Deck 16: Macroeconomic Policy, Business Cycles, and Growth

Question 1

U.S. economic data from 1955 to 2009 give evidence of

A) a positive relationship between the unemployment rate and inflation.
B) a negative relationship between the unemployment rate and inflation.
C) a constant rate of unemployment with changing rates of inflation.
D) a constant rate of inflation with changing rates of unemployment.
E) no particular relationship between the unemployment rate and inflation.

Answer 1

no particular relationship between the unemployment rate and inflation.

Question 2

The Phillips curve is named after the New Zealand economist A. W. Phillips, who discovered a(n)

A) inverse relationship between the PPI and the budget deficit in the United States.
B) inverse relationship between wage rates and the unemployment rate in England.
C) inverse relationship between economic growth and the unemployment rate in England.
D) positive relationship between inflation and the unemployment rate in the United States.
E) positive relationship between the British national debt and economic downturns.

Answer 2

inverse relationship between wage rates and the unemployment rate in England.

Question 3

Most economists believe that the downward-sloping Phillips curve shifts so that, in the long run,

A) inflation and unemployment increase at the same rate.
B) the tradeoff between inflation and unemployment disappears.
C) the tradeoff between inflation and unemployment increases.
D) the tradeoff between inflation and unemployment is constant.
E) the positive relationship between inflation and unemployment disappears.

Answer 3

the tradeoff between inflation and unemployment disappears.

Question 4

If reservation wages and the inflation rate increased simultaneously,

A) the expected rate of inflation would be less than the actual rate.
B) lower inflation would be associated with the original unemployment rate.
C) the unemployment rate would fall.
D) there would be no tradeoff between inflation and the unemployment rate.
E) the unemployment rate would rise.

Question 5

The long-run Phillips curve at the natural rate of unemployment is analogous to the

A) short-run Phillips curve at the natural rate of unemployment.
B) long-run aggregate supply curve at potential national income.
C) short-run aggregate demand curve at potential national income.
D) long-run aggregate demand curve at each price level.
E) horizontal portion of the aggregate supply curve.

Question 6

Figure 16.1

Refer to Figure 16.1. If the natural rate of unemployment is 5 percent, which of the following would cause a movement along Phillips curve III from point A to point B?

A) An inward shift of the aggregate demand curve
B) An outward shift of the aggregate demand curve
C) A movement down the aggregate supply curve
D) A movement down the aggregate demand curve
E) A movement up the aggregate demand curve

Question 7

Figure 16.1

Refer to Figure 16.1. Following the movement from point A to point B on Phillips curve III, what would cause the Phillips curve to shift so that 5 percent unemployment would be associated with 10 percent inflation?

A) A movement up the aggregate supply curve
B) A movement down the aggregate supply curve
C) A movement down the aggregate demand curve
D) An outward shift of the aggregate supply curve
E) An inward shift of the aggregate supply curve

Question 8

When workers expect less inflation than actually occurs,

A) there is a movement down the short-run Phillips curve.
B) the Phillips curve becomes vertical.
C) the long-run Phillips curve shifts to the right.
D) there is a movement up the short-run Phillips curve.
E) the short-run Phillips curve shifts to the left.

Question 9

The key feature that makes the short-run Phillips curve have a negative slope-meaning that unexpected inflation decreases the unemployment rate-is that

A) expectations are formed irrationally.
B) reservation wages are fixed.
C) workers behave irrationally.
D) firms are greedy.
E) government policy is time consistent.

Question 10

If the short-run Phillips curve shifts to the right, we can conclude that

A) the tradeoff between inflation and unemployment worsens over time.
B) the tradeoff between inflation and unemployment improves over time.
C) higher inflation rates are associated with any given level of unemployment.
D) the tradeoff between inflation and unemployment remains unchanged.
E) the unemployment rate rises for any given inflation rate.

Question 11

The Phillips curve suggests a tradeoff between

A) unemployment rates and tax rates.
B) inflation and the money supply.
C) monetary policy and fiscal policy.
D) unemployment rates and inflation.
E) inflation and GDP.

Question 12

U.S. data on unemployment and inflation in the 1970s

A) led economists to place greater emphasis on the Phillips curve as a policy tool.
B) led to the belief that the Phillips curve may shift over time.
C) led to a dismissal of the adaptive-expectations theory.
D) enforced the belief that inflation is constant over time.
E) led to the belief that the Phillips curve is horizontal over time.

Question 13

According to the long-run Phillips curve, which of the following would not be the end result of expansionary monetary policy when unemployment is at its natural rate?

A) Higher inflation
B) Rising production costs
C) No change in potential real GDP
D) A decrease in unemployment
E) An increase in prices

Question 14

The reservation wage is the

A) nominal wage rate minus the inflation rate.
B) legal minimum wage an employer must pay.
C) minimum wage a worker is willing to accept before employment.
D) nominal wage rate plus the expected rate of inflation.
E) nominal wage plus fringe benefits.

Question 15

Unexpected inflation can affect the unemployment rate in all of the following ways except:

A) wage expectations.
B) inventory fluctuations.
C) wage contracts.
D) federal funds rate changes.
E) none - all of these affect the unemployment rate.

Question 16

Figure 16.1

Refer to Figure 16.1. Phillips curve II is associated with the late 1980s in the United States and indicates that 5 percent unemployment was consistent with 4 percent inflation. Which curve would be associated with the late 1970s in the United States?

A) I
B) II
C) III
D) IV
E) None of these

Question 17

In the short run, expansionary monetary policy by the Fed would

A) reduce unemployment at the cost of higher inflation.
B) reduce inflation at the cost of a rise in the natural rate of unemployment.
C) reduce inflation and leave the natural unemployment rate unchanged.
D) reduce both inflation and unemployment.
E) increase both inflation and unemployment.

Question 18

If an increase in inflation is expected, which of the following will occur?

A) Employment will increase.
B) Aggregate supply will increase.
C) Employment will decrease.
D) A worker's reservation wage will rise at the same rate as expected inflation.
E) Nominal wage rates will remain constant.

Question 19

The short-run Phillips curve for the United States shifted down from the

A) early 1960s to the early 1970s
B) early 1970s to the late 1970s
C) late 1970s to the late 1980s
D) early 1960s to the late 1970s
E) none of these-the United States' short-run Phillips curve has never shifted down.

Question 20

The slope of the short-run Phillips curve is consistent with the

A) long-run tradeoff between the unemployment rate and inflation.
B) long-run tradeoff between inflation and GDP.
C) short-run tradeoff between the money supply and interest rates.
D) short-run tradeoff between business productivity and wage contracts.
E) short-run tradeoff between the unemployment rate and inflation.

Question 21

The adaptive expectations theory suggests that

A) the price level people expect in the future is based on the behavior of prices in the past.
B) the unemployment rate adapts immediately to the inflation rate.
C) people have perfect foresight and always predict future price levels correctly.
D) people use all current information available to formulate their inflation expectations.
E) people react spontaneously to price-level changes and do not consider any past or present information.

Question 22

When workers expect 6% inflation, and the inflation rate falls to 3%,

A) there is a movement to a lower Phillips curve.
B) there is a movement to a higher Phillips curve.
C) there is a movement along the Phillips curve to the right.
D) there is a movement along the Phillips curve to the left.
E) inventories will fall.

Question 23

If aggregate demand is higher than expected, which of the following will not occur?

A) Prices will be higher than expected.
B) The unemployment rate will rise.
C) Inventories will fall below targeted levels.
D) Production will increase.
E) Inflation will increase unexpectedly.

Question 24

Figure 16.2

Refer to Figure 16.2. Movement from point A to point B could be the result of a(n)

A) increase in the money supply.
B) decrease in government spending.
C) decrease in the money supply.
D) increase in tax rates.
E) economic recession.

Question 25

When aggregate demand declines unexpectedly and wage contracts are fixed, then inflation will

A) increase and business firms will hire new workers.
B) decline and firms will reduce wages.
C) decline and business firms will lay off workers.
D) increase and business firms will lay off workers.
E) increase and business firms will increase wages.

Question 26

According to the adaptive expectations view, the Phillips curve is

A) vertical in both the short run and the long run.
B) downward sloping in the short run and vertical in the long run.
C) downward sloping in both the short run and the long run.
D) horizontal in both the short run and the long run.
E) vertical in the short run and downward sloping in the long run.

Question 27

Figure 16.3

Refer to Figure 16.3. According to the theory of adaptive expectations, a decrease in the money supply that has been expected would cause the economy to move along path like

A) BC.
B) AC.
C) BD.
D) ABC.
E) ABD.

Question 28

The tradeoff between inflation and the unemployment rate comes from

A) adaptive expectations
B) reservation wages
C) expected inflation
D) unexpected inflation
E) rational expectations

Question 29

The actual rate of inflation is equal to the expected rate of inflation along the

A) downward-sloping Phillips curve.
B) upward-sloping aggregate supply curve.
C) horizontal aggregate supply curve.
D) downward-sloping aggregate demand curve.
E) vertical Phillips curve.

Question 30

If the inflation rate has risen 2 percent a year for the past three years, then using this experience to forecast a 2 percent rise in the coming year's inflation rate is an example of

A) traditional expectations.
B) rational expectations.
C) adaptive expectations.
D) reflective expectations.
E) deductive expectations.

Question 31

When economic conditions change, firms with expiring wage contracts can ____, while firms with existing contracts must ____.

A) adjust employment and wages; adjust wages
B) adjust wages; adjust wages
C) adjust employment; adjust wages
D) adjust wages; adjust employment
E) adjust wages; adjust employment and wages

Question 32

Which of the following statements is not consistent with the theory of rational expectations?

A) The Phillips curve is vertical.
B) Expansionary fiscal policy that is anticipated is ineffective even in the short run.
C) The aggregate supply curve is vertical.
D) People adjust slowly to changes in the inflation rate.
E) A downward-sloping Phillips curve does not exist for expected changes.

Question 33

If nominal wage rates are contractually determined and cannot change in the short run, then an unexpected increase in the inflation rate will

A) increase business profits and reduce the unemployment rate.
B) reduce both business profits and the unemployment rate.
C) reduce business profits and increase the unemployment rate.
D) increase both business profits and the unemployment rate.
E) cause no change in business profits or the unemployment rate.

Question 34

According to the theory of rational expectations, an expected increase in government spending would cause the aggregate supply curve

A) to shift to the left at the same time that the aggregate demand curve shifts to the right.
B) to shift to the left some time after the aggregate demand curve has shifted to the right.
C) to shift to the right before the aggregate demand curve shifts to the right.
D) not to shift at all.
E) to shift to the right after the aggregate demand curve shifts.

Question 35

Along the short-run Phillips curve, the

A) actual inflation rate is equal to the expected inflation rate.
B) expected inflation rate is constant.
C) observed unemployment rate is equal to the natural rate of unemployment.
D) real wage rate is zero.
E) nominal wage rate is constant.

Question 36

The idea that people make economic decisions using all available past and current information is the basis of

A) the downward-sloping Phillips curve.
B) the adaptive expectations theory.
C) the vertical Phillips curve.
D) the rational expectations theory.
E) supply-side economics.

Question 37

Figure 16.2

Refer to Figure 16.2. The simultaneous high unemployment and high inflation that occurred in the 1970s would best be represented by a movement from point

A) B to point A.
B) C to point A.
C) A to point D.
D) A to point C.
E) B to point D.

Question 38

In reality, why don't wages fall during recessions?

A) Wages are sticky downwards.
B) Worker morale.
C) Workers need to pay their bills.
D) The federal government says so.
E) Some workers will be laid off so that wages do not have to decrease.

Question 39

According to the theory of adaptive expectations, if the inflation rate has been 10 percent for the last ten years, people will expect next year's inflation rate to be

A) 10 percent.
B) higher than 10 percent.
C) lower than 10 percent.
D) whatever the government announces.
E) zero.

Question 40

The observed unemployment rate would be less than the natural rate of unemployment if

A) the inflation rate is lower than expected.
B) the reservation wage is adjusted to account for higher inflation.
C) the inflation rate is expected.
D) reservation wages go up with the rate of inflation.
E) the inflation rate is higher than expected.

Question 41

Figure 16.3

Refer to Figure 16.3. Assume that people form expectations adaptively. If they expect an inflation rate of 7% and the actual inflation rate is 4%, the economy would be located at

A) Point A.
B) Point B.
C) Point C.
D) Point D.
E) Point E.

Question 42

The money supply increases when, other things being equal,

A) the government surplus rises.
B) the amount of government borrowing rises.
C) tax revenues increase.
D) government spending increases.
E) the government deficit falls.

Question 43

The change in the money supply equals

A) the government deficit minus government borrowing.
B) the change in high-powered money plus the change in tax revenues.
C) government borrowing plus government spending.
D) the change in excess reserves divided by the deposit expansion multiplier.
E) the change in the government budget deficit.

Question 44

Which of the following does not shift the aggregate supply curve to the right?

A) A very large crop of grain
B) A higher average level of education
C) Lower prices of natural resources
D) Freezing weather that destroys the Florida citrus crop
E) Lower OPEC prices

Question 45

A real business cycle is most likely to be the result of

A) a manipulation of the business cycle shortly before national elections.
B) a breakdown of the automatic stabilizers.
C) discretionary fiscal policy.
D) shocks to the supply side of the economy.
E) expansionary monetary policy.

Question 46

Which of the following would not be considered a real variable in determining the real business cycle?

A) A change in technology
B) A labor strike
C) An increase in the money supply
D) A change in tastes
E) The weather

Question 47

Consider an economy in equilibrium and assume no change in aggregate demand. A breakthrough in agricultural technology would result in a(n) ____ in the average price level and ____ in real GDP.

A) decrease; a decrease
B) decrease; an increase
C) increase; an increase
D) increase; a decrease
E) increase; no change

Question 48

The oil price shocks of the 1970s demonstrated that

A) monetary policy is an ineffective policy tool.
B) a recession and high inflation can never occur simultaneously.
C) a vertical Phillips curve does not exist.
D) supply shocks have little impact on the price level.
E) business-cycle fluctuations are not solely a function of discretionary government policy.

Question 49

Which of the following would be likely to trigger a real business cycle?

A) A decrease in income tax rates
B) Expansionary monetary policy
C) A decrease in the money supply
D) A large government surplus
E) A labor strike in the steel industry

Question 50

Government spending can be financed by all of the following except

A) personal income taxes.
B) investment spending.
C) government borrowing.
D) money creation.
E) excise taxes.

Question 51

Figure 16.3

In Figure 16.3, movement from point C to point D corresponds to a

A) rightward shift of the aggregate demand curve.
B) rightward shift of the aggregate supply curve.
C) movement down the long-run aggregate supply curve.
D) leftward shift of the aggregate supply curve.
E) leftward shift of the aggregate demand curve.

Question 52

The hypothesis of political business cycles asserts that

A) politicians can produce a favorable short-run tradeoff between inflation and unemployment to improve their chances of reelection.
B) political popularity is not a function of the business cycle.
C) an economic recession takes place before every national election.
D) political manipulation of the business cycle is an effective way to increase permanent economic growth.
E) economic expansions or contractions are a function of congressional support for the president's economic policy.

Question 53

If the government fiscal deficit equals $190 million, government borrowing equals $60 million, what is the change in the money supply equal to?

A) $250 million
B) $190 million
C) $130 million
D) $120 million
E) $60 million

Question 54

A expansionary real shock shifts the aggregate

A) supply curve to the left and increases real GDP.
B) demand curve to the left and increases real GDP.
C) demand curve to the right and decreases real GDP.
D) supply curve to the right and increases real GDP.
E) supply curve to the left and reduces real GDP.

Question 55

The "government budget constraint"

A) indicates how a budget deficit can be balanced by decreasing money growth.
B) defines the interdependency between monetary and fiscal policy.
C) states that the amount of government spending is always equal to the money supply.
D) shows that fiscal deficits are not affected by changes in monetary policy.
E) states that the national debt cannot rise beyond 15 percent of real GDP.

Question 56

A six-month strike by U.S. farmers would

A) have no impact on real GDP but would result in higher food prices.
B) cause aggregate demand to fall.
C) cause a recession that is limited to the farming industry.
D) cause the Phillips curve to shift inward.
E) increase prices at every level of output.

Question 57

When the money supply increases by $5 billion, tax revenues are $10 billion, and government borrowing is $30 billion, government spending must equal

A) $10 billion.
B) $15 billion.
C) $20 billion.
D) $35 billion.
E) $45 billion.

Question 58

Figure 16.4

Refer to Figure 16.4. Suppose the economy is located at point A, but the government increases spending because it believes that 6 percent unemployment is unacceptably high. If the adaptive expectations hypothesis holds, in the short run, the economy would move to point

A) B.
B) C.
C) D.
D) E.
E) F.

Question 59

Figure 16.4

Refer to Figure 16.4. Suppose that the rational expectations hypothesis holds, and the Fed implements a fully expected increase in money supply growth. Starting from point C, in the short run, the economy tends to move to point

A) A.
B) B.
C) D.
D) E.
E) F.

Question 60

An increase in national income shortly before a presidential election could signal the start of

A) an economy-wide supply shock.
B) a political business cycle.
C) a real business cycle.
D) long-term economic growth.
E) a permanent reduction in the inflation rate.

Question 61

The money supply declines when, other things being equal,

A) government spending exceeds borrowing.
B) borrowing exceeds tax revenues and there is a deficit.
C) borrowing exceeds the government fiscal deficit.
D) government spending exceeds tax revenues.
E) government spending exceeds borrowing and there is a surplus.

Question 62

Long-term economic growth requires a permanent

A) decline in the average price level.
B) leftward shift of the vertical Phillips curve.
C) rise in the natural rate of unemployment.
D) rightward shift of the aggregate demand curve.
E) rightward shift of the vertical aggregate supply curve.

Question 63

An increase in the long-run aggregate supply curve is due to an increase in

A) the price level.
B) the natural rate of unemployment.
C) real per capita GDP.
D) the rate of economic growth.
E) the rate of inflation.

Question 64

Which of the following is a barrier to economic growth in developing countries?

A) A shortage of labor
B) A declining population
C) Lack of investment in research and development
D) Lack of natural resources
E) A declining labor force

Question 65

Which of the following results in a permanent shift of the vertical aggregate supply curve?

A) Increased consumer optimism
B) Greater business confidence
C) A decline in inflation
D) Technological advances
E) Changing expectations

Question 66

Productivity is the

A) value of the goods a country produces in a year.
B) ratio of capital to labor.
C) ratio of the amount of an input to the quantity of output produced.
D) amount of goods a country produces in a year.
E) ratio of output produced to the amount of input.

Question 67

Because the average annual population growth is higher in developing countries than in industrial nations,

A) economic growth is higher in developing countries.
B) the investment in education is higher in developing countries.
C) the total size of the labor force is higher in industrial countries.
D) productivity is higher in developing countries.
E) the growth in the labor supply is lower in industrial countries.

Question 68

The lack of capital formation in developing countries is due in part to

A) excessive foreign aid.
B) the fact that it is harder to forgo current consumption to be able to save.
C) high interest rates.
D) high tax rates on private investment.
E) government prohibitions on private ownership.

Question 69

In economics, technology refers to the

A) exploitation of natural resources.
B) ways of combining resources to produce output.
C) invention of a new product.
D) productivity of labor.
E) degree of industrial automation.

Question 70

Forgoing consumption today for consumption in the future is achieved by a(n)

A) high-growth monetary policy.
B) ban on the production of consumer goods.
C) increase in borrowing.
D) increase in saving.
E) reduction in consumer income.

Question 71

Other things being equal, which of the following would be least important in increasing an industrial country's potential GDP?

A) Growth in the labor force
B) Technological advancement
C) Increased capital formation
D) Abundant natural resources
E) Better labor skills

Question 72

Total factor productivity is the ratio of

A) skilled labor to unskilled labor.
B) wartime productivity to peacetime productivity.
C) manufacturing productivity to service productivity.
D) agricultural productivity to industrial productivity.
E) the economy's output to its stock of capital and labor.

Question 73

Growth in total factor productivity equals the

A) sum of resource growth and economic growth.
B) ratio of total outputs to total inputs.
C) ratio of total inputs to total outputs.
D) percentage change in per capita real GDP.
E) percentage change in output minus the percentage change in resources.

Question 74

If economic growth in a given year is 4 percent and the growth rate of resources is 6 percent, the change in total factor productivity is

A) -6 percent.
B) -2 percent.
C) +2 percent.
D) +4 percent.
E) +6 percent.

Question 75

Technological progress does not depend on

A) the availability of natural resources.
B) the intellectual capabilities of the population.
C) investment in research and development.
D) the quality of the education system.
E) scientific discoveries.

Question 76

When government spending is $670 million, government borrowing is $320 million, and the central bank has to increase the money supply by $65 million, the fiscal deficit must equal

A) $385 million.
B) $320 million.
C) $330 million.
D) $615 million.
E) $735 million.

Question 77

Economic growth refers to an

A) expansionary period of the business cycle.
B) increase in nominal GDP.
C) increase in real GDP.
D) increase in per capita nominal GDP.
E) increase in the standard of living.

Question 78

Developing countries lag behind the industrial nations in developing and implementing new technology due to:

A) the size of the labor force and capital stock.
B) lack of abundant natural resources and lack of education.
C) the level of education of the population and spending on research and development
D) spending on research and development and lack of abundant natural resources
E) government mandate and lack of education.

Question 79

Which of the following is not considered a determinant of economic growth?

A) Capital
B) Technological advances
C) Land
D) Changing expectations
E) Labor

Question 80

Most developing countries

A) have no natural resources.
B) experience slow growth in their labor force.
C) allocate their resources to the production of capital goods.
D) are unable to convert their natural resources into productive inputs.
E) make inefficient use of their technological advancement.