Question 1

Suppose current government spending increases and that individuals expect future government spending to increase.Given this information,in which of the following cases will output in the current period be more likely to increase?

Accepted Answer

A) Individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates. 
B) Individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. 
C) Individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates. 
D) The output effects will be the same in B and C.

Question 2

Which of the following will not cause aggregate private spending to decrease?

Accepted Answer

A) a reduction in expected future real interest rates 
B) a reduction in government spending 
C) an increase in future taxes 
D) all of the above 
E)  none of the above

Question 3

Which of the following would be a violation of the rational expectations assumption?

Accepted Answer

A) "Over the past twenty years, people have consistently under-predicted the inflation rate for the following year." 
B) "Over the past twenty years, people have never once accurately predicted the inflation rate for the following year." 
C) "The Fed's announcement that it might ease interest rates caused an immediate drop in short-term rates, even before the Fed took any action." 
D) all of the above 
E)  none of the above

Question 4

Which of the following will cause the LM curve to shift up?

Accepted Answer

A) an increase in the expected future interest rate 
B) an increase in current income 
C) an increase in expected future taxes 
D) all of the above 
E)  none of the above

Question 5

Which of the following will cause the LM curve to shift down?

Accepted Answer

A) a reduction in the expected future interest rate 
B) a reduction in current income 
C) a reduction in expected future taxes 
D) all of the above 
E)  none of the above

Question 6

Explain the three channels economists have identified through which quantitative or credit easing may affect the economy.

Accepted Answer

The answer of Explain the three channels economists have identified...

Question 7

Suppose the central bank announces that it will pursue a monetary expansion in the current period and a monetary expansion in the future.Explain how the credibility of the central bank might influence the effectiveness of this monetary policy action and announcement of a future monetary policy action.

Accepted Answer

The answer of Suppose the central bank announces that it...

Question 8

Suppose the central bank implements a monetary contraction in the current period and is expected to continue this monetary contraction in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Accepted Answer

The answer of Suppose the central bank implements a monetary...

Question 9

Suppose individuals now believe that there will be a future tax cut.This reduction in expected future taxes will cause which of the following to occur in the current period?

Accepted Answer

A) the LM curve to shift down 
B) the LM curve to shift up 
C) the IS curve to shift rightward 
D) the IS curve to shift leftward 
E)  none of the above

Question 10

Suppose current government spending increases and that individuals expect future government spending to increase.Given this information,in which of the following cases will output in the current period be more likely to decrease?

Accepted Answer

A) Individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates. 
B) Individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates. 
C) Individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates. 
D) The output effects will be the same in B and C.

Question 11

Suppose there is a reduction in expected future taxes.This will cause which of the following to occur?

Accepted Answer

A) the IS curve to shift left in the current period 
B) the IS curve to shift right in the current period 
C) the LM curve to shift up in the current period 
D) the LM curve to shift down in the current period

Question 12

Assume individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future government spending to decrease.Given this information,individuals will expect

Accepted Answer

A) a reduction in the expected future interest rate and no change in expected future output. 
B) a reduction in the expected future interest rate and an increase in expected future output. 
C) a reduction in the expected future interest rate and a reduction in expected future output. 
D) a reduction in the expected future interest rate and an ambiguous effect on expected future output.

Question 13

A reduction in which of the following variables will cause an increase in the amount of money individuals wish to hold in the current period?

Accepted Answer

A) current income 
B) the current nominal interest rate 
C) the current real interest rate 
D) expected future income 
E)  all of the above

Question 14

The IS curve shifts to the left where there is

Accepted Answer

A) a reduction in current taxes. 
B) an increase in expected future taxes. 
C) an increase in expected future output. 
D) all of the above 
E)  none of the above

Question 15

Assume individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose current government spending increases and that individuals expect future government spending to increase.Given this information,we know with certainty that

Accepted Answer

A) current output and the current interest rate will both increase. 
B) current output will not change. 
C) future expected output will decrease. 
D) future expected output will not change.

Question 16

Assume individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future government spending to increase.Given this information,individuals will expect

Accepted Answer

A) an increase in the expected future interest rate and no change in expected future output. 
B) an increase in the expected future interest rate and an increase in expected future output. 
C) an increase in the expected future interest rate and a reduction in expected future output. 
D) an increase in the expected future interest rate and an ambiguous effect on expected future output.

Question 17

Suppose individuals expect that interest rates will increase in the future.Also assume that the Fed wants to prevent any change in current output.Given this goal of the Fed,the Fed should implement a policy in the current period that

Accepted Answer

A) shifts the IS curve rightward. 
B) shifts the IS curve leftward. 
C) shifts the IS curve leftward and the LM curve upward. 
D) shifts the LM curve upward. 
E)  shifts the LM curve downward.

Question 18

Adaptive expectations assumes that individuals

Accepted Answer

A) can accurately predict the future. 
B) base predictions on random events (i.e., animal spirits). 
C) form their predictions of macroeconomic variables randomly. 
D) use all available information in predicting the future. 
E)  none of the above

Question 19

Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future taxes to decrease.Given this information,individuals will expect

Accepted Answer