Question 1

The natural rate of unemployment is

Accepted Answer

A)  zero. 
B)  the unemployment rate when there is no structural unemployment. 
C)  the unemployment rate when there is no structural or cyclical unemployment. 
D)  the unemployment rate that exists in long-run equilibrium, after adjustments to all changes have occurred. 
A)  zero. 
B)  the unemployment rate when there is no structural unemployment. 
C)  the unemployment rate when there is no structural or cyclical unemployment. 
D)  the unemployment rate that exists in long-run equilibrium, after adjustments to all changes have occurred.

Question 2

Which of the following factors strengthens the case for policy activism?

Accepted Answer

A)  sticky prices 
B)  flexible wages 
C)  flexible prices 
D)  lack of real-business-cycles 
A)  sticky prices 
B)  flexible wages 
C)  flexible prices 
D)  lack of real-business-cycles

Question 3

Which of the following is NOT a possible cause of structural unemployment?

Accepted Answer

A)  individuals take the time to search for the best job opportunities 
B)  a mismatch of worker training and skills with requirements of employers 
C)  government-imposed minimum wage laws 
D)  union activity that sets wages above the equilibrium level 
A)  individuals take the time to search for the best job opportunities 
B)  a mismatch of worker training and skills with requirements of employers 
C)  government-imposed minimum wage laws 
D)  union activity that sets wages above the equilibrium level

Question 4

According to economists who promote sticky-price theories,

Accepted Answer

A)  only fiscal policy is an effective stabilization policy. 
B)  only monetary policy is an effective stabilization policy. 
C)  both fiscal and monetary policy can be effective stabilization policies. 
D)  neither fiscal nor monetary policy is an effective stabilization policy. 
A)  only fiscal policy is an effective stabilization policy. 
B)  only monetary policy is an effective stabilization policy. 
C)  both fiscal and monetary policy can be effective stabilization policies. 
D)  neither fiscal nor monetary policy is an effective stabilization policy.

Question 5

-Refer to the above figure. Suppose the economy is at point B and the central bank adopts expansionary monetary policy. In the short run, this will result in

Accepted Answer

A)  the economy moving towards point A. 
B)  the economy staying at point B. 
C)  the economy moving towards point C. 
D)  an outcome that cannot be predicted, as not enough information is given. 
A)  the economy moving towards point A. 
B)  the economy staying at point B. 
C)  the economy moving towards point C. 
D)  an outcome that cannot be predicted, as not enough information is given.

Question 6

When a person bases her future expectations for the economy on all available current data and her own judgment about future policy effects, this is known as

Accepted Answer

A)  the policy irrelevance proposition. 
B)  rational expectations. 
C)  irrational expectations. 
D)  the new classical theory. 
A)  the policy irrelevance proposition. 
B)  rational expectations. 
C)  irrational expectations. 
D)  the new classical theory.

Question 7

Costs that deter firms from changing prices in response to demand changes are known as

Accepted Answer

A)  sticky costs. 
B)  menu costs. 
C)  policy costs. 
D)  production costs. 
A)  sticky costs. 
B)  menu costs. 
C)  policy costs. 
D)  production costs.

Question 8

The inflation rate has been constant for several years at 4 percent, and the unemployment rate has been stable at 6 percent over the same time period. Changes in government policy that cause the inflation rate to rise to 6 percent will

Accepted Answer

A)  have no effect on the unemployment rate. 
B)  cause the unemployment rate to fall in the short run. 
C)  cause the unemployment rate to rise to 9 percent in the short run. 
D)  cause the unemployment rate to rise in the short run, but we cannot tell by how much. 
A)  have no effect on the unemployment rate. 
B)  cause the unemployment rate to fall in the short run. 
C)  cause the unemployment rate to rise to 9 percent in the short run. 
D)  cause the unemployment rate to rise in the short run, but we cannot tell by how much.

Question 9

During a recession, the overall unemployment rate

Accepted Answer

A)  falls rapidly. 
B)  exceeds the natural rate of unemployment. 
C)  falls below the natural rate of unemployment. 
D)  equals the inflation rate. 
A)  falls rapidly. 
B)  exceeds the natural rate of unemployment. 
C)  falls below the natural rate of unemployment. 
D)  equals the inflation rate.

Question 10

Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is

Accepted Answer

A)  an increased price level in the short run, but no effect on price level in the long run. 
B)  decreased real Gross Domestic Product (GDP) in the short run, but increased real Gross Domestic Product (GDP) in the long run. 
C)  increased real Gross Domestic Product (GDP) and increased employment in the long run. 
D)  an increased price level, but no change in real Gross Domestic Product (GDP) in the long run. 
A)  an increased price level in the short run, but no effect on price level in the long run. 
B)  decreased real Gross Domestic Product (GDP) in the short run, but increased real Gross Domestic Product (GDP) in the long run. 
C)  increased real Gross Domestic Product (GDP) and increased employment in the long run. 
D)  an increased price level, but no change in real Gross Domestic Product (GDP) in the long run.

Question 11

Costs that tend to deter firms from changing their prices in response to changes in the market equilibrium price are referred to as

Accepted Answer

A)  large menu costs. 
B)  small menu costs. 
C)  real menu costs. 
D)  burden costs. 
A)  large menu costs. 
B)  small menu costs. 
C)  real menu costs. 
D)  burden costs.

Question 12

Stagflation means a

Accepted Answer

A)  high rate of inflation coupled with a high rate of unemployment. 
B)  high rate of inflation coupled with a very low rate of unemployment. 
C)  low rate of inflation coupled with a very high rate of unemployment. 
D)  low rate of inflation coupled with a rate of unemployment below the natural rate. 
A)  high rate of inflation coupled with a high rate of unemployment. 
B)  high rate of inflation coupled with a very low rate of unemployment. 
C)  low rate of inflation coupled with a very high rate of unemployment. 
D)  low rate of inflation coupled with a rate of unemployment below the natural rate.

Question 13

If a group of economists believes the following points are true, which is likely to be their policy making stance? ∙ Aggregate demand shocks have no long run effect on real Gross Domestic Product (GDP) or unemployment.
∙ Pure competition is widespread throughout the economy.
∙ Real wages are flexible.
∙ The Phillips Curve trade-off does not exist in the long run.

Accepted Answer

A)  They will support active policy making. 
B)  They will support passive policy making. 
C)  They will support discretionary policy making. 
D)  They will argue that any attempt at economic policy making is futile. 
A)  They will support active policy making. 
B)  They will support passive policy making. 
C)  They will support discretionary policy making. 
D)  They will argue that any attempt at economic policy making is futile.

Question 14

All of the following would increase the natural rate of unemployment EXCEPT

Accepted Answer

A)  union activity restricts the mobility of labor. 
B)  government licensing of teachers restricts employment. 
C)  a mismatch of skills and jobs. 
D)  a downturn in the economy. 
A)  union activity restricts the mobility of labor. 
B)  government licensing of teachers restricts employment. 
C)  a mismatch of skills and jobs. 
D)  a downturn in the economy.

Question 15

-In the above figure, if we start at   and   , and the money supply increases unexpectedly, what would be the long-run equilibrium?

Accepted Answer

A)    
B)    
C)    
D)    
A)    
B)    
C)    
D)

Question 16

Structural unemployment is likely to be affected by

Accepted Answer

A)  recessions and expansions. 
B)  the reservation wage curves of people. 
C)  minimum wage laws and other "rigidities" in the economy. 
D)  the amount of the money supply. 
A)  recessions and expansions. 
B)  the reservation wage curves of people. 
C)  minimum wage laws and other "rigidities" in the economy. 
D)  the amount of the money supply.

Question 17

New Keynesian economists generally argue that

Accepted Answer

A)  there is an exploitable tradeoff between unemployment and inflation. 
B)  changes in aggregate demand will have relatively greater effects on real GDP when firms change prices less frequently. 
C)  activist policy can be used to reduce the fluctuations in real GDP. 
D)  all of the above 
A)  there is an exploitable tradeoff between unemployment and inflation. 
B)  changes in aggregate demand will have relatively greater effects on real GDP when firms change prices less frequently. 
C)  activist policy can be used to reduce the fluctuations in real GDP. 
D)  all of the above

Question 18

During the 1970s, the shocks to the United States' economy resulted in

Accepted Answer

A)  an increase in the unemployment rate, but a decrease in the inflation rate. 
B)  a decrease in the unemployment rate, but an increase in the inflation rate. 
C)  an increase in both the unemployment rate and the inflation rate. 
D)  a decrease in both the unemployment rate and the inflation rate. 
A)  an increase in the unemployment rate, but a decrease in the inflation rate. 
B)  a decrease in the unemployment rate, but an increase in the inflation rate. 
C)  an increase in both the unemployment rate and the inflation rate. 
D)  a decrease in both the unemployment rate and the inflation rate.

Question 19

One key assumption lying behind the policy irrelevance proposition is that

Accepted Answer

A)  wages are "sticky" downward. 
B)  prices are "sticky" upward. 
C)  the rational expectations hypothesis is correct. 
D)  markets are not purely competitive. 
A)  wages are "sticky" downward. 
B)  prices are "sticky" upward. 
C)  the rational expectations hypothesis is correct. 
D)  markets are not purely competitive.

Question 20

-Use the above figure. Assuming that policy actions are unanticipated, if the economy is at point A and the policy makers want to get to point B, they could

Accepted Answer

A)  increase the money supply. 
B)  decrease taxation. 
C)  decrease the money supply. 
D)  increase government spending. 
A)  increase the money supply. 
B)  decrease taxation. 
C)  decrease the money supply. 
D)  increase government spending.

Exam 17: Stabilization in an Integrated World Economy

The natural rate of unemployment is

Which of the following factors strengthens the case for policy activism?

Which of the following is NOT a possible cause of structural unemployment?

According to economists who promote sticky-price theories,

-Refer to the above figure. Suppose the economy is at point B and the central bank adopts expansionary monetary policy. In the short run, this will result in

When a person bases her future expectations for the economy on all available current data and her own judgment about future policy effects, this is known as

Costs that deter firms from changing prices in response to demand changes are known as

The inflation rate has been constant for several years at 4 percent, and the unemployment rate has been stable at 6 percent over the same time period. Changes in government policy that cause the inflation rate to rise to 6 percent will

During a recession, the overall unemployment rate

Assume the Fed initiates an expansionary monetary policy that is correctly anticipated by economic agents in the economy. According to the rational expectation hypothesis, the result is

Costs that tend to deter firms from changing their prices in response to changes in the market equilibrium price are referred to as

Stagflation means a

All of the following would increase the natural rate of unemployment EXCEPT

-In the above figure, if we start at and , and the money supply increases unexpectedly, what would be the long-run equilibrium?

Structural unemployment is likely to be affected by

New Keynesian economists generally argue that

During the 1970s, the shocks to the United States' economy resulted in

One key assumption lying behind the policy irrelevance proposition is that

-Use the above figure. Assuming that policy actions are unanticipated, if the economy is at point A and the policy makers want to get to point B, they could

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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