Deck 15: Issues in Stabilization Policy

Question 1

Cyclical unemployment is

A)the difference between the unemployment rate when the economy is in a recession and the unemployment rate when the economy is at the peak of an expansion.
B)the difference between the actual unemployment rate and the natural rate of unemployment.
C)the unemployment due to union activities and government-imposed restrictions to entry into specific occupations.
D)the unemployment due to the unemployment benefits and welfare programs of the government.

Answer 1

the difference between the actual unemployment rate and the natural rate of unemployment.

Question 2

Suppose the job market improved and workers didn't realize it.We would expect to observe

A)frictional unemployment to increase.
B)the duration of unemployment and the amount of unemployment to decrease.
C)higher wages,with the duration of unemployment and the amount of unemployment unchanged.
D)a decrease in aggregate demand.

Answer 2

the duration of unemployment and the amount of unemployment to decrease.

Question 3

Suppose the government abolished the minimum wage law,we would expect to see

A)a decline in the natural rate of unemployment.
B)an increase in claims for unemployment benefits.
C)the duration of unemployment to increase.
D)a recession.

Answer 3

a decline in the natural rate of unemployment.

Question 4

An unexpected increase in aggregate demand causes

A)the unemployment rate to fall,with no change in the price level.
B)the price level to rise,but the duration of unemployment will remain constant,so the unemployment rate remains constant.
C)simultaneously the price level to rise and the unemployment rate to fall.
D)simultaneously the price level to fall and the unemployment rate to fall.

Question 5

Monetary and fiscal policymaking that is carried out in response to a pre-set rule,and which does not respond to changes in economic activity,is known as

A)active policymaking.
B)discretionary policymaking.
C)nondiscretionary policymaking.
D)Keynesian policymaking.

Question 6

Assume that the government decides to use fiscal or monetary policy to stimulate the economy,and that this action comes as a surprise to most individuals and businesses.In the short run,the result will be

A)a decrease in the average duration of unemployment and a decrease in the unemployment rate.
B)an increase in the average duration of unemployment and an increase in the unemployment rate.
C)a decrease in aggregated demand and a rise in the price level.
D)an increase in aggregate demand and a fall in the price level.

Question 7

An increase in employment insurance and other transfer payments may

A)increase the natural rate of unemployment.
B)increase the number of discouraged workers.
C)reduce the rate of inflation at every level of unemployment.
D)lead to less unanticipated inflation.

Question 8

The natural rate of unemployment is

A)zero.
B)the unemployment rate when there is no structural unemployment.
C)the unemployment rate when there is no structural or cyclical unemployment.
D)the unemployment rate that exists in long-run equilibrium,after adjustments to all changes have occurred.

Question 9

If the economy is in a strong expansion and moved beyond its long-run equilibrium real national output,then the

A)natural rate of unemployment has fallen.
B)cyclical rate of unemployment is positive.
C)cyclical rate of unemployment is zero.
D)cyclical rate of unemployment is negative.

Question 10

An example of nondiscretionary policymaking is

A)the monetary rule.
B)expansionary fiscal policy.
C)changes in the interest rate initiated by the Federal Government.
D)a tax cut to stimulate the economy.

Question 11

Parliament passing that mandates a balanced budget every year is an example of

A)active policymaking.
B)decisive policymaking.
C)nondiscretionary policymaking.
D)cooperative policymaking.

Question 12

The natural rate of unemployment is defined as the rate of unemployment that

A)prevails in long-run macroeconomic equilibrium,when all workers and employers have fully adjusted to any changes in the economy.
B)prevails in the short-run macroeconomic equilibrium,before workers and employers have had a chance to adjust to an economic shock.
C)exists due to welfare and employment benefits that reduce potential workers' incentives to find work.
D)exists only during periods of recession or depression in the economy.

Question 13

If a policy is carried out by a rule,then we have an example of

A)active policymaking.
B)discretionary policymaking.
C)nondiscretionary policymaking.
D)natural policymaking.

Question 14

If cyclical unemployment is negative,then

A)the actual unemployment rate is below the natural rate of unemployment.
B)the natural rate of unemployment is getting smaller.
C)there have been some errors in classifying the Type of unemployment experienced by some people.
D)structural unemployment must be increasing.

Question 15

The natural rate of unemployment includes

A)frictional and cyclical unemployment.
B)only cyclical unemployment.
C)only unemployment due to lay-offs and corporate downsizing.
D)frictional unemployment and structural unemployment.

Question 16

An unexpected increase in aggregate demand typically causes

A)frictional unemployment to increase but structural unemployment to decrease.
B)the price level to increase but has no effect on the unemployment rate.
C)the price level to increase and the unemployment rate to fall.
D)the price level to increase and the unemployment rate to increase.

Question 17

The Phillips curve shows

A)a positive relationship in the long-run between the rate of inflation and the rate of unemployment.
B)a negative relationship between the inflation rate and the unemployment rate,at least in the short run.
C)a positive relationship between contractionary monetary policy and higher price levels.
D)a positive relationship between price stability and constant,small-increment changes in the fiscal policy on the part of the Bank of Canada.

Question 18

We observe the duration of unemployment falling and wage rates rising.It is likely that

A)the government has initiated expansionary fiscal policy but the policies haven't taken effect yet.
B)summer has arrived.
C)aggregate demand has increased.
D)aggregate supply has increased.

Question 19

Deviations of the actual unemployment rate from the natural rate of unemployment are called

A)frictional unemployment.
B)cyclical unemployment.
C)seasonal unemployment.
D)underemployment.

Question 20

The rational expectations hypothesis argues that a monetary policy designed to stabilize the economy will succeed only when

A)changes in the money supply are unexpected.
B)the government's budget is not in deficit.
C)labour unions have long-term contracts.
D)changes in the money supply are completely anticipated.

Question 21

When the Phillips curve was first used in economics,many economists believed that

A)the government could fine-tune the economy and generate both the natural rate of unemployment and zero inflation.
B)the government could fine-tune the economy and pick the most preferred combination of unemployment and inflation.
C)low unemployment could be obtained only by generating rapidly increasing inflation.
D)there was no relationship between inflation and unemployment,at least in the long run.

Question 22

Economist A.W.Phillips,looking at British data,concluded that

A)there is no trade-off between inflation and unemployment.
B)high inflation rates were associated with low unemployment rates,and vice-versa.
C)unemployment could be effectively combated by raising wages.
D)higher rates of inflation are associated with higher rates of unemployment.

Question 23

A Phillips curve shows

A)the relationship between the rate of interest and planned investment.
B)the relationship between the money supply and the price level.
C)that an increase in government spending will decrease real national income.
D)that an increase in inflation may be associated with a decrease in the rate of unemployment.

Question 24

A Phillips curve shows the relationship between

A)unemployment and inflation.
B)unemployment and real national income.
C)the interest rate and planned investment.
D)money demand and the rate of interest.

Question 25

Economists Milton Friedman and E.S.Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policymakers because

A)economic participants routinely incorporate changes in the inflation rate into their expectations.
B)economic participants are not rational,and therefore act unpredictably to any policy change.
C)unemployment levels and the inflation rate have a clear,positive relationship.
D)unemployment levels and the inflation rate have a negative (inverse)relationship.

Question 26

One economic theory states that people combine the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes,and react accordingly.This theory is known as the

A)relevance hypothesis.
B)contrary opinion hypothesis.
C)rational expectations hypothesis.
D)structural hypothesis.

Question 27

Changes in government policy that cause the inflation rate to rise will

A)have no effect on the unemployment rate.
B)cause the unemployment rate to fall.
C)cause the unemployment rate to rise by the rate of inflation.
D)cause the unemployment rate to rise,but we cannot tell by how much.

Question 28

Critics of the Phillips curve contend that in the long run

A)there is a trade-off between unemployment and inflation.
B)for any given unemployment level there is a corresponding inflation rate to which the economy will automatically revert.
C)employees are not able to anticipate future rates of inflation,and therefore unemployment can always be reduced by inflating the economy.
D)there is no useful trade-off between inflation and unemployment because workers' expectations adjust to any systematic attempts to reduce unemployment below the natural rate.

Question 29

According to the rational expectations hypothesis,an individual's view of future economic performance

A)does not consider past performance.
B)does not consider the impact of inflation.
C)only considers past performance.
D)considers both past performance and current monetary and fiscal policy.

Question 30

In the short run,unanticipated inflation typically leads to

A)higher rates of unemployment.
B)decreases in aggregate demand.
C)lower rates of unemployment.
D)workers' thinking the real wage has been reduced.

Question 31

The rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall is called.

A)structural unemployment.
B)extraneous inflation rate.
C)the unemployment rate.
D)the NAIRU.

Question 32

The nonaccelerating inflation rate of unemployment (NAIRU)is

A)discretionary policy making.
B)nondiscretionary policy making.
C)natural rate of unemployment.
D)the rate of unemployment below which the rate of inflation tends to rise and above which the rate of inflation tends to fall.

Question 33

The inflation rate has been 3 percent per year for several years,and the unemployment rate has been stable at 5 percent.Unanticipated changes in government policy cause the inflation rate to increase to 6 percent.In the short run,we would expect the unemployment rate to

A)remain constant.
B)increase to 10 percent.
C)increase,but the exact amount cannot be known for sure.
D)decrease.

Question 34

The trade-off between unemployment and inflation is known as

A)the Keynesian mechanism.
B)the Phillips Curve.
C)an expansionary gap.
D)the new classical model.

Question 35

The stagflation experienced by many of the world's industrialized economies during the late 1960s and the 1970s showed us that

A)the Phillips curve accurately represents the trade-off between unemployment and inflation.
B)both inflation and economic expansion could exist simultaneously.
C)the relationship between unemployment and inflation was not as clear-cut as presented on the Phillips curve.
D)it is possible to alleviate economic stagflation through the government discretionary fiscal policy.

Question 36

The relationship between unemployment and inflation is characterized by

A)the Phillips curve
B)the aggregate demand curve.
C)the planned investment.curve
D)the demand for money curve.

Question 37

In the short run,an unanticipated cut in the rate of inflation would

A)increase the unemployment rate.
B)decrease the unemployment rate.
C)unambiguously improve the misery index.
D)lower the natural rate of unemployment.

Question 38

Figure 15-1
In Figure 15-1,line ABC is a

A)job offer curve.
B)reservation wage curve.
C)Phillips curve.
D)Keynesian transmission curve.

Question 39

During the 1960s many Keynesian economists felt that,by studying the Phillips curve,

A)policymakers could dispense with the Bank of Canada's open market operations.
B)policymakers could fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives.
C)the Prime Minister and Parliament did not need to attempt to balance the budget.
D)policymakers could eliminate even frictional unemployment in the economy.

Question 40

When workers and employers correctly anticipate the rate of inflation,

A)there will be no unemployment.
B)there will be only involuntary unemployment.
C)unemployment will be at the natural rate.
D)workers will underestimate the real wage.

Question 41

Rational expectations theory suggests that short-run stabilization policy

A)is best achieved with monetary policy.
B)is best achieved with fiscal policy.
C)is equally easy to achieve with monetary or fiscal policy.
D)should not be attempted.

Question 42

Figure 15-2
In Figure 15-2,suppose the economy is at a short run equilibrium at point C and the Bank of Canada announces that the money supply will be decreased over the next six months.What point represents the new equilibrium according to the rational expectations theory?

A)A
B)B
C)C
D)D

Question 43

Figure 15-3
In Figure 15-3,if the economy is initially at equilibrium at point B,an unanticipated increase in aggregate demand from A D₁ to A D₂ would cause,in the short run,

A)the price level to rise from P₂ to P₁,real GDP to increase from Q₂ to Q₁,and the rate of unemployment to decrease.
B)the price level to move from P₂ to P₁,but real GDP would stay at Q₁.
C)the price level to rise by some amount less than P₁ but greater than P₂,and the rate of unemployment would decrease.
D)no change in either the price level or real GDP,but a decrease in unemployment.

Question 44

Figure 15-4
In Figure 15-4,if A is the initial equilibrium point and there is an unanticipated rise in aggregate demand from A D₁ to A D₂,then

A)the new short run equilibrium will be at point B.
B)the new long run equilibrium will be at point B.
C)the new short run equilibrium will be at point D.
D)real GDP per year will fall below Q₁.

Question 45

New classical models of economics are often associated with

A)inflation.
B)the rational expectations hypothesis.
C)real business cycle theories..
D)the policy irrelevance proposition.

Question 46

Figure 15-2
In Figure 15-2,suppose the economy is initially at a short run equilibrium at point A and there is an unanticipated increase in the money supply.Which point represents the new short run equilibrium?

A)A
B)B
C)C
D)D

Question 47

Figure 15-2
In Figure 15-2,suppose the economy is initially at a short run equilibrium at point C and there is an unanticipated decrease in the money wage rate.Which point represents the new short run equilibrium?

A)A
B)B
C)C
D)D

Question 48

Figure 15-2
In Figure 15-2,suppose the economy is currently at an equilibrium at point C.Applying rational expectations theory,what will happen if the Bank of Canada announces that it is decreasing the money supply?

A)the price level will increase
B)real GDP per year will increase
C)real GDP per year will decrease
D)the price level will decrease

Question 49

According to the rational expectations model,the attempt by the government to reduce unemployment below its natural rate through expansionary policies will

A)succeed in the short run and can succeed in the long run as long as the government makes it clear what its goals are.
B)succeed because the government knows how people will react to their policies and will adjust their policies accordingly.
C)fail because people will figure out what the government is doing and alter their expectations and their behaviour in ways that counteract the government policy.
D)fail because the economy can never achieve an unemployment rate below the natural level.

Question 50

Figure 15-2
In Figure 15-2,suppose the economy is initially at a short run equilibrium at point D and there is an unanticipated increase in the money supply.Which point represents the new short run equilibrium?

A)A
B)B
C)C
D)D

Question 51

Figure 15-2
In Figure 15-2,suppose the economy is initially at a short run equilibrium at point C and there is an unanticipated decrease in the money supply.Which point represents the new short run equilibrium?

A)A
B)B
C)C
D)D

Question 52

The rational expectations hypothesis argues that a monetary policy designed to stabilize the economy will fail unless

A)changes in the money supply are unexpected.
B)the government's budget is not in deficit.
C)labour unions have long-term contracts.
D)changes in the money supply are completely anticipated.

Question 53

The rational expectations hypothesis is associated with the

A)classical model of economics.
B)new classical model of economics.
C)Keynesian model of economics.
D)neo-Keynesian model of economics.

Question 54

Figure 15-3
Figure 15-3 indicates that,in the short run,an unexpected increase in aggregate demand would cause

A)the price level to fall.
B)the price level to rise.
C)the unemployment rate to rise.
D)real GDP to decrease.

Question 55

One assumption of the new classical model is that

A)wages are "sticky" downward.
B)prices are "sticky" upward.
C)the rational expectations hypothesis is correct.
D)markets are not purely competitive.

Question 56

Figure 15-2
In Figure 15-2,suppose the economy is initially at a short run equilibrium at point B and there is an unanticipated decrease in the money supply.Which point represents the new short run equilibrium?

A)A
B)B
C)C
D)D

Question 57

Figure 15-2
In Figure 15-2,suppose the economy is at a short run equilibrium at point A and the Bank of Canada announces that the money supply will be increased over the next six months.What point represents the new equilibrium according to the rational expectations theory?

A)A
B)B
C)C
D)D

Question 58

Under the new classical model,monetary policy can

A)have an effect in both the short and the long run.
B)have an effect on the long run,but not the short run.
C)have an effect only on the short run and only if the policy is unanticipated.
D)have an effect only on the long run and only if the policy is fully anticipated.

Question 59

Figure 15-3
In Figure 15-3,if the economy is initially at equilibrium at point A,an unanticipated reduction in aggregate demand from A D₁ to A D₂ would cause,in the short run,

A)the price level to fall from P₁ to P₂,real GDP to fall from Q₁ to Q₂,and the rate of unemployment to increase.
B)the price level to move from P₁ to P₂,but real GDP would stay at Q₁.
C)the price level to fall by some amount less than P₁ but greater than P₂,and the rate of unemployment would decrease.
D)no change in either the price level or real GDP,but a decrease in unemployment.

Question 60

According to the new classical model,the impact of an anticipated expansionary monetary policy will be

A)to increase the price level in the long run.
B)to increase the real national income in the long run.
C)to decrease the natural rate of unemployment.
D)to decrease the price level and the unemployment rate.

Question 61

In the short run,an unanticipated increase in the rate of inflation would

A)increase the unemployment rate.
B)decrease the unemployment rate.
C)unambiguously improve the misery index.
D)lower the natural rate of unemployment.

Question 62

The idea that anticipated monetary policy changes cannot affect real GDP or employment is known as

A)real business cycle theory.
B)the policy irrelevance theorem.
C)monetarism.
D)Keynesianism.

Question 63

According to the new classical economists and the policy irrelevance proposition,real GDP is determined by

A)the economy's aggregate demand curve.
B)the economy's long-run aggregate supply curve.
C)the rate of inflation only.
D)a combination of fiscal policy and monetary policy.

Question 64

According to the rational expectations hypothesis,monetary policy can have an effect on real world variable (such as GDP)in the short run

A)only when the policy is anticipated.
B)only when the policy is unsystematic and unanticipated.
C)regardless of whether the policy is anticipated or unanticipated.
D)when the Bank of Canada operates as expected in either buying or selling bonds.

Question 65

In the short run,an anticipated increase in the rate of inflation would

A)increase the unemployment rate.
B)decrease the unemployment rate.
C)have no effect on employment.
D)lower the natural rate of unemployment.

Question 66

Figure 15-4
In Figure 15-4,if initial equilibrium is at point C and there is an anticipated decrease in aggregate demand from A D₂ to A D₁ due to an anticipated decrease in the money supply,then

A)the economy will move directly from point C to point A without passing through point D.
B)the economy will move directly from point C to point D,and will remain at point D in the long run.
C)the price level will shift to P₂ in the short run.
D)the price level will shift to P₂ in the long run.

Question 67

According to the new classical model,government fiscal and monetary policy changes are effective

A)all of the time.
B)only when the short-run aggregate supply curve is upward sloping.
C)only when the policy changes affect aggregate demand.
D)only when the policy changes are unanticipated.

Question 68

The idea that anticipated monetary policy cannot affect real variables such as real GDP or employment is known as

A)the Keynesian hypothesis.
B)the policy irrelevance proposition.
C)the job search model.
D)the monetary velocity theory.

Question 69

Figure 15-4
In Figure 15-4,if initial equilibrium is at point A and if there is an unanticipated increase in aggregate demand from A D₁ to A D₂,then

A)in the short run real output will remain at Q₁.
B)in the short run real output will increase above Q₁,but in the long run it will return to Q₁.
C)in the long run real output will increase above Q₁.
D)real output will increase above Q₁ in both the short run and in the long run.

Question 70

The rational expectations hypothesis is a theory that states that

A)individuals can predict the future perfectly,at least with respect to macroeconomic variables like the interest rate and inflation.
B)people make their economic plans by using all available past and present information and their understanding about how the economy operates.
C)people make their economic plans in an irrational,intuitive manner.
D)people make their economic plans by relying on the policy statements made by the Prime Minister and leaders in Parliament.

Question 71

Suppose there is an oil supply shock to the Canadian economy due to an embargo.According to the real business cycle theory,the supply shock

A)would increase the rate of unemployment in the long run.
B)would decrease the rate of unemployment in the long run.
C)not have any long term effect on the labour market.
D)would cause economywide deflation.

Question 72

According to new classical economists who adhere to the policy irrelevance proposition,

A)monetary policy can effectively reduce the rate of unemployment in the short run.
B)workers are not rational in the long run.
C)the Phillips curve actually slopes upward,not downward as traditionally assumed.
D)expansionary monetary policy will only lead to a higher rate of inflation in the long run.

Question 73

Figure 15-4
In Figure 15-4,if C is the initial equilibrium point and there is an unanticipated decrease in aggregate demand from A D₂ to A D₁,then

A)the new short run equilibrium will be at point B.
B)the new long run equilibrium will be at point B.
C)the new short run equilibrium will be at point D.
D)real GDP per year will fall below Q₁.

Question 74

Figure 15-4
In Figure 15-4,if initial equilibrium is at point A and there is an anticipated increase in aggregate demand from A D₁ to A D₂ due to an anticipated increase in the money supply,then

A)the economy will move directly from point A to point C without passing through point B.
B)the economy will move directly from point A to point B,and will remain at point B in the long run.
C)the price level will shift to P₂ in the short run.
D)the price level will shift to P₂ in the long run.

Question 75

For the policy irrelevance theorem to hold,people must

A)know the future perfectly.
B)not persistently make the same mistakes in forecasting the future.
C)know exactly what the Bank of Canada is planning to do.
D)never make mistakes in their forecasts even when they do not know the future perfectly.

Question 76

Assume the Bank of Canada initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy.According to the new classical model,the result is

A)increased prices in the short run,but no effect on prices in the long run.
B)decreased real national income in the short run but increased national income in the long run.
C)increased real national income and increased employment in the long run.
D)increased prices but no change in real output or real national income in the long run.

Question 77

The Federal Government initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy.The result is

A)decreased prices,but no change in real national income.
B)decreased prices and decreased real national income in the short run,but only decreased prices in the long run.
C)decreased real national income in the short run and decreased prices in the long run.
D)decreased real national income and prices in both the short run and the long run.

Question 78

According to the real business cycle theory,an increase in an input price,such as oil,will

A)increase both real income and the price level.
B)increase real income but not change the price level.
C)decrease real income but increase the price level.
D)decrease both real income and the price level.

Question 79

Real business cycle theory explains variations in prices,employment and output by focusing on

A)changes in real variables such as demand and supply shocks,technological changes,and shifts in the composition of the labour force.
B)anticipated monetary policies enacted by the Bank of Canada.
C)the effects of the Phillips curve.
D)anticipated changes fiscal policy enacted by the government.

Question 80

The rational expectations model is associated with

A)the view that monopoly is widespread in modern industrial economies.
B)monetarists.
C)Keynesian economics.
D)the new classical model.