Deck 14: Macroeconomic Policy: Challenges in a Global Economy

Question 1

One of the key factors leading to the Great Recession was

A) a worldwide savings glut.
B) a shortage of housing in the United States.
C) a surplus in the federal budget.
D) the war in Iraq.

Answer 1

a worldwide savings glut.

Question 2

(Figure: Understanding Phillips Curves Shifts 2) What would cause an outward shift from Phillips curve PC₁ to Phillips curve PC₀?

A) a decrease in the expected inflation rate
B) an increase in the expected inflation rate
C) a decrease in the natural rate of unemployment
D) an increase in the natural rate of unemployment

Answer 2

an increase in the expected inflation rate

Question 3

(Figure: Determining Long-Run and Short-Run Economic Shifts) Starting at point r, the economy will move to point _____ in the long run if policymakers successfully increase aggregate demand.

A) m
B) s
C) j
D) n

Answer 3

j

Question 4

Which of these is NOT a factor that explains jobless recoveries?

A) rising productivity
B) the increased use of temporary and part-time workers
C) lax labor laws
D) an increase in outsourcing

Question 5

According to the Phillips curve analysis, the way to solve inflation is to _____ unemployment or _____.

A) increase; increase productivity
B) increase; decrease productivity
C) decrease; increase the money supply
D) increase; increase the money supply

Question 6

Monetized debt is paid for by a(n)

A) decrease in the money supply.
B) increase in U.S. Treasury securities outstanding.
C) increase in the money supply.
D) decrease in world demand for U.S. Treasuries.

Question 7

The graph that shows the tradeoff between inflation and money wages is called the

A) misery index.
B) employment line.
C) Phillips curve.
D) minimization curve.

Question 8

If policymakers want to keep unemployment below the natural rate, they must continually increase aggregate demand so that inflation is always greater than anticipated, thereby setting up an inflationary spiral.

Question 9

In the long run, any demand-side policy that attempts to reduce unemployment below its natural rate will

A) cause inflation.
B) be successful.
C) increase the natural rate.
D) lower GDP.

Question 10

Deflation can be a problem because it

A) leads to higher wages.
B) makes it more difficult to pay off debt.
C) can easily become hyperinflation.
D) increases interest rates.

Question 11

Which statement about adjustable-rate mortgages is true?

A) Interest rates cannot change over the life of the mortgage.
B) Adjustable-rate mortgages are especially attractive to high-income buyers.
C) Adjustable-rate mortgages usually have interest rates lower than market rates during their first year.
D) Adjustable-rate mortgages are more attractive when interest rates on fixed mortgages fall.

Question 12

Ceteris paribus, if workers receive all their productivity increases in the form of higher wages, then wage inflation will remain stable.

Question 13

According to the equation for the Phillips curve, if nominal wages increase by 3% and productivity increases 2%, then inflation will change by

A) -5%.
B) -1%.
C) 1%.
D) 5%.

Question 14

A consequence of trying to keep unemployment below its natural level is ever-accelerating inflation.

Question 15

Robert Lucas argued that

A) workers and employers would adjust to macroeconomic inflationary policies designed to increase employment and thereby negate the policies.
B) the opportunity cost of macroeconomic policies was always negative.
C) workers were more important than employers in determining macroeconomic policy.
D) macroeconomic policy would work only with a three-year lag.

Question 16

Suppose the economy is currently in equilibrium, with unemployment equal to the natural rate, and that people form expectations rationally. If the Federal Reserve announces that it is going to decrease the money supply, then the economy will

A) permanently move to a higher level of output and a higher price level.
B) move to a lower price level but remain at potential GDP.
C) permanently move to a lower level of output and a lower price level.
D) move to a higher GDP level but remain at a constant price level.

Question 17

The main practical difference between the rational expectations and adaptive expectations theories is the speed of adjustment in the economy.

Question 18

One of the trigger points for the financial crisis of 2007-2009 was that subprime borrowers defaulted when the interest on adjustable-rate mortgages went up.

Question 19

What factor does NOT help to explain the recent phenomenon of a jobless recovery?

A) a rapid increase in productivity
B) greater reliance on temporary and part-time workers
C) outsourcing
D) higher levels of government stimulus spending

Question 20

Adjustable-rate mortgages usually have interest rates lower than market rates during the first year.

Question 21

Wages above market-clearing rates, intended to improve morale and reduce turnover, are called _____ wages.

A) efficiency
B) high-cost
C) undeserved
D) profit-impediment

Question 22

The Phillips curve

A) was developed by economists at Phillips 66.
B) shows the effectiveness of government policy.
C) is used by economists to determine optimal oil prices.
D) shows the relationship between unemployment and inflation.

Question 23

By paying an efficiency wage, employers give employees an incentive to shirk their duties.

Question 24

The adjustable-rate mortgage was the standard type before the early 2000s.

Question 25

According to the equation for the Phillips curve, if wages increase by 3% and productivity increases by 5%, then inflation will be

A) -8%.
B) -2%.
C) 2%.
D) 8%.

Question 26

One can understand the debt obligations stemming from health care and Social Security by looking at current deficit statistics.

Question 27

If workers fail to anticipate inflation increases, their real wages are likely to fall.

Question 28

Milton Friedman argued that

A) people's experiences determine their behavior.
B) people's expectations determine their behavior.
C) people are irrational.
D) in the long run, people's expectations are irrelevant.

Question 29

Suppose the economy is at the natural rate of unemployment, but it's an election year and expansionary policies are used to reduce the unemployment rate. If inflation now exceeds expected inflation, real wages have _____ and workers will demand _____ in their nominal wages.

A) risen; increases
B) risen; decreases
C) fallen; no changes
D) fallen; increases

Question 30

One implication of the long-run Phillips curve is that

A) economic policies to keep the unemployment rate below its natural rate will lead to accelerating inflation.
B) in the long run, the government can accurately estimate the natural rate of unemployment.
C) in the long run, the curve becomes upward sloping.
D) the natural rate of unemployment must be lowered to zero.

Question 31

The rational expectations theory describes the assumption that people are _____, and the adaptive expectations theory describes the assumption that people are _____.

A) forward-looking; backward-looking
B) backward-looking; forward-looking
C) rational; irrational
D) profit maximizers; loss minimizers

Question 32

Which of these does NOT describe the natural rate of unemployment?

A) the point at which the rates of change in productivity and wages are equal
B) the unemployment rate that exerts inflationary pressures
C) the unemployment rate at which inflation equals expected inflation, resulting in zero price pressures on the economy
D) the point at which the rates of change in productivity and wages are equal and the unemployment rate exerts no inflationary pressures

Question 33

The Phillips curve tradeoff worsened in the 1970s because of

A) oil shocks.
B) aggressive unions.
C) environmental concerns.
D) the Watergate scandal.

Question 34

(Figure: Understanding Economic Shifts) The graph depicts

A) an expansion.
B) decreasing unemployment rates.
C) stagflation.
D) deflation.

Question 35

Country X is practicing expansionary monetary policy. This helps improve its trade balance.

Question 36

One of the reasons wages may be sticky is because of

A) imperfect information.
B) inefficiency wages.
C) the Phillips curve.
D) Friedman's curse.

Question 37

Any action that reduces the public's perception of the rate of future inflation will shift the Phillips curve to the left.

Question 38

The Phillips curve shows a positive relationship between wages and unemployment.

Question 39

Which of these is NOT a cost of using fiscal or monetary policy to address a jobless recovery?

A) Expansionary monetary policy may lead to inflation in the long run.
B) Government spending might crowd out spending by consumers and firms.
C) Lower interest rates encourage consumers to increase spending.
D) Cutting taxes and increasing government spending increases the national debt.

Question 40

Wall Street ratings firms had an incentive to give overly glowing ratings to collateralized debt obligations because the firm received a higher fee for giving higher ratings.

Question 41

When the growth in productivity is _____ the rate of change in wages, inflation is _____, and the level of unemployment at that point is _____ the natural rate of unemployment.

A) greater than; positive; less than
B) less than; zero; greater than
C) equal to; zero; equal to
D) equal to; negative; less than

Question 42

According to the original Phillips curve, there is an inverse relationship between money wages and the unemployment level.

Question 43

The long-run Phillips curve

A) shows a tradeoff between inflation and unemployment.
B) graphs as an upward sloping curve.
C) is a horizontal line at the expected rate of inflation.
D) is a vertical line at the natural rate of unemployment.

Question 44

For developed countries like the United States and Japan, the increased pace of globalization has brought increased competition for resources.

Question 45

One major conclusion of the rational expectations theory is that

A) macroeconomic policy can be used to fine-tune the economy.
B) macroeconomic policy has no impact on GDP, even in the short run.
C) consumers do not always make rational decisions.
D) citizens cannot rationally expect the government to pursue the proper economic policy.

Question 46

Suppose policymakers want to keep the unemployment rate below its natural rate by increasing demand. A consequence of this policy would be

A) an increase in aggregate supply.
B) a stable Phillips curve.
C) increasing structural unemployment.
D) accelerating inflation.

Question 47

A shortcoming of the rational expectations hypothesis is that

A) it ignores short-term wage stickiness.
B) people prefer rational ignorance in making decisions.
C) it ignores the role of saving.
D) it is inconsistent with the long-run Phillips curve.

Question 48

When inflationary expectations are added to the Phillips curve, the nonaccelerating inflation rate of unemployment is defined as the unemployment rate at which the

A) inflation rate is always zero.
B) actual inflation rate exceeds the expected inflation rate.
C) actual inflation rate is less than the expected inflation rate.
D) actual inflation rate equals the expected inflation rate.

Question 49

The 2007-2009 recession was not as severe as the previous two recessions, in 1990 and 2001.

Question 50

Adaptive expectations are driven by emotions.

Question 51

The natural rate of unemployment is the rate at which inflation equals expected inflation, resulting in zero price pressures in the economy.

Question 52

Rational expectations analysis leads to the conclusion that policy changes will be effective in the short run.

Question 53

Most economists agree that expansionary fiscal policy is not effective in addressing a jobless recovery.

Question 54

(Figure: Determining Long-Run and Short-Run Economic Shifts) Starting at point r, the economy will move to point _____ in the short run if policymakers successfully increase aggregate demand.

A) m
B) s
C) j
D) n

Question 55

Unanticipated inflation results in

A) increasing real wages.
B) decreasing nominal wages.
C) decreasing real wages.
D) increasing nominal and real wages.

Question 56

When the expected rate of inflation increases, the Phillips curve

A) shifts to the right.
B) shifts to the left.
C) becomes horizontal.
D) disappears.

Question 57

One of the trigger points for the financial crisis of 2007-2009 was that Congress failed to balance the federal budget.

Question 58

Which company did the Federal Reserve and the Treasury allow to fail to send a message to the financial markets about the costs of risky behavior?

A) AIG
B) Chrysler
C) Ford
D) Lehman Brothers

Question 59

When QE ended in 2014, the Fed had accumulated over _____ trillion in mortgage-backed securities.

A) $1.425
B) $0.6
C) $3.725
D) $1.7

Question 60

_____ expectations measure the rate of inflation expected by workers for any given period.

A) Rational
B) Natural
C) Wage
D) Inflationary

Question 61

If inflationary expectations fall

A) there is a movement down along the Phillips curve.
B) the Phillips curve shifts outward.
C) the Phillips curve shifts inward.
D) there is a movement up along the Phillips curve.

Question 62

Which statement(s) is/are TRUE? I. People on fixed incomes will not be hurt if the United States monetizes its debt.
II) If the cost of Medicare changes as health care costs increase, it would enhance the government's ability to keep deficits and the national debt under control over the long term.
III) If the United States monetizes its debt, it will result in a weaker dollar if foreigners hold fewer U.S. dollars.

A) I only
B) II only
C) III only
D) I, II, and III only

Question 63

The efficiency wage theory states that by paying their employees more than the market-clearing wage, employers hope to

A) reduce productivity.
B) set up incentives for employees to shirk their duties.
C) increase turnover.
D) improve employee morale.

Question 64

Robert Lucas argued that the theory of rational expectations suggests that tax cuts will work if used temporarily.

Question 65

Essentially, the way to reduce inflationary expectations using demand-side policies is to cause an economic slowdown.

Question 66

As inflationary expectations rise, the _____ Phillips curve shifts to the _____.

A) long-run; right
B) short-run; right
C) long-run; left
D) short-run; left

Question 67

The adaptive expectations model concludes that individuals use past events to form expectations.

Question 68

Assume that inflation rates for the past 5 years have been 1%, 2%, 2.5%, 2%, 2%. The Federal Reserve announces that it is going to decrease the money supply because it is concerned about inflationary pressures in the economy. If people form their expectations _____, then in light of the Fed's announcement, they will expect an inflation rate of _____.

A) rationally; 2.5%
B) adaptively; 2%
C) adaptively; 1.9%
D) rationally; 4%

Question 69

Increases in productivity contributed to the jobless recovery after the 2007-2009 recession.

Question 70

The 2007-2009 recession was brought on when the Federal Reserve used excessive tightening of the money supply to solve the period of stagflation from 2004 to 2007.

Question 71

Suppose the Federal Reserve announces that its policy will increase the supply of money next year. This announcement can be expected to

A) increase unemployment.
B) shift the Phillips curve to the right.
C) reduce tax revenues.
D) shift the Phillips curve to the left.

Question 72

Expansionary monetary policy leads to inflation and is therefore not an appropriate policy for addressing a jobless recovery.

Question 73

If rational expectations theory is correct, then any increase in aggregate demand caused by announced expansionary policies

A) leads to a short-run increase in real output but no long-run increase.
B) causes the inflation rate to fall.
C) is offset by rising inflationary expectations, causing the short-run aggregate supply curve to immediately shift to the left.
D) is offset by rising inflationary expectations, causing the short-run aggregate supply curve to slowly shift to the left.

Question 74

In a global economy, a problem with using fiscal and monetary policies to fix the problems in our country is that those policies

A) are more likely to help other countries than to help us.
B) become completely ineffective.
C) make our trade balance deteriorate.
D) can lead to retaliatory actions by other nations.

Question 75

The long-run Phillips curve is vertical.

Question 76

Monetized debt occurs when debt is reduced by a fall in the money supply.

Question 77

The stagflation of the 1960s and 1970s showed policymakers that

A) the Phillips curve should slope upward.
B) the Phillips curve was always a useful tool of analysis.
C) the Phillips curve could shift over time.
D) Keynes was wrong in his analysis of aggregate demand.

Question 78

According to the equation for the Phillips curve, if nominal wages and labor productivity both rise by 3%

A) unemployment rises by 3%.
B) unemployment falls by 3%.
C) unemployment is at its natural rate.
D) inflation is increasing.

Question 79

Rational expectations theory suggests that the Federal Reserve and other policymakers must fool the public if their policies are to have short-term effects.

Question 80

One implication of the Phillips curve when it is unable to shift in the short run is that

A) fiscal and monetary policies have no impact on the economy.
B) the economy is in a liquidity trap.
C) policymakers face a tradeoff between low unemployment and low inflation.
D) fiscal policy is more effective than monetary policy.