Question 1

A fiscal policy that changes over time as economic conditions change is considered to be time inconsistent.

Accepted Answer

A) True 
 B)False

Question 2

Critics of the Federal Reserve maintain that, to correct the credibility problem of monetary policy, the Fed should:

Accepted Answer

A)  tighten monetary policy. 
B)  be required to maintain a growth rate of the money supply that is fixed by law. 
C)  give more power to the Federal Open Market Committee. 
D)  ignore public opinion and establish more discretionary power over monetary policy. 
E)  merge with the U.S. Treasury and be dissolved as an independent agency.

Question 3

Following a decline in the inflation rate, once long-term wage contracts are renegotiated and all prices in the economy adjust to their new equilibrium:

Accepted Answer

A)  the economy will move up the short-run Phillips curve. 
B)  the short-run Phillips curve will shift to the left. 
C)  the economy will return to the vertical Phillips curve. 
D)  the aggregate supply curve will shift to the right. 
E)  the aggregate demand curve will shift to the right.

Question 4

Irrespective of whether the inflation rate is high or low, if the inflation rate is above the expected level, the unemployment rate in the economy will remain stable.

Accepted Answer

A) True 
 B)False

Question 5

Suppose that the economy has witnessed an 8 percent increase in its money supply over the last few years and the Fed now announces a plan to increase the money supply by 4 percent per year. What will be the public response, assuming that the Fed has a reputation for always implementing its announced plans?

Accepted Answer

A)  High-wage contracts will prevail, and the economy will experience lower inflation at the cost of higher unemployment. 
B)  High-wage contracts will prevail, and the economy will experience lower unemployment at the cost of higher inflation. 
C)  Low-wage contracts will emerge, and the economy will experience lower inflation with no change in the unemployment rate. 
D)  Low-wage contracts will emerge and the economy will experience higher unemployment with no change in the inflation rate. 
E)  Low-wage contracts will emerge, and the economy will experience lower inflation at the cost of higher unemployment.

Question 6

The change in the money supply in an economy is measured as:

Accepted Answer

A)  the difference between government deficit and government borrowing. 
B)  the sum of a change in high-powered money and the change in tax revenues. 
C)  the difference between government borrowing and government spending. 
D)  the ratio of the change in excess reserves to the deposit expansion multiplier. 
E)  the change in the government budget deficit.

Question 7

The reservation wage is the minimum wage rate that an unemployed worker must receive before employment is accepted.

Accepted Answer

A) True 
 B)False

Question 8

During the 1970s, real shocks to the U.S. economy caused:

Accepted Answer

A)  an increase in both aggregate demand and aggregate supply. 
B)  an increase in both the price level and the unemployment rate. 
C)  a leftward shift of the Phillips curve. 
D)  a decline in inflation but higher unemployment. 
E)  a decline in both the price level and the unemployment rate.

Question 9

Other things equal, the higher the fiscal deficit, the higher the required increase in base money.

Accepted Answer

A) True 
 B)False

Question 10

The long-run Phillips curve indicates that the consequences of trying to reduce unemployment below its natural rate would be:

Accepted Answer

A)  an ever-rising rate of unemployment. 
B)  an inflation rate equal to zero. 
C)  a very high uncontrollable rate of inflation. 
D)  a very low rate of inflation. 
E)  a natural rate of unemployment equal to zero.

Question 11

If the government fiscal deficit equals $240 million and government borrowing equals $120 million, what is the change in the money supply in the economy?

Accepted Answer

A)  $120 million 
B)  $240 million 
C)  $360 million 
D)  $480 million 
E)  $600 million

Question 12

The Phillips curve based on the unemployment and inflation rates in the U.S. between 1961 and 1969 was:

Accepted Answer

A)  upward sloping. 
B)  downward sloping. 
C)  horizontal. 
D)  vertical. 
E)  upward sloping but kinked.

Question 13

The figure given below represents the short run and long run Phillips curve.
Figure 14.4
 
-Refer to Figure 14.4. Suppose the economy is located at point A, but the government increases spending because it believes that 6 percent unemployment is unacceptably high. If the adaptive expectations hypothesis holds, in the short run, the economy will move to:

Accepted Answer

A)  point B. 
B)  point C. 
C)  point D. 
D)  point E. 
E)  point F.

Question 14

To some economists, the "great moderation" means:

Accepted Answer

A)  small change in real GDP. 
B)  low inflation rate. 
C)  low unemployment rate. 
D)  low output growth variability. 
E)  low money supply growth.

Question 15

Which of the following will be a short run impact of a pre-election expansionary fiscal policy, public expectations remaining constant?

Accepted Answer

A)  An increase in unemployment 
B)  A decline in real GDP 
C)  An increase in real GDP 
D)  A fall in the rate of inflation 
E)  An economic recession

Question 16

Wage contracts force businesses to adjust wages rather than employment in response to an unexpected change in aggregate demand.

Accepted Answer

A) True 
 B)False

Question 17

A sudden technological breakthrough in an economy would:

Accepted Answer

A)  have no impact on real GDP. 
B)  cause aggregate demand to fall. 
C)  lower the natural rate of unemployment. 
D)  increase the price level. 
E)  cause aggregate supply to rise.

Question 18

Which of the following is most likely to have contributed to better inventory management?

Accepted Answer

A)  Stability in the market demand 
B)  Stability in the average price level 
C)  Perfect forecasting by the firms 
D)  Reduced variability in the input costs 
E)  Improvement in information technology and communication

Question 19

If nominal wages are contractually fixed and cannot change in the short run, then an unexpected decline in the inflation rate will reduce business revenues and lower the unemployment rate.

Accepted Answer

A) True 
 B)False

Question 20

If the government fiscal deficit equals $78 billion, government borrowing equals $38 million, and tax revenue equals $92 billion, what is the value of the change in the money supply?

Accepted Answer

A)  $40 billion 
B)  $132 billion 
C)  $18 billion 
D)  $208 billion 
E)  $78 billion

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

A fiscal policy that changes over time as economic conditions change is considered to be time inconsistent.

Critics of the Federal Reserve maintain that, to correct the credibility problem of monetary policy, the Fed should:

Following a decline in the inflation rate, once long-term wage contracts are renegotiated and all prices in the economy adjust to their new equilibrium:

Irrespective of whether the inflation rate is high or low, if the inflation rate is above the expected level, the unemployment rate in the economy will remain stable.

The change in the money supply in an economy is measured as:

The reservation wage is the minimum wage rate that an unemployed worker must receive before employment is accepted.

During the 1970s, real shocks to the U.S. economy caused:

Other things equal, the higher the fiscal deficit, the higher the required increase in base money.

The long-run Phillips curve indicates that the consequences of trying to reduce unemployment below its natural rate would be:

If the government fiscal deficit equals $240 million and government borrowing equals $120 million, what is the change in the money supply in the economy?

The Phillips curve based on the unemployment and inflation rates in the U.S. between 1961 and 1969 was:

To some economists, the "great moderation" means:

Which of the following will be a short run impact of a pre-election expansionary fiscal policy, public expectations remaining constant?

Wage contracts force businesses to adjust wages rather than employment in response to an unexpected change in aggregate demand.

A sudden technological breakthrough in an economy would:

Which of the following is most likely to have contributed to better inventory management?

If nominal wages are contractually fixed and cannot change in the short run, then an unexpected decline in the inflation rate will reduce business revenues and lower the unemployment rate.

If the government fiscal deficit equals $78 billion, government borrowing equals $38 million, and tax revenue equals $92 billion, what is the value of the change in the money supply?