Question 1

A credible policy designed to lower inflation is likely to push the economy into recession.

Accepted Answer

A) True 
 B)False

Question 2

Suppose the Fed announced a policy of rapid growth in the money supply in 2015, but then put the brakes on money expansion without any announcement. If in 2016, Fed officials announce again that an expansion is planned, it is most likely that _____

Accepted Answer

A)  people will believe in the announcement since the conditions that created a need for the expansion are probably still in effect. 
B)  people will believe in the announcement since they expect the Fed to implement the expansionary policy, despite not doing so in the past. 
C)  people will not believe in the announcement since they reason that the conditions that created a need for the expansion must have changed in the meantime. 
D)  people will believe in the announcement because an expansionary monetary policy is easier to implement than a contractionary monetary policy. 
E)  there will be further uncertainty about the Fed following through on the policies it announces. 
A)  people will believe in the announcement since the conditions that created a need for the expansion are probably still in effect. 
B)  people will believe in the announcement since they expect the Fed to implement the expansionary policy, despite not doing so in the past. 
C)  people will not believe in the announcement since they reason that the conditions that created a need for the expansion must have changed in the meantime. 
D)  people will believe in the announcement because an expansionary monetary policy is easier to implement than a contractionary monetary policy. 
E)  there will be further uncertainty about the Fed following through on the policies it announces.

Question 3

Which of the following is likely to dampen economic fluctuations in a country?

Accepted Answer

A)  a regressive income tax 
B)  an increase in tax rates 
C)  a decrease in tax rates 
D)  an increase in money supply 
E)  unemployment insurance 
A)  a regressive income tax 
B)  an increase in tax rates 
C)  a decrease in tax rates 
D)  an increase in money supply 
E)  unemployment insurance

Question 4

The country of Glassen has experienced an expansionary gap for the last three years. The advocates of passive policy believe that _____

Accepted Answer

A)  the short-run aggregate supply will shift to the left to close the expansionary gap. 
B)  the short-run aggregate supply will shift to the right to close the expansionary gap. 
C)  rising prices will shift the aggregate demand curve to the left. 
D)  the price level will fall relatively quickly to close the expansionary gap. 
E)  the aggregate demand curve will shift to the right as wages increase. 
A)  the short-run aggregate supply will shift to the left to close the expansionary gap. 
B)  the short-run aggregate supply will shift to the right to close the expansionary gap. 
C)  rising prices will shift the aggregate demand curve to the left. 
D)  the price level will fall relatively quickly to close the expansionary gap. 
E)  the aggregate demand curve will shift to the right as wages increase.

Question 5

Which of the following is a difference between an active approach to close a recessionary gap and a passive approach to close a recessionary gap?

Accepted Answer

A)  The level of real GDP would be higher in the long run with the active approach, while it would be lower with the passive approach. 
B)  The level of real GDP would be lower in the long run with the active approach, while it would be higher with the passive approach. 
C)  The price level would be higher and the level of real GDP would be lower in the long run with the active approach, whereas the price level would be lower and real GDP level would be higher with the passive approach. 
D)  Only the price level would be lower in the long run with the active approach, whereas it would be higher with the passive approach. 
E)  Only the price level would be higher in the long run with the active approach, whereas it would be lower with the passive approach. 
A)  The level of real GDP would be higher in the long run with the active approach, while it would be lower with the passive approach. 
B)  The level of real GDP would be lower in the long run with the active approach, while it would be higher with the passive approach. 
C)  The price level would be higher and the level of real GDP would be lower in the long run with the active approach, whereas the price level would be lower and real GDP level would be higher with the passive approach. 
D)  Only the price level would be lower in the long run with the active approach, whereas it would be higher with the passive approach. 
E)  Only the price level would be higher in the long run with the active approach, whereas it would be lower with the passive approach.

Question 6

The rational expectations school advocates _____

Accepted Answer

A)  monetarism. 
B)  Keynesianism. 
C)  the use of foreign trade policy. 
D)  the use of monetary policy. 
E)  a passive approach to policy. 
A)  monetarism. 
B)  Keynesianism. 
C)  the use of foreign trade policy. 
D)  the use of monetary policy. 
E)  a passive approach to policy.

Question 7

_____, the time-inconsistency problem is eliminated.

Accepted Answer

A)  When an inflation or a recession is correctly anticipated 
B)  When lags associated with monetary and fiscal policy are extremely short 
C)  When discretionary macro policy is replaced with fixed policy rules that are well publicized 
D)  When expectations about an economy adjust very slowly 
E)  When the price level in an economy adjusts over time with changes in aggregate demand 
A)  When an inflation or a recession is correctly anticipated 
B)  When lags associated with monetary and fiscal policy are extremely short 
C)  When discretionary macro policy is replaced with fixed policy rules that are well publicized 
D)  When expectations about an economy adjust very slowly 
E)  When the price level in an economy adjusts over time with changes in aggregate demand

Question 8

Sharp increases by OPEC in oil prices and crop failures around the world reduced aggregate supply, which sparked another outward shift of the Phillips curve _____

Accepted Answer

A)  in 1974. 
B)  in 1984. 
C)  during the 1960s. 
D)  during the 1970s. 
E)  during the early 1980s. 
A)  in 1974. 
B)  in 1984. 
C)  during the 1960s. 
D)  during the 1970s. 
E)  during the early 1980s.

Question 9

The theorists of the rational expectations school _____

Accepted Answer

A)  favor monetary rules because they believe individuals know too little about how the economy works. 
B)  favor monetary rules so that workers and firms do not get any unanticipated surprises from the Fed. 
C)  are those who favor an "active approach" to policy and reject monetary rules. 
D)  oppose monetary rules because they believe rules impede the natural self-correcting mechanism of the economy. 
E)  believe in implementing discretionary policies. 
A)  favor monetary rules because they believe individuals know too little about how the economy works. 
B)  favor monetary rules so that workers and firms do not get any unanticipated surprises from the Fed. 
C)  are those who favor an "active approach" to policy and reject monetary rules. 
D)  oppose monetary rules because they believe rules impede the natural self-correcting mechanism of the economy. 
E)  believe in implementing discretionary policies.

Question 10

After World War II, the average U.S. recession has lasted _____

Accepted Answer

A)  a few months. 
B)  about half a year. 
C)  a little less than a year. 
D)  about three weeks. 
E)  about two years. 
A)  a few months. 
B)  about half a year. 
C)  a little less than a year. 
D)  about three weeks. 
E)  about two years.

Question 11

In its original form, the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

Accepted Answer

A) True 
 B)False

Question 12

According to economists of the rational expectations school, _____

Accepted Answer

A)  the passive approach must be adopted because they believe the economy is too complex. 
B)  individual forecasts about policies can never be right. 
C)  anticipated monetary policy can affect the output level. 
D)  discretionary policy can stabilize the economy. 
E)  discretionary policy should be completely avoided. 
A)  the passive approach must be adopted because they believe the economy is too complex. 
B)  individual forecasts about policies can never be right. 
C)  anticipated monetary policy can affect the output level. 
D)  discretionary policy can stabilize the economy. 
E)  discretionary policy should be completely avoided.

Question 13

The Fed has tried to influence _____

Accepted Answer

A)  long-term interest rates by purchasing mortgage-backed securities. 
B)  short-term interest rates by purchasing mortgage-backed securities. 
C)  long-term interest rates by purchasing treasury bills. 
D)  short-term interest rates by purchasing long-term bonds. 
E)  monetary aggregates by printing banknotes. 
A)  long-term interest rates by purchasing mortgage-backed securities. 
B)  short-term interest rates by purchasing mortgage-backed securities. 
C)  long-term interest rates by purchasing treasury bills. 
D)  short-term interest rates by purchasing long-term bonds. 
E)  monetary aggregates by printing banknotes.

Question 14

In A. W. Phillips' data, the rate of change in nominal wages served as _____

Accepted Answer

A)  the rate of change in nominal wages. 
B)  the rate of change in the employment rate. 
C)  the rate of change in the unemployment rate. 
D)  a measure of output. 
E)  a measure of inflation. 
A)  the rate of change in nominal wages. 
B)  the rate of change in the employment rate. 
C)  the rate of change in the unemployment rate. 
D)  a measure of output. 
E)  a measure of inflation.

Question 15

Which of the following is not a valid criticism of discretionary fiscal policy?

Accepted Answer

A)  The implementation of fiscal policy is sometimes difficult. 
B)  Time lags in fiscal policy are long. 
C)  Fiscal policy works only during periods of stagflation. 
D)  Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income. 
E)  Fiscal policy might have undesirable long-term effects on aggregate supply. 
A)  The implementation of fiscal policy is sometimes difficult. 
B)  Time lags in fiscal policy are long. 
C)  Fiscal policy works only during periods of stagflation. 
D)  Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income. 
E)  Fiscal policy might have undesirable long-term effects on aggregate supply.

Question 16

If workers and firms expect continued inflation, their wage agreements _____

Accepted Answer

A)  are contingent on changes in policy. 
B)  are based on the weighted averages of previous inflation rates. 
C)  are based on the lowest historical inflation rate. 
D)  are based on present inflation rates. 
E)  reflect these inflationary expectations. 
A)  are contingent on changes in policy. 
B)  are based on the weighted averages of previous inflation rates. 
C)  are based on the lowest historical inflation rate. 
D)  are based on present inflation rates. 
E)  reflect these inflationary expectations.

Question 17

Both those who favor an active approach as well as those who favor a passive approach to policy believe that an economy can suffer from extreme and long-lasting swings in real GDP.

Accepted Answer

A) True 
 B)False

Question 18

The immediate effects of a discretionary increase in government spending are represented by a _____

Accepted Answer

A)  movement along the aggregate demand curve. 
B)  leftward shift of the aggregate demand curve. 
C)  rightward shift of the Phillips curve. 
D)  leftward shift of the Phillips curve. 
E)  movement along the Phillips curve. 
A)  movement along the aggregate demand curve. 
B)  leftward shift of the aggregate demand curve. 
C)  rightward shift of the Phillips curve. 
D)  leftward shift of the Phillips curve. 
E)  movement along the Phillips curve.

Question 19

If an economy's actual GDP exceeds its potential GDP, _____

Accepted Answer

A) wages and prices must fall. 
B) self-correcting forces will shift the SRAS curve to the left. 
C) self-correcting forces will shift the AD curve to the left. 
D) inflation will occur when AD shifts to the left. 
E) unemployment is likely to be unusually high. 
A) wages and prices must fall. 
B) self-correcting forces will shift the SRAS curve to the left. 
C) self-correcting forces will shift the AD curve to the left. 
D) inflation will occur when AD shifts to the left. 
E) unemployment is likely to be unusually high.

Question 20

Exhibit 16.3
  
-Refer to Exhibit 16.3. An expansionary monetary policy increases the aggregate demand curve to _____, stimulates output and employment in the short run to equilibrium point _____, with output at _____.

Accepted Answer

A)  AD, a, Q 
B)  AD, a, Q' 
C)  AD, c, Q 
D)  AD, b, Q 
E)  AD', b, Q' 
A)  AD, a, Q 
B)  AD, a, Q' 
C)  AD, c, Q 
D)  AD, b, Q 
E)  AD', b, Q'

A credible policy designed to lower inflation is likely to push the economy into recession.

Suppose the Fed announced a policy of rapid growth in the money supply in 2015, but then put the brakes on money expansion without any announcement. If in 2016, Fed officials announce again that an expansion is planned, it is most likely that _____

Which of the following is likely to dampen economic fluctuations in a country?

The country of Glassen has experienced an expansionary gap for the last three years. The advocates of passive policy believe that _____

Which of the following is a difference between an active approach to close a recessionary gap and a passive approach to close a recessionary gap?

The rational expectations school advocates _____

_____, the time-inconsistency problem is eliminated.

Sharp increases by OPEC in oil prices and crop failures around the world reduced aggregate supply, which sparked another outward shift of the Phillips curve _____

The theorists of the rational expectations school _____

After World War II, the average U.S. recession has lasted _____

In its original form, the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

According to economists of the rational expectations school, _____

The Fed has tried to influence _____

In A. W. Phillips' data, the rate of change in nominal wages served as _____

Which of the following is not a valid criticism of discretionary fiscal policy?

If workers and firms expect continued inflation, their wage agreements _____

Both those who favor an active approach as well as those who favor a passive approach to policy believe that an economy can suffer from extreme and long-lasting swings in real GDP.

The immediate effects of a discretionary increase in government spending are represented by a _____

If an economy's actual GDP exceeds its potential GDP, _____

Exhibit 16.3 -Refer to Exhibit 16.3. An expansionary monetary policy increases the aggregate demand curve to ___, stimulates output and employment in the short run to equilibrium point _, with output at ___.

The Art and Science of Economic Analysis.

Economic Tools and Economic Systems.

Economic Decision Makers.

Demand, Supply, and Markets.

Introduction to Macroeconomics.

Tracking the U. S. Economy.

Unemployment and Inflation.

Productivity and Growth.

Aggregate Demand.

Aggregate Supply.

Fiscal Policy.

Federal Budgets and Public Policy.

Money and the Financial System.

Banking and the Money Supply.

Monetary Theory and Policy.

International Trade.

International Finance.

Economic Development.

Filters

Exam 16: Macro Policy Debate: Active or Passive?

A credible policy designed to lower inflation is likely to push the economy into recession.

Suppose the Fed announced a policy of rapid growth in the money supply in 2015, but then put the brakes on money expansion without any announcement. If in 2016, Fed officials announce again that an expansion is planned, it is most likely that _____

Which of the following is likely to dampen economic fluctuations in a country?

The country of Glassen has experienced an expansionary gap for the last three years. The advocates of passive policy believe that _____

Which of the following is a difference between an active approach to close a recessionary gap and a passive approach to close a recessionary gap?

The rational expectations school advocates _____

_____, the time-inconsistency problem is eliminated.

Sharp increases by OPEC in oil prices and crop failures around the world reduced aggregate supply, which sparked another outward shift of the Phillips curve _____

The theorists of the rational expectations school _____

After World War II, the average U.S. recession has lasted _____

In its original form, the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady.

According to economists of the rational expectations school, _____

The Fed has tried to influence _____

In A. W. Phillips' data, the rate of change in nominal wages served as _____

Which of the following is not a valid criticism of discretionary fiscal policy?

If workers and firms expect continued inflation, their wage agreements _____

Both those who favor an active approach as well as those who favor a passive approach to policy believe that an economy can suffer from extreme and long-lasting swings in real GDP.

The immediate effects of a discretionary increase in government spending are represented by a _____

If an economy's actual GDP exceeds its potential GDP, _____

Exhibit 16.3 -Refer to Exhibit 16.3. An expansionary monetary policy increases the aggregate demand curve to _____, stimulates output and employment in the short run to equilibrium point _____, with output at _____.

The Art and Science of Economic Analysis.

Economic Tools and Economic Systems.

Economic Decision Makers.

Demand, Supply, and Markets.

Introduction to Macroeconomics.

Tracking the U. S. Economy.

Unemployment and Inflation.

Productivity and Growth.

Aggregate Demand.

Aggregate Supply.

Fiscal Policy.

Federal Budgets and Public Policy.

Money and the Financial System.

Banking and the Money Supply.

Monetary Theory and Policy.

International Trade.

International Finance.

Economic Development.

Filters

Exhibit 16.3 -Refer to Exhibit 16.3. An expansionary monetary policy increases the aggregate demand curve to ___, stimulates output and employment in the short run to equilibrium point _, with output at ___.