Question 1

Many economists believe that stabilization policy should be limited in scope until

Accepted Answer

A) Keynesians and monetarists agree on policy. 
B) inflation is brought under control. 
C) the economy is operating near capacity. 
D) forecasting becomes more reliable. 
A) Keynesians and monetarists agree on policy. 
B) inflation is brought under control. 
C) the economy is operating near capacity. 
D) forecasting becomes more reliable.

Question 2

Advocates of stabilization policy prefer quick medicine for economic ills.This leads some observers to favor fiscal policy while others endorse monetary policy.Describe the positions of each side in the debate and what seems to be the current consensus.

Accepted Answer

Fiscal policy advocates argue that fisca

Question 3

Which of the following is an example of active fiscal policy?

Accepted Answer

A) Income tax revenues rise in an inflationary period. 
B) Income tax revenues fall in a recession. 
C) Congress passes a major tax increase in an inflationary period. 
D) Unemployment benefits increase in a recession. 
A) Income tax revenues rise in an inflationary period. 
B) Income tax revenues fall in a recession. 
C) Congress passes a major tax increase in an inflationary period. 
D) Unemployment benefits increase in a recession.

Question 4

Asset price bubble is an increase in the price of assets that goes far beyond what can be justified by improving the fundamentals.

Accepted Answer

A) True 
 B)False

Question 5

The quantity theory of money assumes that

Accepted Answer

A) velocity varies inversely with interest rates. 
B) if velocity equals six, the Fed can increase nominal GDP by 30 percent if it increases the money supply by 5 percent. 
C) changes in the money supply affect output but not prices. 
D) changes in velocity are so small that velocity can be considered constant. 
A) velocity varies inversely with interest rates. 
B) if velocity equals six, the Fed can increase nominal GDP by 30 percent if it increases the money supply by 5 percent. 
C) changes in the money supply affect output but not prices. 
D) changes in velocity are so small that velocity can be considered constant.

Question 6

According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise

Accepted Answer

A) nominal GDP by 50 percent. 
B) real GDP by 10 percent. 
C) nominal GDP by 10 percent. 
D) real GDP by 50 percent. 
A) nominal GDP by 50 percent. 
B) real GDP by 10 percent. 
C) nominal GDP by 10 percent. 
D) real GDP by 50 percent.

Question 7

In the monetarist view, the money supply affects the economy

Accepted Answer

A) through investment spending and government spending. 
B) indirectly through interest rates. 
C) directly, apart from interest rates. 
D) by altering the size of the money multiplier. 
A) through investment spending and government spending. 
B) indirectly through interest rates. 
C) directly, apart from interest rates. 
D) by altering the size of the money multiplier.

Question 8

How will an increase in the efficiency of the payments mechanism effect velocity?

Accepted Answer

A) Velocity will decrease. 
B) Velocity will increase. 
C) Velocity will remain constant. 
D) Velocity is unrelated to payments. 
A) Velocity will decrease. 
B) Velocity will increase. 
C) Velocity will remain constant. 
D) Velocity is unrelated to payments.

Question 9

When will stabilization policy be most effective in combating inflation?

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 10

Which of the following leads to a fundamental difficulty for stabilization policy?

Accepted Answer

A) Time lags in policy decisions 
B) Presence of shock absorbers in the economy 
C) Absence of data on the effectiveness of policy measures 
D) Existence of self-correcting mechanism 
A) Time lags in policy decisions 
B) Presence of shock absorbers in the economy 
C) Absence of data on the effectiveness of policy measures 
D) Existence of self-correcting mechanism

Question 11

Some economists believe that policymakers should avoid stabilization policy because

Accepted Answer

A) lags make the policy impact unpredictable. 
B) no tax cut ever stimulated demand. 
C) stabilization policies are rarely signed into law. 
D) it never works. 
A) lags make the policy impact unpredictable. 
B) no tax cut ever stimulated demand. 
C) stabilization policies are rarely signed into law. 
D) it never works.

Question 12

Critics of the Fed's unconventional policies in 2009 and 2010 argued that determining which financial institutions would be bailed out and which would be allowed to fail was a political decision that rightfully belonged to Congress.

Accepted Answer

A) True 
 B)False

Question 13

The equation now called the ______________ starts with a 2 percent real interest rate, and then instructs the Fed to lower the interest rate in proportion to any recessionary gap and to raise it in proportion to any excess of inflation above 2 percent.

Accepted Answer

A) Taylor rule 
B) rule of 70 
C) Spencer's rule 
D) None of the above is correct. 
A) Taylor rule 
B) rule of 70 
C) Spencer's rule 
D) None of the above is correct.

Question 14

Economists who focus their analyses on the effects of a change in the money supply and velocity are called

Accepted Answer

A) realists. 
B) Keynesians. 
C) supply siders. 
D) monetarists. 
A) realists. 
B) Keynesians. 
C) supply siders. 
D) monetarists.

Question 15

When the Fed increases the money supply, interest rates

Accepted Answer

A) rise, causing velocity to fall. 
B) fall, causing velocity to fall. 
C) rise, causing velocity to rise. 
D) fall, causing velocity to rise. 
A) rise, causing velocity to fall. 
B) fall, causing velocity to fall. 
C) rise, causing velocity to rise. 
D) fall, causing velocity to rise.

Question 16

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 these responses 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 these responses are correct.

Question 17

As market interest rates rise, people want to hold smaller cash balances, which means that the existing stock of money circulates faster and velocity rises.

Accepted Answer

A) True 
 B)False

Question 18

If the aggregate supply curve is steep,

Accepted Answer

A) increased aggregate demand will not lead to higher prices. 
B) greater demand for labor will not cause significant wage increases. 
C) business firms are probably producing near capacity. 
D) All of these responses are correct. 
A) increased aggregate demand will not lead to higher prices. 
B) greater demand for labor will not cause significant wage increases. 
C) business firms are probably producing near capacity. 
D) All of these responses are correct.

Question 19

Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8 percent; GDP deflator = 2.2 percent.Given this data, the growth of velocity was approximately

Accepted Answer

A) −7.8 percent. 
B) −5.0 percent. 
C) −2.8 percent. 
D) −2.2 percent. 
E) −2.0 percent. 
A) −7.8 percent. 
B) −5.0 percent. 
C) −2.8 percent. 
D) −2.2 percent. 
E) −2.0 percent.

Question 20

Which one of the following will cause velocity to increase?

Accepted Answer

A) Decreasing the interest rates 
B) Increasing the efficiency of the payments system 
C) Switching from weekly to monthly payroll checks 
D) Increasing the money supply 
A) Decreasing the interest rates 
B) Increasing the efficiency of the payments system 
C) Switching from weekly to monthly payroll checks 
D) Increasing the money supply

Exam 31: The Debate Over Monetary and Fiscal Policy

Many economists believe that stabilization policy should be limited in scope until

Advocates of stabilization policy prefer quick medicine for economic ills.This leads some observers to favor fiscal policy while others endorse monetary policy.Describe the positions of each side in the debate and what seems to be the current consensus.

Which of the following is an example of active fiscal policy?

Asset price bubble is an increase in the price of assets that goes far beyond what can be justified by improving the fundamentals.

The quantity theory of money assumes that

According to the quantity theory of money currently used by monetarists, assuming velocity is constant (at a value of 5), a 10 percent increase in the money supply will raise

In the monetarist view, the money supply affects the economy

How will an increase in the efficiency of the payments mechanism effect velocity?

When will stabilization policy be most effective in combating inflation?

Which of the following leads to a fundamental difficulty for stabilization policy?

Some economists believe that policymakers should avoid stabilization policy because

Critics of the Fed's unconventional policies in 2009 and 2010 argued that determining which financial institutions would be bailed out and which would be allowed to fail was a political decision that rightfully belonged to Congress.

The equation now called the ______________ starts with a 2 percent real interest rate, and then instructs the Fed to lower the interest rate in proportion to any recessionary gap and to raise it in proportion to any excess of inflation above 2 percent.

Economists who focus their analyses on the effects of a change in the money supply and velocity are called

When the Fed increases the money supply, interest rates

Many economists maintain that

As market interest rates rise, people want to hold smaller cash balances, which means that the existing stock of money circulates faster and velocity rises.

If the aggregate supply curve is steep,

Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M1 = 7.8 percent; GDP deflator = 2.2 percent.Given this data, the growth of velocity was approximately

Which one of the following will cause velocity to increase?

What Is Economics

The Economony: 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

The Financial Markets and the Economy: the Tail That Wags the Dog

The Firm and the Industry Under Perfect Competition

The Case for Free Markets: the Price System

Monopoly

Between Competition and Monopoly

Limiting Market Power: Antitrust and Regulation

The Shortcomings of Free Markets

The Economics of 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

Contemporary Issues in the Useconomy

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Economists observed the following growth rates in the fourth quarter of 1995: real GDP = 2.8 percent; M₁ = 7.8 percent; GDP deflator = 2.2 percent.Given this data, the growth of velocity was approximately