Question 1

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 2

Explain two reasons why economic forecasting can only be of limited use.

Accepted Answer

The answer of Explain two reasons why economic forecasting can...

Question 3

Which of the following reduced the effectiveness of the Fed's low interest rate policy during the aftermath of the 2008-2009 recession?

Accepted Answer

A)  The heavy indebtedness of households. 
B)  The reduction in the earnings derived from savings accounts, certificates of deposits, and other forms of savings used by many Americans. 
C)  The increased fear of inflation fueled by the Fed's expansionary monetary policy. 
D)  All of the above.

Question 4

Compared to the 1910-1960 period, during the past 50 years the severity of macroeconomic fluctuations has

Accepted Answer

A)  increased. 
B)  decreased. 
C)  changed little. 
D)  increased, but the general level of prices has been more stable.

Question 5

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 6

Regarding the issue of economic stability, nonactivists believe that

Accepted Answer

A)  consumption is highly unstable over the business cycle. 
B)  the highest possible level of investment must be maintained over all phases of the business cycle. 
C)  minor economic disturbances often feed on themselves, leading to severe swings in the business cycle. 
D)  the self-correcting properties of a market economy work reasonably well.

Question 7

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.

Question 8

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 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 9

Between 1983 and 2007, the U.S. economy was in recession

Accepted Answer

A)  approximately 33 percent of the time. 
B)  approximately 20 percent of the time. 
C)  17 months. 
D)  This is a trick question; there was no recession during this period.

Question 10

During the recession of 2008-2009, the length of time qualified workers were permitted to draw unemployment benefits was increased from 26 to up to 99 weeks. Economic theory indicates that this extension would

Accepted Answer

A)  reduce the opportunity cost of job search and lead to longer spells of unemployment. 
B)  increase the opportunity cost of job search and lead to shorter spells of unemployment. 
C)  reduce the long-term rate of unemployment. 
D)  increase the current supply of labor and make it easier for employers to hire workers.

Question 11

Under the adaptive expectations theory, expansionary monetary and fiscal policies designed to reduce the unemployment rate will be

Accepted Answer

A)  ineffective in the long run. 
B)  ineffective in the short run. 
C)  noninflationary. 
D)  all of the above.

Question 12

According to the rational expectations theory, which of the following will affect the levels of output and employment?

Accepted Answer

A)  expansionary monetary policy that is fully anticipated 
B)  contractionary monetary policy that is fully anticipated 
C)  changes in monetary policy that are unanticipated 
D)  changes in fiscal policy that are anticipated

Question 13

The 25 years prior to the crisis of 2008-2009 were

Accepted Answer

A)  characterized by more instability than the first 50 years of the twentieth century. 
B)  the most stable economic quarter of a century in American history. 
C)  characterized by more monetary and price instability than any era other than the 1970s. 
D)  a period of historically slow growth and high unemployment.

Question 14

The U.S. experience during the 1980s and 1990s illustrates that

Accepted Answer

A)  fiscal policy is substantially more potent than monetary policy. 
B)  a balanced budget is essential for the achievement of price stability. 
C)  a monetary policy that keeps the inflation rate low and steady will help promote economic stability. 
D)  there is a trade-off between inflation and unemployment-the unemployment rate can be reduced if we are willing to tolerate higher rates of inflation.

Question 15

Most economists agree that

Accepted Answer

A)  fiscal policy is a more effective stabilization tool than monetary policy. 
B)  price stability is the proper goal of monetary policy. 
C)  monetary policy should focus on reducing unemployment, while fiscal policy should focus on the control of inflation. 
D)  discretionary macro-policy can easily be instituted in a manner that will promote economic stability.

Question 16

The interval between the recognition of a need for a policy change and when the policy change is instituted is called the:

Accepted Answer

A)  recognition lag. 
B)  impact lag. 
C)  policy lag. 
D)  administrative lag.

Question 17

Use the table below to choose the correct answer. 
According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers would expect inflation during period 3 to be

Accepted Answer

A)  4 percent. 
B)  5 percent. 
C)  6 percent. 
D)  8 percent.

Question 18

When it comes to macro-policy, most economists now agree that

Accepted Answer

A)  policy should be constantly changing in response to business cycle conditions. 
B)  policy changes should exert stimulus during inflationary booms and restraint during downturns. 
C)  given our ability to forecast economic conditions, policy changes easily can be implemented in a timely manner. 
D)  policy changes are difficult to time correctly, and therefore constant shifts in policy are likely to be a source of economic instability.

Question 19

Economists who believe that market economies are inherently unstable argue that the crisis of 2008 was primarily the result of

Accepted Answer

A)  the expansionary policies of the Fed that caused the housing boom. 
B)  housing regulations that undermined sound lending practices. 
C)  the leveraged lending practices of banks and the fear that retarded both consumption and investment in the latter half of 2008. 
D)  persistently high interest rates during the decade leading up to the crisis.

Question 20

The index of leading indicators was developed to provide more reliable information on

Accepted Answer

A)  the expected future direction of the economy. 
B)  the future profitability of the leading companies in various industries. 
C)  where the economy has been in the recent past. 
D)  the extent to which the economy's existing plant and equipment capacity is being used.

Exam 15: Stabilization Policy, Output, and Employment