Question 1

Which one of the following reduces the likelihood that real-world fiscal policy will promote economic stability?

Accepted Answer

A)   Policy planners do not know whether a tax cut is expansionary or restrictive.
B)   Policy makers need to know what economic conditions will be like 6 to 18 months into the future, and this is extremely difficult to forecast accurately.
C)   Policy planners are reluctant to implement expansionary fiscal policy even during a serious recession.
D)   Public choice theory suggests that elected political officials will generally favor restrictive fiscal policy.E) B) and C)
F) C) and D)

Question 2

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.E) B) and C)
F) A) and B)

Question 3

The rational expectations hypothesis implies that discretionary macropolicy may be

Accepted Answer

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

Question 4

During the 1900-1950 period,

Accepted Answer

A)   the growth of real GDP was more stable than has been the case since 1950.
B)   unemployment seldom exceeded 4 percent of the labor force.
C)   double-digit swings in real GDP during a single year were not uncommon.
D)   the money supply was increased at a constant annual rate of between 4 percent and 6 percent throughout the period.E) C) and D)
F) B) and C)

Question 5

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.E) B) and D)
F) A) and B)

Question 6

Most economists believe that

Accepted Answer

A)   a monetary policy that achieves price stability will reduce uncertainty and provide the framework for strong economic growth.
B)   demand stimulus policies will reduce the long-term average rate of unemployment.
C)   expansionary monetary policy, if persistently followed, will reduce nominal interest rates.
D)   inflation is primarily the result of large budget deficits and other elements of expansionary fiscal policy.E) B) and C)
F) All of the above

Question 7

The proponents of adaptive expectations believe that

Accepted Answer

A)   there will be a substantial time lag before people anticipate the 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)   discretionary changes in macro-policy can be made in a manner that will reduce the economic ups and downs of a market economy.
D)   all of the above are true.E) All of the above
F) A) and D)

Question 8

The modern view of the Phillips curve indicates that in the long run there

Accepted Answer

A)   is no trade-off between inflation and unemployment.
B)   is a definite trade-off between unemployment and inflation.
C)   will be a trade-off if the rational expectations hypothesis is correct.
D)   may be a long-run trade-off between unemployment and inflation, but there is no such trade-off in the short run.E) A) and B)
F) B) and C)

Question 9

Activists and nonactivists both believe that

Accepted Answer

A)   the self-corrective mechanism of a market economy works quite well.
B)   macro-policy should seek to minimize economic fluctuations, keep the inflation rate low, and establish an environment consistent with strong economic growth.
C)   discretionary monetary and fiscal policy can be used successfully to speed the adjustment process and reduce the swings of the business cycle.
D)   policies that stimulate aggregate demand can reduce the long-term rate of unemployment.E) A) and D)
F) A) and C)

Question 10

According to the theory of rational expectations, the government can influence output

Accepted Answer

A)   with appropriate fiscal and monetary policy.
B)   in the short run, but not in the long run.
C)   without affecting the price level.
D)   only by making unexpected changes that impact aggregate demand.E) A) and B)
F) B) and C)

Question 11

Under rational expectations, which of the following will likely be an initial effect of an unanticipated shift to a more restrictive macroeconomic policy?

Accepted Answer

A)   a short-run decrease in output and a long-run decrease in inflation
B)   no change in output even in the short run, only a permanent decrease in inflation
C)   a short-run decrease in inflation and a long-run decrease in output
D)   lower inflation and lower output in the long runE) None of the above
F) A) and D)

Question 12

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.E) B) and C)
F) None of the above

Question 13

Incorporation of expectations into economic decision making and the economic experience of recent decades indicate that in the long run

Accepted Answer

A)   inflation relates directly to unemployment.
B)   inflation is inversely related to unemployment.
C)   there is no trade-off between inflation and unemployment.
D)   high unemployment is a primary cause of inflation.E) B) and C)
F) A) and C)

Question 14

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.E) A) and D)
F) B) and D)

Question 15

Which one of the following accurately states the view of activists who favor discretionary stabilization policy?

Accepted Answer

A)   Neither monetary nor fiscal policy will exert an impact on the real level of economic activity.
B)   Since we have only limited ability to forecast the future direction of the economy, the best policy is to do nothing.
C)   Our ability to forecast the future direction of economic activity is quite good, and therefore, discretionary macroeconomic policy is now capable of eliminating fluctuations in the business cycle if policy makers would follow the advice of leading economists.
D)   The index of leading indicators and other forecasting tools provide policy makers with valuable information that permits them to institute stabilizing changes in macroeconomic policy.E) None of the above
F) A) and D)

Question 16

According to the adaptive expectations hypothesis, people will

Accepted Answer

A)   anticipate that what has happened in the immediate past will continue.
B)   systematically overestimate inflation when inflation is increasing.
C)   use all available information, including information on the expected impact of economic policy, when they formulate expectations about economic events.
D)   systematically underestimate inflation when inflation is declining.E) C) and D)
F) A) and C)

Question 17

The variables in the index of leading indicators are included in the index because

Accepted Answer

A)   they are good indicators of the current rate of inflation.
B)   they generally lag behind turns in the business cycle.
C)   of their tendency to lead (or predict)  turns in the business cycle.
D)   they are good indicators of the current state of the economy.E) B) and C)
F) None of the above

Question 18

Which of the following is a widely-used and closely-watched forecasting tool concerning the future direction of the macro-economy?

Accepted Answer

A)   the excess reserves of commercial banks
B)   the Phillips curve
C)   the index of leading indicators
D)   the current budget deficit or surplus
E)   the velocity of the M1 money supplyF) A) and B)
G) B) and E)

Question 19

Between 1983 and 2007, the U.S. economy was in recession approximately

Accepted Answer

A)   6 percent of the time.
B)   20 percent of the time
C)   30 percent of the time
D)   This is a trick question; the U.S. economy has not experienced a recession during this period.E) None of the above
F) B) and D)

Question 20

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 recessionE) A) and B)
F) B) and C)

Exam 15: Stabilization Policy, Output, and Employment

The variables in the index of leading indicators are included in the index because

Correct AnswerverifiedShow Answer

Which of the following is a widely-used and closely-watched forecasting tool concerning the future direction of the macro-economy?

Correct AnswerverifiedShow Answer

Activists and nonactivists both believe that

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Most economists believe that

Correct AnswerverifiedShow Answer

According to the adaptive expectations hypothesis, people will

Correct AnswerverifiedShow Answer

The modern view of the Phillips curve suggests that

Correct AnswerverifiedShow Answer

Under rational expectations, which of the following will likely be an initial effect of an unanticipated shift to a more restrictive macroeconomic policy?

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

The proponents of adaptive expectations believe that

Correct AnswerverifiedShow Answer

Incorporation of expectations into economic decision making and the economic experience of recent decades indicate that in the long run

Correct AnswerverifiedShow Answer

During the 1900-1950 period,

Correct AnswerverifiedShow Answer

According to the theory of rational expectations, the government can influence output

Correct AnswerverifiedShow Answer

The rational expectations hypothesis implies that discretionary macropolicy may be

Correct AnswerverifiedShow Answer

Prior to World War II,

Correct AnswerverifiedShow Answer

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

Correct AnswerverifiedShow Answer

Between 1983 and 2007, the U.S. economy was in recession approximately

Correct AnswerverifiedShow Answer

The modern view of the Phillips curve indicates that in the long run there

Correct AnswerverifiedShow Answer

Which one of the following reduces the likelihood that real-world fiscal policy will promote economic stability?

Correct AnswerverifiedShow Answer

Which one of the following accurately states the view of activists who favor discretionary stabilization policy?

Correct AnswerverifiedShow Answer

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