Question 1

A decrease in a broad index of commodity prices suggests to the Fed that

Accepted Answer

A) money is plentiful, and the Fed should conduct restrictive policy. 
B) money is plentiful, and the Fed should conduct expansionary policy. 
C) deflation is a potential future danger, and the Fed should conduct expansionary policy. 
D) future prices will likely increase, and the Fed should conduct expansionary policy.

Question 2

What will actual unemployment be (in relation to the natural rate) in each of the following cases? Use a graph of the modern Phillips curve in your answer.
a.Decision makers underestimate inflation.
b.Decision makers overestimate inflation.
c.Decision makers correctly forecast inflation.

Accepted Answer

The answer of What will actual unemployment be (in relation...

Question 3

The time between implementation of a macro-policy change and when the change exerts its primary influence is called the

Accepted Answer

A) impact lag. 
B) recognition lag. 
C) administrative lag. 
D) tax reform lag.

Question 4

Which of the following variables are included in the index of leading indicators?

Accepted Answer

A) new orders placed with manufacturers, length of average workweek, permits for new housing starts 
B) changes in the M1 money supply, number of new credit cards, political stance of current politicians 
C) average worker salary, average number of children per family, current standard of living 
D) labor-force participation rate, household debt as a share of disposable income, the real interest rate

Question 5

What is the Phillips curve? What is the difference between the original Phillips curve and the "modern" view of the Phillips curve? What problems caused the abandonment of the ideas behind the original Phillips curve?

Accepted Answer

The answer of What is the Phillips curve? What is...

Question 6

Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices,

Accepted Answer

A) unemployment will rise. 
B) unemployment will fall. 
C) there will be no effect on unemployment. 
D) unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates.

Question 7

What is the index of leading indicators, and what is it used for?

Accepted Answer

The answer of What is the index of leading indicators,...

Question 8

Which of the following is part of the modern view of the Phillips curve?

Accepted Answer

A) When inflation exceeds what was anticipated, unemployment falls below the natural rate. 
B) When inflation is less than anticipated, unemployment will rise above the natural rate. 
C) Demand stimulus policies can temporarily reduce unemployment, but in the long run, their primary impact will be on prices (inflation). 
D) All of the above are correct.

Question 9

Which one of the following accurately states the view of activists who favor discretionary stabilization policy?

Accepted Answer

A) Neither monetary nor fiscal policy will exert an impact on the real level of economic activity. 
B) Since we have only limited ability to forecast the future direction of the economy, the best policy is to do nothing. 
C) Our ability to forecast the future direction of economic activity is quite good, and therefore, discretionary macroeconomic policy is now capable of eliminating fluctuations in the business cycle if policy makers would follow the advice of leading economists. 
D) The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy.

Question 10

The rational expectations hypothesis implies that discretionary macropolicy may be

Accepted Answer

A) relatively effective in both the short run and long run. 
B) relatively effective in the short run but ineffective in the long run. 
C) relatively ineffective both in the short run and long run. 
D) effective in the long run since decision makers will continually make predictable, systematic errors.

Question 11

During and following the recession of 2008-2009, private investment was

Accepted Answer

A) strong, and this should increase the future productivity of workers. 
B) strong, and this will tend to weaken the future productivity of workers. 
C) weak, and this will tend to reduce the future productivity of workers. 
D) weak, and this will tend to increase the future productivity of workers.

Question 12

According to the adaptive expectations hypothesis, people will

Accepted Answer

A) anticipate that what has happened in the immediate past will continue. 
B) systematically overestimate inflation when inflation is increasing. 
C) use all available information, including information on the expected impact of economic policy, when they formulate expectations about economic events. 
D) systematically underestimate inflation when inflation is declining.

Question 13

The rational expectations hypothesis implies that use of discretionary macro-policy as a stabilization tool will

Accepted Answer

A) be ineffective, even in the short run. 
B) be effective in the short run but ineffective in the long run. 
C) be effective both in the short run and long run. 
D) make it possible to trade-off a higher rate of inflation for a lower rate of unemployment.

Question 14

Which of the following is true regarding economic fluctuations in the United States?

Accepted Answer

A) Since World War II, economic ups and downs have been more moderate than before the war. 
B) Prior to World War II, real GDP annual increases of more than 5 percent were unheard of. 
C) Real GDP grew rapidly during the 1930s. 
D) The 1920s was a period of prolonged economic stagnation and high unemployment.

Question 15

Which of the following factors substantially reduces the effectiveness of discretionary changes in tax rates or government expenditures as a stabilization tool?

Accepted Answer

A) Even though computer models have enhanced our forecasting ability, policy makers at the Federal Reserve have been reluctant to utilize information supplied by the models. 
B) When fiscal policy is altered, the Fed generally shifts monetary policy in a manner that offsets the impact of the fiscal action. 
C) Changes in government expenditures and taxes are always offset by equal changes in private spending. 
D) Since it takes time for fiscal policy to work and since the future is difficult to forecast, it is difficult to time fiscal policy changes correctly.

Question 16

The view that decision-maker expectations are based on actual outcomes observed during the recent past is called the

Accepted Answer

A) rational expectations hypothesis. 
B) adaptive expectations hypothesis. 
C) permanent income theory. 
D) recognition lag.

Question 17

An unanticipated shift to a more expansionary macro-policy that leads to a higher-than-expected rate of inflation will

Accepted Answer

A) place downward pressure on prices. 
B) temporarily reduce unemployment. 
C) temporarily reduce output. 
D) temporarily reduce the natural rate of unemployment.

Question 18

If the monetary authorities follow policies that keep the annual rate of inflation steady and low (for example, 2 percent), which of the following is most likely to occur?

Accepted Answer

A) a high rate of unemployment because people will anticipate a higher rate of inflation 
B) considerable fluctuations in real GDP because the monetary authorities are not constantly adjusting monetary policy in light of current business conditions 
C) higher real interest rates because decision makers will fail to anticipate the 2 percent rate of inflation 
D) an unemployment rate that is at or near the natural rate of unemployment because the actual rate of inflation will not be much different than what people expect

Question 19

During the 1900-1950 period,

Accepted Answer

A) the growth of real GDP was more stable than has been the case since 1950. 
B) unemployment seldom exceeded 4 percent of the labor force. 
C) double-digit swings in real GDP during a single year were not uncommon. 
D) the money supply was increased at a constant annual rate of between 4 percent and 6 percent throughout the period.

Question 20

The time period between when economic conditions change and when policy makers are aware of the change is called the

Accepted Answer

A) index of leading indicators. 
B) administrative lag. 
C) recognition lag. 
D) impact lag.

Exam 15: Stabilization Policy, Output, and Employment