Question 1

The business cycle that results from the election campaign of incumbent politicians is called a:

Accepted Answer

A)   monetary business cycle.
B)   time consistent business cycle.
C)   political business cycle.
D)   real business cycle.
E)   historical business cycle. C

Question 2

A recessionary real shock is associated with an outward shift of the short-run Phillips curve and with a leftward shift of the short-run aggregate supply curve.

Accepted Answer

A) True 
 B)False  True

Question 3

According to the theory of rational expectations, expansionary fiscal policy that is anticipated will:

Accepted Answer

A)   cause wage expectations to adjust downward immediately following the lower price level.
B)   increase the real wage rate in the long run.
C)   cause a permanent decline in the natural rate of unemployment.
D)   decrease the real wage rate in the long run.
E)   cause wage expectations to adjust upward immediately following the higher price level. E

Question 4

The long-run aggregate supply curve at potential national income is analogous to:

Accepted Answer

A)   the short-run aggregate demand curve at potential national income.
B)   the long-run Phillips curve at the natural rate of unemployment.
C)   the long-run aggregate demand curve at each price level.
D)   the short-run Phillips curve at the natural rate of unemployment.
E)   the horizontal portion of the Phillips curve.

Question 5

A time-inconsistent monetary policy is one that:

Accepted Answer

A)   is set by congressional decree.
B)   is based on monetary targets established by law.
C)   changes over time as economic conditions change.
D)   follows a zero percent inflation rate.
E)   does not adapt to changing economic conditions.

Question 6

Suppose workers expect the inflation rate to be 3.6 percent and they receive a nominal wage increase of 7.5 percent. If the actual inflation rate turns out to be 2.8 percent, workers will receive a lower real wage than expected.

Accepted Answer

A) True 
 B)False

Question 7

Assume that an unemployed person expects inflation to be 4.5 percent. In reality, inflation turns out to be 2.9 percent. If wage expectations lag behind actual price changes:

Accepted Answer

A)   job offers below the reservation wage will decline, and the unemployment rate will rise.
B)   job offers above the reservation wage will rise, and the unemployment rate will fall.
C)   job offers above the reservation wage will decline, and the unemployment rate will rise.
D)   job offers above the reservation wage will decline, and the unemployment rate will fall.
E)   job offers below the reservation wage will increase, and the unemployment rate will fall.

Question 8

The only difference between adaptive and rational expectations is that adaptive expectation assumes economic agents to be irrational.

Accepted Answer

A) True 
 B)False

Question 9

The Phillips curve describes a negative relationship between unemployment and inflation.

Accepted Answer

A) True 
 B)False

Question 10

If the Fed follows a high-growth monetary policy, but workers believe that the policy is time inconsistent, then low-wage contracts will be in force and unemployment will decline.

Accepted Answer

A) True 
 B)False

Question 11

The long run Phillips curve assumes that every unemployed worker who is looking for a job has a constant reservation wage.

Accepted Answer

A) True 
 B)False

Question 12

Consider a nation experiencing the relationship illustrated by the short run Phillips curve. An increase in both unemployment and inflation in this nation over the next ten years can be explained by:

Accepted Answer

A)   a movement down along the short-run Phillips curve.
B)   a series of outward shifts of the short-run Phillips curve.
C)   a movement up along the short-run Phillips curve
D)   a series of inward shifts of the short-run Phillips curve.
E)   a complete change in the slope of the Phillips curve.

Question 13

In the presence of Regulation Q, when interest rates rise:

Accepted Answer

A)   the transaction demand for money increases in the economy.
B)   people invest in the bond markets.
C)   the economy grows faster.
D)   people withdraw money from banks seeking higher interest rates elsewhere.
E)   U.S. dollar depreciates.

Question 14

According to the long-run Phillips curve, which of the following will be the end result of an expansionary monetary policy when unemployment is at its natural rate?

Accepted Answer

A)   Zero inflation
B)   Deflation
C)   A constant level of potential real GDP
D)   A decrease in unemployment
E)   An increase in unemployment

Question 15

The pursuit of low unemployment rates must necessarily result in time-inconsistent government policies.

Accepted Answer

A) True 
 B)False

Question 16

In order to achieve an unemployment rate below the natural rate of unemployment, the Fed must pursue a policy of low-monetary-growth during a time when the public expects high inflation.

Accepted Answer

A) True 
 B)False

Question 17

According to the rational expectations view:

Accepted Answer

A)   the economy will never deviate from the natural rate of unemployment for any anticipated policy.
B)   the long-run inflation rate is equal to zero.
C)   expected inflation is always less than actual inflation.
D)   people use only past information to form expectations about future inflation rates.
E)   announced money-growth policies are quite effective in reducing unemployment below its natural rate.

Question 18

The adaptive expectations theory suggests that:

Accepted Answer

A)   the price level that people expect in the future is based on the behavior of prices in the past.
B)   the unemployment rate adapts immediately to the inflation rate.
C)   people have perfect foresight and always predict future price levels correctly.
D)   people use all current information available to formulate their inflation expectations.
E)   people react spontaneously to price level changes and do not consider any past or present information.

Question 19

The key feature due to which unexpected inflation decreases the unemployment rate is that:

Accepted Answer

A)   expectations are formed irrationally.
B)   reservation wages of workers are fixed.
C)   workers behave irrationally.
D)   firms are greedy.
E)   government policy is time consistent.

Question 20

Which of the following techniques adopted by the central banks around the world have helped them to achieve credibility?

Accepted Answer

A)   Maintaining a low rate of inflation through tight monetary policies
B)   Publicly announcing a target rate of inflation
C)   Refusing to bail out the commercial banks at times of failure
D)   Supporting all government budget deficits through deficit financing
E)   Reducing unemployment amidst high inflation

Exam 14: Macroeconomic Policy: Tradeoffs, Expectations, Credibility, and Sources of Business Cycles

The business cycle that results from the election campaign of incumbent politicians is called a:

A recessionary real shock is associated with an outward shift of the short-run Phillips curve and with a leftward shift of the short-run aggregate supply curve.

According to the theory of rational expectations, expansionary fiscal policy that is anticipated will:

The long-run aggregate supply curve at potential national income is analogous to:

A time-inconsistent monetary policy is one that:

Suppose workers expect the inflation rate to be 3.6 percent and they receive a nominal wage increase of 7.5 percent. If the actual inflation rate turns out to be 2.8 percent, workers will receive a lower real wage than expected.

Assume that an unemployed person expects inflation to be 4.5 percent. In reality, inflation turns out to be 2.9 percent. If wage expectations lag behind actual price changes:

The only difference between adaptive and rational expectations is that adaptive expectation assumes economic agents to be irrational.

The Phillips curve describes a negative relationship between unemployment and inflation.

If the Fed follows a high-growth monetary policy, but workers believe that the policy is time inconsistent, then low-wage contracts will be in force and unemployment will decline.

The long run Phillips curve assumes that every unemployed worker who is looking for a job has a constant reservation wage.

Consider a nation experiencing the relationship illustrated by the short run Phillips curve. An increase in both unemployment and inflation in this nation over the next ten years can be explained by:

In the presence of Regulation Q, when interest rates rise:

According to the long-run Phillips curve, which of the following will be the end result of an expansionary monetary policy when unemployment is at its natural rate?

The pursuit of low unemployment rates must necessarily result in time-inconsistent government policies.

In order to achieve an unemployment rate below the natural rate of unemployment, the Fed must pursue a policy of low-monetary-growth during a time when the public expects high inflation.

According to the rational expectations view:

The adaptive expectations theory suggests that:

The key feature due to which unexpected inflation decreases the unemployment rate is that:

Which of the following techniques adopted by the central banks around the world have helped them to achieve credibility?