Deck 18: Macro Policy Debate: Active or Passive

Question 1

Advocates of the passive approach to government economic policy believe that the government should lower tax rates when there is a contractionary gap.

Answer 1

False

Question 2

An economy in which actual GDP is $10 billion below potential GDP

A)is experiencing an expansionary gap
B)will have the short run aggregate supply shifting outward, if the passive approach is correct
C)will typically have the short-run aggregate supply curve shifting to the left
D)will likely have falling prices but rising wages
E)will experience stagflation (i.e., rising prices and falling output)

Answer 2

B

Question 3

Which of the following is not consistent with a self-correcting economy?

A)Market forces work relatively well in pushing the economy to potential GDP.
B)Prices and wages are flexible.
C)A contractionary gap is corrected through falling wages and prices.
D)The short-run aggregate supply tends to shift until it intersects aggregate demand at potential GDP.
E)An active approach to a recession or depression.

Answer 3

E

Question 4

When self-correcting forces cure a recessionary gap,

A)money wages and real wages both increase
B)money wages remain constant while real wages fall
C)money wages and real wages both decrease
D)money wages fall while real wages increase
E)real wages must increase regardless of what happens to money wages

Question 5

If a recessionary gap is cured by increasing aggregate demand,

A)both c and e are correct
B)both d and e are correct
C)real wages fall because prices rise
D)prices rise causing real wages to increase
E)money wages decrease as prices decrease

Question 6

To favor a passive approach to policy is to believe that the private sector is

A)relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor
B)basically unstable, although both wages and prices adjust quickly to eliminate excess supply or excess demand for labor
C)relatively stable, although both wages and prices tend to be very sticky downward
D)basically unstable and both wages and prices tend to be very sticky downward
E)so stable that wages and prices rarely change

Question 7

Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP.

Question 8

A policy to increase aggregate demand to cure a recessionarly gap may succeed; however, inflation is a likely result.

Question 9

In the 1992 presidential campaign, candidate Al Gore advocated a more active role for government in economic policy than did candidate George W. Bush

Question 10

According to the active policy position, eliminating a recessionary gap

A)can only be achieved by decreasing wages
B)requires a public policy of wage and price controls
C)should be accomplished by stimulating aggregate demand
D)will increase unemployment
E)will cause a recession

Question 11

An economy that self-corrects a recessionary gap will experience falling nominal wages, rising real wages and falling output.

Question 12

According to those who favor a passive approach to policy, a recessionary gap will be eliminated because

A)prices and wages rise rapidly
B)prices and wages are flexible
C)the aggregate demand curve will shift to the right
D)the economy automatically slows down
E)the aggregate demand curve will shift to the left

Question 13

If we observe an economy adjusting to potential GDP as prices fall and real output increases,

A)it was experiencing an expansionary gap
B)the correction involves a shift of the AD curve
C)it was experiencing a contractionary gap
D)self-correction is not the process that is occurring
E)there are widespread labor shortages

Question 14

For those who favor an active approach, public policy changes are necessary to cure a recessionary gap because

A)the short-run aggregate supply curve will otherwise shift quickly to the right
B)prices and wages are flexible downward but not upward
C)the required decrease in output can be achieved only by shifting the AD curve
D)real wages must fall through price increases rather than waiting for money wages to fall
E)falling money wages will cause the AD curve to shift leftward unless policy counters this movement

Question 15

Advocates of the active approach believe that discretionary government policy can restore economic stability and improve economic performance.

Question 16

If the advice of those who favor a passive approach to policy is correct, how would a recessionary gap eventually close?

A)The aggregate demand curve would shift rightward.
B)The aggregate demand curve would shift leftward.
C)The short-run aggregate supply curve would shift rightward.
D)The short-run aggregate supply curve would shift leftward.
E)There would be a movement upward along the aggregate demand curve.

Question 17

In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy?

A)cut taxes
B)increase government spending
C)reduce interest rates
D)increase the money supply
E)do nothing

Question 18

If an economist who favors a passive approach observes a drop in real GDP caused by a decrease in aggregate demand, she is most likely to think that

A)the economy will recover by itself before discretionary policy can correct the situation
B)discretionary policy will correct the situation before the economy recovers by itself
C)the imposition of policy rules will correct the situation before the economy recovers by itself
D)aggregate supply will decrease to compensate for the decrease in aggregate demand
E)the economy will not recover by itself

Question 19

The reason why self-correction works to close a recessionary gap is because

A)a labor shortage causes money wages to increase
B)a labor surplus causes money wages to increase
C)a labor shortage causes money wages to fall
D)a labor surplus causes money wages to fall
E)falling money wages shift the short-run aggregate supply curve to the left

Question 20

If self-correction causes prices to fall less than nominal wages, both output and real wages will decrease.

Question 21

Those who favor a passive approach to policy think that all of the following conditions will allow the economy to bring itself out of a recessionary gap except one. Which is the exception?

A)lower real wages
B)a shortage of labor
C)lower production costs
D)a lower expected price level
E)a rightward shift in the short-run aggregate supply curve

Question 22

According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)The Fed or the government should act to shift the aggregate demand curve to the right.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question 23

According to those who favor a passive approach to policy, where will the economy in Exhibit 17-1 end up when it achieves its potential output?

A)point A
B)point B
C)point C
D)either point B or C
E)unable to tell from the information given

Question 24

If an economy adjusts to potential GDP accompanied by a rising price level and a falling output level,

A)all of the following are correct
B)an active approach to correcting a contractionary gap is being used
C)an active approach to correcting an expansionary gap is being used
D)a passive approach to correcting a contractionary gap is being used
E)a passive approach to correcting an expansionary gap is being used

Question 25

If the economy were in a recession, which of the following policies would a person who favors an active approach to policy be most likely to support?

A)The economy should be left to cure itself without government intervention.
B)The Fed should sell U.S. government securities in its open-market operations.
C)The Fed should raise the discount rate.
D)Government purchases should increase.
E)The Fed should raise the required reserve ratio.

Question 26

Exhibit 17-2

According to those who favor a passive approach to policy, where will the economy in Exhibit 17-2 end up once the expansionary gap is eliminated?

A)point A
B)point B
C)point C
D)either point B or C
E)cannot tell from the information provided

Question 27

Exhibit 17-2

According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-2 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be increased.

Question 28

According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-1 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question 29

According to those who favor a passive approach to policy, how will the economy shown in Exhibit 17-1 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)Real wages will fall shifting the SRAS curve to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question 30

An economy experiencing an expansionary gap

A)operates in an environment in which labor shortages drive up money wages, real wages, and prices
B)results in an excess supply of labor due to rising money wages and prices
C)will self-correct as rising money wages decrease faster than rising prices
D)will experience rising money wages and prices but falling real wages
E)will have excessive involuntary unemployment (e.g., cyclical unemployment)

Question 31

When self-correction works to eliminate an expansionary gap,

A)both money wages and real wages increase
B)money wages increase while real wages decrease
C)both money wages and real wages decrease
D)money wages decrease while real wages increase
E)money wages remain unchanged

Question 32

Exhibit 17-1

According to those who favor a passive approach to policy, how will the economy shown in Exhibit 17-1 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question 33

If prices and wages are not flexible, an adverse supply shock is most likely to be followed by

A)a rightward shift of the aggregate supply curve
B)a rightward shift of the aggregate demand curve
C)a leftward shift of the aggregate supply curve
D)a leftward shift of the aggregate demand curve
E)persistent unemployment

Question 34

An economy that self-corrects an expansionary gap will experience stagflation.

Question 35

Which of the following is consistent with an active approach to policy?

A)The natural rate of unemployment is uncertain.
B)Wages and prices adjust relatively quickly.
C)The short-run aggregate supply curve is slow to shift in the presence of a recessionary gap.
D)The size of the multiplier is irrelevant.
E)Self-correction lags are not a problem.

Question 36

Exhibit 17-2

According to those who favor a passive approach to policy, how will the economy shown in Exhibit 17-2 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question 37

An economy in which actual GDP exceeds potential GDP means that

A)wages and prices must fall
B)self-correcting forces will shift the SRAS curve to the left
C)self-correcting forces will shift the AD curve to the left
D)inflation will occur when AD shifts to the left
E)unemployment is likely to be unusually high

Question 38

According to those who favor an active approach to policy, where will the economy in Exhibit 17-1 end up when it achieves its potential output?

A)point A
B)point B
C)point C
D)either point B or C
E)cannot tell from the information provided

Question 39

Exhibit 17-2

According to those who favor a passive approach to policy, how will the economy shown in Exhibit 17-2 attain equilibrium at potential output?

A)Real wages will rise causing the SRAS curve to shift left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the money supply or government spending should be decreased.
E)Aggregate demand should be decreased.

Question 40

In the long run, how would an active approach to a recessionary gap differ from a passive approach to policy?

A)Both the price level and the level of real GDP would be higher in the long run with the activist solution.
B)Both the price level and the level of real GDP would be lower in the long run with the activist solution.
C)The price level would be higher and the level of real GDP would be lower in the long run with the activist solution.
D)Only the price level would be lower in the long run with the activist solution.
E)Only the price level would be higher in the long run with the activist solution.

Question 41

Which of the following lags reduces the effectiveness of active policy?

A)both d and e
B)all of the following
C)self-correction lag
D)recognition lag
E)decision-making lag

Question 42

In total, the lags associated with discretionary policy can extend from the time a

A)problem occurs in the economy through the time it is recognized by the government
B)problem is recognized by the government through the time an agreed-on policy is approved
C)policy is approved through the time the policy is implemented
D)policy is implemented through the time its impact is felt in the economy
E)problem occurs in the economy through the time a corrective policy has an impact on the economy

Question 43

According to the passive policy maker's position, an expansionary gap will be eliminated because

A)the short-run aggregate supply will shift to the left
B)the short-run aggregate supply will shift to the right
C)rising prices will shift the aggregate demand to the left
D)wages will fall relatively quickly
E)aggregate demand will shift to the right as wages increase

Question 44

Exhibit 17-2

According to those who favor an active approach to policy, where will the economy in Exhibit 17-2 end up once the expansionary gap is eliminated?

A)point A
B)point B
C)point C
D)either point B or C
E)cannot tell from the information given

Question 45

Which of the following pieces of information is not necessary for active policy to work successfully?

A)All of the following are necessary for good policy.
B)the size of potential output or the natural rate of unemployment
C)the speed of self-correction
D)the slope of the short-run aggregate supply curve
E)the size of the multiplier

Question 46

One reason that long time lags hamper the effectiveness of economic policy is that

A)people don't want to wait for economic recovery
B)the longer unemployment lasts the more intense inflation becomes
C)by the time the impact of a policy is felt, a new problem may have come along that requires a different policy, which may make the economic situation even worse
D)if inflation is allowed to continue for too long, it becomes immune to policy interference
E)if unemployment is allowed to continue for too long, it becomes immune to policy interference

Question 47

A new policy is actually put in force during the

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 48

Long lags make discretionary policy less effective because

A)in the long run, we shall all be dead
B)by the time the impact of a policy is felt, the problem it was meant to cure may have been corrected
C)lags are longer in contractions than in expansions
D)lags are longer in expansions than in contractions
E)automatic stabilizers are subject to longer lags than are discretionary policies

Question 49

If an active approach to policy is followed, how would an expansionary gap eventually close?

A)The aggregate demand curve would shift rightward.
B)The aggregate demand curve would shift leftward.
C)The short-run aggregate supply curve would shift rightward.
D)The short-run aggregate supply curve would shift leftward.
E)There would be a movement up and to the left along the short-run supply curve.

Question 50

The selection of a new policy takes place during a period of time known as the

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 51

If a passive approach to policy was followed, how would an expansionary gap eventually close?

A)Restrictive fiscal policy would be used.
B)Restrictive monetary policy would be used.
C)Both restrictive fiscal policy and restrictive monetary policy would be used.
D)Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected.
E)Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected.

Question 52

The time it takes for the Fed's purchase of government securities to ultimately change aggregate demand is called the

A)recognition lag
B)implementation lag
C)effectiveness lag
D)decision-making lag
E)self-correction lag

Question 53

Problems facing active policy decisions include

A)both c and d
B)all of the following
C)timing problems related to lags and self-correction
D)that the natural unemployment rate is uncertain
E)the self-correcting forces in the economy don't work well

Question 54

Exhibit 17-2

According to those who favor an active approach to policy, how can the economy shown in Exhibit 17-2 attain equilibrium at potential output?

A)The SRAS curve will shift to the left.
B)The SRAS curve will shift to the right.
C)Either the money supply or government spending should be increased.
D)Either the Fed or the government will act to decrease aggregate demand.
E)Aggregate demand should be increased.

Question 55

If the natural unemployment rate cannot easily be estimated, __________ policy making becomes more difficult.

A)active
B)passive
C)monetarist
D)classical
E)rational expectations

Question 56

The formulation of active policy is

A)made easier if the natural unemployment rate can be easily calculated
B)made easier if the natural unemployment rate cannot be easily calculated
C)made more difficult if the natural unemployment rate can be easily calculated
D)made more difficult if the natural unemployment rate cannot be easily calculated
E)done without considering the natural unemployment rate because such a policy focuses on rules to follow in any unemployment situation

Question 57

The effectiveness lag for monetary policy is short.

Question 58

The time it takes to identify and examine the nature and seriousness of an economic problem is the

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 59

The time it takes for a new policy to register its full impact on the economy after it has been put in force is known as the

A)activity lag
B)decision-making lag
C)effectiveness lag
D)implementation lag
E)recognition lag

Question 60

If self-correction works, a policy that continually increases aggregate demand will

A)have a strong impact on GDP
B)cause permanent inflation
C)eventually cause the SRAS curve to shift to the right
D)have relatively large impact on GDP
E)will cause inflation to continually diminish

Question 61

Discretionary policy advocates believe

A)both c and d
B)that self-correction forces work slowly
C)that rules are effective in changing output
D)in rational expectations
E)none of the above

Question 62

Those who favor an active approach to policy believe that

A)discretionary monetary policy cannot be used to help the economy since monetary policy lags are long
B)discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long
C)lags associated with implementing policies are too long and unstable for discretionary policy to be effective
D)despite the lags involved, implementing discretionary policy is preferable to inaction
E)none of the above

Question 63

Policy makers may not know that the economy is in a recession until six months after the recession starts; this is a phenomenon known as the

A)implementation lag
B)policy coordination problem
C)decision-making lag
D)recognition lag
E)effectiveness lag

Question 64

Those who favor a passive approach to policy believe that

A)discretionary monetary policy can be used to help the economy since monetary policy lags are short
B)discretionary fiscal policy can be used to help the economy since fiscal policy lags are short
C)lags associated with implementing policies are too long and unstable for discretionary policy to be effective
D)despite the lags involved, implementing discretionary policy is preferable to inaction
E)none of the above

Question 65

Those who favor an active approach to policy and those who favor a passive approach disagree not only on how quickly the government can act but also on how stable the economy basically is.

Question 66

According to the rational expectations school, people base their expectations about inflation on

A)the announcement of a change in policy
B)weighted averages of previous inflation rates, with the most distant getting the heaviest weight
C)all information available to them
D)changes in monetary policy only
E)changes in both monetary and fiscal policy

Question 67

Which of the following statements supports the passive approach to a contractionary gap?

A)It is likely that policies will be subject to time lags.
B)Prolonged unemployment may cause the economy's potential real GDP to fall.
C)Workers' skills may grow rusty during a prolonged recession.
D)Unemployed workers may drop out of the labor force during a prolonged recession.
E)Firms may neglect their capital stock during a prolonged recession.

Question 68

Suppose that policy makers are concerned about a shortage of long-term capital investment. To remedy the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan is called the

A)implementation lag
B)policy coordination problem
C)decision-making lag
D)recognition lag
E)effectiveness lag

Question 69

The average U.S. recession (after World War II) has lasted

A)a few months
B)about half a year
C)just under a year
D)about three weeks
E)about two years

Question 70

An implementation lag is the time it takes

A)policy makers to decide what to do
B)for the chosen policy to have its full impact on the economy
C)to identify trouble in the economy and to assess its severity
D)to put a selected policy into action
E)before a policy's effects on the economy are noticed by ordinary people

Question 71

Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy?

A)the recognition lag and the implementation lag
B)the effectiveness lag and the decision-making lag
C)the decision-making lag and the implementation lag
D)the implementation lag and the effectiveness lag
E)the recognition lag and the effectiveness lag

Question 72

Those who favor a passive approach to policy often argue that changes in prices and wages will shift the short-run aggregate supply curve

A)before active policy shifts the aggregate demand curve
B)only after active policy shifts the aggregate demand curve
C)more than active policy shifts the aggregate demand curve
D)less than active policy shifts the aggregate demand curve
E)in a direction opposite to the shift in the aggregate demand curve caused by active policy

Question 73

Suppose a recession surprises economic forecasters, who did not see it coming. Which type of lag is that?

A)cyclical lag
B)recognition lag
C)decision-making lag
D)implementation lag
E)effectiveness lag

Question 74

Time required __________ is not a time lag associated with using discretionary policy to correct an economic problem.

A)to recognize the problem
B)to decide how to handle the problem
C)to set a policy change in action
D)for a policy to affect economic variables
E)to coordinate monetary and fiscal policy

Question 75

Which of the following is not a valid criticism of discretionary fiscal policy?

A)Implementation of fiscal policy is sometimes difficult.
B)Time lags in fiscal policy are long.
C)Fiscal policy works only during periods of stagflation.
D)Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income.
E)Fiscal policy might have undesirable long-term effects on aggregate supply.

Question 76

The __________ lag is typically longer for fiscal policy than monetary policy.

A)both b and d
B)decision-making
C)effectiveness
D)implementation
E)recognition

Question 77

An effective policy of governmental intervention in the economy requires all of the following except one. Which is the exception?

A)the will to reject sound policy if it gets in the way of political considerations
B)the ability to estimate the economy's potential level of output
C)the ability to predict what would happen without intervention
D)an assortment of effective tools of discretionary policy
E)the ability to achieve effective cooperation between fiscal and monetary policy makers

Question 78

A passive approach to economic policy calls for the government to do nothing to offset unemployment because of

A)a lack of any real concern for those who have no jobs
B)a conviction that unemployment is relatively harmless
C)a belief that active economic policy is likely to be either ineffective or harmful
D)a desire to await further economic data before intervening
E)belief in the law of diminishing returns

Question 79

If high unemployment lasts a long time, it could cause potential real GDP to fall.

Question 80

If the time for an economy to self-correct is shorter than the active policy lags,

A)active policy should be strengthened
B)active policy will likely be destabilizing
C)the passive policy case is weakened
D)the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve
E)active policy will work better than passive policy