Question 1

Because of the lag of the effects of changes in monetary policy and the failure of forecasters to anticipate supply-side shocks as well as changes in money demand or velocity, activist policy changes have tended at times during the mid 1970's to

Accepted Answer

A)  accelerate inflation during expansions. 
B)  increase unemployment during recessions. 
C)  accelerate inflation and increased unemployment. 
D)  dampen inflation and decrease unemployment.

Question 2

Gordon believes that the expansion which began in 1982 did so because of the

Accepted Answer

A)  expansionary monetary policy which was pursued. 
B)  Reagan tax cuts, the passage of the Economic Recovery Act in 1981. 
C)  increases in consumer and business firm optimism concerning future business conditions. 
D)  A and B are both correct.

Question 3

The Canadian experience with inflation and unemployment in the early 1990s has this to say about policy rules:

Accepted Answer

A)  a central bank independent of political pressure may thereby not be serving the public's politically-revealed preferences. 
B)  a central bank bowing to political pressure cannot get the inflation rate below the unemployment rate. 
C)  a constant-growth-rate-of-money rule cannot stabilize inflation if unemployment is allowed to vary substantially. 
D)  a constant-growth-rate-of-high-powered-money rule allows too much variation in the growth of the actual money supply to hold down inflation.

Question 4

A major problem in developing an activist policy is

Accepted Answer

A)  uncertainty about the magnitude of the dynamic multiplier. 
B)  uncertainty about the length and variability of policy lags. 
C)  uncertainty about the costs of various policies. 
D)  All of the above are correct.

Question 5

Economists who support a monetary rule as opposed to an activist monetary policy believe that the effectiveness lag in monetary policy is

Accepted Answer

A)  short and variable, policy changes affect AD quickly and are predictable. 
B)  zero, policy changes have an immediate effect on expenditures. 
C)  long and variable, policy changes affect AD slowly over time and are unpredictable. 
D)  long, but predictable.

Question 6

According to the New Classical macroeconomic school

Accepted Answer

A)  active policy intervention is ineffective. 
B)  active policy intervention is undesirable and perverse. 
C)  active policy intervention's benefits exceed its costs. 
D)  active policy intervention's benefits are less than its costs.

Question 7

The non-activists believe that

Accepted Answer

A)  the government has been a stabilizing force in the economy. 
B)  much of the existing unemployment voluntary. 
C)  the velocity of money is unstable. 
D)  policymakers are able to accurately forecast the future effect of current policy actions.

Question 8

By refusing to be time inconsistent, a central bank is ________ its reputation and ________ "policy credibility."

Accepted Answer

A)  harming, losing 
B)  harming, gaining 
C)  investing in, losing 
D)  investing in, gaining

Question 9

The length of money or commodity demand disturbances is important to the "policy activism" debate between non-activists and activists because

Accepted Answer

A)  changing the money supply affects the economy with a lag. 
B)  changes in private spending must be offset by policy debate. 
C)  Both A and B are correct. 
D)  None of the above is correct.

Question 10

In Taylor Rule equation, high value of parameter b indicates that:

Accepted Answer

A)  Fed cares more about avoiding recessions and high unemployment than about avoiding inflation. 
B)  Fed cares more about avoiding inflation than about avoiding recessions and high unemployment. 
C)  Fed cares more about avoiding recessions than about avoiding high unemployment. 
D)  Fed cares more about avoiding high unemployment than about avoiding recessions.

Question 11

Non-activists are most interested in

Accepted Answer

A)  the short-run level of unemployment and the effectiveness of monetary policy. 
B)  the long-run consequences of policies. 
C)  the effectiveness of monetary policy and the short-run inflation rate. 
D)  the short-run rate of inflation and level of unemployment.

Question 12

The activists believe that

Accepted Answer

A)  the time required for flexible prices to bring the economy back to the natural rate of unemployment is relatively short. 
B)  the IS curve is relatively flat because of the broad range of assets whose demand is very sensitive to changes in the interest rate. 
C)  the time required for flexible prices to return the economy to the natural level of real GDP is intolerably long. 
D)  the severity of the Great Depression was primarily related to the large decline in the supply of money.

Question 13

Which of the following does not contribute to the choice of a policy of hyperinflation?

Accepted Answer

A)  war 
B)  increased price of energy paid to foreigners 
C)  price of export commodities increase 
D)  diminished ability to collect taxes

Question 14

The time between the policy decision and the subsequent change in policy instruments is called the

Accepted Answer

A)  data lag, the time required to collect and analyze data. 
B)  effectiveness lag, the time required for the change in money supply to affect real output. 
C)  legislative lag, the time required for policymaking body to make decisions. 
D)  transmission lag, the time between the change in policy and the change in policy instruments.

Question 15

Which of the following changes should make activist policy makers more confident in their capacity to make good policy recommendations?

Accepted Answer

A)  structural change in the economy 
B)  changes in multipliers 
C)  a longer estimated lag for monetary policy 
D)  none of the above

Question 16

Supply shocks after 1985

Accepted Answer

A)  forced the Fed to follow restrictive monetary policy and caused a negative output ratio. 
B)  forced the Fed to follow restrictive monetary policy and caused a positive output ratio. 
C)  allowed the Fed to follow accommodative monetary policy and caused a negative output ratio. 
D)  allowed the Fed to follow accommodative monetary policy and push the output ratio toward zero.

Question 17

The Fed's interest rate response to the rising output ratio experienced from 1997 to 1999 is explained by

Accepted Answer

A)  beneficial supply shocks which pushed down the inflation rate. 
B)  the Fed's efforts to help end the Asian financial crisis 
C)  the Fed's uncertainty about the concepts of the natural level of output and natural rate of unemployment. 
D)  All of the above.

Question 18

The European Monetary Union which preceded the Euro was

Accepted Answer

A)  opposed by most politicians. 
B)  favored by most economists. 
C)  likely to improve the use of monetary policy to deal with contractionary shocks which strike only one or two countries in Europe. 
D)  all of the above. 
E)  none of the above.

Question 19

The switch to flexible exchange rates in 1973 has made the effect of monetary policy on net exports a ________ important component of the monetary policy multiplier process, and thus has ________ the effectiveness lag.

Accepted Answer

A)  more, lengthened 
B)  more, shortened 
C)  less, lengthened 
D)  less, shortened

Question 20

The measure of the effectiveness lag for a change in monetary policy is the length of time necessary for ________ of the ultimate effect to be felt.

Accepted Answer

A)  one-quarter 
B)  one-half 
C)  three-quarters 
D)  all

Exam 14: Stabilization Policy in the Closed and Open Economy