Deck 16: Expectations, output, and Policy

Question 1

Suppose individuals now believe that there will be an increase in the future expected interest rate.This increase in the expected future interest rate will cause which of the following to occur in the current period?

A)an upward shift of the LM curve
B)a leftward shift of the IS curve
C)the IS curve to become flatter
D)the LM curve to become steeper
E) none of the above

Answer 1

a leftward shift of the IS curve

Question 2

Which of the following will cause aggregate private spending to increase?

A)an increase in government spending
B)a reduction in expected future interest rates
C)a reduction in expected future taxes
D)all of the above
E) none of the above

Answer 2

all of the above

Question 3

Explain what effect an increase in the future expected interest rate will have on the IS curve and LM curve in the current period.

Answer 3

An increase in the future expected interest rate will cause a reduction in the present value of future disposable income and,therefore,human wealth.This causes current C to decrease and the IS curve to shift left.The increase in the future expected rate will also cause a reduction in the present value of future profits.This will cause a reduction in investment and another leftward shift in the IS curve.The LM curve will not be affected.

Question 4

Which of the following will cause aggregate private spending to decrease?

A)a reduction in government spending
B)an increase in expected future interest rates
C)an increase in expected future taxes
D)all of the above
E) none of the above

Question 5

Which of the following will not cause aggregate private spending to increase?

A)an increase in expected future real interest rates
B)an increase in government spending
C)a reduction in future taxes
D)all of the above
E) none of the above

Question 6

Explain the determinants of aggregate private spending.

Question 7

Compare the following three ways to model expectations: animal spirits,adaptive expectations,and rational expectations.

Question 8

Suppose individuals now believe that there will be a future tax cut.This reduction in expected future taxes will cause which of the following to occur in the current period?

A)the LM curve to shift down
B)the LM curve to shift up
C)the IS curve to shift rightward
D)the IS curve to shift leftward
E) none of the above

Question 9

Changes in future expected interest rates can affect current consumption.Suppose individuals expect future interest rates to decrease.Consumption will change as a result of this lower expected future interest rate because of its effects on which of the following?

A)human wealth
B)the value of stocks
C)the value of bonds
D)all of the above
E) none of the above

Question 10

Explain what effect a reduction in the future expected interest rate will have on the IS curve and LM curve in the current period.

Question 11

Suppose individuals now believe that there will be a future tax increase.This increase in expected future taxes will cause which of the following to occur in the current period?

A)the LM curve to shift down
B)the LM curve to shift up
C)the IS curve to shift rightward
D)the IS curve to shift leftward
E) none of the above

Question 12

Explain why the new IS curve that takes into account expectations is likely steeper than the original IS curve that ignored expectations.

Question 13

Which of the following will not cause aggregate private spending to decrease?

A)a reduction in expected future real interest rates
B)a reduction in government spending
C)an increase in future taxes
D)all of the above
E) none of the above

Question 14

Explain what effect a reduction in future expected output will have on the IS curve and LM curve in the current period.

Question 15

Suppose there is a reduction in the expected future interest rate.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period

Question 16

Explain what effect an increase in future expected output will have on the IS curve and LM curve in the current period.

Question 17

The IS curve shifts to the left where there is

A)a reduction in current taxes.
B)an increase in expected future taxes.
C)an increase in expected future output.
D)all of the above
E) none of the above

Question 18

Suppose there is a reduction in expected future output.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period

Question 19

Suppose there is a fiscal expansion in the current period.This fiscal expansion will tend to cause a smaller increase in current output when

A)an increase in current output causes an increase in expected future output.
B)an increase in the current interest rate causes expectations of expansionary monetary policy in the future.
C)an increase in the current interest rate causes an increase in expected future interest rates.
D)both A and B
E) all of the above

Question 20

The IS curve shifts to the right where there is

A)an increase in current taxes.
B)a reduction in expected future taxes.
C)a reduction in expected future output.
D)all of the above
E) none of the above

Question 21

Rational expectations assumes that individuals

A)can accurately predict the future.
B)make predictions based on the past behavior of the economy.
C)form their predictions of macroeconomic variables randomly.
D)have perfect foresight.
E) none of the above

Question 22

Assume individuals consider only the short-run effects of changes in future macro variables when forming expectations of future output and future interest rates.A permanent increase in the money supply,with no other policy change implemented or anticipated,will most likely cause

A)an increase in the current interest rate.
B)an increase in future output and an increase in the future interest rate.
C)an unknown effect on the current interest rate.
D)all of the above
E) none of the above

Question 23

A reduction in which of the following variables will cause an increase in the amount of money individuals wish to hold in the current period?

A)current income
B)the current nominal interest rate
C)the current real interest rate
D)expected future income
E) all of the above

Question 24

The IS curve becomes steeper when

A)government spending is relatively small.
B)the income tax rate in the current period is relatively small.
C)current changes in the real interest rate cause large changes in current real output.
D)changes in the current real interest rate cause small changes in current demand.
E) none of the above

Question 25

Suppose the Fed increases the money supply in the current period with no other policy change implemented or anticipated.This policy action will cause which of the following shifts in the IS and / or LM curves in the current period?

A)IS left; LM up
B)IS right; LM up
C)no shift in IS; LM down
D)IS left; LM down
E) IS right; LM down

Question 26

Adaptive expectations assumes that individuals

A)can accurately predict the future.
B)base predictions on random events (i.e., animal spirits).
C)form their predictions of macroeconomic variables randomly.
D)use all available information in predicting the future.
E) none of the above

Question 27

A change in which of the following will have a direct effect on the amount of money individuals wish to hold in the current period?

A)the current nominal interest rate
B)the current real interest rate
C)the expected future nominal interest rate
D)the expected future real interest rate
E) all of the above

Question 28

Which of the following would be a violation of the rational expectations assumption?

A)"Over the past twenty years, people have consistently under-predicted the inflation rate for the following year."
B)"Over the past twenty years, people have never once accurately predicted the inflation rate for the following year."
C)"The Fed's announcement that it might ease interest rates caused an immediate drop in short-term rates, even before the Fed took any action."
D)all of the above
E) none of the above

Question 29

Suppose the central bank reduces the money supply.This monetary contraction will always cause a greater reduction in output when it is accompanied by

A)an increase in expected future taxes.
B)an increase in expected future interest rates.
C)a reduction in expected future output.
D)all of the above
E) none of the above

Question 30

An increase in which of the following variables will cause a reduction in the amount of money individuals wish to hold in the current period?

A)current income
B)the current nominal interest rate
C)the current real interest rate
D)expected future income
E) all of the above

Question 31

Assume that the current demand for goods DOES depend on expectations in the IS-LM model.A monetary expansion in the current period will cause a rightward shift in the IS curve if

A)current and expected future real interest rates are positively related.
B)current and expected future real interest rates are negatively related.
C)current and expected future real interest rates are unrelated.
D)the central bank is expected to reverse any current movements in monetary policy in the future.
E) monetary policy cannot affect, directly or indirectly, the position of the IS curve in the current period.

Question 32

Which of the following will cause the LM curve to shift up?

A)an increase in the expected future interest rate
B)an increase in current income
C)an increase in expected future taxes
D)all of the above
E) none of the above

Question 33

Which of the following will cause the LM curve to shift down?

A)a reduction in the expected future interest rate
B)a reduction in current income
C)a reduction in expected future taxes
D)all of the above
E) none of the above

Question 34

Suppose individuals expect that interest rates will increase in the future.Also assume that the Fed wants to prevent any change in current output.Given this goal of the Fed,the Fed should implement a policy in the current period that

A)shifts the IS curve rightward.
B)shifts the IS curve leftward.
C)shifts the IS curve leftward and the LM curve upward.
D)shifts the LM curve upward.
E) shifts the LM curve downward.

Question 35

Since the end of 2008,the Federal Reserve has adopted an unconventional monetary tool called

A)quantitative easing.
B)open market operation.
C)change required reserve ratio.
D)discount loan.

Question 36

"Animal spirits" refers to

A)the stubborn refusal of many economic decision-makers to use rational expectations.
B)movements in investment that cannot be explained by changes in current variables.
C)the often-observed Fed refusal to cooperate with the government in setting its monetary policy.
D)the impact of tax-evasion on the budget deficit.
E) an exotic alcoholic drink favored by Wall Street traders.

Question 37

A change in which of the following variables will cause a shift of the IS curve in the current period?

A)the current interest rate
B)current output
C)current taxes
D)all of the above
E) none of the above

Question 38

Suppose the central bank implements a monetary expansion in the current period and is expected to continue this monetary expansion in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Question 39

Suppose the Fed reduces the money supply in the current period with no other policy change implemented or anticipated.This policy action will cause which of the following shifts in the IS and / or LM curves in the current period?

A)IS left; LM up
B)IS right; LM up
C)no shift in IS; LM up
D)IS left; LM down
E) IS right; LM down

Question 40

Suppose individuals expect that interest rates will decrease in the future.Also assume that the Fed wants to prevent any change in current output.Given this goal of the Fed,the Fed should implement a policy in the current period that

A)shifts the IS curve rightward.
B)shifts the IS curve leftward.
C)shifts the IS curve leftward and the LM curve upward.
D)shifts the LM curve upward.
E) shifts the LM curve downward.

Question 41

Suppose policy makers pass a budget that reduces the budget deficit.A deficit reduction package such as this has a greater chance of increasing current output when

A)the policy is front-loaded.
B)financial markets believe that taxes will not increase in the future.
C)financial markets believe the Fed will lower interest rates in the future.
D)all of the above
E) none of the above

Question 42

When answering this question,assume individuals consider only the medium-run effects of changes in future variables when forming expectations of future output and future interest rates Suppose policy makers announce a reduction in future government spending.Which of the following will occur as a result of this expected reduction in government spending?

A)a reduction in the expected future interest rate and no change in expected future output
B)a reduction in the expected future interest rate and an increase in expected future output
C)a reduction in the expected future interest rate and a reduction in expected future output
D)a reduction in the expected future interest rate and an ambiguous effect on expected future output

Question 43

Suppose there is an increase in expected future taxes.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period

Question 44

Which of the following individuals was responsible for introducing rational expectations into macroeconomic models?

A)Keynes
B)Tobin
C)Phillips
D)Solow
E) none of the above

Question 45

Suppose there is a reduction in expected future taxes.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period

Question 46

Suppose the central bank implements a monetary contraction in the current period and is expected to continue this monetary contraction in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Question 47

When answering this question,assume individuals consider only the short-run effects of changes in future variables when forming expectations of future output and future interest rates.Suppose policy makers announce a reduction in future government spending.Which of the following will occur as a result of this expected reduction in government spending?

A)a reduction in the expected future interest rate and no change in expected future output
B)a reduction in the expected future interest rate and an increase in expected future output
C)a reduction in the expected future interest rate and an ambiguous effect on expected future output
D)none of the above

Question 48

Assume individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose current taxes are cut and that individuals expect future taxes to decrease.Given this information,we know with certainty that

A)current output and the current interest rate will both increase.
B)current output will increase.
C)the current interest rate will increase.
D)the current output effects are ambiguous.

Question 49

Suppose there is an increase in expected future output.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period

Question 50

Suppose there is a simultaneous reduction in the expected future interest rate and increase in future expected output.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period
E) an ambiguous effect on the position of the IS curve in the current period

Question 51

Assume individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future taxes to decrease.Given this information,individuals will expect

A)an increase in the expected future interest rate and no change in expected future output.
B)an increase in the expected future interest rate and an increase in expected future output.
C)an increase in the expected future interest rate and a reduction in expected future output.
D)an increase in the expected future interest rate and an ambiguous effect on expected future output.

Question 52

Assume individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future government spending to increase.Given this information,individuals will expect

A)an increase in the expected future interest rate and no change in expected future output.
B)an increase in the expected future interest rate and an increase in expected future output.
C)an increase in the expected future interest rate and a reduction in expected future output.
D)an increase in the expected future interest rate and an ambiguous effect on expected future output.

Question 53

Assume individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future government spending to decrease.Given this information,individuals will expect

A)a reduction in the expected future interest rate and no change in expected future output.
B)a reduction in the expected future interest rate and an increase in expected future output.
C)a reduction in the expected future interest rate and a reduction in expected future output.
D)a reduction in the expected future interest rate and an ambiguous effect on expected future output.

Question 54

Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose current taxes are cut AND that individuals expect future taxes to decrease.Given this information,we know with certainty that

A)current output and the current interest rate will both increase.
B)current output will increase.
C)the current interest rate will increase.
D)the expected future interest rate will increase.

Question 55

Suppose there is a simultaneous reduction in expected future output and reduction in the future expected interest rate.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period
E) an ambiguous effect on the position of the IS curve in the current period

Question 56

Suppose the central bank announces that it will pursue a monetary expansion in the current period and a monetary expansion in the future.Explain how the credibility of the central bank might influence the effectiveness of this monetary policy action and announcement of a future monetary policy action.

Question 57

Assume individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose current government spending increases and that individuals expect future government spending to increase.Given this information,we know with certainty that

A)current output and the current interest rate will both increase.
B)current output will not change.
C)future expected output will decrease.
D)future expected output will not change.

Question 58

Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect future taxes to decrease.Given this information,individuals will expect

A)an increase in the expected future interest rate and no change in expected future output.
B)an increase in the expected future interest rate and an increase in expected future output.
C)an increase in the expected future interest rate and a reduction in expected future output.
D)an increase in the expected future interest rate and an ambiguous effect on expected future output.

Question 59

Suppose there is an increase in the expected future interest rate.This will cause which of the following to occur?

A)the IS curve to shift left in the current period
B)the IS curve to shift right in the current period
C)the LM curve to shift up in the current period
D)the LM curve to shift down in the current period

Question 60

Explain the three channels economists have identified through which quantitative or credit easing may affect the economy.

Question 61

Suppose current government spending increases and that individuals expect future government spending to increase.Given this information,in which of the following cases will output in the current period be more likely to decrease?

A)Individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B)Individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C)Individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D)The output effects will be the same in B and C.

Question 62

Suppose fiscal policy makers pass a budget that increases taxes in the current period and are expected to raise taxes in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Question 63

Assume individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect the central bank to pursue a monetary expansion in the future.Given this information,we know with certainty that

A)current output and the current interest rate will both increase.
B)current output will decrease.
C)the current interest rate will decrease.
D)the current output effects are ambiguous.

Question 64

Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output.

Question 65

Suppose current government spending increases and that individuals expect future government spending to increase.Given this information,in which of the following cases will output in the current period be more likely to increase?

A)Individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B)Individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C)Individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D)The output effects will be the same in B and C.

Question 66

Suppose fiscal policy makers pass a budget that cuts taxes in the current period and are expected to cut taxes in the future.Use the IS-LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Question 67

Assume individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.Suppose individuals expect the central bank to pursue a monetary expansion in the future.Given this information,we know with certainty that

A)current output and the current interest rate will both increase.
B)current output will decrease.
C)the current interest rate will decrease.
D)the current output effects are ambiguous.
E) current output will not change.

Question 68

Suppose current government spending decreases and that individuals expect future government spending to decrease.Given this information,in which of the following cases will output in the current period be more likely to increase?

A)Individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B)Individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C)Individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D)The output effects will be the same in B and C.

Question 69

Explain whether a fiscal policy that causes an increase in current and future government spending can cause a reduction in current output.

Question 70

Suppose current government spending decreases and that individuals expect future government spending to decrease.Given this information,in which of the following cases will output in the current period be more likely to decrease?

A)Individuals consider only the short run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B)Individuals consider only the medium run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C)Individuals consider only the long run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D)The output effects will be the same in B and C.