Deck 15: Stabilization Policy, Output, and Employment

Question 1

When the effects of a more expansionary macroeconomic policy are quickly and accurately anticipated, the policy will

A) increase inflation without reducing unemployment.
B) increase unemployment while exerting little impact on inflation.
C) decrease unemployment while exerting little impact on inflation.
D) fail to exert a significant impact on either unemployment or inflation.

Answer 1

increase inflation without reducing unemployment.

Question 2

The rational expectations theory indicates that expansionary policy will

A) stimulate real output in the long run but not in the short run.
B) expand real output and employment if the public quickly anticipates the effects of the expansionary policy.
C) equalize real and nominal interest rates during lengthy periods of inflation.
D) fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Answer 2

fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Question 3

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase

A) prices but not real output in the short run.
B) real output but not prices in the short run.
C) real output in the long run but not in the short run.
D) real output in both the long run and the short run.

Answer 3

prices but not real output in the short run.

Question 4

The rational expectations hypothesis implies that use of discretionary macro-policy as a stabilization tool will

A) be ineffective, even in the short run.
B) be effective in the short run but ineffective in the long run.
C) be effective both in the short run and long run.
D) make it possible to trade-off a higher rate of inflation for a lower rate of unemployment.

Question 5

According to the rational expectations theory,

A) on average people have very little idea of what to expect from government policy makers.
B) people form expectations by focusing only on the private sector.
C) people do not consider likely government policies when forming expectations.
D) people form expectations, in part, by considering the probable future effects of changes in government policy.

Question 6

Under the rational expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy?

A) higher prices and no change in real output
B) higher prices and expansion in real output
C) no change in prices but an expansion in real output
D) no change in either prices or real output

Question 7

The integration of expectations into macroeconomic analysis indicates that

A) fiscal policy is more potent than monetary policy.
B) monetary policy is more potent than fiscal policy.
C) once people come to expect a given rate of inflation, the inflation will neither stimulate real output nor reduce unemployment.
D) higher rates of inflation will lead to lower rates of unemployment in the long run but not in the short run.

Question 8

Under the adaptive expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy?

A) higher prices and no change in real output
B) higher prices and expansion in real output
C) no change in prices but an expansion in real output
D) no change in either prices or real output

Question 9

Under the rational expectations hypothesis, which of the following is the most likely effect of a shift to a more expansionary monetary policy?

A) In the short run, the real rate of output will be unaffected, but in the long run, it will increase.
B) In the short run, the real rate of output will increase, but in the long run, it will be unchanged.
C) There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher.
D) In the short run, the impact on the real rate of output is uncertain; in the long run, it will remain unchanged.

Question 10

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

A) higher prices and no change in real output
B) higher prices and expansion in real output
C) no change in prices but an expansion in real output
D) no change in either prices or real output

Question 11

Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a more expansionary policy will increase

A) prices and unemployment in the long run.
B) real output in the short run but not in the long run.
C) real output in the long run but not in the short run.
D) real output in both the long run and the short run.

Question 12

According to the rational expectations theory, expansionary monetary policy will

A) reduce inflation.
B) lead to inflation and the higher rate of inflation will be quickly anticipated.
C) reduce unemployment because people will generally underestimate the inflationary side effects of the monetary expansion.
D) accelerate inflation in the short run, but in the long run the primary effect will be an increase in employment.

Question 13

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a

A) temporary reduction in the unemployment rate.
B) permanent reduction in the unemployment rate.
C) temporary reduction in the inflation rate.
D) permanent reduction in the inflation rate.

Question 14

The rational expectations hypothesis implies that discretionary macropolicy may be

A) relatively effective in both the short run and long run.
B) relatively effective in the short run but ineffective in the long run.
C) relatively ineffective both in the short run and long run.
D) effective in the long run since decision makers will continually make predictable, systematic errors.

Question 15

Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy?

A) In the short run, the real rate of output will be unaffected, but in the long run, it will increase.
B) In the short run, the real rate of output will increase, but in the long run, it will be unchanged.
C) There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher.
D) In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Question 16

Under the adaptive expectations theory, expansionary monetary and fiscal policies designed to reduce the unemployment rate will be

A) ineffective in the long run.
B) ineffective in the short run.
C) noninflationary.
D) all of the above.

Question 17

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will

A) ignore the policy until it exerts an observable impact on prices, output, and employment.
B) quickly take steps to adjust their decision making in light of the more expansionary policies.
C) be fooled at the outset but eventually adjust their decision making in accordance with the change in policy.
D) be unaware that this policy change has been implemented until a higher rate of inflation is observed.

Question 18

Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

A) higher prices and no change in real output
B) higher prices and expansion in real output
C) no change in prices but an expansion in real output
D) no change in either prices or real output

Question 19

Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices,

A) unemployment will rise.
B) unemployment will fall.
C) there will be no effect on unemployment.
D) unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates.

Question 20

The proponents of rational expectations believe that

A) there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B) macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C) the inflationary side effects of expansionary policies will be anticipated quickly, and therefore, even their short-run effects on real output and employment will be minimal.
D) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Question 21

Use the table below to choose the correct answer. According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers would expect inflation during period 3 to be

A) 2 percent.
B) 5 percent.
C) 7 percent.
D) 8 percent.

Question 22

The rational expectations hypothesis assumes that individuals will

A) never make forecasting errors.
B) be as likely to overestimate as to underestimate the future rate of inflation.
C) continually make systematic forecasting errors.
D) ignore past forecasting errors when formulating predictions.

Question 23

According to the rational expectations theory, expansionary monetary policy is fully effective only if

A) the policy is anticipated by workers and firms.
B) aggregate supply shifts to the left.
C) the economy is operating at or above its potential output level.
D) policy makers follow through on their previously announced plans.
E) the effects of the policy are unexpected.

Question 24

Assume that during the last several years, the annual rate of inflation was 4 percent and the annual growth rate of the money supply was 5 percent. During the last 12 months, however, the monetary authorities have increased the money supply at a 12 percent annual rate. The expected inflation rate for the next period will be

A) higher than 4 percent under the rational expectations hypothesis.
B) 4 percent under the adaptive expectations hypothesis.
C) higher than 4 percent under both the adaptive and rational expectations hypotheses.
D) both a and b.

Question 25

Suppose the inflation rate of a country falls from 8 percent during 2002-2004 to 6 percent in 2005-2007, under the adaptive expectations hypothesis what will the expected rate of inflation at the beginning of 2008?

A) 2 percent
B) 4 percent
C) 6 percent
D) 8 percent

Question 26

The main policy conclusion of the rational expectations theory is

A) fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can stimulate output.
B) monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can stimulate output.
C) both monetary and fiscal policy will affect real output if firms and households correctly anticipate the effects of changes in government policy.
D) neither monetary nor fiscal policy will affect real output if firms and households correctly anticipate the effects of changes in government policy.

Question 27

The rational expectations hypothesis indicates that people

A) pay little attention to policy when forming their expectations about the future.
B) expect the next period to be pretty much like the recent past, regardless of policy changes.
C) will always be able to forecast the future accurately.
D) change their expectations about the future if policy changes.

Question 28

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called

A) the adaptive expectations hypothesis.
B) the permanent income hypothesis.
C) the rational expectations hypothesis.
D) the Phillips curve.

Question 29

Under the adaptive expectations theory, people persistently

A) underestimate inflation when it is slowing down.
B) overestimate inflation when it is accelerating.
C) underestimate inflation when it is accelerating.
D) adapt to the prevailing inflation rate quickly.

Question 30

According to the rational expectations theory, which of the following will affect the levels of output and employment?

A) expansionary monetary policy that is fully anticipated
B) contractionary monetary policy that is fully anticipated
C) changes in monetary policy that are unanticipated
D) changes in fiscal policy that are anticipated

Question 31

According to the adaptive expectations hypothesis, people will

A) anticipate that what has happened in the immediate past will continue.
B) systematically overestimate inflation when inflation is increasing.
C) use all available information, including information on the expected impact of economic policy, when they formulate expectations about economic events.
D) systematically underestimate inflation when inflation is declining.

Question 32

Systematic overestimation or underestimation of inflation will

A) occur under rational expectations but not under adaptive expectations.
B) occur under adaptive expectations but not under rational expectations.
C) occur under both rational and adaptive expectations.
D) not occur under either rational or adaptive expectations.

Question 33

(I)  Rational expectations adherents believe that decision makers base their future expectations on actual outcomes observed during recent periods.
(II)  The adaptive expectations hypothesis states that decision makers weigh all available evidence when forming expectations about future economic events.

A) I is true; II is false.
B) I is false; II is true.
C) Both I and II are true.
D) Both I and II are false.

Question 34

The proponents of adaptive expectations believe that

A) there will be a substantial time lag before people anticipate the effects of a shift to a more expansionary macro-policy.
B) macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C) discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.
D) all of the above are true.

Question 35

According to the theory of rational expectations, errors in predicting inflation will

A) be biased upward more often than not.
B) be purely random.
C) tend to be biased downward when inflation is rising, and tend to be biased upward when inflation is falling.
D) tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling.

Question 36

Suppose that during the last five years the rate of inflation was 3 percent each year and the money supply had grown 6 percent annually during the period. However, during the last nine months, the Fed has expanded bank reserves more rapidly and the money supply has been growing at a 12 percent annual rate. As a result, the expected inflation rate for the next period will be

A) higher than 3 percent under the rational expectations hypothesis.
B) 3 percent under the adaptive expectations hypothesis.
C) higher than 3 percent under both the adaptive and rational expectations hypotheses.
D) both a and b.

Question 37

According to the adaptive expectations hypothesis,

A) inflation will cause the long-run unemployment rate to decline.
B) the economic record during the current period strongly influences decision-maker expectations about the future.
C) decision makers will consider the expected impact of policy changes when forming their expectations about the future rate of inflation.
D) future inflation will adapt to conform with the expectations of decision makers.

Question 38

According to the theory of rational expectations, the government can influence output

A) with appropriate fiscal and monetary policy.
B) in the short run, but not in the long run.
C) without affecting the price level.
D) only by making unexpected changes that impact aggregate demand.

Question 39

The view that decision-maker expectations are based on actual outcomes observed during the recent past is called the

A) rational expectations hypothesis.
B) adaptive expectations hypothesis.
C) permanent income theory.
D) recognition lag.

Question 40

Which of the following is true regarding economic fluctuations in the United States?

A) Prior to World War II, economic ups and downs were more moderate than after the war.
B) Prior to World War II, annual increases in real GDP of more than 5 percent were unheard of.
C) Real GDP grew rapidly during the 1930s.
D) The 1930s was a period of prolonged economic stagnation and high unemployment.

Question 41

Prior to World War II,

A) the growth of real GDP was more stable than has been the case since the war.
B) the growth of real GDP was less stable than has been the case since the war.
C) unemployment seldom exceeded 4 percent of the labor force.
D) double-digit swings in real GDP during a single year were unheard of.

Question 42

Which combination of signals would be a strong indication that Fed policy is too expansionary and that a shift to a more restrictive policy is in order?

A) commodity prices are falling and the dollar is appreciating.
B) commodity prices are rising and the dollar is depreciating.
C) commodity prices are rising and the dollar is appreciating.
D) commodity prices are falling and the dollar is depreciating.

Question 43

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

A) Commodity prices are falling, and the dollar is appreciating.
B) Commodity prices are rising, and the dollar is appreciating.
C) Commodity prices are rising, and the dollar is depreciating.
D) Commodity prices are falling, and the dollar is depreciating.

Question 44

Computer forecasting models are most accurate at predicting the economy when

A) inflation is accelerating.
B) there is a turn in the business cycle.
C) economic conditions are relatively stable.
D) supply shocks impact the economy.

Question 45

During the 1900-1950 period,

A) the growth of real GDP was more stable than has been the case since 1950.
B) unemployment seldom exceeded 4 percent of the labor force.
C) double-digit swings in real GDP during a single year were not uncommon.
D) the money supply was increased at a constant annual rate of between 4 percent and 6 percent throughout the period.

Question 46

Which of the following variables are included in the index of leading indicators?

A) new orders placed with manufacturers, length of average workweek, permits for new housing starts
B) changes in the M1 money supply, number of new credit cards, political stance of current politicians
C) average worker salary, average number of children per family, current standard of living
D) labor-force participation rate, household debt as a share of disposable income, the real interest rate

Question 47

The effectiveness of monetary policy as a stabilization tool is limited by

A) activist economists, who exert pressure on politicians.
B) the inability to forecast the future and time policy changes in a stabilizing manner.
C) Congressional attempts to offset changes in monetary policy with modifications in fiscal policy.
D) the inability of the Federal Reserve to alter the money supply.

Question 48

In order to make effective policy changes, policy makers need to know

A) where the economy is going to be six to twelve months from now.
B) the magnitude of past recessions.
C) Keynesian economics.
D) the exact size of the current M1 money supply.

Question 49

The variables in the index of leading indicators are included in the index because

A) they are good indicators of the current rate of inflation.
B) they generally lag behind turns in the business cycle.
C) of their tendency to lead (or predict) turns in the business cycle.
D) they are good indicators of the current state of the economy.

Question 50

The index of leading indicators was developed to provide more reliable information on

A) the expected future direction of the economy.
B) the future profitability of the leading companies in various industries.
C) where the economy has been in the recent past.
D) the extent to which the economy's existing plant and equipment capacity is being used.

Question 51

If monetary and fiscal policy are going to promote economic stability, they must _________ during a recession, and _________ during an economic boom.  (Fill in the blank)

A) add stimulus; apply restraint
B) apply restraint; add stimulus
C) add stimulus; add stimulus
D) apply restraint; apply restraint

Question 52

Which of the following factors substantially reduces the effectiveness of discretionary changes in tax rates or government expenditures as a stabilization tool?

A) Even though computer models have enhanced our forecasting ability, policy makers at the Federal Reserve have been reluctant to utilize information supplied by the models.
B) When fiscal policy is altered, the Fed generally shifts monetary policy in a manner that offsets the impact of the fiscal action.
C) Changes in government expenditures and taxes are always offset by equal changes in private spending.
D) Since it takes time for fiscal policy to work and since the future is difficult to forecast, it is difficult to time fiscal policy changes correctly.

Question 53

Which of the following is a widely-used and closely-watched forecasting tool concerning the future direction of the macro-economy?

A) the excess reserves of commercial banks
B) the Phillips curve
C) the index of leading indicators
D) the current budget deficit or surplus
E) the velocity of the M1 money supply

Question 54

A decrease in a broad index of commodity prices suggests to the Fed that

A) money is plentiful, and the Fed should conduct restrictive policy.
B) money is plentiful, and the Fed should conduct expansionary policy.
C) deflation is a potential future danger, and the Fed should conduct expansionary policy.
D) future prices will likely increase, and the Fed should conduct expansionary policy.

Question 55

Computer forecasting models have

A) been able to forecast changes in the growth rate of real GDP with considerable accuracy.
B) had only limited success predicting turns in key economic variables such as real GDP.
C) been able to accurately forecast the future direction of inflation but not real GDP.
D) been able to accurately forecast the future direction of real GDP but not inflation.

Question 56

The variables in the index of leading indicators are included in the index because

A) they turn down prior to a deflation and turn up prior to an inflation.
B) they generally lag behind turns in the business cycle.
C) they turn down prior to a recession and turn up before the beginning of a business expansion.
D) they provide a comprehensive measure of the current state of the economy.

Question 57

Which one of the following reduces the likelihood that real-world fiscal policy will promote economic stability?

A) Policy planners do not know whether a tax cut is expansionary or restrictive.
B) Policy makers need to know what economic conditions will be like 6 to 18 months into the future, and this is extremely difficult to forecast accurately.
C) Policy planners are reluctant to implement expansionary fiscal policy even during a serious recession.
D) Public choice theory suggests that elected political officials will generally favor restrictive fiscal policy.

Question 58

Which of the following would suggest that monetary policy is restrictive?

A) falling commodity prices
B) depreciation of the foreign exchange value of the dollar
C) a rising M1 money supply
D) an increase in the rate of inflation

Question 59

If the index of leading indicators and other forecasting devices suggested that the economy is moving into an inflationary boom, activists' economic policy would call for

A) a decrease in money supply growth and a tax increase.
B) an increase in money supply growth and a shift toward a budget deficit.
C) an increase in money supply growth and a tax decrease.
D) a continuation of the policies already in place.

Question 60

If indicators like weak demand and falling commodity prices caused concern about deflation (falling prices), what could the Fed do to head off the deflationary threat?

A) increase the reserve requirements imposed on banks
B) buy bonds in order to expand the money supply
C) increase the discount rate
D) increase the national debt

Question 61

The Phillips curve illustrates the relationship between

A) change in the money supply and change in unemployment.
B) tax rates and tax revenues.
C) the equilibrium level of income and the employment rate.
D) inflation and unemployment.

Question 62

Those who favor active use of monetary and fiscal policy believe that

A) the M1 money supply should be increased at a steady rate annually.
B) taxes should be increased during a recession in order to balance the federal budget.
C) the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment.
D) discretionary changes in macroeconomic policy can help smooth the business cycle of a market economy.

Question 63

If decision makers adjust fully to demand stimulus policies, persistent expansionary macro-policy will lead to

A) inflation with no lasting reductions in unemployment.
B) a permanent reduction in unemployment.
C) lower interest rates.
D) more rapid economic growth.

Question 64

According to the modern view of the Phillips curve, expansionary macroeconomic policy that leads to inflation will reduce unemployment

A) only if people underestimate the inflationary side effects of the policy.
B) only if people overestimate the inflationary side effects of the policy.
C) if people accurately anticipate the inflationary side effects of the policy.
D) only if monetary policy provides the macroeconomic stimulus.

Question 65

During the 1960s, most economists believed that expansionary macro-policy

A) that caused inflation would permanently reduce unemployment.
B) that caused inflation would permanently increase unemployment.
C) could not be utilized to reduce unemployment.
D) did not affect inflation.

Question 66

Which one of the following accurately states the view of activists who favor discretionary stabilization policy?

A) Neither monetary nor fiscal policy will exert an impact on the real level of economic activity.
B) Since we have only limited ability to forecast the future direction of the economy, the best policy is to do nothing.
C) Our ability to forecast the future direction of economic activity is quite good, and therefore, discretionary macroeconomic policy is now capable of eliminating fluctuations in the business cycle if policy makers would follow the advice of leading economists.
D) The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy.

Question 67

Which of the following has been the most stable period (i.e., least amount of time spent in recession) in American history?

A) 1910-1932
B) 1930-1945
C) 1960-1982
D) 1983-2015

Question 68

Regarding the issue of economic stability, nonactivists believe that

A) consumption is highly unstable over the business cycle.
B) the highest possible level of investment must be maintained over all phases of the business cycle.
C) minor economic disturbances often feed on themselves, leading to severe swings in the business cycle.
D) the self-correcting properties of a market economy work reasonably well.

Question 69

Which of the following is a major area of disagreement between activists and nonactivists?

A) Activists believe discretionary macroeconomic policy can be applied in a manner that will enhance economic stability. Nonactivists disagree.
B) Activists believe monetary policy is more potent than fiscal policy. Nonactivists disagree.
C) Activists believe changes in monetary and fiscal policy exert their effects instantaneously. Nonactivists think they work only with a substantial lag.
D) Nonactivists think macroeconomic policy is sometimes motivated by the pursuit of political gain. Activists disagree.

Question 70

As measured by the amount of time spent in recession, the 1983-2015 period was

A) characterized by 4 downturns and 65 months of recession.
B) characterized by 2 downturns and 72 months of recession.
C) the most stable era in American history.
D) the second most unstable 33-year period in American history.

Question 71

Between 1983 and 2015, the U.S. economy experienced  ___________ recessions and the economy was in recession  ___________ of the time.  (Fill in the blanks)

A) no; 0 percent
B) 1; 2 percent
C) 3; 9 percent
D) 5; 22 percent

Question 72

Activists and nonactivists both believe that

A) the self-corrective mechanism of a market economy works quite well.
B) macro-policy should seek to minimize economic fluctuations, keep the inflation rate low, and establish an environment consistent with strong economic growth.
C) discretionary monetary and fiscal policy can be used successfully to speed the adjustment process and reduce the swings of the business cycle.
D) policies that stimulate aggregate demand can reduce the long-term rate of unemployment.

Question 73

Incorporation of expectations into economic decision making and the economic experience of recent decades indicate that in the long run

A) inflation relates directly to unemployment.
B) inflation is inversely related to unemployment.
C) there is no trade-off between inflation and unemployment.
D) high unemployment is a primary cause of inflation.

Question 74

As measured by amount of time spent in recession, the ups and downs of the U.S. economy were

A) less frequent during 1983-2015.
B) less frequent during 1960-1982.
C) less frequent during 1910-1959.
D) more frequent during 1983-2015.

Question 75

Which of the following best reflects the nonactivist view of stabilization policy?

A) Monetary and fiscal policies exert little impact on the economy.
B) Discretionary policy changes often make matters worse.
C) Fiscal policy should be used to help stabilize the economy; monetary policy should not.
D) Expansionary monetary policy is the primary source of rapid economic growth.

Question 76

An unanticipated shift to a more expansionary macro-policy that leads to a higher-than-expected rate of inflation will

A) place downward pressure on prices.
B) temporarily reduce unemployment.
C) temporarily reduce output.
D) temporarily reduce the natural rate of unemployment.

Question 77

Activists believe that

A) discretionary changes in macroeconomic policy can help smooth the ups and downs of the business cycle.
B) balancing the federal budget is of primary importance to economic stability.
C) the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment.
D) the M1 money supply should be increased at a steady annual rate.

Question 78

The interval between the recognition of a need for a policy change and when the policy change is instituted is called the:

A) recognition lag.
B) impact lag.
C) policy lag.
D) administrative lag.

Question 79

The time between implementation of a macro-policy change and when the change exerts its primary influence is called the

A) impact lag.
B) recognition lag.
C) administrative lag.
D) tax reform lag.

Question 80

The time period between when economic conditions change and when policy makers are aware of the change is called the

A) index of leading indicators.
B) administrative lag.
C) recognition lag.
D) impact lag.