Question 1

The rational expectations hypothesis is a theory that states that

Accepted Answer

A)  individuals can predict the future perfectly, at least with respect to macroeconomic variables like the interest rate and inflation. 
B)  people make their economic plans by using all available past and present information and their understanding about how the economy operates. 
C)  people make their economic plans in an irrational, intuitive manner. 
D)  people make their economic plans by relying on the policy statements made by the President and by leaders in Congress. 
A)  individuals can predict the future perfectly, at least with respect to macroeconomic variables like the interest rate and inflation. 
B)  people make their economic plans by using all available past and present information and their understanding about how the economy operates. 
C)  people make their economic plans in an irrational, intuitive manner. 
D)  people make their economic plans by relying on the policy statements made by the President and by leaders in Congress.

Question 2

The idea that anticipated monetary policy changes cannot affect real GDP or employment is known as

Accepted Answer

A)  the systematic policy hypothesis. 
B)  the policy irrelevance theorem. 
C)  the policy relevance theorem. 
D)  the Keynesian hypothesis. 
A)  the systematic policy hypothesis. 
B)  the policy irrelevance theorem. 
C)  the policy relevance theorem. 
D)  the Keynesian hypothesis.

Question 3

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

Accepted Answer

A)  expansionary monetary policy will be effective in combating recessions. 
B)  contractionary monetary policy will be effective in combating inflation. 
C)  only predictable policy actions by the Fed will have an effect on the real economy. 
D)  only unpredictable policy actions by the Fed will have an effect on the real economy. 
A)  expansionary monetary policy will be effective in combating recessions. 
B)  contractionary monetary policy will be effective in combating inflation. 
C)  only predictable policy actions by the Fed will have an effect on the real economy. 
D)  only unpredictable policy actions by the Fed will have an effect on the real economy.

Question 4

What types of unemployment will still exist when the economy is at the natural rate of unemployment?

Accepted Answer

A)  frictional and cyclical unemployment only 
B)  frictional and structural unemployment only 
C)  structural and cyclical unemployment only 
D)  frictional, structural, and cyclical unemployment 
A)  frictional and cyclical unemployment only 
B)  frictional and structural unemployment only 
C)  structural and cyclical unemployment only 
D)  frictional, structural, and cyclical unemployment

Question 5

What kind of relationship appears to actually exist, if one examines the actual data regarding the inflation rate and the unemployment rate for all years since 1953?

Accepted Answer

A)  a direct relationship 
B)  a one-to-one relationship 
C)  an inverse relationship 
D)  no relationship in the long run 
A)  a direct relationship 
B)  a one-to-one relationship 
C)  an inverse relationship 
D)  no relationship in the long run

Question 6

During the 1960s, many Keynesian economists felt that by studying the Phillips curve,

Accepted Answer

A)  policy makers could dispense with the Federal Reserve's open-market operations. 
B)  policy makers could fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives. 
C)  the President and Congress did not need to attempt to balance the budget. 
D)  policy makers could eliminate even frictional unemployment in the economy. 
A)  policy makers could dispense with the Federal Reserve's open-market operations. 
B)  policy makers could fine-tune the economy by selecting policies that would produce the exact mix of unemployment and inflation that suited current government objectives. 
C)  the President and Congress did not need to attempt to balance the budget. 
D)  policy makers could eliminate even frictional unemployment in the economy.

Question 7

Which of the following holds that business cycles are primarily due to changes in technology and does not invoke any monetary or demand-side forces?

Accepted Answer

A)  the real business cycle theory 
B)  the efficiency wage theory 
C)  rational expectations hypothesis 
D)  Keynesian economics 
A)  the real business cycle theory 
B)  the efficiency wage theory 
C)  rational expectations hypothesis 
D)  Keynesian economics

Question 8

-In the above figure, what does the line U represent?

Accepted Answer

A)  the Phillips curve 
B)  the natural rate of Unemployment 
C)  potential unemployment 
D)  full inflation rate of unemployment 
A)  the Phillips curve 
B)  the natural rate of Unemployment 
C)  potential unemployment 
D)  full inflation rate of unemployment

Question 9

Those who favor passive policy making argue that all of the following exist EXCEPT

Accepted Answer

A)  perfectly flexible wages and prices. 
B)  the trade off between inflation and unemployment is not stable in the short run and is non-existent in the long run. 
C)  pure competition is typical. 
D)  aggregate demand shocks can influence real GDP and unemployment. 
A)  perfectly flexible wages and prices. 
B)  the trade off between inflation and unemployment is not stable in the short run and is non-existent in the long run. 
C)  pure competition is typical. 
D)  aggregate demand shocks can influence real GDP and unemployment.

Question 10

Under the assumption of rational expectations, government fiscal and monetary policy changes are effective in the short run

Accepted Answer

A)  all of the time. 
B)  only when the short-run aggregate supply curve is the same as the long-run aggregate supply curve. 
C)  only when the policy changes leave the position of the aggregate demand curve unaffected. 
D)  only when the policy changes are unanticipated. 
A)  all of the time. 
B)  only when the short-run aggregate supply curve is the same as the long-run aggregate supply curve. 
C)  only when the policy changes leave the position of the aggregate demand curve unaffected. 
D)  only when the policy changes are unanticipated.

Question 11

Explain the difference between active and passive policy making.

Accepted Answer

Active policy making, or discretionary p

Question 12

Which of the following can help explain why prices might be "sticky"?

Accepted Answer

A)  The rational expectations hypothesis 
B)  The policy irrelevance proposition 
C)  Real business cycles 
D)  Small menu costs 
A)  The rational expectations hypothesis 
B)  The policy irrelevance proposition 
C)  Real business cycles 
D)  Small menu costs

Question 13

Real business cycles could be a result of

Accepted Answer

A)  discretionary fiscal policy. 
B)  abrupt changes in monetary policy. 
C)  increases in the budget deficit and national debt. 
D)  shocks to the aggregate supply side of the economy. 
A)  discretionary fiscal policy. 
B)  abrupt changes in monetary policy. 
C)  increases in the budget deficit and national debt. 
D)  shocks to the aggregate supply side of the economy.

Question 14

An unexpected decrease in aggregate demand

Accepted Answer

A)  will decrease long-run aggregate supply. 
B)  will decrease the average duration of unemployment. 
C)  will decrease the price level. 
D)  will decrease real GDP, but will not affect the rate and duration of unemployment. 
A)  will decrease long-run aggregate supply. 
B)  will decrease the average duration of unemployment. 
C)  will decrease the price level. 
D)  will decrease real GDP, but will not affect the rate and duration of unemployment.

Question 15

Your friend recently graduated from college and is actively looking for employment. The economy has completely recovered from the last recession and your friend is taking her time, looking for the "perfect" job. In the meantime, the unemployment she is experiencing is categorized as

Accepted Answer

A)  cyclical. 
B)  structural. 
C)  seasonal. 
D)  frictional. 
A)  cyclical. 
B)  structural. 
C)  seasonal. 
D)  frictional.

Question 16

We observe the duration of unemployment falling and wage rates rising. It is likely that

Accepted Answer

A)  the government has initiated expansionary fiscal policy but the policies haven't taken effect yet. 
B)  summer has arrived. 
C)  aggregate demand has increased. 
D)  aggregate supply has increased. 
A)  the government has initiated expansionary fiscal policy but the policies haven't taken effect yet. 
B)  summer has arrived. 
C)  aggregate demand has increased. 
D)  aggregate supply has increased.

Question 17

-Refer to the above figure. Suppose the natural rate of unemployment is 5 percent. If the government tried to reduce unemployment to 4 percent and keep it there, it must

Accepted Answer

A)  raise unemployment benefits. 
B)  accept a permanent inflation rate of 1 percent. 
C)  generate higher and higher inflation rates or else people will adjust their behavior and the unemployment rate will return to 5 percent. 
D)  use contractionary fiscal and expansionary monetary policy. 
A)  raise unemployment benefits. 
B)  accept a permanent inflation rate of 1 percent. 
C)  generate higher and higher inflation rates or else people will adjust their behavior and the unemployment rate will return to 5 percent. 
D)  use contractionary fiscal and expansionary monetary policy.

Question 18

Which of the following statements has been proposed as a benefit of passive policy making?

Accepted Answer

A)  Passive policy making allows for making immediate changes in response to an anticipated change in economic performance. 
B)  Passive policy making utilizes the rational expectations hypothesis. 
C)  When using passive policy making there is no tradeoff between price stability and unemployment. 
D)  Passive policy making does not wait for the time lag between recognition of a problem and policy action before engaging in economic policies to stabilize the economy. 
A)  Passive policy making allows for making immediate changes in response to an anticipated change in economic performance. 
B)  Passive policy making utilizes the rational expectations hypothesis. 
C)  When using passive policy making there is no tradeoff between price stability and unemployment. 
D)  Passive policy making does not wait for the time lag between recognition of a problem and policy action before engaging in economic policies to stabilize the economy.

Question 19

Suppose the natural rate of unemployment is 5 percent. If the actual unemployment rate is 4 percent, then the cyclical unemployment rate is

Accepted Answer

A)  9 percent. 
B)  1 percent. 
C)  -1 percent. 
D)  0 percent as cyclical unemployment cannot be less than zero. 
A)  9 percent. 
B)  1 percent. 
C)  -1 percent. 
D)  0 percent as cyclical unemployment cannot be less than zero.

Question 20

-Refer to the above figure. Government policy that moved the economy from A to B would be accomplished by

Accepted Answer

A)  an expansionary fiscal policy combined with a contractionary monetary policy. 
B)  a contractionary fiscal policy combined with an expansionary monetary policy. 
C)  a contractionary policy that would reduce the rate of inflation and would cause workers to remain unemployed longer than they were before. 
D)  raising the minimum wage. 
A)  an expansionary fiscal policy combined with a contractionary monetary policy. 
B)  a contractionary fiscal policy combined with an expansionary monetary policy. 
C)  a contractionary policy that would reduce the rate of inflation and would cause workers to remain unemployed longer than they were before. 
D)  raising the minimum wage.

Exam 17: Stabilization in an Integrated World Economy

The rational expectations hypothesis is a theory that states that

The idea that anticipated monetary policy changes cannot affect real GDP or employment is known as

One implication of coupling the rational expectations hypothesis with the assumption of flexible wages and prices is that

What types of unemployment will still exist when the economy is at the natural rate of unemployment?

What kind of relationship appears to actually exist, if one examines the actual data regarding the inflation rate and the unemployment rate for all years since 1953?

During the 1960s, many Keynesian economists felt that by studying the Phillips curve,

Which of the following holds that business cycles are primarily due to changes in technology and does not invoke any monetary or demand-side forces?

-In the above figure, what does the line U represent?

Those who favor passive policy making argue that all of the following exist EXCEPT

Under the assumption of rational expectations, government fiscal and monetary policy changes are effective in the short run

Explain the difference between active and passive policy making.

Which of the following can help explain why prices might be "sticky"?

Real business cycles could be a result of

An unexpected decrease in aggregate demand

Your friend recently graduated from college and is actively looking for employment. The economy has completely recovered from the last recession and your friend is taking her time, looking for the "perfect" job. In the meantime, the unemployment she is experiencing is categorized as

We observe the duration of unemployment falling and wage rates rising. It is likely that

-Refer to the above figure. Suppose the natural rate of unemployment is 5 percent. If the government tried to reduce unemployment to 4 percent and keep it there, it must

Which of the following statements has been proposed as a benefit of passive policy making?

Suppose the natural rate of unemployment is 5 percent. If the actual unemployment rate is 4 percent, then the cyclical unemployment rate is

-Refer to the above figure. Government policy that moved the economy from A to B would be accomplished 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

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