Question 1

"Leaning against the wind" is exemplified by a(n)

Accepted Answer

A)  tax increase when there is a recession.
B)  increase in the money supply when there is a recession.
C)  decrease in government expenditures when there is a recession.
D)  All of the above are correct. B

Question 2

The Fed lowered interest rates in 2007 and 2008.This implies,other things the same,that the Fed

Accepted Answer

A)  increased the money supply because it was concerned about unemployment.
B)  increased the money supply because it was concerned about inflation.
C)  decreased the money supply because it was concerned about unemployment.
D)  decreased the money supply because it was concerned about inflation. A

Question 3

Suppose aggregate demand fell.In order to stabilize the economy,the government might

Accepted Answer

A)  decrease the money supply.
B)  decrease government expenditures.
C)  decrease taxes.
D)  do nothing. C

Question 4

The Fed lowered interest rates in 2001 and 2002.This implies,other things the same,that the Fed

Accepted Answer

A)  increased the money supply because it was concerned about unemployment.
B)  increased the money supply because it was concerned about inflation.
C)  decreased the money supply because it was concerned about unemployment.
D)  decreased the money supply because it was concerned about inflation.

Question 5

Fluctuations in employment and output result from changes in

Accepted Answer

A)  aggregate demand only.
B)  aggregate supply only.
C)  aggregate demand and aggregate supply.
D)  neither aggregate demand nor aggregate supply.

Question 6

If the natural rate of unemployment is 6%,but the Fed thinks it is 5% and attempts to use monetary policy to move unemployment from 6% to 5%,then in the short run which of the following variables will the Fed's policy raise?

Accepted Answer

A)  the price level and real GDP
B)  the price level but not real GDP
C)  real GDP but not the price level
D)  neither real GDP nor the price level

Question 7

In the summer of 2008,consumers indicated that they were less optimistic about the future of the economy.Such a change in sentiment is likely to

Accepted Answer

A)  shift aggregate demand to the left.
B)  increase output.
C)  decrease unemployment.
D)  increase prices.

Question 8

If firms were faced with greater uncertainty because of concern that oil prices might rise,they might decrease expenditures on capital.In response to this change,someone who advocated "lean against the wind" policies might advocate

Accepted Answer

A)  decreasing the money supply.
B)  increasing taxes.
C)  increasing government expenditures.
D)  All of the above

Question 9

Policymakers following a "lean against the wind" policy would

Accepted Answer

A)  increase government expenditures when output is low and decrease them when output is high.
B)  increase government expenditures when output is low and do nothing when output is high.
C)  decrease government expenditures when output is low and increase them when output is high.
D)  decrease government expenditures when output is high and do nothing when output is low.

Question 10

Which of the following is correct?

Accepted Answer

A)  Economic forecasts are precise and aggregate spending responds almost immediately to interest rate changes.
B)  Economic forecast are precise and aggregate spending responds to interest rate changes with a lag.
C)  Economic forecasts are imprecise and aggregate spending responds almost immediately to interest rate changes.
D)  Economic forecast are imprecise and aggregate spending responds to interest rate changes with a lag.

Question 11

The Fed raised interest rates in 2004 and 2005.This implies,other things the same,that the Fed

Accepted Answer

A)  increased the money supply because it was concerned about unemployment.
B)  increased the money supply because it was concerned about inflation.
C)  decreased the money supply because it was concerned about unemployment.
D)  decreased the money supply because it was concerned about inflation.

Question 12

A policymaker in favor of stabilizing the economy would be likely to believe

Accepted Answer

A)  recessions are a waste of resources.
B)  economies must suffer through the booms and busts of the business cycle.
C)  the long policy lags make implementing policy changes in response to recession too risky.
D)  policy increases the magnitude of economic fluctuations.

Question 13

The effects of a decline in the value of financial assets,such as stocks,on consumption and the economy might be offset by

Accepted Answer

A)  increasing government spending.
B)  decreasing the money supply.
C)  increasing taxes.
D)  undertaking no policy action.

Question 14

If financial turmoil overseas reduces U.S.net exports,then those in favor of "lean against the wind policies" would advocate

Accepted Answer

A)  decreasing the money supply and cutting taxes.
B)  decreasing the money supply and raising taxes.
C)  increasing the money supply and cutting taxes.
D)  increasing the money supply and raising taxes.

Question 15

Suppose there is a decrease in short-run aggregate supply.If the Federal Reserve wants to stabilize output it should

Accepted Answer

A)  buy bonds.These purchases also move the price level closer to its original level.
B)  buy bonds.However these purchases move the price level farther from its original level.
C)  sell bonds.These purchases also move the price level closer to its original level.
D)  sell bonds.However these purchase move the price level farther from its original level.

Question 16

If the Fed announced its intention to sell bonds,then it would be signaling that it was going to

Accepted Answer

A)  raise the money supply.It could do this to counter high unemployment.
B)  raise the money supply.It could do this to counter high inflation.
C)  reduce the money supply.It could do this to counter high unemployment.
D)  reduce the money supply.It could do this to counter high inflation.

Question 17

The Federal Reserve will tend to tighten monetary policy when

Accepted Answer

A)  interest rates are rising too rapidly.
B)  it thinks the unemployment rate is too high.
C)  the growth rate of real GDP is quite sluggish.
D)  it thinks inflation is too high today,or will become too high in the future.

Question 18

Studies have shown significant spending changes arise from interest rate changes after

Accepted Answer

A)  a few days.
B)  a few weeks.
C)  a few months.
D)  about a year and a half..

Question 19

President George W.Bush and congress cut taxes and raised government expenditures in 2003.According to the aggregate supply and aggregate demand model

Accepted Answer

A)  both the tax cut and the increase in government expenditures would tend to increase output.
B)  only the tax cut would tend to increase output.
C)  only the increase in government expenditures would tend to increase output.
D)  neither the tax cut nor the increase in government expenditures would tend to increase output.

Question 20

Which of the following is an argument against trying to use policy to stabilize the economy?

Accepted Answer

A)  Recessions represent a waste of resources.
B)  Pessimism on the part of households and firms may become a self-fulfilling prophecy.
C)  "Leaning against the wind" requires policymakers to increase aggregate demand in recessions and reduce aggregate demand in booms.
D)  Macroeconomic forecasting is not developed sufficiently to allow policymakers to change aggregate demand at the proper time.

Exam 23: Six Debates Over Macroeconomic Policy: Should Monetary and Fiscal Policymakers Try to Stabilize the Economy