Deck 17: Stabilization in an Integrated World Economy

Question 1

Which of the following would be an example of passive policymaking?

A) establishing a system of automatic tax stabilizers
B) marginal rate tax cuts intended to increase real Gross Domestic Product (GDP)
C) government spending decreases intended to decrease real Gross Domestic Product (GDP)
D) raising the money supply when the unemployment rate increases.

Answer 1

A

Question 2

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

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

Answer 2

C

Question 3

Which of the following scenarios can be classified as passive policymaking?

A) The Federal Reserve cuts the federal funds rate in order to increase economic activity.
B) The federal government increases spending in order to create jobs.
C) The Federal Reserve adjusts the money supply as appropriate to attain a target rate of inflation.
D) Congress increases expenditures in an effort to stimulate economic activity.

Answer 3

C

Question 4

If a policymaker is convinced that time lags frequently negate the impact of short-run stabilization efforts, it is likely she would favor ________ policymaking.

A) nondiscretionary
B) discretionary
C) active
D) aggressive

Question 5

When policy makers take actions in response to or in anticipation of some change in the overall economy, there is

A) active policymaking.
B) passive policymaking.
C) rationalization policymaking.
D) rational expectations policymaking.

Question 6

When policymakers make decisions in response to a pre-specified rule, they are undertaking

A) active policy.
B) discretionary policy.
C) passive policy.
D) irrational policy.

Question 7

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 8

Active policymaking would include all of the following EXCEPT

A) interest rate changes by the Fed.
B) tax increases.
C) unemployment insurance benefits.
D) increased government spending by the Congress.

Question 9

With discretionary policy making, fiscal and monetary policies are usually

A) undertaken in response to or anticipation of some change in the overall economy.
B) set according to pre-established standards that do not take into account any changes in the economy.
C) immune to any political overtones.
D) immune to any lag times that might counter their effectiveness.

Question 10

Which one of the following is an example of passive policymaking?

A) introducing expansionary monetary policy to combat a recession
B) introducing expansionary monetary policy to combat inflation
C) introducing expansionary fiscal policy to combat a recession
D) following a predetermined monetary policy rule

Question 11

The Federal Reserve is anticipating a contractionary period in the economy. The Fed decides to engage in open market operations to stimulate the economy. This action is

A) active policymaking.
B) passive policymaking.
C) the monetary rule.
D) nondiscretionary rule.

Question 12

Active policymaking refers to

A) actions taken by policy makers in response to a change in the overall economy.
B) policy making that is carried out in response to a rule.
C) relying on policies that act as automatic stabilizers.
D) nondiscretionary policymaking.

Question 13

Policymaking that is carried out in response to a rule is

A) active policymaking.
B) passive policymaking.
C) restrictive policymaking.
D) determined policymaking.

Question 14

Suppose a constitutional amendment is passed that mandates a balanced federal budget every year and the President and Congress consistently carry this mandate out. This would be an example of

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

Question 15

Which of the following statements has been proposed as a benefit of passive policymaking?

A) Passive policymaking allows for making immediate changes in response to an anticipated change in economic performance.
B) Passive policymaking utilizes the rational expectations hypothesis.
C) When using passive policymaking there is no tradeoff between price stability and unemployment.
D) Passive policymaking does not wait for the time lag between recognition of a problem and policy action before engaging in economic policies to stabilize the economy.

Question 16

When policymakers base their actions on a rule there is

A) active policymaking.
B) passive policymaking.
C) rationalization policymaking.
D) rational expectations policymaking.

Question 17

Actions on the part of monetary and fiscal policymakers that are undertaken in response to some change in the overall economy are known as

A) nondiscretionary policymaking.
B) passive policymaking.
C) creative policymaking.
D) active policymaking.

Question 18

What best defines active policymaking?

A) taking action to offset a change in economic performance
B) taking action to increase long-term economic growth
C) taking action to make markets more competitive so as to improve efficiency
D) taking action to make markets less competitive so as to improve equity

Question 19

An example of nondiscretionary policymaking is

A) a rule under which the Fed targets the inflation rate.
B) expansionary fiscal policy.
C) changes in the interest rate initiated by the Fed.
D) a Congressional tax-rate cut aimed at boosting real GDP.

Question 20

Proponents of passive policymaking believe that

A) the existence of time lags makes active policy ineffective or even procyclical.
B) time lags do not exist so the economy will adjust too rapidly with active policy.
C) government should not follow any particular policy.
D) fiscal policy is always better than monetary policy in stabilizing the economy.

Question 21

From 1950 until the late 1980s, the natural rate of unemployment in the United States

A) fell sharply as government retraining programs helped put the unemployed back to work.
B) cycled up and down in tandem with the actual rate of unemployment.
C) rose sharply, always exceeding the actual rate of unemployment.
D) trended upward.

Question 22

An increase in unemployment 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 23

The natural rate of unemployment includes

A) frictional and cyclical unemployment.
B) only cyclical unemployment.
C) workers who are underemployed.
D) frictional unemployment and structural unemployment.

Question 24

According to the text, minimum-wage laws cause increases in

A) employment possibilities.
B) structural unemployment.
C) poverty.
D) productivity.

Question 25

You recently graduated from college and you are actively looking for employment. The economy has completely recovered from the last recession and you are taking your time looking for the "perfect" job. In the meantime, the unemployment you are experiencing is categorized as

A) cyclical.
B) structural.
C) seasonal.
D) frictional.

Question 26

The idea of policymaking being undertaken as a response to a change in the economy is referred to as

A) active policymaking.
B) non-discretionary policymaking.
C) passive policymaking.
D) Keynesianism.

Question 27

Frictional and structural unemployment both exist

A) when inflation becomes very high.
B) when the economy is in long-run equilibrium.
C) only when the economy is at the peak of the business cycle.
D) only when the economy is in recession.

Question 28

From the late 1980s to 2000, the natural rate of unemployment

A) climbed sharply.
B) held constant.
C) fluctuated up and down, following the path of the actual rate of unemployment.
D) gradually declined.

Question 29

The difference between the actual unemployment rate and the natural unemployment rate is

A) cyclical unemployment.
B) frictional unemployment.
C) the percentage of discouraged workers in the labor force.
D) structural unemployment.

Question 30

If the rate of growth in the money supply is predetermined on the basis of a monetary rule, this is known as

A) direct policymaking.
B) active policymaking.
C) passive policymaking.
D) fiscal policymaking.

Question 31

The natural rate of unemployment is

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

Question 32

The idea of policymaking taking place in response to a predetermined set of rules is referred to as

A) active policymaking.
B) discretionary policymaking.
C) passive policymaking.
D) Keynesianism.

Question 33

Structural unemployment may result from all of the following factors EXCEPT

A) union wage contracts.
B) a higher minimum wage.
C) improved college education.
D) welfare and unemployment benefits.

Question 34

If the Fed engages in open market sales in direct response to an increase in the rate of inflation, this is known as

A) direct policymaking.
B) active policymaking.
C) passive policymaking.
D) fiscal policymaking.

Question 35

The Phillips curve shows the relationship between

A) the price level and real Gross Domestic Product (GDP).
B) the real Gross Domestic Production (GDP) and the unemployment rate.
C) the unemployment rate and inflation rate.
D) the interest rate and exchange rate.

Question 36

Which of the following types of unemployment that occurs after all adjustments in the labor market have occurred?

A) passive unemployment
B) natural unemployment
C) cyclical unemployment
D) seasonal unemployment

Question 37

What types of unemployment will still exist when the economy is at the natural rate of unemployment?

A) none as there will be no unemployment
B) frictional and structural unemployment only
C) structural and cyclical unemployment only
D) frictional, structural, and cyclical unemployment

Question 38

During a recession, the overall unemployment rate

A) falls rapidly.
B) exceeds the natural rate of unemployment.
C) falls below the natural rate of unemployment.
D) equals the inflation rate.

Question 39

The natural rate of unemployment

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 unemployment benefits that reduce potential workers' incentives to find work.
D) exists only during periods of recession or depression in the economy.

Question 40

Structural unemployment is likely to be affected by

A) an economic recession or boom.
B) the reservation wage curves of people.
C) minimum wage laws in the economy.
D) the amount of the money supply.

Question 41

Which of the following unemployment rates can be negative?

A) the cyclical unemployment rate
B) the natural unemployment rate
C) the seasonal unemployment rate
D) the unemployment rate that includes underemployment

Question 42

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 43

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 44

When the actual unemployment rate is greater than the NAIRU, the inflation rate

A) tends to increase.
B) tends to decrease.
C) remains unchanged.
D) falls to zero.

Question 45

Which type of unemployment is associated with the slump in aggregate demand that accompanies a recession?

A) expansionary unemployment
B) cyclical unemployment
C) frictional unemployment
D) structural unemployment

Question 46

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.

Question 47

In the above figure, if initial equilibrium is at point A and there is a fully anticipated increase in aggregate demand from AD1 to AD2 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 48

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 49

One result of an unanticipated reduction in aggregate demand would be that

A) fewer firms would be hiring.
B) more firms would be hiring.
C) there would be no change in hiring.
D) the price level would rise.

Question 50

An important source of structural unemployment is

A) seasonal variations in aggregate demand.
B) unemployment insurance benefits.
C) people looking for the right job decide to change jobs.
D) recessions.

Question 51

In the above figure, if initial equilibrium is at point A and if there is an unanticipated increase in aggregate demand from AD1 to AD2, then

A) in the short run real output will remain at Y1.
B) in the short run real output will increase above Y1, but in the long run it will return to Y1.
C) in the long run real output will increase above Y1.
D) real output will increase above Y1 in both the short run and in the long run.

Question 52

In the above figure, if A is the initial equilibrium point and there is an unanticipated rise in aggregate demand from AD1 to AD2, 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 Gross Domestic Product (GDP) per year will fall below Y1.

Question 53

Suppose that the inflation rate has been 2 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 5 percent. In the short run, we would expect the unemployment rate to

A) remain constant.
B) increase to 7 percent.
C) increase, but the exact amount cannot be known for sure.
D) decrease.

Question 54

Which of the following is NOT a possible cause of structural unemployment?

A) individuals take the time to search for the best job opportunities
B) a mismatch of worker training and skills with requirements of employers
C) government-imposed minimum wage laws
D) union activity that sets wages above the equilibrium level

Question 55

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 56

Suppose the economy is initially operating at point A in the above figure. Which of the following statements is TRUE?

A) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the long run.
B) An unexpected reduction in aggregate demand will cause the economy to move from point A to point B in the short run.
C) An unexpected reduction in aggregate demand will cause the economy to move from point A to point C in the short run.
D) none of the above

Question 57

The natural rate of unemployment consists of

A) unemployment associated with high inflation.
B) only seasonal unemployment.
C) only structural unemployment.
D) structural and frictional unemployment.

Question 58

On average, the greater the unexpected decline in aggregate demand

A) the weaker is the resulting deflation.
B) the greater is the resulting deflation.
C) the greater is the resulting inflation.
D) the greater is the rise in the price level.

Question 59

The natural rate of unemployment is

A) the unemployment rate when cyclical unemployment is the only type of unemployment.
B) the unemployment rate when there is no frictional unemployment.
C) the rate of unemployment associated with long-run equilibrium.
D) zero.

Question 60

In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand triggers a shift from AD1 to AD2. In the short run, this would cause

A) the price level to fall from P1 to P2, real Gross Domestic Product (GDP) to fall from Y1 to Y2, and the rate of unemployment to increase.
B) the price level to move from P1 to P2, but real Gross Domestic Product (GDP) would stay at Y1.
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 Gross Domestic Product (GDP), but a decrease in unemployment.

Question 61

Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run

A) the unemployment rate will be the same rate as before the expansionary monetary policy.
B) the unemployment rate will be larger than the rate before the expansionary monetary policy.
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy.
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question 62

When the economy is in long-run equilibrium, there will be

A) no unemployment.
B) frictional and structural unemployment.
C) cyclical unemployment only.
D) cyclical and seasonal unemployment.

Question 63

Suppose the natural rate of unemployment is 6 percent. If the actual unemployment rate is 6 percent, then the cyclical unemployment rate

A) is 0 percent.
B) is 6 percent.
C) is 11 percent.
D) cannot be determined given the information.

Question 64

When the economy is operating at a level of real GDP that is greater than its potential level, we know that

A) the actual unemployment rate is greater than the natural rate of unemployment.
B) the structural rate of unemployment is negative.
C) the frictional unemployment is zero.
D) the cyclical rate of unemployment is negative.

Question 65

We observe the duration of unemployment rising and wage rates falling. 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 decreased.
D) aggregate supply has increased.

Question 66

Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run

A) real GDP will be Y1, and the price level will be P1.
B) real GDP will be Y2, and the price level will be P2.
C) real GDP will be Y1, and the price level will be above P2.
D) real GDP will be between Y1 and Y2, and the price level will be between P1 and P2.

Question 67

Suppose the natural rate of unemployment is 4 percent. If the actual unemployment is 5 percent, then the cyclical unemployment rate is

A) -9 percent.
B) -1 percent.
C) 1 percent.
D) 9 percent.

Question 68

Suppose the government abolished the minimum wage law and the law that requires union wage rates to be paid on all government contract jobs. 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.

Question 69

Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run

A) the unemployment rate will be the same rate as before the contractionary monetary policy.
B) the unemployment rate will be larger than the rate before the expansionary monetary policy.
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy.
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question 70

During a recession, 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 71

Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run

A) the unemployment rate will be the same rate as before the expansionary monetary policy.
B) the unemployment rate will be larger than the rate before the expansionary monetary policy.
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy.
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question 72

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 73

Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run

A) the unemployment rate will be the same rate as before the expansionary monetary policy.
B) the unemployment rate will be larger than the rate before the contractionary monetary policy.
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy.
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question 74

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

A) cyclical unemployment.
B) frictional unemployment.
C) structural unemployment.
D) the monetary rule.

Question 75

Suppose the natural rate of unemployment is 6 percent. If the actual unemployment rate is 5 percent, then the cyclical unemployment rate is

A) 9 percent.
B) 1 percent.
C) -1 percent.
D) 0 percent as cyclical unemployment cannot be less than zero.

Question 76

Refer to the above figure. Unexpected expansionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run

A) real GDP will be Y1, and the price level will be P1.
B) real GDP will be Y2, and the price level will be P2.
C) real GDP will be Y1, and the price level will be above P2.
D) real GDP will be between Y1 and Y2, and the price level will be between P1 and P2.

Question 77

Suppose there was an unexpected increase in aggregate demand. 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.

Question 78

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 79

Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the long run

A) real GDP will be Y1, and the price level will be P1.
B) real GDP will be Y2, and the price level will be P2.
C) real GDP will be between Y1 and Y2, and the price level will be above P1.
D) real GDP will be between Y1 and Y2, and the price level will be below P2.

Question 80

Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run

A) real GDP will be Y1, and the price level will be P1.
B) real GDP will be Y2, and the price level will be P2.
C) real GDP will be between Y1 and Y2, and the price level will be above P1.
D) real GDP will be between Y1 and Y2, and the price level will be below P2.