Question 1

Many people assert that the national debt is not a problem because "we owe it to ourselves." Is this true?

Accepted Answer

This idea is only true in a limited sense. It is true that future generations will inherit the benefits of the debt along with the liabilities, but this does not mean that the people who pay taxes to service the debt are the same people who will receive interest payments from the debt. Additionally, part of the debt (the external debt) is held by foreigners, and dollars used to repay that part of the debt will only return to the United States indirectly.

Question 2

Assume that during the last several years, the annual rate of inflation was 4 percent and the annual growth rate of the money supply was 5 percent. During the last 12 months, however, the monetary authorities have increased the money supply at a 12 percent annual rate. The expected inflation rate for the next period will be

Accepted Answer

A)   higher than 4 percent under the rational expectations hypothesis.
B)   4 percent under the adaptive expectations hypothesis.
C)   higher than 4 percent under both the adaptive and rational expectations hypotheses.
D)   both a and b. D

Question 3

According to the theory of rational expectations, the government can influence output

Accepted Answer

A)   with appropriate fiscal and monetary policy.
B)   in the short run, but not in the long run.
C)   without affecting the price level.
D)   only by making unexpected changes that impact aggregate demand. D

Question 4

Which of the following is true of deficit spending and government debt?

Accepted Answer

A)   The opportunity costs of government spending must be incurred today and cannot be passed on through deficit spending.
B)   Because of the national debt, future generations will incur liabilities without any corresponding benefits.
C)   Financing government spending with debt allows the government to pass the opportunity costs of government spending along to future generations.
D)   All of the public debt is owed to foreigners because the people who pay taxes are U.S. citizens.

Question 5

During the 1950s and 1960s, the national debt as a percent of GDP in the United States

Accepted Answer

A)   soared to an all-time high.
B)   declined.
C)   increased.
D)   was virtually unchanged.

Question 6

Figure 15-3  As shown in Figure 15-3, if people behave according to rational expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the price level to move

Accepted Answer

A)   directly from 100 to 105 and then remain at 105.
B)   directly from 100 to 110 and then remain at 110.
C)   from 100 to 105 initially and then eventually move back to 100.
D)   from 100 to 105 initially and then eventually move to 110.

Question 7

Indicate what might be done to restrain the tendency of the democratic process to generate budget deficits.

Accepted Answer

The answer of Indicate what might be done to restrain...

Question 8

Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a more expansionary policy will increase

Accepted Answer

A)   prices and unemployment in the long run.
B)   real output in the short run but not in the long run.
C)   real output in the long run but not in the short run.
D)   real output in both the long run and the short run.

Question 9

Figure 15-3  As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD1 to AD2 will cause the economy to move

Accepted Answer

A)   directly from E1 to E3 and then remain at E3.
B)   directly from E1 to E2 and then remain at E2.
C)   from E1 to E2 initially and then eventually move back to E1.
D)   from E1 to E2 initially and then eventually move to E3.

Question 10

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 11

According to the modern view of the Phillips curve, expansionary macroeconomic policy that leads to inflation will reduce unemployment

Accepted Answer

A)   only if people underestimate the inflationary side effects of the policy.
B)   only if people overestimate the inflationary side effects of the policy.
C)   if people accurately anticipate the inflationary side effects of the policy.
D)   only if monetary policy provides the macroeconomic stimulus.

Question 12

The modern view of the Phillips curve suggests that

Accepted Answer

A)   when inflation is less than anticipated, unemployment will rise above the natural rate.
B)   monetary policy will be unable to affect inflation.
C)   when people accurately anticipate inflation, expansionary monetary policy will reduce unemployment.
D)   when inflation exceeds what was anticipated, the natural rate of unemployment will rise.

Question 13

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 14

Under the adaptive expectations hypothesis, how will a shift to a more expansionary monetary policy affect the economy?

Accepted Answer

A)   In the short run, the real rate of output will be unaffected, but in the long run, it will increase.
B)   In the short run, the real rate of output will increase, but in the long run, it will be unchanged.
C)   There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher.
D)   In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Question 15

If the federal government were to run a budget surplus, this would

Accepted Answer

A)   increase the size of the national debt.
B)   reduce the size of the national debt.
C)   leave the size of the national debt unchanged.
D)   decrease the national debt only if the government also reduces the supply of money.

Question 16

Use the figure below to answer the following question(s). Figure 15-1
 In Figure 15-1, AD1 and SRAS1 indicate initial conditions in the goods and services market. In the short run, which of the following will most likely result from a shift to a more expansionary monetary policy under the rational expectations hypothesis?

Accepted Answer

A)   price level P1 and output Y1
B)   price level P2 and output Y2
C)   price level P3 and output Y1
D)   price level P1 and output Y2

Question 17

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 18

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 19

According to the modern expectational Phillips curve, unemployment will temporarily rise above the natural rate of unemployment when

Accepted Answer

A)   any inflation is present.
B)   inflation turns out to be lower than what people expected.
C)   inflation turns out to be higher than what people expected.
D)   inflation turns out to be equal to what people expected.

Question 20

Systematic overestimation or underestimation of inflation will

Accepted Answer

A)   occur under rational expectations but not under adaptive expectations.
B)   occur under adaptive expectations but not under rational expectations.
C)   occur under both rational and adaptive expectations.
D)   not occur under either rational or adaptive expectations.

Exam 15: Stabilization Policy, Output, and Employment