Question 1

Under the assumption of rational expectations, fiscal and monetary policy changes are effective in the short run

Accepted Answer

A)  all of the time. 
B)  only when the short-run aggregate supply curve is the same as the long-run aggregate supply curve. 
C)  only when the policy changes leave the position of the aggregate demand curve unaffected. 
D)  only when the policy changes are unanticipated.

Question 2

According to the rational expectations hypothesis, the attempt by the government to reduce unemployment below its natural rate through expansionary policies will

Accepted Answer

A)  succeed in the short run and can succeed in the long run as long as the government makes it clear what its goals are. 
B)  succeed because the government knows how people will react to their policies and will adjust their policies accordingly. 
C)  fail because people will figure out what the government is doing and alter their expectations and their behavior in ways that counteract the government policy. 
D)  fail because the economy can never achieve an unemployment rate below the natural level.

Question 3

The real business cycle theory

Accepted Answer

A)  indicates that supply side shocks cause most business cycles. 
B)  indicates that demand side shocks cause most business cycles. 
C)  indicates that unanticipated changes in the money supply cause most business cycles. 
D)  indicates that frequent fiscal policy actions cause most business cycles.

Question 4

According to sticky-price theories,

Accepted Answer

A)  only fiscal policy is an effective stabilization policy. 
B)  only monetary policy is an effective stabilization policy. 
C)  both fiscal and monetary policy can be effective stabilization policies. 
D)  neither fiscal nor monetary policy is an effective stabilization policy.

Question 5

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

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 short-lived reduction in real GDP. 
D)  none of the above.

Question 6

During a recession, the

Accepted Answer

A)  natural rate of unemployment has fallen. 
B)  cyclical rate of unemployment is positive. 
C)  cyclical rate of unemployment is zero. 
D)  cyclical rate of unemployment is negative.

Question 7

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 8

If a significant portion of firms in the economy does NOT adjust product prices, a predicted result according to new Keynesian theory is

Accepted Answer

A)  real business cycles. 
B)  real inflation cycles. 
C)  inflation dynamics. 
D)  output dynamics.

Question 9

People combining the effects of past policy changes on important economic variables with their own judgment about the future effects of current and future policy changes is consistent with

Accepted Answer

A)  frictional unemployment. 
B)  the rational expectations hypothesis. 
C)  active policy making. 
D)  passive policy making.

Question 10

According to the Phillips curve

Accepted Answer

A)  there is a direct relationship between price-level changes and the level of unemployment rate. 
B)  the unemployment rate is not affected by changes in the price level. 
C)  price-level changes are not affected by changes in the unemployment rate. 
D)  there is an inverse relationship between price-level changes and the unemployment rate.

Question 11

-Use the above figure. Assuming that policy actions are unanticipated, if the economy is at point A and the policy makers want to get to point B, they could

Accepted Answer

A)  increase the money supply. 
B)  decrease taxation. 
C)  decrease the money supply. 
D)  increase government spending.

Question 12

-Refer to the above figure. The economy initially is at point A. The Fed unexpectedly increases the money supply. Which of the following statements are TRUE?

Accepted Answer

A)  In the short run, the economy will move from point A to point C. In the long run, the economy will move to point B. 
B)  In the short run, the economy will move from point A to point C. In the long run, the economy will move back to point A. 
C)  In the short run, the economy will move from point A to point B. In the long run, the economy will stay at point B. 
D)  In the short run, the economy will move from point A to point B. In the long run, the economy will move back to point A.

Question 13

Costs that deter firms from changing prices in response to demand changes are known as

Accepted Answer

A)  sticky costs. 
B)  menu costs. 
C)  transaction costs. 
D)  implicit costs.

Question 14

According to the real business cycle theory, which of the following would be a real disturbance to the economy?

Accepted Answer

A)  change in the required reserve ratio 
B)  reduction in the money supply 
C)  increase in the labor force 
D)  increase in the price level

Question 15

A central bank initiates a contractionary monetary policy that is correctly anticipated by economic agents in the economy. The result is

Accepted Answer

A)  decreased prices, but no change in real GDP. 
B)  decreased prices and decreased real GDP in the short run, but only decreased prices in the long run. 
C)  decreased real GDP in the short run and decreased prices in the long run. 
D)  decreased real GDP and prices in both the short run and the long run.

Question 16

Under the assumption of rational expectations, real GDP is determined by

Accepted Answer

A)  the economy's aggregate demand curve. 
B)  monetary policy but not by fiscal policy. 
C)  a combination of monetary and fiscal policy. 
D)  the long-run aggregate supply curve.

Question 17

The idea that anticipated monetary policy cannot affect real variables such as real Gross Domestic Product (GDP) or employment is known as

Accepted Answer

A)  the Keynesian hypothesis. 
B)  the policy irrelevance proposition. 
C)  the job search model. 
D)  the monetary velocity theory.

Question 18

-In the above figure, suppose the economy is initially at a short-run equilibrium at point D and there is an unanticipated increase in the money supply. Which point represents the new short-run equilibrium?

Accepted Answer

A)  A 
B)  B 
C)  C 
D)  D

Question 19

Fully anticipated monetary policy actions cannot alter either the rate of unemployment or the level of real GDP. This statement is

Accepted Answer

A)  the policy irrelevance proposition. 
B)  the nonaccelerating inflation rate of unemployment theory. 
C)  the Phillips curve. 
D)  not supported by any economic theory.

Question 20

In the absence of rational expectations, an expansionary monetary policy should in the short run

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.

Exam 17: Stabilization in an Integrated World Economy