Question 1

Use the figure below to answer the following question(s).
Figure 15-2
 
-According to the modern expectational Phillips curve illustrated in Figure 15-2,unemployment will equal the natural rate of unemployment when

Accepted Answer

A)  inflation turns out to be lower than what people expected.
B)  inflation turns out to be higher than what people expected.
C)  inflation turns out to be equal to what people expected.
D)  all of the above are true. C

Question 2

The rational expectations hypothesis implies that discretionary macropolicy may be

Accepted Answer

A)  relatively effective in both the short run and long run.
B)  relatively effective in the short run but ineffective in the long run.
C)  relatively ineffective both in the short run and long run.
D)  effective in the long run since decision makers will continually make predictable,systematic errors. C

Question 3

Prior to World War II,

Accepted Answer

A)  the growth of real GDP was more stable than has been the case since the war.
B)  the growth of real GDP was less stable than has been the case since the war.
C)  unemployment seldom exceeded 4 percent of the labor force.
D)  double-digit swings in real GDP during a single year were unheard of. B

Question 4

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order?

Accepted Answer

A)  Commodity prices are falling,and the dollar is appreciating.
B)  The unemployment rate is low and the inflation rate is high.
C)  Commodity prices are rising,and the dollar is depreciating.
D)  The index of leading indicators is rising and the unemployment rate is low.

Question 5

The rational expectations hypothesis indicates that people

Accepted Answer

A)  pay little attention to policy when forming their expectations about the future.
B)  expect the next period to be pretty much like the recent past,regardless of policy changes.
C)  will always be able to forecast the future accurately.
D)  change their expectations about the future if policy changes.

Question 6

When persons overestimate inflation (when actual inflation is lower than was expected),actual unemployment will

Accepted Answer

A)  exceed the natural rate of unemployment.
B)  equal the natural rate of unemployment.
C)  fall below the natural rate of unemployment.
D)  decrease if the government is running a budget deficit and increase if a budget surplus is present.

Question 7

The two most severe recessions of the post-World War II era occurred in 1981-1982 and 2008-2009.The policy responses to the two recessions were

Accepted Answer

A)  very similar;expansionary fiscal policy promoted a strong recovery in both cases
B)  very similar,but the recovery was nonetheless weak in both cases
C)  dramatically different;tax rates were cut and monetary policy was restrictive during the earlier recession,while government spending was increased sharply and monetary policy highly expansionary during the more recent recession
D)  dramatically different;tax rates were increased and monetary policy was highly expansionary during the earlier recession,while tax rates were cut and monetary policy was restrictive during the more recent recession

Question 8

The modern view of the Phillips curve suggests that

Accepted Answer

A)  when inflation is less than anticipated,unemployment will rise above the natural rate.
B)  monetary policy will be unable to affect inflation.
C)  when people accurately anticipate inflation,expansionary monetary policy will reduce unemployment.
D)  when inflation exceeds what was anticipated,the natural rate of unemployment will rise.

Question 9

Which of the following is an implication of the modern view of the Phillips curve?

Accepted Answer

A)  Higher rates of inflation always lead to lower rates of unemployment.
B)  Higher rates of inflation always lead to higher rates of unemployment.
C)  If actual inflation exceeds the inflation rate anticipated by decision makers,unemployment will temporarily fall below the natural rate.
D)  If actual inflation exceeds the inflation rate anticipated by decision makers,unemployment will temporarily rise above the natural rate.

Question 10

The index of leading indicators is

Accepted Answer

A)  an alphabetical listing of the most popular indicators in the economy for a given month.
B)  a composite index of indicators that provides information on the future direction of the economy.
C)  a measure of the level of aggregate output.
D)  a composite index designed to measure inflation.

Question 11

The effectiveness of monetary policy as a stabilization tool is limited by

Accepted Answer

A)  activist economists,who exert pressure on politicians.
B)  the inability to forecast the future and time policy changes in a stabilizing manner.
C)  Congressional attempts to offset changes in monetary policy with modifications in fiscal policy.
D)  the inability of the Federal Reserve to alter the money supply.

Question 12

The proponents of rational expectations believe that

Accepted Answer

A)  there will be a substantial time lag before people anticipate the eventual effects of a shift to a more expansionary macro-policy.
B)  macro-policies that stimulate demand and place upward pressure on the general level of prices will temporarily increase output and employment.
C)  the inflationary side effects of expansionary policies will be anticipated quickly,and therefore,even their short-run effects on real output and employment will be minimal.
D)  discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.

Question 13

An unanticipated shift to a more expansionary macro-policy that leads to a higher-than-expected rate of inflation will

Accepted Answer

A)  place downward pressure on prices.
B)  temporarily reduce unemployment.
C)  temporarily reduce output.
D)  temporarily reduce the natural rate of unemployment.

Question 14

Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent.If decision makers accurately anticipate the impact of these policy changes on prices,

Accepted Answer

A)  unemployment will rise.
B)  unemployment will fall.
C)  there will be no effect on unemployment.
D)  unemployment will fall if the change in monetary policy dominates,but unemployment will rise if the change in fiscal policy dominates.

Question 15

The interval between the recognition of a need for a policy change and when the policy change is instituted is called the

Accepted Answer

A)  recognition lag.
B)  impact lag.
C)  policy lag.
D)  administrative lag.

Question 16

According to the rational expectations theory,expansionary monetary policy is fully effective only if

Accepted Answer

A)  the policy is anticipated by workers and firms.
B)  aggregate supply shifts to the left.
C)  the economy is operating at or above its potential output level.
D)  policy makers follow through on their previously announced plans.
E)  the effects of the policy are unexpected.

Question 17

During the 1960s,most economists believed that expansionary macro-policy

Accepted Answer

A)  that caused inflation would permanently reduce unemployment.
B)  that caused inflation would permanently increase unemployment.
C)  could not be utilized to reduce unemployment.
D)  did not affect inflation.

Question 18

If indicators like weak demand and falling commodity prices caused concern about deflation (falling prices),what could the Fed do to head off the deflationary threat?

Accepted Answer

A)  increase the reserve requirements imposed on banks
B)  buy bonds in order to expand the money supply
C)  increase the discount rate
D)  increase the national debt

Question 19

Since the 1960s,macroeconomists have become more aware

Accepted Answer

A)  that increases in government expenditures are more effective than tax reductions as a source of economic stimulus.
B)  that persistent inflation will reduce the unemployment rate.
C)  of both the potential and the limitations of fiscal and monetary policy as stabilization tools.
D)  of the fact that fiscal policy is more potent than monetary policy.

Question 20

Use the figure below to answer the following question(s).
Figure 15-1
 
-In Figure 15-1,AD₁ and SRAS₁ indicate initial conditions in the goods and services market.In the short run,which of the following will most likely result from a shift to a more expansionary monetary policy under the rational expectations hypothesis?

Accepted Answer

A)  price level P₁ and output Y₁
B)  price level P₂ and output Y₂
C)  price level P₃ and output Y₁
D)  price level P₁ and output Y₂

Exam 15: Stabilization Policy, output, and Employment

Use the figure below to answer the following question(s) . Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2,unemployment will equal the natural rate of unemployment when