Question 1

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.

Question 2

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 3

Assume that a low-wage contract is in force in the society, and the central bank follows a low-money-growth policy. Which of the following will be observed?

Accepted Answer

A)  The actual inflation rate will match the low rate that people had expected. 
B)  The actual inflation rate will be higher than the natural rate. 
C)  The actual inflation rate will be higher than the low rate that people had expected. 
D)  The actual inflation rate will be lower than the high rate that people had expected. 
E)  The unemployment rate will be lower than the natural rate.

Question 4

Which of the following factors have not contributed to the "Great Moderation" of real GDP in the U.S. over the past 20 years?

Accepted Answer

A)  Better inventory management 
B)  Better macroeconomic policy 
C)  Greater availability of financial products for lending and borrowing 
D)  Imposition of a ceiling on interest rates 
E)  Smaller real shocks

Question 5

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 6

Suppose workers do not believe the Fed will implement its announced monetary policy plans and the Fed wants to achieve low unemployment. In this situation the Fed would be best off:

Accepted Answer

A)  implementing a policy of high money growth. 
B)  announcing and implementing a policy of low money growth. 
C)  announcing a policy of high money growth and implementing a policy of low money growth. 
D)  following a policy that forces the actual inflation rate to coincide with the expected inflation rate. 
E)  promoting a low rate of inflation and adjusting actual policy plans to economic conditions.

Question 7

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 8

A recessionary real shock will:

Accepted Answer

A)  shift the aggregate demand curve to the left and reduce real GDP. 
B)  shift the aggregate demand curve to the right and increase real GDP. 
C)  shift the aggregate supply curve to the left and increase real GDP. 
D)  shift the aggregate supply curve to the left and reduce real GDP. 
E)  shift the aggregate supply curve to the right and increase real GDP.

Question 9

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 10

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 downward movement along the short-run Phillips curve. 
B)  a series of outward shifts of the short-run Phillips curve. 
C)  an upward movement 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 11

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 12

Suppose that an increase in aggregate demand causes an unplanned depletion in business inventories. Which of the following situations will result from this?

Accepted Answer

A)  The economy moves up the short-run Phillips curve. 
B)  The short-run Phillips curve shifts to the right. 
C)  The short-run Phillips curve shifts to the left. 
D)  The aggregate supply curve shifts to the left. 
E)  The economy moves down the short-run Phillips curve.

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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 15

Suppose the inflation rate has been 6 percent over the past four years. If the Federal Reserve announces an increase in the growth of the money supply, adaptive expectations would predict an inflation rate of 6 percent.

Accepted Answer

A) True 
 B)False

Question 16

Assume that taxes are constant. If the government borrows $17 billion in new funds and has a budget deficit of $35 billion, then the central bank has to:

Accepted Answer

A)  reduce the money supply by $52 billion. 
B)  reduce the money supply by $35 billion. 
C)  increase the money supply by $17 billion. 
D)  increase the money supply by $35 billion. 
E)  increase the money supply by $18 billion.

Question 17

Suppose that the Fed announces a low-money-growth policy to control inflation and workers sign low-wage contracts as a result. If instead, the Fed had implemented a high-money-growth policy, which of the following would not occur?

Accepted Answer

A)  The unemployment rate would increase. 
B)  The Fed's stated policy would be time inconsistent. 
C)  The unemployment rate would be less than the natural rate. 
D)  The Fed would not achieve credibility through its actions. 
E)  The rate of inflation would be higher than expected.

Question 18

In the presence of Regulation Q, when interest rates would rise, _____.

Accepted Answer

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

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

Suppose that a labor union negotiates an increase in wages of 4 percent for the coming year because annual inflation for the past five years has been 4 percent. The expectations formed by the union are:

Accepted Answer

A)  pessimistic expectations. 
B)  deductive expectations. 
C)  rational expectations. 
D)  adaptive expectations. 
E)  optimistic expectations.

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

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

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:

Assume that a low-wage contract is in force in the society, and the central bank follows a low-money-growth policy. Which of the following will be observed?

Which of the following factors have not contributed to the "Great Moderation" of real GDP in the U.S. over the past 20 years?

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.

Suppose workers do not believe the Fed will implement its announced monetary policy plans and the Fed wants to achieve low unemployment. In this situation the Fed would be best off:

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

A recessionary real shock will:

A sudden technological breakthrough in an economy would:

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:

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?

Suppose that an increase in aggregate demand causes an unplanned depletion in business inventories. Which of the following situations will result from this?

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

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

Suppose the inflation rate has been 6 percent over the past four years. If the Federal Reserve announces an increase in the growth of the money supply, adaptive expectations would predict an inflation rate of 6 percent.

Assume that taxes are constant. If the government borrows $17 billion in new funds and has a budget deficit of $35 billion, then the central bank has to:

Suppose that the Fed announces a low-money-growth policy to control inflation and workers sign low-wage contracts as a result. If instead, the Fed had implemented a high-money-growth policy, which of the following would not occur?

In the presence of Regulation Q, when interest rates would rise, _____.

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

Suppose that a labor union negotiates an increase in wages of 4 percent for the coming year because annual inflation for the past five years has been 4 percent. The expectations formed by the union are: