Question 1

How do you think each of the following would affect the unemployment rate?
a. The Fed increases the money supply and engineers an unexpected increase in the rate of inflation from 2 percent to 5 percent.
b. As expected, the rate of inflation remains stable at 2 percent over a five-year period.
c. There is an unexpected decrease in the rate of inflation from 10 percent to 3 percent.

Accepted Answer

The answer of How do you think each of the...

Question 2

When the economy operates at levels significantly lower than the full-employment level, input prices are flexible.

Accepted Answer

A) True 
 B)False

Question 3

Why is a stagflation caused by a negative supply shock worse than a recession caused by a negative demand shock?

Accepted Answer

The answer of Why is a stagflation caused by a...

Question 4

What is quantitative easing?

Accepted Answer

The answer of What is quantitative easing?...

Question 5

Why is indexing not commonly adopted in spite of the fact that it eliminates most of the wealth transfers associated with unexpected inflation?

Accepted Answer

The answer of Why is indexing not commonly adopted in...

Question 6

Why does a larger government budget deficit increase the magnitude of the crowding-out effect?

Accepted Answer

The answer of Why does a larger government budget deficit...

Question 7

If policy makers choose to use a contractionary fiscal policy as a response to the recession caused by a negative supply shock, _____.

Accepted Answer

A) both aggregate output and inflation will increase 
B) both aggregate output and unemployment level will increase 
C) aggregate output will and unemployment will increase 
D) aggregate output will increase and unemployment will decrease 
E) both unemployment and prices will decrease

Question 8

If policy makers' ability to forecast the future is limited, their ability to stabilize the economy with fiscal and monetary policy is compromised.

Accepted Answer

A) True 
 B)False

Question 9

A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve to the right will:

Accepted Answer

A) result in an increase in the demand for money once people's expectations have been accounted for. 
B) shift the AD curve in the opposite direction intended once people's expectations have been accounted for. 
C) result in no significant change in real or nominal GDP or employment once the change is anticipated. 
D) result in a change in real output in the intended direction if the policy is anticipated. 
E) result in a change in real output in the long run if the policy is unanticipated.

Question 10

Critics of targeting a zero inflation rate believe that achieving zero inflation is almost impossible and the costs are too high.

Accepted Answer

A) True 
 B)False

Question 11

The time span between the beginning of a downturn and the time taken to gather enough data to indicate a downturn is called _____.

Accepted Answer

A) the display lag 
B) the implementation lag 
C) the impact lag 
D) the recognition lag 
E) the decision lag

Question 12

What do rational expectations theorists believe? What is their critics' point of view?

Accepted Answer

The answer of What do rational expectations theorists believe? What...

Question 13

According to the Taylor rule, the Fed should raise the federal funds rate by 0.5% relative to the inflation rate _____.

Accepted Answer

A) if nominal GDP rises 1.0% above its target of 1.0% 
B) if real GDP rises 1.0% above its target of 1.0% 
C) if inflation falls 1.0% below its target of 2.0% 
D) if inflation rises 1.0% above its target of 2.0% 
E) if nominal GDP falls 1.0% below its target of 1.0%

Question 14

Which of the following contributed to the global economic crisis of 2008?

Accepted Answer

A) Low interest rates encouraging less qualified buyers to purchase houses 
B) An excessive outflow of foreign capital 
C) A large amount of subsidies being offered by the government 
D) Low ratings of mortgage-backed subprime securities 
E) A sharp increase in personal savings

Question 15

A positive supply shock causes a leftward shift in the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False

Question 16

The rational expectations theory implies that an accurately anticipated change in aggregate demand:

Accepted Answer

A) will increase real GDP in the long run. 
B) will affect real GDP and inflation only in the long run. 
C) will affect real GDP in the short run but not nominal GDP. 
D) will affect nominal GDP in the short run but not real GDP. 
E) will affect real GDP in the long run but not nominal GDP.

Question 17

Is it possible for monetary policy to be more effective during an expansion than during a recession? If yes, why?

Accepted Answer

The answer of Is it possible for monetary policy to...

Question 18

When a commercial bank purchases government securities from the Fed, _____.

Accepted Answer

A) aggregate supply in the economy decreases 
B) aggregate demand in the economy increases 
C) both aggregate demand and aggregate supply increase 
D) both aggregate demand and aggregate supply decrease 
E) aggregate demand in the economy decreases

Question 19

When the crowding-out effect of an increase in government purchases is included when analyzing the impact of the increase in government purchases, _____.

Accepted Answer

A) the AD curve shifts to the left, but by more than the simple multiplier analysis would imply 
B) the AD curve remains unchanged 
C) the AD curve shifts to the right, but by more than the simple multiplier analysis would imply 
D) the AD curve shifts to the right, but by less than the simple multiplier analysis would imply 
E) the AD curve shifts to the left, but by less than the simple multiplier analysis would imply

Question 20

According to the Taylor rule, if real GDP rises 1.0 % over potential GDP, the Fed should, _____.

Accepted Answer

A) raise the federal funds rate by 5% relative to the inflation rate 
B) raise the federal funds rate by 1% relative to the inflation rate 
C) raise the federal funds rate by 2% relative to the inflation rate 
D) raise the federal funds rate by 0.5% relative to the inflation rate 
E) keep the federal funds rate at 4 percent

Exam 17: Issues in Macroeconomic Theory and Policy

When the economy operates at levels significantly lower than the full-employment level, input prices are flexible.

Why is a stagflation caused by a negative supply shock worse than a recession caused by a negative demand shock?

What is quantitative easing?

Why is indexing not commonly adopted in spite of the fact that it eliminates most of the wealth transfers associated with unexpected inflation?

Why does a larger government budget deficit increase the magnitude of the crowding-out effect?

If policy makers choose to use a contractionary fiscal policy as a response to the recession caused by a negative supply shock, _____.

If policy makers' ability to forecast the future is limited, their ability to stabilize the economy with fiscal and monetary policy is compromised.

A conclusion of the theory of rational expectations is that, in the short run, the impact of discretionary fiscal policies designed to shift the AD curve to the right will:

Critics of targeting a zero inflation rate believe that achieving zero inflation is almost impossible and the costs are too high.

The time span between the beginning of a downturn and the time taken to gather enough data to indicate a downturn is called _____.

What do rational expectations theorists believe? What is their critics' point of view?

According to the Taylor rule, the Fed should raise the federal funds rate by 0.5% relative to the inflation rate _____.

Which of the following contributed to the global economic crisis of 2008?

A positive supply shock causes a leftward shift in the short-run aggregate supply curve.

The rational expectations theory implies that an accurately anticipated change in aggregate demand:

Is it possible for monetary policy to be more effective during an expansion than during a recession? If yes, why?

When a commercial bank purchases government securities from the Fed, _____.

When the crowding-out effect of an increase in government purchases is included when analyzing the impact of the increase in government purchases, _____.

According to the Taylor rule, if real GDP rises 1.0 % over potential GDP, the Fed should, _____.