Question 1

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD₂. In the short run

Accepted Answer

A) real GDP will be Y₁, and the price level will be P₁. 
B) real GDP will be Y₂, and the price level will be P₂. 
C) real GDP will be between Y₁ and Y₂, and the price level will be above P₁. 
D) real GDP will be between Y₁ and Y₂, and the price level will be below P₂.

Question 2

Assuming that the rational expectations hypothesis is NOT in effect, in the short run an expansionary monetary policy should

Accepted Answer

A) shift the aggregate supply function. 
B) increase real Gross Domestic Product (GDP)and the price level. 
C) increase the rate of unemployment. 
D) generate stagflation.

Question 3

The rational expectations hypothesis indicates that a monetary policy designed to alter real Gross Domestic Product (GDP)will fail unless

Accepted Answer

A) changes in the money supply are unexpected. 
B) the government's budget is not in deficit. 
C) labor unions have long-term contracts. 
D) changes in the money supply are completely anticipated.

Question 4

According to the text, the probability of an unemployed person finding a job doubles when

Accepted Answer

A) his unemployment benefits expire. 
B) his unemployment benefits are extended. 
C) the economy enters a recessionary phase. 
D) he is threatened with arrest.

Question 5

Which of the following curves shows the relationship between the unemployment rate and the rate of change in the price level?

Accepted Answer

A) the new Keynesian aggregate supply curve 
B) the real business cycle curve 
C) the aggregate demand curve 
D) none of the above

Question 6

-Use the above figure. This graph is known as

Accepted Answer

A) the Laffer curve. 
B) the short-run Phillips curve. 
C) the NAIRU relationship. 
D) the Keynesian curve.

Question 7

-Refer to the above figure. Suppose the economy is at point B and the central bank adopts contractionary monetary policy. In the short run, this will result in

Accepted Answer

A) the economy moving towards point A. 
B) the economy staying at point B. 
C) the economy moving towards point C. 
D) an outcome that cannot be predicted, because not enough information is given.

Question 8

Which of the following factors strengthens the case for policy activism?

Accepted Answer

A) sticky prices 
B) flexible wages 
C) flexible prices 
D) lack of real-business-cycles

Question 9

The short run aggregate supply (SRAS)curve shifts left when oil supply shocks occur because

Accepted Answer

A) fewer goods are produced at any given price level due to higher oil prices. 
B) oil-based production has increased at any given price level. 
C) average total cost will fall at any given output level. 
D) the price level will fall at any given output level.

Question 10

-Refer to the above figure. Government policy that moved the economy from A to B would be accomplished by

Accepted Answer

A) an expansionary fiscal policy combined with a contractionary monetary policy. 
B) a contractionary fiscal policy combined with an expansionary monetary policy. 
C) a contractionary policy that would reduce the rate of inflation and would cause workers to remain unemployed longer than they were before. 
D) raising the minimum wage.

Question 11

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD₂. In the short run

Accepted Answer

A) the unemployment rate will be the same rate as before the expansionary monetary policy. 
B) the unemployment rate will be larger than the rate before the contractionary monetary policy. 
C) the unemployment rate will be smaller than the rate before the expansionary monetary policy. 
D) the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question 12

When the actual unemployment rate is greater than the NAIRU, the inflation rate

Accepted Answer

A) tends to increase. 
B) tends to decrease. 
C) remains unchanged. 
D) falls to zero.

Question 13

If the average interval between firms' price adjustments is relatively short

Accepted Answer

A) an increase in aggregate demand will cause a relatively short-lived increase in real GDP. 
B) an increase in aggregate demand will cause a relatively long-lived increase in real GDP. 
C) a reduction in aggregate demand will cause a relatively long-lived reduction in real GDP. 
D) both B and C

Question 14

Under the rational expectations hypothesis, if wages adjust rapidly to new information about intended policy actions, the only time that changes in government policies have real effects is when

Accepted Answer

A) the changes are unanticipated. 
B) the changes involve fiscal policy. 
C) the changes involve monetary policy. 
D) the changes affect aggregate demand.

Question 15

Suppose that the inflation rate has been 3 percent per year for several years, and the unemployment rate has been stable at 5 percent. Unanticipated changes in government policy cause the inflation rate to increase to 6 percent. In the short run, we would expect the unemployment rate to

Accepted Answer

A) remain constant. 
B) increase to 10 percent. 
C) increase, but the exact amount cannot be known for sure. 
D) decrease.

Question 16

-Refer to the above figure. The rational expectations hypothesis implies that an anticipated increase in aggregate demand from AD₁ to AD₂ will

Accepted Answer

A) move the economy from c to b. 
B) move the economy from a to b. 
C) move the economy from a to c. 
D) will shift the aggregate supply (AS)curve to the right.

Question 17

The theory of new Keynesian inflation dynamics suggests that a fall in aggregate demand would

Accepted Answer

A) immediately reduce the price level, followed by a more sluggish decline in real GDP. 
B) immediately raise the price level, followed by a more sluggish decline in real GDP. 
C) immediately reduce real GDP, followed by a more sluggish decline in the price level. 
D) immediately raise real GDP, followed by a more sluggish increase in the price level.

Question 18

Some economists suggest that because of the costs of negotiating contracts, printing price lists, etc., it is costly for firms to change prices in response to demand changes. This hypothesis is known as the

Accepted Answer

A) sticky wage theory. 
B) menu cost theory. 
C) Phillips theory. 
D) Friedman theory.

Question 19

Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because

Accepted Answer

A) economic participants routinely incorporate changes in the inflation rate into their expectations. 
B) economic participants are not rational, and therefore act unpredictably to any policy change. 
C) unemployment levels and the inflation rate have a clear, positive relationship. 
D) unemployment levels and the inflation rate have a negative (inverse)relationship.

Question 20

During a recession, the overall unemployment rate

Accepted Answer

A) falls rapidly. 
B) exceeds the natural rate of unemployment. 
C) falls below the natural rate of unemployment. 
D) equals the inflation rate.

Exam 16: Stabilization in an Integrated World Economy

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD₂. In the short run

Assuming that the rational expectations hypothesis is NOT in effect, in the short run an expansionary monetary policy should

The rational expectations hypothesis indicates that a monetary policy designed to alter real Gross Domestic Product (GDP) will fail unless

According to the text, the probability of an unemployed person finding a job doubles when

Which of the following curves shows the relationship between the unemployment rate and the rate of change in the price level?

-Use the above figure. This graph is known as

-Refer to the above figure. Suppose the economy is at point B and the central bank adopts contractionary monetary policy. In the short run, this will result in

Which of the following factors strengthens the case for policy activism?

The short run aggregate supply (SRAS) curve shifts left when oil supply shocks occur because

-Refer to the above figure. Government policy that moved the economy from A to B would be accomplished by

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD₂. In the short run

When the actual unemployment rate is greater than the NAIRU, the inflation rate

If the average interval between firms' price adjustments is relatively short

Under the rational expectations hypothesis, if wages adjust rapidly to new information about intended policy actions, the only time that changes in government policies have real effects is when

Suppose that the inflation rate has been 3 percent per year for several years, and the unemployment rate has been stable at 5 percent. Unanticipated changes in government policy cause the inflation rate to increase to 6 percent. In the short run, we would expect the unemployment rate to

-Refer to the above figure. The rational expectations hypothesis implies that an anticipated increase in aggregate demand from AD₁ to AD₂ will

The theory of new Keynesian inflation dynamics suggests that a fall in aggregate demand would

Some economists suggest that because of the costs of negotiating contracts, printing price lists, etc., it is costly for firms to change prices in response to demand changes. This hypothesis is known as the

Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because

During a recession, the overall unemployment rate