Question 1

The policy irrelevance proposition suggests that the policy effects on the economy primarily occur as a result of

Accepted Answer

A)  fiscal policy measures. 
B)  policy mistakes or misjudgment of policies. 
C)  nondiscretionary fiscal policy. 
D)  illusion about the value of money.

Question 2

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 3

The new Keynesian sticky-price theory indicates that an increase in aggregate demand generates

Accepted Answer

A)  a speedy rise in real GDP but a sluggish increase in the price level. 
B)  a speedy rise in the price level but a sluggish increase in real GDP. 
C)  sluggish increases in both real GDP and the price level. 
D)  rapid increases in both real GDP and the price level.

Question 4

According to the new Keynesian sticky-price theory, a rise in aggregate demand results in ________ price level in the near term and in ________ price level in the longer term.

Accepted Answer

A)  a higher; an unchanged 
B)  an unchanged; a higher 
C)  a lower; an unchanged 
D)  a lower; a higher

Question 5

The short-run Phillips curve relationship indicates that

Accepted Answer

A)  only an anticipated change in aggregate demand affects the inflation rate or the unemployment rate. 
B)  an unanticipated increase in aggregate demand raises the inflation rate but lowers the unemployment rate. 
C)  an unanticipated increase in aggregate demand lowers the inflation rate but raises the unemployment rate. 
D)  an unanticipated increase in aggregate demand raises both the inflation rate and the unemployment rate.

Question 6

-Refer to the above figure. Suppose the economy is at point B and the central bank adopts expansionary 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, as not enough information is given.

Question 7

The real business cycle theory is based on all of the assumptions below EXCEPT

Accepted Answer

A)  the absence of rationality among people. 
B)  flexible wages. 
C)  pure competition. 
D)  flexible prices.

Question 8

According to the text, minimum-wage laws cause increases in

Accepted Answer

A)  employment possibilities. 
B)  structural unemployment. 
C)  poverty. 
D)  productivity.

Question 9

The Phillips curve reflects the relationship between

Accepted Answer

A)  unemployment and real GDP. 
B)  unemployment and inflation. 
C)  inflation and real GDP. 
D)  the price level and inflation.

Question 10

What happens to the Phillips curve when future inflation is expected to rise?

Accepted Answer

A)  The curve shifts to the right. 
B)  The curve shifts to the left. 
C)  The curve becomes horizontal. 
D)  The Phillips curve is unaffected.

Question 11

According to the policy irrelevance proposition, real Gross Domestic Product (GDP) is determined by

Accepted Answer

A)  the economy's aggregate demand curve. 
B)  the economy's long-run aggregate supply curve. 
C)  the rate of inflation only. 
D)  a combination of fiscal policy and monetary policy.

Question 12

Suppose the government abolished the minimum wage law and the law that requires union wage rates to be paid on all government contract jobs. We would expect to see

Accepted Answer

A)  a decline in the natural rate of unemployment. 
B)  an increase in claims for unemployment benefits. 
C)  the duration of unemployment to increase. 
D)  a recession.

Question 13

The Phillips Curve will shift downward if

Accepted Answer

A)  the expected inflation rate falls. 
B)  the price level falls. 
C)  the overall employment rate remains unchanged. 
D)  the unexpected inflation rate rises.

Question 14

According to New Keynesians, which of the following is one of the two key factors that determines the inflation rate?

Accepted Answer

A)  fiscal policy 
B)  firms' average inflation adjusted per-unit costs of production 
C)  energy cost 
D)  monetary policy

Question 15

The menu cost theory states that

Accepted Answer

A)  prices are not fully flexible because it is costly for firms to change prices every time there is a demand change. 
B)  economic agents quickly learn the likely responses of the Fed to changes in unemployment. 
C)  prices depend only on the input costs. 
D)  the economy is characterized by perfect competition.

Question 16

-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 17

Compare and contrast the arguments favoring active versus passive policymaking.

Accepted Answer

The answer of Compare and contrast the arguments favoring active...

Question 18

When the economy is at its natural rate of unemployment,

Accepted Answer

A)  it is still experiencing frictional and cyclical unemployment. 
B)  it is still experiencing structural and cyclical unemployment. 
C)  it is still experiencing frictional, seasonal, and structural unemployment. 
D)  it is still experiencing frictional, structural, and cyclical unemployment.

Question 19

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)  rational expectations theory.

Question 20

At one time, many economists believed that

Accepted Answer

A)  the government could determine what the Phillips curve should be. 
B)  the government could determine the slope of the Phillips curve. 
C)  the government could make the Phillips curve horizontal. 
D)  the government could decide at which point on the Phillips curve the economy should be.

Exam 17: Stabilization in an Integrated World Economy