Question 1

Which of the following curves shows the relationship between the unemployment rate and the rate of change in the price level?

Accepted Answer

A)  the new Keynesian aggregate supply curve 
B)  the real business cycle curve 
C)  the aggregate demand curve 
D)  none of the above 
A)  the new Keynesian aggregate supply curve 
B)  the real business cycle curve 
C)  the aggregate demand curve 
D)  none of the above

Question 2

-In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand triggers a shift from AD1 to AD2. In the short run, this would cause

Accepted Answer

A)  the price level to fall from P1 to P2, real Gross Domestic Product (GDP) to fall from Y1 to Y2, and the rate of unemployment to increase. 
B)  the price level to move from P1 to P2, but real Gross Domestic Product (GDP) would stay at Y1. 
C)  the price level to fall by some amount less than P1 but greater than P2, and the rate of unemployment would decrease. 
D)  no change in either the price level or real Gross Domestic Product (GDP), but a decrease in unemployment. 
A)  the price level to fall from P1 to P2, real Gross Domestic Product (GDP) to fall from Y1 to Y2, and the rate of unemployment to increase. 
B)  the price level to move from P1 to P2, but real Gross Domestic Product (GDP) would stay at Y1. 
C)  the price level to fall by some amount less than P1 but greater than P2, and the rate of unemployment would decrease. 
D)  no change in either the price level or real Gross Domestic Product (GDP), but a decrease in unemployment.

Question 3

When the economy is at its natural rate of unemployment,

Accepted Answer

A)  it is still experiencing frictional and cyclical unemployment. 
B)  it is still experiencing structural and cyclical unemployment. 
C)  it is still experiencing frictional, seasonal, and structural unemployment. 
D)  it is still experiencing frictional, structural, and cyclical unemployment. 
A)  it is still experiencing frictional and cyclical unemployment. 
B)  it is still experiencing structural and cyclical unemployment. 
C)  it is still experiencing frictional, seasonal, and structural unemployment. 
D)  it is still experiencing frictional, structural, and cyclical unemployment.

Question 4

Menu costs are a possible reason for

Accepted Answer

A)  aggregate supply shocks. 
B)  low levels of consumer confidence in response to aggregate supply shocks. 
C)  sticky product prices. 
D)  swings in the labor force participation rate. 
A)  aggregate supply shocks. 
B)  low levels of consumer confidence in response to aggregate supply shocks. 
C)  sticky product prices. 
D)  swings in the labor force participation rate.

Question 5

Available evidence about price adjustments across U.S. industries indicates that

Accepted Answer

A)  prices are very flexible in all industries. 
B)  prices are very sticky in all industries. 
C)  prices are equally flexible in all industries. 
D)  there is considerable variation in price flexibility across industries. 
A)  prices are very flexible in all industries. 
B)  prices are very sticky in all industries. 
C)  prices are equally flexible in all industries. 
D)  there is considerable variation in price flexibility across industries.

Question 6

If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy?

Accepted Answer

A)  Consumers do not understand the workings of monetary policy, so discretionary and nondiscretionary policies are equally effective. 
B)  Individuals do understand how monetary policy works, so consistency and predictability are the keys to effective policy making. 
C)  Individuals base their economic expectations solely on current information, so repeating policy decisions that have worked in the past is the most effective path to take. 
D)  Only unanticipated policies will be effective once individuals understand how monetary policy works. 
A)  Consumers do not understand the workings of monetary policy, so discretionary and nondiscretionary policies are equally effective. 
B)  Individuals do understand how monetary policy works, so consistency and predictability are the keys to effective policy making. 
C)  Individuals base their economic expectations solely on current information, so repeating policy decisions that have worked in the past is the most effective path to take. 
D)  Only unanticipated policies will be effective once individuals understand how monetary policy works.

Question 7

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run,

Accepted Answer

A)  the unemployment rate will be the same rate as before the expansionary monetary policy. 
B)  the unemployment rate will be larger than the rate before the expansionary monetary policy. 
C)  the unemployment rate will be smaller than the rate before the expansionary monetary policy. 
D)  the unemployment rate can increase or decrease depending upon how much the LRAS will shift. 
A)  the unemployment rate will be the same rate as before the expansionary monetary policy. 
B)  the unemployment rate will be larger than the rate before the expansionary monetary policy. 
C)  the unemployment rate will be smaller than the rate before the expansionary monetary policy. 
D)  the unemployment rate can increase or decrease depending upon how much the LRAS will shift.

Question 8

The idea that policy actions have no real effects in the short run if they are anticipated and no real effects in the long run is called the

Accepted Answer

A)  Keynesian proposition. 
B)  policy irrelevance proposition. 
C)  adaptive proposition. 
D)  activism proposition. 
A)  Keynesian proposition. 
B)  policy irrelevance proposition. 
C)  adaptive proposition. 
D)  activism proposition.

Question 9

What is the Phillips curve? What does the Phillips curve suggest about optimal policy?

Accepted Answer

The Phillips curve shows a trade-off bet

Question 10

What is meant by the natural rate of unemployment?

Accepted Answer

The natural rate of unemployme

Question 11

Assuming that the rational expectations hypothesis is NOT in effect, in the short run an expansionary monetary policy should

Accepted Answer

A)  shift the aggregate supply function. 
B)  increase real Gross Domestic Product (GDP) and the price level. 
C)  increase the rate of unemployment. 
D)  generate stagflation. 
A)  shift the aggregate supply function. 
B)  increase real Gross Domestic Product (GDP) and the price level. 
C)  increase the rate of unemployment. 
D)  generate stagflation.

Question 12

Actions on the part of monetary and fiscal policy makers that are undertaken in response to some change in the overall economy are known as

Accepted Answer

A)  nondiscretionary policy making. 
B)  passive policy making. 
C)  creative policy making. 
D)  active policy making. 
A)  nondiscretionary policy making. 
B)  passive policy making. 
C)  creative policy making. 
D)  active policy making.

Question 13

When the economy is in long-run equilibrium, there will be

Accepted Answer

A)  no unemployment. 
B)  frictional and structural unemployment. 
C)  cyclical unemployment only. 
D)  cyclical and seasonal unemployment. 
A)  no unemployment. 
B)  frictional and structural unemployment. 
C)  cyclical unemployment only. 
D)  cyclical and seasonal unemployment.

Question 14

The rational expectations hypothesis states that

Accepted Answer

A)  the government combines the effects of past policy changes on important economic variables with accepted views about the effects of current and future policy changes. 
B)  people combine the effect of past policy changes on important economic variables with unpredictable views on what policy makers will do to determine what the economy will do in the future. 
C)  people combine the effects of past policy changes on important economic variables with their own judgments about the future effects of current and future policy changes. 
D)  people understand how the economy operates and use their knowledge in making expectations about the future, but are uninformed about how fiscal and monetary policies are made and carried out. 
A)  the government combines the effects of past policy changes on important economic variables with accepted views about the effects of current and future policy changes. 
B)  people combine the effect of past policy changes on important economic variables with unpredictable views on what policy makers will do to determine what the economy will do in the future. 
C)  people combine the effects of past policy changes on important economic variables with their own judgments about the future effects of current and future policy changes. 
D)  people understand how the economy operates and use their knowledge in making expectations about the future, but are uninformed about how fiscal and monetary policies are made and carried out.

Question 15

According to a theory that relies on the rational expectations hypothesis and the assumption that wages and prices are flexible, why do anticipated expansionary monetary actions NOT boost real GDP?

Accepted Answer

A)  Anticipated expansionary monetary policy actions do not increase aggregate demand. 
B)  The short-run aggregate supply curve shifts upward simultaneously with the rightward shift of aggregate demand. 
C)  The short-run aggregate supply curve shifts downward simultaneously with the upward shift of aggregate demand. 
D)  The higher interest rates associated with anticipated expansionary monetary policy actions will dampen investment spending. 
A)  Anticipated expansionary monetary policy actions do not increase aggregate demand. 
B)  The short-run aggregate supply curve shifts upward simultaneously with the rightward shift of aggregate demand. 
C)  The short-run aggregate supply curve shifts downward simultaneously with the upward shift of aggregate demand. 
D)  The higher interest rates associated with anticipated expansionary monetary policy actions will dampen investment spending.

Question 16

According to the rational expectations hypothesis, monetary policy can have real effects on such variables as real Gross Domestic Product (GDP) in the short run

Accepted Answer

A)  only when the policy is anticipated. 
B)  only when the policy is unsystematic and unanticipated. 
C)  regardless of whether the policy is anticipated or unanticipated. 
D)  when the Federal Reserve's open market committee operates as expected in either buying or selling bonds. 
A)  only when the policy is anticipated. 
B)  only when the policy is unsystematic and unanticipated. 
C)  regardless of whether the policy is anticipated or unanticipated. 
D)  when the Federal Reserve's open market committee operates as expected in either buying or selling bonds.

Question 17

Using a graph, show and explain the difference between an anticipated and an unanticipated increase in aggregate demand.

Accepted Answer

@#IMG-DLM& In the above figure, an unanticipated i

Question 18

Describe and explain the policy irrelevance proposition.

Accepted Answer

The policy irrelevance proposition is th

Question 19

Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because

Accepted Answer

A)  economic participants routinely incorporate changes in the inflation rate into their expectations. 
B)  economic participants are not rational, and therefore act unpredictably to any policy change. 
C)  unemployment levels and the inflation rate have a clear, positive relationship. 
D)  unemployment levels and the inflation rate have a negative (inverse) relationship. 
A)  economic participants routinely incorporate changes in the inflation rate into their expectations. 
B)  economic participants are not rational, and therefore act unpredictably to any policy change. 
C)  unemployment levels and the inflation rate have a clear, positive relationship. 
D)  unemployment levels and the inflation rate have a negative (inverse) relationship.

Question 20

According to the policy irrelevance proposition, real Gross Domestic Product (GDP) is determined by

Accepted Answer

A)  the economy's aggregate demand curve. 
B)  the economy's long-run aggregate supply curve. 
C)  the rate of inflation only. 
D)  a combination of fiscal policy and monetary policy. 
A)  the economy's aggregate demand curve. 
B)  the economy's long-run aggregate supply curve. 
C)  the rate of inflation only. 
D)  a combination of fiscal policy and monetary policy.

Exam 17: Stabilization in an Integrated World Economy

Which of the following curves shows the relationship between the unemployment rate and the rate of change in the price level?

-In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand triggers a shift from AD1 to AD2. In the short run, this would cause

When the economy is at its natural rate of unemployment,

Menu costs are a possible reason for

Available evidence about price adjustments across U.S. industries indicates that

If you accept the rational expectations hypothesis as accurate, what would you tell monetary policy makers who ask you how to more effectively manage the economy?

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD2. In the short run,

The idea that policy actions have no real effects in the short run if they are anticipated and no real effects in the long run is called the

What is the Phillips curve? What does the Phillips curve suggest about optimal policy?

What is meant by the natural rate of unemployment?

Assuming that the rational expectations hypothesis is NOT in effect, in the short run an expansionary monetary policy should

Actions on the part of monetary and fiscal policy makers that are undertaken in response to some change in the overall economy are known as

When the economy is in long-run equilibrium, there will be

The rational expectations hypothesis states that

According to a theory that relies on the rational expectations hypothesis and the assumption that wages and prices are flexible, why do anticipated expansionary monetary actions NOT boost real GDP?

According to the rational expectations hypothesis, monetary policy can have real effects on such variables as real Gross Domestic Product (GDP) in the short run

Using a graph, show and explain the difference between an anticipated and an unanticipated increase in aggregate demand.

Describe and explain the policy irrelevance proposition.

Economists Milton Friedman and E.S. Phelps suggested that the apparent trade-off suggested by the Phillips curve could not be exploited by policy makers, because

According to the policy irrelevance proposition, real Gross Domestic Product (GDP) is determined by

The Nature of Economics

Scarcity and the World of Trade-Offs

Demand and Supply

Extensions of Demand and Supply Analysis

Public Spending and Public Choice

Funding the Public Sector

The Macroeconomy: Unemployment, Inflation, and Deflation

Measuring the Economys Performance

Global Economic Growth and Development

Real GDP and the Price Level in the Long Run

Classical and Keynesian Macro Analyses

Consumption, Real GDP, and the Multiplier

Fiscal Policy

Deficit Spending and the Public Debt

Money, Banking, and Central Banking

Domestic and International Dimensions of Monetary Policy

Policies and Prospects for Global Economic Growth

Demand and Supply Elasticity

Consumer Choice

Rents, Profits, and the Financial Environment of Business

The Firm: Cost and Output Determination

Perfect Competition

Monopoly

Monopolistic Competition

Oligopoly and Strategic Behavior

Regulation and Antitrust Policy in a Globalized Economy

The Labor Market: Demand, Supply and Outsourcing

Unions and Labor Market Monopoly Power

Income, Poverty, and Health Care

Environmental Economics

Comparative Advantage and the Open Economy

Exchange Rates and the Balance of Payments

Filters

-In the above figure, start with the economy in equilibrium at point A. Then an unanticipated reduction in aggregate demand triggers a shift from AD₁ to AD₂. In the short run, this would cause

-Refer to the above figure. Unexpected contractionary monetary policy has caused the aggregate demand curve to shift to AD₂. In the short run,