary policy measures to stabilize the economy since

A)this will shorten any policy lags
B)this will always maintain full employment
C)this will eliminate multiplier uncertainty
D)there is a chance that errors in estimating one multiplier will be offset by errors in estimating another
E)none of the above

Question 25

Multiplier uncertainty is defined as uncertainty about

A)the structure of the economy
B) the length of the outside lag
C) the magnitude of the effects that will result from a particular policy action
D)the accuracy of the indicators that predict the immediate impact of a policy action
E)both A)and C)

Question 26

Economists are more likely to be in favor of a strict monetary policy rule if they

A)believe that the Phillips curve is close to vertical even in the short run
B)believe that the economy is basically self-correcting
C)want to minimize the problem of dynamic inconsistency
D)favor a truly independent central bank
E)all of the above

Question 27

After the attack on the World Trade Center in New York on September 11, 2001, the U.S.Fed decided to

A)cautiously assess the situation and wait several days before taking any policy action
B)lower reserve requirements for banks to signal its desire to stimulate the economy
C)increase bank reserves to guarantee liquidity to the financial system
D)close for a few days and therefore could not undertake any open market operations
E)undertake large open market sales to indicate to the world that financial markets still worked

Question 28

If the monetary growth rate is far above the target range previously announced by the central bank, financial markets will assume that

A)the central bank will reduce money supply in the near future, which may push up interest rates
B)the rate of inflation will increase soon, which may lead to higher nominal interest rates
C)anticipation of higher inflation will increase the demand for credit from firms or households and this will push up interest rates
D)all of these are possible
E)none of these are possible

Question 29

Trying to stabilize the economy through discretionary policy

A)is easier using fiscal policy, since its effects are better understood than those of monetary policy
B)is easier using monetary policy, since its outside lag is shorter than that of fiscal policy
C)is easier using monetary policy, since its inside lag is shorter than that of fiscal policy
D)is not necessary, since automatic stabilizers always provide enough built-in stability
E)is virtually impossible, since neither fiscal nor monetary policy affects the unemployment rate in the short run

Question 30

Imposing policy rules

A)reduces the risk that policy makers will react to disturbances in unpredictable ways
B)appeals to economists who assume the economy is very unstable
C)always implies that the growth rate of money supply has to be kept constant
D)only works if there is a large tradeoff between unemployment and inflation
E)all of the above

Question 31

Economists who believe that a large unemployment-inflation tradeoff exists are likely to advocate

A)real GDP targeting
B)nominal GDP targeting
C)inflation targeting
D)a strict monetary growth rule
E)none of the above

Question 32

There is considerable discussion of whether an activist policy approach is preferable over a strict rule approach.In this discussion, which of the following has been established?

A)active policy is not impossible, but a full-employment bias may create too much inflation
B) no activist policy rule has ever been created
C)no exceptions to the imposed rule should ever be made even under extreme circumstances, otherwise policy makers lose credibility
D)the economy can successfully be fine tuned as long as monetary policy decisions are announced in advance
E)none of the above

Question 33

Imposing an active monetary growth rule that links monetary growth to the unemployment rate implies that

A)the economy can be fine tuned
B) flexibility in responding to economic disturbances is totally lost
C) political cycles can more easily occur
D)the administration can more easily influence decisions made by the FOMC
E)none of the above

Question 34

Which of these economists proposed that economic policy should be confined primarily to maintaining a constant long-run money supply growth rate?

A)Stanley Fischer
B)Milton Friedman
C)John Maynard Keynes
D)Paul Samuelson
E)John Taylor

Question 35

If policy makers were convinced that the Phillips curve were close to vertical even in the short run, they would most likely advocate

A)real GDP targeting
B)inflation targeting
C)a policy to keep unemployment close to its natural rate
D)very active monetary policy
E)none of the above

Question 36

When trying to stabilize the economy, it is always good to use a variety of fiscal and monetary policy measures since

A)the size of both the fiscal and monetary policy multipliers is uncertain
B)neither fiscal nor monetary policy works well when used by itself
C)one has only a short-run effect and the other only a long-run effect
D)this way full-employment can always be maintained
E)none of the above

Question 37

Advanced announcements of monetary policy changes are desirable since

A)financial markets need a long time to interpret and react to policy announcements
B) monetary policy only has an effect on real output if people believe policy announcements
C)as long as policy announcements are consistently followed, the central bank's credibility is increased, creating more rational expectations
D)individuals tend to adjust their behavior following these announcements in a way that actually negates the need for any real policy action
E)none of the above

Question 38

During the recession of 2007-09, the U.S.Fed

A)carefully reduced interests rates step by step until it achieved its desired target level
B)wasted a lot of time before it realized how severe the recession actually was, but then responded with massive open market sales
C)stuck to its monetary growth targets in an effort to calm financial markets
D)reduced short-term interest rates rapidly until they were close to zero percent
E)kept unemployment below 8 percent by rapidly increasing money supply

Question 39

Fiscal policy can be an inappropriate macroeconomic stabilization tool, since

A)it has a larger outside lag than monetary policy
B)it may have side effects that can distort decisions in the private sector
C)it will always involve a loss of tax revenue for the government
D)it has no short-run effects
E)none of the above

Question 40

The macroeconomic forecast of the Congressional Budget Office (CBO) used to predict the two-year average growth rate in real GDP

A) tends to be highly inaccurate since it is based on fairly unrealistic assumptions
B) accurately predicted the last three recessions in 1991/92, 2001/02, and 2007-09
C) overestimated the actual growth rates of GDP from 2004 - 08
D) was on target in predicting the high growth rates of GDP in the mid to late 1990s
E) both C and D

Question 41

Nominal GDP targeting implies that

A)there is an implicit monetary policy tradeoff between inflation and unemployment
B)the Fed will never have to adjust its monetary targets even if there is a shift in money demand
C)the Fed will never have to make adjustments in its money stock targets as disturbances hit the economy
D)the desire to maintain full employment outweighs any risk of an inflationary bias
E)none of the above

Question 42

If a central bank employs policies that seem appropriate for the short run but may endanger its long-run goals, then

A)its actions involve dynamic inconsistency
B)it should never announce its intentions, because financial markets have a tendency to respond slowly to new information
C)it should not announce which indicators it is using to assess the success of the policy action
D)people cannot profit from anticipating the central bank's policy actions
E)none of the above

Question 43

If a central bank targets inflation, then

A)it should not react to every disturbance in aggregate demand
B)its policy implies an automatic tradeoff between inflation and unemployment
C)it can reduce unemployment without fear of losing credibility
D)interest rates have to be lowered whenever there is a disturbance in the expenditure sector
E)none of the above

Question 44

If we have a loss function that is more heavily weighted against high unemployment than against deviations from an inflation target, then

A)a recession will result if the targeted rate of inflation is below the expected inflation rate
B)there is an inherent incentive to raise inflation in order to lower unemployment
C)there is no good incentive to actually stick to the inflation target
D)real GDP targeting is preferable to nominal GDP targeting
E)all of the above

Question 45

If a central bank targets inflation, then

A)a reduction in unemployment will cause only a modest increase in inflation
B)its policy implies an automatic tradeoff between inflation and unemployment
C)it must assume that the Phillips curve is fairly flat
D)it is guided by the belief that large deviations from full-employment are rare
E)all of the above

Question 46

With nominal GDP targeting, the central bank

A)always tries to keep the economy at its full-employment level by keeping actual inflation close to expected inflation
B)always adjusts money supply even if there is only a temporary shift in aggregate demand
C)never makes adjustments in money supply even under extreme circumstances
D)is willing to risk an inflationary bias in its policy to maintain full employment
E)none of the above

Question 47

The temptation to engage in dynamic inconsistency can be minimized by

A)being more concerned with short-run outcomes than long-run outcomes
B)the desire to achieve credibility
C)employing policy responses that are right for current disturbances without much concern over long-run objectives
D)never announcing any proposed policy actions
E)none of the above

Question 48

The Fed should be much more independent of the administration

A)if we wish to minimize the problem of dynamic inconsistency
B)if there is a strong mandate to fight inflation
C)if there is evidence that Congress is unable to make hard choices
D)all of the above
E)none of the above

Question 49

The concept of dynamic inconsistency implies that a central bank

A)will always do the wrong thing if it is concerned with long-run outcomes rather than current disturbances
B)should never announce its intentions because doing so renders discretionary monetary policy useless
C)should resist making policy changes that may endanger its stated long-run goals even though these changes could successfully address a short-run problem
D)should always be inconsistent in its behavior so people will be less likely to profit from anticipating its policy actions
E)none of the above

Question 50

A central bank that is independent of the administration is desirable since

A)independence decreases the likelihood of political cycles
B)countries with independent central banks tend to have lower inflation rates
C)independence mitigates the problem of dynamic inconsistency
D)independence lends more credibility to monetary policy
E)all of the above