Question 1

When will stabilization policy be most effective in combating recessions?

Accepted Answer

A)  when AS is flat 
B)  when AS is very steep 
C)  when AS has a moderately upward slope 
D)  when AS has a moderately downward slope. 
A)  when AS is flat 
B)  when AS is very steep 
C)  when AS has a moderately upward slope 
D)  when AS has a moderately downward slope.

Question 2

The monetary stimulus post-September 11, 2001, achieved some desired effects within the year.

Accepted Answer

A) True 
 B)False

Question 3

President George W.Bush's tax cut in 2001 was a rare example of

Accepted Answer

A)  timely monetary policy. 
B)  timely fiscal policy. 
C)  the slow response of policy to events. 
D)  the inability of Congress to react to policy needs. 
A)  timely monetary policy. 
B)  timely fiscal policy. 
C)  the slow response of policy to events. 
D)  the inability of Congress to react to policy needs.

Question 4

In 2007-2009, the Fed cut interest rates to limit the international financial crisis.What is the effect of this on velocity?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to interest rates. 
A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to interest rates.

Question 5

Which of the following best describes the assumption that monetarists make regarding velocity?

Accepted Answer

A)  It is fairly predictable in the short run and certainly in the long run. 
B)  It is not possible to predict velocity in the short or long run. 
C)  It is variable in the long run but predictable in the short run. 
D)  It is constant in the long run but variable in the short run. 
A)  It is fairly predictable in the short run and certainly in the long run. 
B)  It is not possible to predict velocity in the short or long run. 
C)  It is variable in the long run but predictable in the short run. 
D)  It is constant in the long run but variable in the short run.

Question 6

Velocity is calculated as nominal GDP/money stock.

Accepted Answer

A) True 
 B)False

Question 7

In 2005-2006, the Fed increased interest rates in an attempt to halt inflation.What was the most likely effect of raising interest rates on velocity?

Accepted Answer

A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to saving accounts. 
A)  It will decrease. 
B)  It will increase. 
C)  It will remain constant. 
D)  Velocity is unrelated to saving accounts.

Question 8

Expansionary monetary policy will decrease interest rates and decrease the velocity of money.

Accepted Answer

A) True 
 B)False

Question 9

The Federal Reserve reduced the fed funds rate to the 0-0.25 percent range in 2008 in response to the Lehman Brother's catastrophe.

Accepted Answer

A) True 
 B)False

Question 10

If economists say that a 7 percent growth in the money supply will increase aggregate demand by 7 percent, they are assuming that velocity

Accepted Answer

A)  will decrease. 
B)  is constant. 
C)  will increase. 
D)  is unpredictable. 
A)  will decrease. 
B)  is constant. 
C)  will increase. 
D)  is unpredictable.

Question 11

Which one of the following will cause velocity to increase?

Accepted Answer

A)  a decrease in interest rates 
B)  increasing the efficiency of the payments system 
C)  switching from weekly to monthly payroll checks 
D)  an increase in the money supply 
A)  a decrease in interest rates 
B)  increasing the efficiency of the payments system 
C)  switching from weekly to monthly payroll checks 
D)  an increase in the money supply

Question 12

Once the federal funds rate is reduced to zero, conventional restrictive monetary policy is no longer an option.

Accepted Answer

A) True 
 B)False

Question 13

How do lags affect stabilization policy? Your answer should include three specific types of lags.

Accepted Answer

Lags make stabilization policy difficult

Question 14

A contractionary monetary policy is most likely to reduce output with little impact on inflation when the economy

Accepted Answer

A)  is near full employment and the aggregate supply curve is horizontal. 
B)  is near full employment and the aggregate supply curve is vertical. 
C)  has substantial unemployment and the aggregate supply curve is vertical. 
D)  has substantial unemployment and the aggregate supply curve is horizontal. 
A)  is near full employment and the aggregate supply curve is horizontal. 
B)  is near full employment and the aggregate supply curve is vertical. 
C)  has substantial unemployment and the aggregate supply curve is vertical. 
D)  has substantial unemployment and the aggregate supply curve is horizontal.

Question 15

The "Taylor rule" is an example of a fixed rule for making monetary policy.

Accepted Answer

A) True 
 B)False

Question 16

In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP Deflator = 325.1; and M₁ = 989.5.What is the value of velocity?

Accepted Answer

A)  32.51 
B)  24.31 
C)  14.32 
D)  2.31 
A)  32.51 
B)  24.31 
C)  14.32 
D)  2.31

Question 17

Many economists maintain that

Accepted Answer

A)  the aggregate supply curve is nearly horizontal at low levels of real GDP. 
B)  the aggregate supply curve is nearly vertical at very high levels of real GDP. 
C)  any change in aggregate demand will have most of its effect on output when economic activity is low but on prices when the economy is near full employment. 
D)  All of the above are correct. 
A)  the aggregate supply curve is nearly horizontal at low levels of real GDP. 
B)  the aggregate supply curve is nearly vertical at very high levels of real GDP. 
C)  any change in aggregate demand will have most of its effect on output when economic activity is low but on prices when the economy is near full employment. 
D)  All of the above are correct.

Question 18

The increased use of PayPal will decrease the velocity of money.

Accepted Answer

A) True 
 B)False

Question 19

Which of the following is an example of a company whose stock showed evidence of a price bubble?

Accepted Answer

A)  Facebook 
B)  Google 
C)  Amazon 
D)  all of the above 
A)  Facebook 
B)  Google 
C)  Amazon 
D)  all of the above

Question 20

Historically, most harmful bubbles are characterized by

Accepted Answer

A)  investment in stocks. 
B)  the sale of Treasury bills. 
C)  heaving borrowing. 
D)  reliance on technology. 
A)  investment in stocks. 
B)  the sale of Treasury bills. 
C)  heaving borrowing. 
D)  reliance on technology.

Exam 32: The Debate over Monetary and Fiscal Policy

When will stabilization policy be most effective in combating recessions?

The monetary stimulus post-September 11, 2001, achieved some desired effects within the year.

President George W.Bush's tax cut in 2001 was a rare example of

In 2007-2009, the Fed cut interest rates to limit the international financial crisis.What is the effect of this on velocity?

Which of the following best describes the assumption that monetarists make regarding velocity?

Velocity is calculated as nominal GDP/money stock.

In 2005-2006, the Fed increased interest rates in an attempt to halt inflation.What was the most likely effect of raising interest rates on velocity?

Expansionary monetary policy will decrease interest rates and decrease the velocity of money.

The Federal Reserve reduced the fed funds rate to the 0-0.25 percent range in 2008 in response to the Lehman Brother's catastrophe.

If economists say that a 7 percent growth in the money supply will increase aggregate demand by 7 percent, they are assuming that velocity

Which one of the following will cause velocity to increase?

Once the federal funds rate is reduced to zero, conventional restrictive monetary policy is no longer an option.

How do lags affect stabilization policy? Your answer should include three specific types of lags.

A contractionary monetary policy is most likely to reduce output with little impact on inflation when the economy

The "Taylor rule" is an example of a fixed rule for making monetary policy.

In the second quarter of 1995, the following values were observed: real GDP = 4,359.3 billion; GDP Deflator = 325.1; and M₁ = 989.5.What is the value of velocity?

Many economists maintain that

The increased use of PayPal will decrease the velocity of money.

Which of the following is an example of a company whose stock showed evidence of a price bubble?

Historically, most harmful bubbles are characterized by

What Is Economics?

The Economy: Myth and Reality

The Fundamental Economic Problem: Scarcity and Choice

Supply and Demand: An Initial Look

Consumer Choice: Individual and Market Demand

Demand and Elasticity

Production, Inputs, and Cost: Building Blocks for Supply Analysis

Output, Price, and Profit: The Importance of Marginal Analysis

Securities: Business Finance, and the Economy: The Tail that Wags the Dog?

The Firm and the Industry under Perfect Competition

Monopoly

Between Competition and Monopoly

Limiting Market Power: Regulation and Antitrust

The Case for Free Markets I: The Price System

The Shortcomings of Free Markets

The Market's Prime Achievement: Innovation and Growth

Externalities, the Environment, and Natural Resources

Taxation and Resource Allocation

Pricing the Factors of Production

Labor and Entrepreneurship: The Human Inputs

Poverty, Inequality, and Discrimination

An Introduction to Macroeconomics

The Goals of Macroeconomic Policy

Economic Growth: Theory and Policy

Aggregate Demand and the Powerful Consumer

Demand-Side Equilibrium: Unemployment or Inflation?

Bringing in the Supply Side: Unemployment and Inflation?

Managing Aggregate Demand: Fiscal Policy

Money and the Banking System

Monetary Policy: Conventional and Unconventional

The Financial Crisis and the Great Recession

Budget Deficits in the Short and Long Run

The Trade-Off between Inflation and Unemployment

International Trade and Comparative Advantage

The International Monetary System: Order or Disorder?

Exchange Rates and the Macroeconomy

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