Question 1

Imposing an active monetary growth rule that links monetary growth to the unemployment rate implies that

Accepted Answer

A) the economy can be fine tuned 
B)  flexibility in responding to economic disturbances is totally lost 
C)  political cycles can more easily occur 
D) the administration can more easily influence decisions made by the FOMC 
E) none of the above 
A) the economy can be fine tuned 
B)  flexibility in responding to economic disturbances is totally lost 
C)  political cycles can more easily occur 
D) the administration can more easily influence decisions made by the FOMC 
E) none of the above

Question 2

If a central bank employs policies that seem appropriate for the short run but may endanger its long-run goals, then

Accepted Answer

A) its actions involve dynamic inconsistency 
B) it should never announce its intentions, because financial markets have a tendency to respond slowly to new information 
C) it should not announce which indicators it is using to assess the success of the policy action 
D) people cannot profit from anticipating the central bank's policy actions 
E) none of the above 
A) its actions involve dynamic inconsistency 
B) it should never announce its intentions, because financial markets have a tendency to respond slowly to new information 
C) it should not announce which indicators it is using to assess the success of the policy action 
D) people cannot profit from anticipating the central bank's policy actions 
E) none of the above

Question 3

The temptation to engage in dynamic inconsistency can be minimized by

Accepted Answer

A) being more concerned with short-run outcomes than long-run outcomes 
B) the desire to achieve credibility 
C) employing policy responses that are right for current disturbances without much concern over long-run objectives 
D) never announcing any proposed policy actions 
E) none of the above 
A) being more concerned with short-run outcomes than long-run outcomes 
B) the desire to achieve credibility 
C) employing policy responses that are right for current disturbances without much concern over long-run objectives 
D) never announcing any proposed policy actions 
E) none of the above

Question 4

If a central bank targets inflation, then

Accepted Answer

A) it should not react to every disturbance in aggregate demand 
B) its policy implies an automatic tradeoff between inflation and unemployment 
C) it can reduce unemployment without fear of losing credibility 
D) interest rates have to be lowered whenever there is a disturbance in the expenditure sector 
E) none of the above 
A) it should not react to every disturbance in aggregate demand 
B) its policy implies an automatic tradeoff between inflation and unemployment 
C) it can reduce unemployment without fear of losing credibility 
D) interest rates have to be lowered whenever there is a disturbance in the expenditure sector 
E) none of the above

Question 5

Economists who believe that a large unemployment-inflation tradeoff exists are likely to advocate

Accepted Answer

A) real GDP targeting 
B) nominal GDP targeting 
C) inflation targeting 
D) a strict monetary growth rule 
E) none of the above 
A) real GDP targeting 
B) nominal GDP targeting 
C) inflation targeting 
D) a strict monetary growth rule 
E) none of the above

Question 6

The inside lag is defined as the length of time it takes

Accepted Answer

A) to recognize that a disturbance has occurred 
B) for automatic stabilizers to mitigate a disturbance 
C) for a policy to affect the economy after its implementation 
D) to recognize that a disturbance has occurred and then formulate and implement an appropriate policy response to it 
E) for a policy measure to be implemented after the administration decided on this policy 
A) to recognize that a disturbance has occurred 
B) for automatic stabilizers to mitigate a disturbance 
C) for a policy to affect the economy after its implementation 
D) to recognize that a disturbance has occurred and then formulate and implement an appropriate policy response to it 
E) for a policy measure to be implemented after the administration decided on this policy

Question 7

Economic forecasters

Accepted Answer

A) almost always time their proposed policy actions accurately 
B) almost always misread the state of the economy 
C) always have an accurate economic model to work with 
D) cannot always accurately predict how a policy change will affect the expectations and actions of households and firms 
E) none of the above 
A) almost always time their proposed policy actions accurately 
B) almost always misread the state of the economy 
C) always have an accurate economic model to work with 
D) cannot always accurately predict how a policy change will affect the expectations and actions of households and firms 
E) none of the above

Question 8

If the monetary growth rate is far above the target range previously announced by the central bank, financial markets will assume that

Accepted Answer

A) the central bank will reduce money supply in the near future, which may push up interest rates 
B) the rate of inflation will increase soon, which may lead to higher nominal interest rates 
C) anticipation of higher inflation will increase the demand for credit from firms or households and this will push up interest rates 
D) all of these are possible 
E) none of these are possible 
A) the central bank will reduce money supply in the near future, which may push up interest rates 
B) the rate of inflation will increase soon, which may lead to higher nominal interest rates 
C) anticipation of higher inflation will increase the demand for credit from firms or households and this will push up interest rates 
D) all of these are possible 
E) none of these are possible

Question 9

The best policy response to a disturbance may be to do nothing if,

Accepted Answer

A) there are long and variable outside lags 
B) a disturbance is short-lived 
C) the inside and outside lags are both short 
D) the recognition lag is negative 
E) both 
A) and B 
A) there are long and variable outside lags 
B) a disturbance is short-lived 
C) the inside and outside lags are both short 
D) the recognition lag is negative 
E) both 
A) and B

Question 10

If it is unknown whether a disturbance is temporary or permanent,

Accepted Answer

A) an attempt should be made to keep both unemployment and inflation constant by fine-tuning the economy 
B) strong measures should be employed immediately to leave no doubt about the government's commitment to full employment 
C) large changes in taxes, government purchases, or money supply should be undertaken to get quick policy responses 
D) only modest policy changes should be made to avoid creating unnecessary fluctuations in the economy 
E) short-term 	interest rates should be changed quickly through monetary policy actions 
A) an attempt should be made to keep both unemployment and inflation constant by fine-tuning the economy 
B) strong measures should be employed immediately to leave no doubt about the government's commitment to full employment 
C) large changes in taxes, government purchases, or money supply should be undertaken to get quick policy responses 
D) only modest policy changes should be made to avoid creating unnecessary fluctuations in the economy 
E) short-term 	interest rates should be changed quickly through monetary policy actions

Question 11

If a central bank targets inflation, then

Accepted Answer

A) a reduction in unemployment will cause only a modest increase in inflation 
B) its policy implies an automatic tradeoff between inflation and unemployment 
C) it must assume that the Phillips curve is fairly flat 
D) it is guided by the belief that large deviations from full-employment are rare 
E) all of the above 
A) a reduction in unemployment will cause only a modest increase in inflation 
B) its policy implies an automatic tradeoff between inflation and unemployment 
C) it must assume that the Phillips curve is fairly flat 
D) it is guided by the belief that large deviations from full-employment are rare 
E) all of the above

Question 12

Fiscal policy can be an inappropriate macroeconomic stabilization tool, since

Accepted Answer

A) it has a larger outside lag than monetary policy 
B) it may have side effects that can distort decisions in the private sector 
C) it will always involve a loss of tax revenue for the government 
D) it has no short-run effects 
E) none of the above 
A) it has a larger outside lag than monetary policy 
B) it may have side effects that can distort decisions in the private sector 
C) it will always involve a loss of tax revenue for the government 
D) it has no short-run effects 
E) none of the above

Question 13

Active stabilization policy may actually destabilize the economy since policy makers

Accepted Answer

A) do not know the exact length of policy lags 
B) often do not know whether a disturbance is permanent or transitory 
C) base their decisions on incomplete information about the economy 
D) cannot take into account how individuals' expectations are affected by policy changes 
E) all of the above 
A) do not know the exact length of policy lags 
B) often do not know whether a disturbance is permanent or transitory 
C) base their decisions on incomplete information about the economy 
D) cannot take into account how individuals' expectations are affected by policy changes 
E) all of the above

Question 14

Policies designed to stabilize economic activity are handicapped by

Accepted Answer

A) incomplete information about the way the economy works 
B) uncertainty about the length or magnitude of a disturbance 
C) lags or delays between the time a decision is made and the time it begins to affect economic behavior 
D) incomplete information about the way expectations are formed and how expectations affect responses to policies 
E) all of the above 
A) incomplete information about the way the economy works 
B) uncertainty about the length or magnitude of a disturbance 
C) lags or delays between the time a decision is made and the time it begins to affect economic behavior 
D) incomplete information about the way expectations are formed and how expectations affect responses to policies 
E) all of the above

Question 15

Automatic stabilizers

Accepted Answer

A) prolong the inside lag but reduce the outside lag 
B) mitigate the multiplier effect of disturbances on aggregate demand 
C) render any active fiscal policy unnecessary 
D) work when there is a demand disturbance but not when there is a supply shock 
E) automatically coordinate fiscal and monetary policy 
A) prolong the inside lag but reduce the outside lag 
B) mitigate the multiplier effect of disturbances on aggregate demand 
C) render any active fiscal policy unnecessary 
D) work when there is a demand disturbance but not when there is a supply shock 
E) automatically coordinate fiscal and monetary policy

Question 16

If we have more information about the precise values of the parameters within a given economic model, then

Accepted Answer

A) multiplier uncertainty decreases 
B) policies can be more easily implemented 
C) the length of the outside lag becomes less important 
D) the inside lag becomes shorter 
E) all of the above 
A) multiplier uncertainty decreases 
B) policies can be more easily implemented 
C) the length of the outside lag becomes less important 
D) the inside lag becomes shorter 
E) all of the above

Question 17

Nominal GDP targeting implies that

Accepted Answer

A) there is an implicit monetary policy tradeoff between inflation and unemployment 
B) the Fed will never have to adjust its monetary targets even if there is a shift in money demand 
C) the Fed will never have to make adjustments in its money stock targets as disturbances hit the economy 
D) the desire to maintain full employment outweighs any risk of an inflationary bias 
E) none of the above 
A) there is an implicit monetary policy tradeoff between inflation and unemployment 
B) the Fed will never have to adjust its monetary targets even if there is a shift in money demand 
C) the Fed will never have to make adjustments in its money stock targets as disturbances hit the economy 
D) the desire to maintain full employment outweighs any risk of an inflationary bias 
E) none of the above

Question 18

Automatic stabilizers reduce the size of economic fluctuations since they

Accepted Answer

A) affect aggregate demand and aggregate supply at the same time 
B) reduce the outside lag to practically zero 
C) reduce the recognition lag to practically zero 
D) reduce the fiscal policy multiplier to 1 
E) ensure that disposable income falls by less than income after a disturbance 
A) affect aggregate demand and aggregate supply at the same time 
B) reduce the outside lag to practically zero 
C) reduce the recognition lag to practically zero 
D) reduce the fiscal policy multiplier to 1 
E) ensure that disposable income falls by less than income after a disturbance

Question 19

When trying to stabilize the economy, it is always good to use a variety of fiscal and monetary policy measures since

Accepted Answer

A) the size of both the fiscal and monetary policy multipliers is uncertain 
B) neither fiscal nor monetary policy works well when used by itself 
C) one has only a short-run effect and the other only a long-run effect 
D) this way full-employment can always be maintained 
E) none of the above 
A) the size of both the fiscal and monetary policy multipliers is uncertain 
B) neither fiscal nor monetary policy works well when used by itself 
C) one has only a short-run effect and the other only a long-run effect 
D) this way full-employment can always be maintained 
E) none of the above

Question 20

If it is clear that a disturbance is only transitory, the best policy response often is to

Accepted Answer

A) react moderately or not at all because any policy action may itself be destabilizing 
B) use only monetary policy since its effects are less powerful than fiscal policy 
C) act quickly and vigorously since another disturbance may follow soon 
D) use only fiscal policy since its impact is more direct and immediate 
E) use an expansionary fiscal/restrictive monetary policy mix to avoid inflationary pressure 
A) react moderately or not at all because any policy action may itself be destabilizing 
B) use only monetary policy since its effects are less powerful than fiscal policy 
C) act quickly and vigorously since another disturbance may follow soon 
D) use only fiscal policy since its impact is more direct and immediate 
E) use an expansionary fiscal/restrictive monetary policy mix to avoid inflationary pressure

Exam 18: Policy

Imposing an active monetary growth rule that links monetary growth to the unemployment rate implies that

If a central bank employs policies that seem appropriate for the short run but may endanger its long-run goals, then

The temptation to engage in dynamic inconsistency can be minimized by

If a central bank targets inflation, then

Economists who believe that a large unemployment-inflation tradeoff exists are likely to advocate

The inside lag is defined as the length of time it takes

Economic forecasters

If the monetary growth rate is far above the target range previously announced by the central bank, financial markets will assume that

The best policy response to a disturbance may be to do nothing if,

If it is unknown whether a disturbance is temporary or permanent,

If a central bank targets inflation, then

Fiscal policy can be an inappropriate macroeconomic stabilization tool, since

Active stabilization policy may actually destabilize the economy since policy makers

Policies designed to stabilize economic activity are handicapped by

Automatic stabilizers

If we have more information about the precise values of the parameters within a given economic model, then

Nominal GDP targeting implies that

Automatic stabilizers reduce the size of economic fluctuations since they

When trying to stabilize the economy, it is always good to use a variety of fiscal and monetary policy measures since

If it is clear that a disturbance is only transitory, the best policy response often is to

Introduction

National income accounting

Growth and accumulation

Growth and policy

Aggregate supply and demand

Aggregate supply and the phillips curve

Unemployment

Inflation

Policy preview

Income and spending

Money, interest, and income

Monetary and fiscal policy

International linkages

Consumption and saving

Investment spending

The demand for money

The fed, money, and credit

Financial markets and asset prices

The national debt

Recession and depression

Inflation and hyperinflation

International adjustment and interdependence

Advanced topics

Filters