Question 1

Which one of the following reduces the likelihood that real-world fiscal policy will promote economic stability?

Accepted Answer

A) Policy planners do not know whether a tax cut is expansionary or restrictive. 
B) Policy makers need to know what economic conditions will be like 6 to 18 months into the future,and this is extremely difficult to forecast accurately. 
C) Policy planners are reluctant to implement expansionary fiscal policy even during a serious recession. 
D) Public choice theory suggests that elected political officials will generally favor restrictive fiscal policy. 
A) Policy planners do not know whether a tax cut is expansionary or restrictive. 
B) Policy makers need to know what economic conditions will be like 6 to 18 months into the future,and this is extremely difficult to forecast accurately. 
C) Policy planners are reluctant to implement expansionary fiscal policy even during a serious recession. 
D) Public choice theory suggests that elected political officials will generally favor restrictive fiscal policy.

Question 2

A decrease in a broad index of commodity prices suggests to the Fed that

Accepted Answer

A) money is plentiful,and the Fed should conduct restrictive policy. 
B) money is plentiful,and the Fed should conduct expansionary policy. 
C) deflation is a potential future danger,and the Fed should conduct expansionary policy. 
D) future prices will likely increase,and the Fed should conduct expansionary policy. 
A) money is plentiful,and the Fed should conduct restrictive policy. 
B) money is plentiful,and the Fed should conduct expansionary policy. 
C) deflation is a potential future danger,and the Fed should conduct expansionary policy. 
D) future prices will likely increase,and the Fed should conduct expansionary policy.

Question 3

According to the rational expectations theory,

Accepted Answer

A) on average people have very little idea of what to expect from government policy makers. 
B) people form expectations by focusing only on the private sector. 
C) people do not consider likely government policies when forming expectations. 
D) people form expectations,in part,by considering the probable future effects of changes in government policy. 
A) on average people have very little idea of what to expect from government policy makers. 
B) people form expectations by focusing only on the private sector. 
C) people do not consider likely government policies when forming expectations. 
D) people form expectations,in part,by considering the probable future effects of changes in government policy.

Question 4

The year-to-year changes in real GDP

Accepted Answer

A) tend to be regular and predictable. 
B) have become more severe since the end of the Second World War. 
C) have never been more than a percentage point or two in magnitude. 
D) vary in magnitude and are difficult to forecast. 
A) tend to be regular and predictable. 
B) have become more severe since the end of the Second World War. 
C) have never been more than a percentage point or two in magnitude. 
D) vary in magnitude and are difficult to forecast.

Question 5

Starting from an initial long-run equilibrium,under the rational expectations hypothesis,an anticipated shift to a more expansionary policy will increase

Accepted Answer

A) prices but not real output in the short run. 
B) real output but not prices in the short run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run. 
A) prices but not real output in the short run. 
B) real output but not prices in the short run. 
C) real output in the long run but not in the short run. 
D) real output in both the long run and the short run.

Question 6

The rational expectations hypothesis assumes that individuals will

Accepted Answer

A) never make forecasting errors. 
B) be as likely to overestimate as to underestimate the future rate of inflation. 
C) continually make systematic forecasting errors. 
D) ignore past forecasting errors when formulating predictions. 
A) never make forecasting errors. 
B) be as likely to overestimate as to underestimate the future rate of inflation. 
C) continually make systematic forecasting errors. 
D) ignore past forecasting errors when formulating predictions.

Question 7

According to the modern expectational Phillips curve,unemployment will equal the natural rate of unemployment when

Accepted Answer

A) any inflation is present. 
B) inflation turns out to be lower than what people expected. 
C) inflation turns out to be higher than what people expected. 
D) inflation turns out to be equal to what people expected. 
A) any inflation is present. 
B) inflation turns out to be lower than what people expected. 
C) inflation turns out to be higher than what people expected. 
D) inflation turns out to be equal to what people expected.

Question 8

Use the table below to choose the correct answer.
 
According to the adaptive expectations hypothesis,at the beginning of period 3,decision makers would expect inflation during period 3 to be

Accepted Answer

A) 4 percent. 
B) 5 percent. 
C) 6 percent. 
D) 8 percent. 
A) 4 percent. 
B) 5 percent. 
C) 6 percent. 
D) 8 percent.

Question 9

Under the adaptive expectations theory,expansionary monetary and fiscal policies designed to reduce the unemployment rate will be

Accepted Answer

A) ineffective in the long run. 
B) ineffective in the short run. 
C) noninflationary. 
D) all of the above. 
A) ineffective in the long run. 
B) ineffective in the short run. 
C) noninflationary. 
D) all of the above.

Question 10

Regarding the issue of economic stability,nonactivists believe that

Accepted Answer

A) consumption is highly unstable over the business cycle. 
B) the highest possible level of investment must be maintained over all phases of the business cycle. 
C) minor economic disturbances often feed on themselves,leading to severe swings in the business cycle. 
D) the self-correcting properties of a market economy work reasonably well. 
A) consumption is highly unstable over the business cycle. 
B) the highest possible level of investment must be maintained over all phases of the business cycle. 
C) minor economic disturbances often feed on themselves,leading to severe swings in the business cycle. 
D) the self-correcting properties of a market economy work reasonably well.

Question 11

Most economists agree that

Accepted Answer

A) fiscal policy is a more effective stabilization tool than monetary policy. 
B) it is difficult to time discretionary changes in macro-policy in a manner that will promote stability. 
C) monetary policy should focus on reducing unemployment,while fiscal policy should focus on the control of inflation. 
D) discretionary macro-policy can easily be instituted in a manner that will promote economic stability. 
A) fiscal policy is a more effective stabilization tool than monetary policy. 
B) it is difficult to time discretionary changes in macro-policy in a manner that will promote stability. 
C) monetary policy should focus on reducing unemployment,while fiscal policy should focus on the control of inflation. 
D) discretionary macro-policy can easily be instituted in a manner that will promote economic stability.

Question 12

What is the index of leading indicators,and what is it used for?

Accepted Answer

The index of leading indicators is a col

Question 13

Use the figure below to answer the following question(s).
Figure 15-1
  
-In Figure 15-1,AD₁ and SRAS₁ indicate initial conditions in the goods and services market.In the short run,which of the following will most likely result from a shift to a more expansionary monetary policy under the adaptive expectations hypothesis?

Accepted Answer

A) price level P₁ and output Y₁ 
B) price level P₂ and output Y₂ 
C) price level P₃ and output Y₁ 
D) price level P₁ and output Y₂ 
A) price level P₁ and output Y₁ 
B) price level P₂ and output Y₂ 
C) price level P₃ and output Y₁ 
D) price level P₁ and output Y₂

Question 14

Under the adaptive expectations hypothesis,which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

Accepted Answer

A) higher prices and no change in real output 
B) higher prices and expansion in real output 
C) no change in prices but an expansion in real output 
D) no change in either prices or real output 
A) higher prices and no change in real output 
B) higher prices and expansion in real output 
C) no change in prices but an expansion in real output 
D) no change in either prices or real output

Question 15

Under adaptive expectations,the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a

Accepted Answer

A) temporary reduction in the unemployment rate. 
B) permanent reduction in the unemployment rate. 
C) temporary reduction in the inflation rate. 
D) permanent reduction in the inflation rate. 
A) temporary reduction in the unemployment rate. 
B) permanent reduction in the unemployment rate. 
C) temporary reduction in the inflation rate. 
D) permanent reduction in the inflation rate.

Question 16

Most economists agree that

Accepted Answer

A) fiscal policy is a more effective stabilization tool than monetary policy. 
B) price stability is the proper goal of monetary policy. 
C) monetary policy should focus on reducing unemployment,while fiscal policy should focus on the control of inflation. 
D) discretionary macro-policy can easily be instituted in a manner that will promote economic stability. 
A) fiscal policy is a more effective stabilization tool than monetary policy. 
B) price stability is the proper goal of monetary policy. 
C) monetary policy should focus on reducing unemployment,while fiscal policy should focus on the control of inflation. 
D) discretionary macro-policy can easily be instituted in a manner that will promote economic stability.

Question 17

"To achieve the nonperfectionist's goal of high enough output to give us no more than 3 percent unemployment,the price index might have to rise by as much as 4 or 5 percent per year." This statement made by two Nobel Prize-winning economists is

Accepted Answer

A) false;if we were willing to accept annual inflation of 5 percent,an unemployment rate of less than 3 percent could be achieved. 
B) false;while a reduction in unemployment to 3 percent is attainable,it would require annual inflation of 8 percent to 10 percent to be sustained in the long run. 
C) false;the statement fails to recognize that inflation does not stimulate output and employment when it is widely anticipated. 
D) essentially true. 
A) false;if we were willing to accept annual inflation of 5 percent,an unemployment rate of less than 3 percent could be achieved. 
B) false;while a reduction in unemployment to 3 percent is attainable,it would require annual inflation of 8 percent to 10 percent to be sustained in the long run. 
C) false;the statement fails to recognize that inflation does not stimulate output and employment when it is widely anticipated. 
D) essentially true.

Question 18

The U.S.experience during the 1980s and 1990s illustrates that

Accepted Answer

A) fiscal policy is substantially more potent than monetary policy. 
B) a balanced budget is essential for the achievement of price stability. 
C) a monetary policy that keeps the inflation rate low and steady will help promote economic stability. 
D) there is a trade-off between inflation and unemployment-the unemployment rate can be reduced if we are willing to tolerate higher rates of inflation. 
A) fiscal policy is substantially more potent than monetary policy. 
B) a balanced budget is essential for the achievement of price stability. 
C) a monetary policy that keeps the inflation rate low and steady will help promote economic stability. 
D) there is a trade-off between inflation and unemployment-the unemployment rate can be reduced if we are willing to tolerate higher rates of inflation.

Question 19

Why did many economists during the 1960s and 1970s believe that expansionary macroeconomic policy that resulted in inflation would reduce the rate of unemployment?

Accepted Answer

A) They failed to realize that the expansionary policy would stimulate aggregate demand. 
B) They failed to realize that the expansionary policy would reduce real interest rates. 
C) They failed to incorporate expectations into their analysis. 
D) They thought that money growth would simply lead to a proportional increase in the price level. 
A) They failed to realize that the expansionary policy would stimulate aggregate demand. 
B) They failed to realize that the expansionary policy would reduce real interest rates. 
C) They failed to incorporate expectations into their analysis. 
D) They thought that money growth would simply lead to a proportional increase in the price level.

Question 20

After an extended period of steady inflation at a constant rate,

Accepted Answer

A) people will anticipate inflation. 
B) actual unemployment will approximate the natural rate of unemployment. 
C) actual unemployment will be less than the natural rate of unemployment. 
D) both a and b are true. 
A) people will anticipate inflation. 
B) actual unemployment will approximate the natural rate of unemployment. 
C) actual unemployment will be less than the natural rate of unemployment. 
D) both a and b are true.

Exam 15: Stabilization Policy, output, and Employment

Which one of the following reduces the likelihood that real-world fiscal policy will promote economic stability?

A decrease in a broad index of commodity prices suggests to the Fed that

According to the rational expectations theory,

The year-to-year changes in real GDP

Starting from an initial long-run equilibrium,under the rational expectations hypothesis,an anticipated shift to a more expansionary policy will increase

The rational expectations hypothesis assumes that individuals will

According to the modern expectational Phillips curve,unemployment will equal the natural rate of unemployment when

Use the table below to choose the correct answer. According to the adaptive expectations hypothesis,at the beginning of period 3,decision makers would expect inflation during period 3 to be

Under the adaptive expectations theory,expansionary monetary and fiscal policies designed to reduce the unemployment rate will be

Regarding the issue of economic stability,nonactivists believe that

Most economists agree that

What is the index of leading indicators,and what is it used for?

Under the adaptive expectations hypothesis,which of the following is the most likely short-run effect of a move to a more expansionary monetary policy?

Under adaptive expectations,the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a

Most economists agree that

"To achieve the nonperfectionist's goal of high enough output to give us no more than 3 percent unemployment,the price index might have to rise by as much as 4 or 5 percent per year." This statement made by two Nobel Prize-winning economists is

The U.S.experience during the 1980s and 1990s illustrates that

Why did many economists during the 1960s and 1970s believe that expansionary macroeconomic policy that resulted in inflation would reduce the rate of unemployment?

After an extended period of steady inflation at a constant rate,

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The Economics of Collective Decision-Making

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Economic Fluctuations, unemployment, and Inflation

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Dynamic Change, economic Fluctuations, and the Ad-As Model

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Great Debates in Economics: Keynes Versus Hayek

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Lessons From the Great Depression

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