Question 1

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 2

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

Accepted Answer

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

Question 3

Compared with the recovery from the recession of 1981-82, the recovery from the recession of 2008-09 was characterized by

Accepted Answer

A)  more rapid growth of real GDP. 
B)  a more rapid decline in the rate of unemployment. 
C)  larger increases in both government spending and budget deficits as a share of GDP. 
D)  higher interest rates and a more restrictive monetary policy.

Question 4

The index of leading indicators has

Accepted Answer

A)  turned down prior to six of the eight recessions since 1959. 
B)  turned up prior to each of the periods of inflation since 1959. 
C)  turned down prior to each of the eight recessions since 1959, but it has also falsely forecast several others. 
D)  turned down only eight times since 1959, and each downturn has been followed by a recession.

Question 5

The variables in the index of leading indicators are included in the index because

Accepted Answer

A)  they turn down prior to a deflation and turn up prior to an inflation. 
B)  they generally lag behind turns in the business cycle. 
C)  they turn down prior to a recession and turn up before the beginning of a business expansion. 
D)  they provide a comprehensive measure of the current state of the economy.

Question 6

Between 1983 and 2007, the U.S. economy was in recession ___________ share of the time, compared to ___________ share of the time during 1910-1959. (Fill in the blank)

Accepted Answer

A)  6 percent; 33 percent 
B)  20 percent; 10 percent 
C)  33 percent; 12 percent 
D)  15 percent; 50 percent

Question 7

Which of the following is an area of substantial agreement among macroeconomists?

Accepted Answer

A)  Expansionary policies that lead to inflation can keep the actual rate of unemployment below the natural rate. 
B)  It is relatively easy to time shifts in monetary policy in a manner that will promote economic stability. 
C)  Price stability is a proper goal of monetary policy. 
D)  It is relatively easy to time shifts in fiscal policy in a manner that will promote economic stability.

Question 8

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called

Accepted Answer

A)  the adaptive expectations hypothesis. 
B)  the permanent income hypothesis. 
C)  the rational expectations hypothesis. 
D)  the Phillips curve.

Question 9

Figure 15-4
 
-Refer to Figure 15-4. According to the modern expectational Phillips curve, actual unemployment will generally fall below the natural rate of unemployment if

Accepted Answer

A)  inflation falls to zero. 
B)  inflation exceeds what was anticipated by decision makers. 
C)  inflation is less than anticipated by decision makers. 
D)  people fully anticipate the inflationary side effects of expansionary macroeconomic policies.

Question 10

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

Accepted Answer

A)  prices but not real output in the short run. 
B)  real output but not prices in the short 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 11

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 12

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 13

Under the rational expectations hypothesis, which of the following is the most likely effect of a shift to a more expansionary monetary policy?

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; in the long run, it will remain unchanged.

Question 14

In response to the recession of 2008-2009, the fiscal policy of the federal government was

Accepted Answer

A)  highly expansionary, and this Keynesian stimulus promoted a rapid recovery. 
B)  highly expansionary, but this was largely offset by the Fed's restrictive monetary policy 
C)  highly restrictive, but this was largely offset by the Fed's highly expansionary monetary policy 
D)  highly expansionary, but the unemployment rate nonetheless remained high during 2010 and 2011

Question 15

When the effects of a more expansionary macroeconomic policy are quickly and accurately anticipated, the policy will

Accepted Answer

A)  increase inflation without reducing unemployment. 
B)  increase unemployment while exerting little impact on inflation. 
C)  decrease unemployment while exerting little impact on inflation. 
D)  fail to exert a significant impact on either unemployment or inflation.

Question 16

Compared to the 1910-1960 period, economic fluctuations during the past 50 years have been less severe. Most economists believe that this increased stability is primarily the result of

Accepted Answer

A)  more stable monetary policy. 
B)  the smaller budget deficits of recent decades. 
C)  regulations that promoted more affordable housing. 
D)  greater stability of stock prices as measured by the Dow Jones Industrial Average.

Question 17

Under the rational expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy?

Accepted Answer

A)  higher prices and no change in real output 
B)  higher prices and expansion in real output 
C)  no change in prices but an expansion in real output 
D)  no change in either prices or real output

Question 18

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 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

If the index of leading indicators and other forecasting devices suggested that the economy is moving into an inflationary boom, activists' economic policy would call for

Accepted Answer

A)  a decrease in money supply growth and a tax increase. 
B)  an increase in money supply growth and a shift toward a budget deficit. 
C)  an increase in money supply growth and a tax decrease. 
D)  a continuation of the policies already in place.

Exam 15: Stabilization Policy, Output, and Employment