Deck 14: Stabilization Policy in the Closed and Open Economy

Question 1

Because of the lag of the effects of changes in monetary policy and the failure of forecasters to anticipate supply-side shocks as well as changes in money demand or velocity, activist policy changes have tended at times during the mid 1970's to

A) accelerate inflation during expansions.
B) increase unemployment during recessions.
C) accelerate inflation and increased unemployment.
D) dampen inflation and decrease unemployment.

Answer 1

accelerate inflation and increased unemployment.

Question 2

To non-activists, which of the following is the most useful stabilization policy?

A) procyclical monetary and fiscal policy changes
B) countercyclical monetary changes
C) government spending changes
D) None of these.

Answer 2

None of these.

Question 3

The length of money or commodity demand disturbances is important to the "policy activism" debate between non-activists and activists because

A) changing the money supply affects the economy with a lag.
B) changes in private spending must be offset by policy debate.
C) Both A and B are correct.
D) None of the above is correct.

Answer 3

changing the money supply affects the economy with a lag.

Question 4

A policymaker would prefer that the lag in the effect of a policy be

A) long and variable in magnitude or size.
B) short and fixed in magnitude or size.
C) long and fixed in magnitude or size.
D) short and variable in magnitude or size.

Question 5

Which of the following multiplier concepts is most important from the point of view of devising an activist policy?

A) the income and money-creation multipliers
B) the dynamic multipliers, that is the timing of multiplier effects given a policy change
C) the long-term multipliers, that is the total effect from several time periods given a policy change
D) the money-creation multiplier

Question 6

Non-activists

A) distrust the ability of the political process to formulate sensible economic policy.
B) argue for a constant-growth-rate rule for the money supply.
C) argue that more unemployment now may prevent a lot more unemployment in the future.
D) All of the above.

Question 7

In the early 1970s monetary growth was relatively stable yet unemployment and prices were quite unstable. This suggests that

A) policy activism is superior to policy rules.
B) government spending must have been destabilizing.
C) monetary rules will not iron out every short-run fluctuation resulting from shocks.
D) the government was following a monetary rule.

Question 8

The central issue in the stabilization policy debate is

A) the effectiveness of monetary policy and fiscal policy.
B) the effectiveness of fiscal policy, but not monetary policy.
C) the role of money in the inflationary process.
D) the location of the sources of economic instability in the economy.

Question 9

Non-activists believe that the IS curve is

A) very flat and that real output is sometimes very sensitive to monetary policy in the short run.
B) very steep and that real output is sometimes very sensitive to monetary policy in the short run.
C) very flat and that real output is not sensitive to monetary policy in the short run.
D) very steep.

Question 10

According to the Monetarists, "Policy activism" is difficult if not impossible to perform successfully because

A) the timing of policy impacts on nominal GDP are known.
B) the magnitude, size of impacts are known.
C) the timing and magnitude of the impact of AD disturbances are known, forecasted with precision.
D) Monetarists believe all of the above are correct.

Question 11

Which of the following is NOT a problem in following an activist policy?

A) ineffectiveness in fiscal policy
B) lags in the effects of policies
C) multiplier uncertainty
D) forecasting errors

Question 12

Non-activists are most interested in

A) the short-run level of unemployment and the effectiveness of monetary policy.
B) the long-run consequences of policies.
C) the effectiveness of monetary policy and the short-run inflation rate.
D) the short-run rate of inflation and level of unemployment.

Question 13

Successful activist stabilization policy presumes that

A) the timing of policy impacts on nominal GNP are known.
B) the magnitude, size of impacts, are known.
C) the timing and magnitude of the impact of AD disturbances are known, forecasted with precision.
D) All of the above.

Question 14

Non-activists believe that the principal source of AD instability is

A) private investment spending.
B) private consumption spending.
C) erratic government policy.
D) All of the above.

Question 15

A major problem in developing an activist policy is

A) uncertainty about the magnitude of the dynamic multiplier.
B) uncertainty about the length and variability of policy lags.
C) uncertainty about the costs of various policies.
D) All of the above are correct.

Question 16

Which of the following is NOT an argument of non-activists?

A) private expenditures tend to be stable
B) monetary policy is impotent relative to fiscal policy
C) prices are flexible in the long-run
D) government actions may be destabilizing

Question 17

If the Fed announces a new policy of slower monetary growth it will result in lower inflation and no change in output only if

A) the policy is credible and price expectations are reduced.
B) the policy is time consistent and expectations remain constant.
C) the policy is time inconsistent and expectations increase.
D) Both A and B are correct.

Question 18

If the demand for money is relatively stable

A) the velocity of money will be constant.
B) the velocity of money will grow at a steady and predictable rate.
C) a fixed growth rate for the nominal money supply will lead to a stable growth rate of nominal GDP.
D) B and C are both correct.

Question 19

The increase of the real money supply by 10% by the Federal Reserve when the unemployment rate rises by 1% is an example of

A) the conduct of procyclical monetary policy.
B) the utilization of feedback policy rule.
C) the utilization of rigid policy rule.
D) the conduct of nondiscretionary fiscal policy.

Question 20

Monetarists believe that the major source of macroeconomic instability lies in

A) the private investment sector and the government sector.
B) the government sector.
C) private corporations and the government sector.
D) export and import sector.

Question 21

According to the new classical macroeconomists, each of the following statements is true EXCEPT

A) disinflation will be harder to bring about because of the time-inconsistency problem.
B) policymakers are tempted to deviate from the preannounced policy once the public changes its expectations.
C) feedback rules are preferred to discretionary rules.
D) disinflation will be painless if the restrictive policies announced by the government are credible.

Question 22

To be successful in stabilizing AD, the application of a constant growth-rate rule for the money supply requires

A) a constant velocity of money.
B) a steady and predictable rate of growth of the velocity of money.
C) a steady and predictable rate of growth of the velocity of income.
D) Both B and C are correct.

Question 23

In general, activists are ________ about the ability of the economy to remain stable and non-activists are ________.

A) pessimistic; optimistic
B) optimistic; optimistic
C) pessimistic; pessimistic
D) optimistic; pessimistic

Question 24

Economists who support a monetary rule as opposed to an activist monetary policy believe that the effectiveness lag in monetary policy is

A) short and variable, policy changes affect AD quickly and are predictable.
B) zero, policy changes have an immediate effect on expenditures.
C) long and variable, policy changes affect AD slowly over time and are unpredictable.
D) long, but predictable.

Question 25

The activists believe that

A) the time required for flexible prices to bring the economy back to the natural rate of unemployment is relatively short.
B) the IS curve is relatively flat because of the broad range of assets whose demand is very sensitive to changes in the interest rate.
C) the time required for flexible prices to return the economy to the natural level of real GDP is intolerably long.
D) the severity of the Great Depression was primarily related to the large decline in the supply of money.

Question 26

The activist response to the monetarist platform says that

A) private spending may show some stability, but monetary or fiscal policy designed to stabilize it will just make things worse.
B) private spending is stable partly because consumption spending is based on permanent income.
C) even if prices are not completely flexible in the short-run, given time there is enough flexibility for the system to return to the natural level of real GDP.
D) None of the above.

Question 27

One of describing the debate between activists and non-activists is that

A) activists are pessimistic about the self-correcting powers of the economy but non-activists are optimistic.
B) activists tend to be oriented to the long-run but non-activists are short-run oriented.
C) non-activists are optimistic about the efficacy of stabilization policy but activists are pessimistic.
D) A and B are both correct.

Question 28

If both money demand and commodity demand are unstable, as many activists believe, which type of policy target(s) would most likely lead to a stable economy (assuming supply-side shocks are likely to occur)?

A) money supply target
B) real GDP target
C) interest rate target
D) nominal GDP

Question 29

According to the New Classical macroeconomic school

A) active policy intervention is ineffective.
B) active policy intervention is undesirable and perverse.
C) active policy intervention's benefits exceed its costs.
D) active policy intervention's benefits are less than its costs.

Question 30

The activists' paradise requires

A) that government expenditures follow a fairly steady growth path.
B) the ability to forecast perfectly future changes in demand and effects of changes in policy.
C) policy to have powerful direct effects but no side-effects.
D) B and C are both correct.

Question 31

In general, activists are ________ about the ability of fiscal and monetary policies to stabilize AD and non-activists are ________.

A) pessimistic; optimistic
B) optimistic; optimistic
C) pessimistic; pessimistic
D) optimistic; pessimistic

Question 32

The time between the policy decision and the subsequent change in policy instruments is called the

A) data lag, the time required to collect and analyze data.
B) effectiveness lag, the time required for the change in money supply to affect real output.
C) legislative lag, the time required for policymaking body to make decisions.
D) transmission lag, the time between the change in policy and the change in policy instruments.

Question 33

The "policy ineffectiveness proposition" of the new classical attack on policy activism is based on the idea that

A) people will anticipate policy changes particularly those based on a feedback rule.
B) people will anticipate the effects of policy changes and act to offset these effects.
C) Both A and B are correct.
D) None of the above is correct.

Question 34

Activists-believe that AD is unstable because

A) business and consumer attitudes and expectations shift.
B) monetary policy is variable.
C) fiscal policy effects are unpredictable.
D) Both B and C are correct.

Question 35

Activists believe that postwar instability is primarily the result of

A) erratic growth of private investment.
B) uneven changes in real government expenditures.
C) uneven changes in private consumption of durables.
D) A and C are both correct.

Question 36

A study of estimated multipliers in the major econometric models shows that

A) the government-spending multiplier tends to increase and then later decrease over time.
B) the monetary multiplier is much larger than the government spending multiplier.
C) there is quite a bit of variation in the value of the multipliers among the models.
D) A and C are both correct.

Question 37

Non-activists believe that postwar instability is primarily the result of

A) erratic growth of private investment.
B) uneven changes in real government expenditures.
C) uneven changes in private consumption of durables.
D) A and C are both correct.

Question 38

Which of the following is NOT an argument of non-activists?

A) private spending may show some instability but monetary or fiscal policy designed to stabilize it will just make things worse
B) private spending is stable partly because consumption spending is based on permanent income
C) even if prices are not completely flexible in the short-run, given time there is enough flexibility for the system to return to the natural level of real GNP
D) it is true that monetary and fiscal policy have destabilizing in the past, but economic knowledge is now advanced enough to permit effective countercyclical policy

Question 39

The non-activists believe that

A) the government has been a stabilizing force in the economy.
B) much of the existing unemployment voluntary.
C) the velocity of money is unstable.
D) policymakers are able to accurately forecast the future effect of current policy actions.

Question 40

The "effectiveness lag" in monetary policy is the amount of time it takes

A) to collect the data to determine if a policy change is required.
B) for monetary policy to have an impact on inflation and unemployment.
C) for monetary policy to affect the money supply.
D) to collect the data to determine what effect monetary policy has had on the economy.

Question 41

In the schematic theory of economic policy, the demand for money is considered

A) a policy instrument.
B) an exogenous nonpolicy variable.
C) a structural relation.
D) a target variable.
E) an irrelevant side effect.

Question 42

If the Federal Reserve wants to control the level of interest rates

A) it must keep the supply of money constant.
B) it must let the money supply grow at a constant rate.
C) it can do so only if it also stabilizes nominal GDP.
D) it will have to give up control of the money supply.

Question 43

Linking policy instruments to target variables are the

A) indices of economic welfare.
B) structural economic relations.
C) exogenous nonpolicy variables.
D) irrelevant side effects.

Question 44

The major difference between the lag in monetary policy versus the lag in fiscal policy stems from the

A) data lag.
B) legislative lag.
C) recognition lag.
D) transmission lag.

Question 45

Gordon believes that the expansion which began in 1982 did so because of the

A) expansionary monetary policy which was pursued.
B) Reagan tax cuts, the passage of the Economic Recovery Act in 1981.
C) increases in consumer and business firm optimism concerning future business conditions.
D) A and B are both correct.

Question 46

In the Activists' Paradise, to increase real GDP without affecting the interest rate, it is necessary to change

A) only fiscal policy and shift the IS curve.
B) only monetary policy and shift the LM curve.
C) fiscal and monetary policies and shift both IS and LM.
D) more policy instruments than policymakers are actually able to manipulate.

Question 47

The economy has been compared to a supertanker on the ocean to make the point that

A) the larger the economy, the less it is influenced by other economies (the weather).
B) it takes time for a policy change to overcome the economy's momentum and change its direction (as in steering an immense ship).
C) a random shock affects all parts of the economy in the same way (as all of a ship rises or falls together with the waves).
D) the larger the economy, the worse it is for the rest of the world when it goes into a recession (there is enough oil in a supertanker for a spill to stretch across the ocean).

Question 48

In the long run, monetary and fiscal policies have no control over

A) the unemployment rate
B) nominal GDP.
C) the inflation rate.
D) the interest rate

Question 49

Which of the following is likely to have the shortest transmission lag?

A) a change in personal income tax rates
B) a change in government expenditures
C) an increase in subsidies paid to firms
D) an increase in public-service employment

Question 50

Which of the following is not one of the set of assumptions necessary to create the Activists' Paradise?

A) political constraints on the use of policy instruments
B) perfect forecasting of future movements in aggregate demand
C) the absence of costs in changing the policy instruments
D) policy instruments that strongly affect aggregate demand

Question 51

Dividing fiscal policy into two instruments has the effect of introducing another policy target:

A) the interest rate.
B) the national debt.
C) the unemployment rate.
D) the division of output between public and private spending.

Question 52

In Gordon's early presentation of the IS-LM and AD/SRAS/LRAS models, macro policy was assumed to have ________ effects on aggregate demand.

A) immediate and certain
B) immediate but uncertain
C) delayed but certain
D) delayed and uncertain

Question 53

Expenditure changes may be potentially inequitable, as are tax changes, because

A) their spatial distribution must be determined by the legislature.
B) their spatial distribution must be determined by the Fed.
C) the government is slow to implement new programs.
D) unlike Japan, public works projects are the province of the executive branch.

Question 54

In the schematic theory of economic policy, consumer optimism is considered

A) a policy instrument.
B) an exogenous nonpolicy variable.
C) a structural relation.
D) a target variable.
E) an irrelevant side effect.

Question 55

The major difference in the efficacy of monetary policy relative to fiscal policy

A) the longer recognition lag for fiscal policy
B) the shorter recognition lag for fiscal policy
C) the longer legislative lag for fiscal policy
D) the longer data lag for fiscal policy

Question 56

Observers of the economy often complain that indicators of economic activity are often contradictory. This is an example of the ________ lag.

A) data
B) recognition
C) legislative
D) effectiveness

Question 57

The measure of the effectiveness lag for a change in monetary policy is the length of time necessary for ________ of the ultimate effect to be felt.

A) one-quarter
B) one-half
C) three-quarters
D) all

Question 58

Policy makers usually wait for ________ months of data to confirm a change.

A) two
B) three
C) four
D) six

Question 59

Typically the data lag is about

A) one month.
B) about a month and a half.
C) about three months.
D) about six months.

Question 60

Based on the record of past business cycles as well as Fed behavior, we can estimate that for expansionary monetary policy the overall lag is approximately

A) eighteen months, about half of which is the effectiveness lag.
B) twenty months, slightly more than three-quarters of which is the effectiveness lag.
C) ten months, with less than half due to the effectiveness lag.
D) nine months, with the effectiveness lag responsible for about six months.

Question 61

A clear-cut "rules versus discretion" debate is no longer possible because those economists advocating rules for ________, such as ________, must leave the Fed with plenty of discretionary power.

A) policy instruments, the money supply
B) policy instruments, the inflation rate
C) target variables, the money supply
D) target variables, the inflation rate

Question 62

The longest lag monetary policy suffers is the ________ lag.

A) data
B) recognition
C) legislative
D) transmission
E) effectiveness

Question 63

With lags in monetary policy, an effective expansionary policy must be initiated many months ________ the start of the economic downturn it is intended to moderate, and this requires ________ economic forecasts.

A) before, generating accurate
B) before, ignoring
C) after, generating accurate
D) after, ignoring

Question 64

Suppose that the central bank operates under a money supply growth rule, but with changes in the unemployment rate automatically adjusting the money growth target. This is called a ________ rule.

A) CGRR
B) discretionary
C) feedback
D) nominally-anchored

Question 65

Gordon's plots of the effectiveness lags of monetary policy over the periods 1961-1975, 1976-1990, and 1991-2007 show the effectiveness lags have become ________ and the overall response of GDP to monetary policy has ________.

A) shorter, decreased
B) shorter, increased
C) longer, decreased
D) longer, increased

Question 66

The switch to flexible exchange rates in 1973 has made the effect of monetary policy on net exports a ________ important component of the monetary policy multiplier process, and thus has ________ the effectiveness lag.

A) more, lengthened
B) more, shortened
C) less, lengthened
D) less, shortened

Question 67

"Monetarism" advocates a monetary policy

A) at the full discretion of the Fed.
B) that fixes the growth rate of money.
C) that fixes a constant short-term interest rate.
D) that fixes the growth rate of real GDP.
E) that fixes the unemployment rate.

Question 68

What is the only policy instrument the Fed really can control directly and precisely?

A) short-term interest rates
B) the money supply
C) high-powered money
D) corporate tax rates

Question 69

The Fed has the least degree of discretion and the least to do under a policy rule setting

A) the growth rate of money.
B) the growth rate of high-powered money.
C) the Federal funds rate.
D) nominal GDP.

Question 70

Economists who really do want to take discretion away from the Fed, by imposing rules on ________, face the problem of ________.

A) policy instruments, the Fed requiring discretion to adhere to the rule
B) policy instruments, slippages between instruments and target variables
C) target variables, the Fed requiring discretion on how to achieve the rule
D) target variables, slippages between instruments and target variables

Question 71

The deregulation of thrift institutions in the 1970s and 1980s have made their deposits and thus their ability to finance mortgages ________ sensitive to movements in the market interest rate, thus ________ the monetary policy multiplier.

A) more, raising
B) more, lowering
C) less, raising
D) less, lowering

Question 72

A believer in the need for a CGRR of the money supply policy must be ________ about the ability of the private economy to self-stabilize and ________ about the accuracy of discretionary stabilization policy.

A) optimistic, optimistic
B) optimistic, pessimistic
C) pessimistic, optimistic
D) pessimistic, pessimistic

Question 73

Monetary policy has one clear advantage over fiscal policy by virtue of its very short

A) data lag.
B) data and recognition lags.
C) legislative and transmissions lags.
D) effectiveness lag.

Question 74

Data indicate that the economy's response to monetary policy became noticeably weaker and more stretched out during

A) 1961-75
B) 1976-90
C) 1991-2007
D) None of the above. The response has grown stronger and shorter.

Question 75

Monetarists believe that there is a ________ link between money supply growth and target variables and that the public is ________ in movements in the money supply.

A) strong, interested
B) strong, disinterested
C) tenuous, interested
D) tenuous, disinterested

Question 76

The Canadian experience with inflation and unemployment in the early 1990s has this to say about policy rules:

A) a central bank independent of political pressure may thereby not be serving the public's politically-revealed preferences.
B) a central bank bowing to political pressure cannot get the inflation rate below the unemployment rate.
C) a constant-growth-rate-of-money rule cannot stabilize inflation if unemployment is allowed to vary substantially.
D) a constant-growth-rate-of-high-powered-money rule allows too much variation in the growth of the actual money supply to hold down inflation.

Question 77

The believer in policy ________ must be pessimistic about the ability of the private economy to self-stabilize and ________ about the accuracy of economic forecasting.

A) activism, pessimistic
B) activism, optimistic
C) rules, pessimistic
D) rules, optimistic

Question 78

If the Fed were required to maintain an absolutely constant growth rate of high-powered money, then the growth rate of the money supply

A) would be zero.
B) would be constant at the growth rate of H.
C) would be constant but not necessarily at the growth rate of H.
D) would fluctuate along with the parameters in the money-creation formula.

Question 79

Which of the following groups of economic forecasters have been able to forecast "turning points" when the economy turned up or down?

A) Forecasters as the Fed.
B) Forecasters in branches of the government other than the Fed.
C) Forecasters at private firms.
D) None of the above.
E) All of the above.

Question 80

David and Christian Romer's estimate of monetary policy's current effectiveness lag, defined as the time necessary for a policy change to have one-half its ultimate effect on GDP, is approximately ________ months.

A) 2
B) 6
C) 10
D) 19
E) 24