CH-16 Macro Policy Debate: Active or Passive? – Macroeconomics: A Contemporary Introduction : Exam Guide

Chapter 16—Macro Policy Debate: Active or Passive? 1. Advocates of the active approach believe that discretionary government policy can restore economic stability and improve economic performance. A. True B. False 2. Advocates of the passive approach to government economic policy believe that the government should lower tax rates when there is a recessionary gap. A. True B. False 3. Advocates of the passive approach to government economic policy believe that the self-correcting forces of the economy can be counted on to effectively correct imbalances in the economy. A. True B. False 4. In the 1992 presidential campaign, candidate Al Gore advocated a more active role for government in economic policy than did candidate George W. Bush A. True B. False 5. In the event of a recession, which of the following is the most likely policy stance of those who advocate a passive approach to economic policy? A. cut taxes B. increase government spending C. reduce interest rates D. increase the money supply E. do nothing 6. Both those who favor an active approach as well as those who favor a passive approach to policy believe that the economy can suffer from extreme and long-lasting swings in real GDP. A. True B. False 7. An economy that self-corrects a recessionary gap will experience falling nominal wages, rising real wages and falling output. A. True B. False 8. An economy that self-corrects a recessionary gap will experience falling nominal wages, falling prices and increasing employment. A. True B. False 9. If self-correction causes prices to fall less than nominal wages, both output and real wages will decrease. A. True B. False 10. A policy to increase aggregate demand to cure a recessionary gap may succeed; however, inflation is a likely result. A. True B. False 11. Which of the following is not consistent with a self-correcting economy? A. Market forces work relatively well in pushing the economy to potential GDP. B. Prices and wages are flexible. C. A recessionary gap is corrected through falling wages and prices. D. The short-run aggregate supply tends to shift until it intersects aggregate demand at potential GDP. E. An active approach to a recession or depression. 12. When self-correcting forces cure a recessionary gap, A. money wages and real wages both increase B. money wages remain constant while real wages fall C. money wages and real wages both decrease D. money wages fall while real wages increase E. real wages must increase regardless of what happens to money wages 13. If a recessionary gap is cured by increasing aggregate demand, A. both c and e are correct B. both d and e are correct C. real wages fall because prices rise D. prices rise causing real wages to increase E. money wages decrease as prices decrease 14. The reason why self-correction works to close a recessionary gap is because A. a labor shortage causes money wages to increase B. a labor surplus causes money wages to increase C. a labor shortage causes money wages to fall D. a labor surplus causes money wages to fall E. falling money wages shift the short-run aggregate supply curve to the left 15. If we observe an economy adjusting to potential GDP as prices fall and real output increases, A. it was experiencing an expansionary gap B. the correction involves a shift of the AD curve C. it was experiencing a recessionary gap D. self-correction is not the process that is occurring E. there are widespread labor shortages 16. An economy in which actual GDP is $10 billion below potential GDP A. is experiencing an expansionary gap B. will have the short run aggregate supply shifting outward, if the passive approach is correct C. will typically have the short-run aggregate supply curve shifting to the left D. will likely have falling prices but rising wages E. will experience stagflation (i.e., rising prices and falling output) 17. According to the active policy position, eliminating a recessionary gap A. can only be achieved by decreasing wages B. requires a public policy of wage and price controls C. should be accomplished by stimulating aggregate demand D. will increase unemployment E. will cause a recession 18. For those who favor an active approach, public policy changes are necessary to cure a recessionary gap because A. the short-run aggregate supply curve will otherwise shift quickly to the right B. prices and wages are flexible downward but not upward C. the required decrease in output can be achieved only by shifting the AD curve D. real wages must fall through price increases rather than waiting for money wages to fall E. falling money wages will cause the AD curve to shift leftward unless policy counters this movement 19. If the advice of those who favor a passive approach to policy is correct, how would a recessionary gap eventually close? A. The aggregate demand curve would shift rightward. B. The aggregate demand curve would shift leftward. C. The short-run aggregate supply curve would shift rightward. D. The short-run aggregate supply curve would shift leftward. E. There would be a movement upward along the aggregate demand curve. 20. According to those who favor a passive approach to policy, a recessionary gap will be eliminated because A. prices and wages rise rapidly B. prices and wages are flexible C. the aggregate demand curve will shift to the right D. the economy automatically slows down E. the aggregate demand curve will shift to the left 21. If an economist who favors a passive approach observes a drop in real GDP caused by a decrease in aggregate demand, she is most likely to think that A. the economy will recover by itself before discretionary policy can correct the situation B. discretionary policy will correct the situation before the economy recovers by itself C. the imposition of policy rules will correct the situation before the economy recovers by itself D. aggregate supply will decrease to compensate for the decrease in aggregate demand E. the economy will not recover by itself 22. To favor a passive approach to policy is to believe that the private sector is A. relatively stable and both wages and prices adjust quickly to eliminate excess supply or excess demand for labor B. basically unstable, although both wages and prices adjust quickly to eliminate excess supply or excess demand for labor C. relatively stable, although both wages and prices tend to be very sticky downward D. basically unstable and both wages and prices tend to be very sticky downward E. so stable that wages and prices rarely change 23. If prices and wages are not flexible, an adverse supply shock is most likely to be followed by A. a rightward shift of the aggregate supply curve B. a rightward shift of the aggregate demand curve C. a leftward shift of the aggregate supply curve D. a leftward shift of the aggregate demand curve E. persistent unemployment 24. Exhibit 16-1 According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-1 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. The SRAS curve will shift to the right. C. Either the money supply or government spending should be increased. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be decreased. 25. Exhibit 16-1 According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-1 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. Real wages will fall shifting the SRAS curve to the right. C. Either the money supply or government spending should be increased. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be decreased. 26. Exhibit 16-1 According to those who favor a passive approach to policy, where will the economy in Exhibit 16-1 end up when it achieves its potential output? A. point A B. point B C. point C D. either point B or C E. unable to tell from the information given 27. Exhibit 16-1 According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-1 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. The SRAS curve will shift to the right. C. Either the money supply or government spending should be increased. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be decreased. 28. Exhibit 16-1 According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-1 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. The SRAS curve will shift to the right. C. The Fed or the government should act to shift the aggregate demand curve to the right. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be decreased. 29. Exhibit 16-1 According to those who favor an active approach to policy, where will the economy in Exhibit 16-1 end up when it achieves its potential output? A. point A B. point B C. point C D. either point B or C E. cannot tell from the information provided 30. If the economy were in a recession, which of the following policies would a person who favors an active approach to policy be most likely to support? A. The economy should be left to cure itself without government intervention. B. The Fed should sell U.S. government securities in its open-market operations. C. The Fed should raise the discount rate. D. Government purchases should increase. E. The Fed should raise the required reserve ratio. 31. If the economy were in a recession, which of the following policies would a person who favors an active approach to policy be most likely to support? A. The economy should be left to cure itself without government intervention. B. The Fed should sell U.S. government securities in its open-market operations. C. The Fed should raise the discount rate. D. Government lower tax rates. E. The Fed should raise the required reserve ratio. 32. In the long run, how would an active approach to a recessionary gap differ from a passive approach to policy? A. Both the price level and the level of real GDP would be higher in the long run with the activist solution. B. Both the price level and the level of real GDP would be lower in the long run with the activist solution. C. The price level would be higher and the level of real GDP would be lower in the long run with the activist solution. D. Only the price level would be lower in the long run with the activist solution. E. Only the price level would be higher in the long run with the activist solution. 33. Those who favor a passive approach to policy think that all of the following conditions will allow the economy to bring itself out of a recessionary gap except one. Which is the exception? A. lower real wages B. a shortage of labor C. lower production costs D. a lower expected price level E. a rightward shift in the short-run aggregate supply curve 34. Which of the following is consistent with an active approach to policy? A. The natural rate of unemployment is uncertain. B. Wages and prices adjust relatively quickly. C. The short-run aggregate supply curve is slow to shift in the presence of a recessionary gap. D. The size of the multiplier is irrelevant. E. Self-correction lags are not a problem. 35. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD0 and the short run aggregate supply by SRAS110. Which of the following represents the long-run equilibrium in the economy? A. A B. B C. C D. D E. E 36. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD0 and the short run aggregate supply by SRAS120. Which of the following represents the short-run equilibrium in the economy? A. A B. B C. C D. D E. E 37. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD0 and the short run aggregate supply by SRAS120. If a passive policy is followed to eliminate the recessionary gap, the economy will move from its current short-run equilibrium to point _____. A. A B. B C. F D. D E. E 38. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD0 and the short run aggregate supply by SRAS120. If an active policy approach is followed to eliminate the recessionary gap, the economy will move from its current short-run equilibrium to _______. A. A B. B C. F D. D E. E 39. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD0 and the short run aggregate supply by SRAS120. If an active policy approach is followed to eliminate the recessionary gap, the economy will move from its current short-run equilibrium to _______. A. A B. B C. F D. D E. E 40. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD1 and the short run aggregate supply by SRAS110. Which of the following represents the short-run equilibrium in the economy? A. A B. B C. C D. D E. F 41. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD1 and the short run aggregate supply by SRAS110. If a passive policy approach is used, the economy will move from its current short-run equilibrium to point _____. A. A B. B C. C D. E E. F 42. Exhibit 16-2 In Exhibit 16-2, the aggregate demand in the economy is represented by AD1 and the short run aggregate supply by SRAS110. If an active policy approach is used, the economy will move from its current short-run equilibrium to point _____. A. A B. B C. C D. E E. F 43. An economy that self-corrects an expansionary gap will experience stagflation. A. True B. False 44. When self-correction works to eliminate an expansionary gap, A. both money wages and real wages increase B. money wages increase while real wages decrease C. both money wages and real wages decrease D. money wages decrease while real wages increase E. money wages remain unchanged 45. If an economy adjusts to potential GDP accompanied by a rising price level and a falling output level, A. all of the following are correct B. an active approach to correcting a recessionary gap is being used C. an active approach to correcting an expansionary gap is being used D. a passive approach to correcting a recessionary gap is being used E. a passive approach to correcting an expansionary gap is being used 46. An economy experiencing an expansionary gap A. operates in an environment in which labor shortages drive up money wages, real wages, and prices B. results in an excess supply of labor due to rising money wages and prices C. will self-correct as rising money wages decrease faster than rising prices D. will experience rising money wages and prices but falling real wages E. will have excessive involuntary unemployment (e.g., cyclical unemployment) 47. An economy in which actual GDP exceeds potential GDP means that A. wages and prices must fall B. self-correcting forces will shift the SRAS curve to the left C. self-correcting forces will shift the AD curve to the left D. inflation will occur when AD shifts to the left E. unemployment is likely to be unusually high 48. Exhibit 16-3 According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-3 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. The SRAS curve will shift to the right. C. Either the money supply or government spending should be increased. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be decreased. 49. Exhibit 16-3 According to those who favor a passive approach to policy, how will the economy shown in Exhibit 16-3 attain equilibrium at potential output? A. Real wages will rise causing the SRAS curve to shift left. B. The SRAS curve will shift to the right. C. Either the money supply or government spending should be increased. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be decreased. 50. Exhibit 16-3 According to those who favor a passive approach to policy, where will the economy in Exhibit 16-3 end up once the expansionary gap is eliminated? A. point A B. point B C. point C D. either point B or C E. cannot tell from the information provided 51. Exhibit 16-3 According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-3 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. The SRAS curve will shift to the right. C. Either the money supply or government spending should be increased. D. Either the money supply or government spending should be decreased. E. Aggregate demand should be increased. 52. Exhibit 16-3 According to those who favor an active approach to policy, how can the economy shown in Exhibit 16-3 attain equilibrium at potential output? A. The SRAS curve will shift to the left. B. The SRAS curve will shift to the right. C. Either the money supply or government spending should be increased. D. Either the Fed or the government will act to decrease aggregate demand. E. Aggregate demand should be increased. 53. Exhibit 16-3 According to those who favor an active approach to policy, where will the economy in Exhibit 16-3 end up once the expansionary gap is eliminated? A. point A B. point B C. point C D. either point B or C E. cannot tell from the information given 54. If an active approach to policy is followed, how would an expansionary gap eventually close? A. The aggregate demand curve would shift rightward. B. The aggregate demand curve would shift leftward. C. The short-run aggregate supply curve would shift rightward. D. The short-run aggregate supply curve would shift leftward. E. There would be a movement up and to the left along the short-run supply curve. 55. If a passive approach to policy was followed, how would an expansionary gap eventually close? A. Restrictive fiscal policy would be used. B. Restrictive monetary policy would be used. C. Both restrictive fiscal policy and restrictive monetary policy would be used. D. Inflation would cure the problem because the price level in an expansionary gap is lower than firms and workers had expected. E. Inflation would cure the problem because the price level in an expansionary gap is higher than firms and workers had expected. 56. According to the passive policy maker's position, an expansionary gap will be eliminated because A. the short-run aggregate supply will shift to the left B. the short-run aggregate supply will shift to the right C. rising prices will shift the aggregate demand to the left D. wages will fall relatively quickly E. aggregate demand will shift to the right as wages increase 57. If self-correction works, a policy that continually increases aggregate demand will A. have a strong impact on GDP B. cause permanent inflation C. eventually cause the SRAS curve to shift to the right D. have relatively large impact on GDP E. will cause inflation to continually diminish 58. If the natural unemployment rate cannot easily be estimated, __________ policy making becomes more difficult. A. active B. passive C. monetarist D. classical E. rational expectations 59. The formulation of active policy is A. made easier if the natural unemployment rate can be easily calculated B. made easier if the natural unemployment rate cannot be easily calculated C. made more difficult if the natural unemployment rate can be easily calculated D. made more difficult if the natural unemployment rate cannot be easily calculated E. done without considering the natural unemployment rate because such a policy focuses on rules to follow in any unemployment situation 60. Problems facing active policy decisions include A. both c and d B. all of the following C. timing problems related to lags and self-correction D. that the natural unemployment rate is uncertain E. the self-correcting forces in the economy don't work well 61. Which of the following pieces of information is not necessary for active policy to work successfully? A. All of the following are necessary for good policy. B. the size of potential output or the natural rate of unemployment C. the speed of self-correction D. the slope of the short-run aggregate supply curve E. the size of the multiplier 62. The effectiveness lag for monetary policy is short. A. True B. False 63. Which of the following lags reduces the effectiveness of active policy? A. both d and e B. all of the following C. self-correction lag D. recognition lag E. decision-making lag 64. In total, the lags associated with discretionary policy can extend from the time a A. problem occurs in the economy through the time it is recognized by the government B. problem is recognized by the government through the time an agreed-on policy is approved C. policy is approved through the time the policy is implemented D. policy is implemented through the time its impact is felt in the economy E. problem occurs in the economy through the time a corrective policy has an impact on the economy 65. Long lags make discretionary policy less effective because A. in the long run, we shall all be dead B. by the time the impact of a policy is felt, the problem it was meant to cure may have been corrected C. lags are longer in contractions than in expansions D. lags are longer in expansions than in contractions E. automatic stabilizers are subject to longer lags than are discretionary policies 66. One reason that long time lags hamper the effectiveness of economic policy is that A. people don't want to wait for economic recovery B. the longer unemployment lasts the more intense inflation becomes C. by the time the impact of a policy is felt, a new problem may have come along that requires a different policy, which may make the economic situation even worse D. if inflation is allowed to continue for too long, it becomes immune to policy interference E. if unemployment is allowed to continue for too long, it becomes immune to policy interference 67. The time it takes for a new policy to register its full impact on the economy after it has been put in force is known as the A. activity lag B. decision-making lag C. effectiveness lag D. implementation lag E. recognition lag 68. The time it takes for the Fed's purchase of government securities to ultimately change aggregate demand is called the A. recognition lag B. implementation lag C. effectiveness lag D. decision-making lag E. self-correction lag 69. The time it takes to identify and examine the nature and seriousness of an economic problem is the A. activity lag B. decision-making lag C. effectiveness lag D. implementation lag E. recognition lag 70. The selection of a new policy takes place during a period of time known as the A. activity lag B. decision-making lag C. effectiveness lag D. implementation lag E. recognition lag 71. A new policy is actually put in force during the A. activity lag B. decision-making lag C. effectiveness lag D. implementation lag E. recognition lag 72. Policy makers may not know that the economy is in a recession until six months after the recession starts; this is a phenomenon known as the A. implementation lag B. policy coordination problem C. decision-making lag D. recognition lag E. effectiveness lag 73. Suppose that policy makers are concerned about a shortage of long-term capital investment. To remedy the problem, various plans to cut capital gains taxes have been suggested. The delay in picking a plan is called the A. implementation lag B. policy coordination problem C. decision-making lag D. recognition lag E. effectiveness lag 74. Time required __________ is not a time lag associated with using discretionary policy to correct an economic problem. A. to recognize the problem B. to decide how to handle the problem C. to set a policy change in action D. for a policy to affect economic variables E. to coordinate monetary and fiscal policy 75. Those who favor a passive approach to policy believe that A. discretionary monetary policy can be used to help the economy since monetary policy lags are short B. discretionary fiscal policy can be used to help the economy since fiscal policy lags are short C. lags associated with implementing policies are too long and unstable for discretionary policy to be effective D. despite the lags involved, implementing discretionary policy is preferable to inaction E. none of the above 76. Suppose a recession surprises economic forecasters, who did not see it coming. Which type of lag is that? A. cyclical lag B. recognition lag C. decision-making lag D. implementation lag E. effectiveness lag 77. An implementation lag is the time it takes A. policy makers to decide what to do B. for the chosen policy to have its full impact on the economy C. to identify trouble in the economy and to assess its severity D. to put a selected policy into action E. before a policy's effects on the economy are noticed by ordinary people 78. Which of the following pairs of lags are typically shorter for monetary policy than for fiscal policy? A. the recognition lag and the implementation lag B. the effectiveness lag and the decision-making lag C. the decision-making lag and the implementation lag D. the implementation lag and the effectiveness lag E. the recognition lag and the effectiveness lag 79. The average U.S. recession (after World War II) has lasted A. a few months B. about half a year C. just under a year D. about three weeks E. about two years 80. The __________ lag is typically longer for fiscal policy than monetary policy. A. both b and d B. decision-making C. effectiveness D. implementation E. recognition 81. Those who favor a passive approach to policy often argue that changes in prices and wages will shift the short-run aggregate supply curve A. before active policy shifts the aggregate demand curve B. only after active policy shifts the aggregate demand curve C. more than active policy shifts the aggregate demand curve D. less than active policy shifts the aggregate demand curve E. in a direction opposite to the shift in the aggregate demand curve caused by active policy 82. If the time for an economy to self-correct is shorter than the active policy lags, A. active policy should be strengthened B. active policy will likely be destabilizing C. the passive policy case is weakened D. the aggregate demand curve shifts more rapidly than the short-run aggregate supply curve E. active policy will work better than passive policy 83. Which of the following statements supports the passive approach to a recessionary gap? A. It is likely that policies will be subject to time lags. B. Prolonged unemployment may cause the economy's potential real GDP to fall. C. Workers' skills may grow rusty during a prolonged recession. D. Unemployed workers may drop out of the labor force during a prolonged recession. E. Firms may neglect their capital stock during a prolonged recession. 84. If high unemployment lasts a long time, it could cause potential real GDP to fall. A. True B. False 85. Those who favor an active approach to policy and those who favor a passive approach disagree not only on how quickly the government can act but also on how stable the economy basically is. A. True B. False 86. Those who favor an active approach to policy believe that A. discretionary monetary policy cannot be used to help the economy since monetary policy lags are long B. discretionary fiscal policy cannot be used to help the economy since fiscal policy lags are long C. lags associated with implementing policies are too long and unstable for discretionary policy to be effective D. despite the lags involved, implementing discretionary policy is preferable to inaction E. none of the above 87. Discretionary policy advocates believe A. both c and d B. that self-correction forces work slowly C. that rules are effective in changing output D. in rational expectations E. none of the above 88. An effective policy of governmental intervention in the economy requires all of the following except one. Which is the exception? A. the will to reject sound policy if it gets in the way of political considerations B. the ability to estimate the economy's potential level of output C. the ability to predict what would happen without intervention D. an assortment of effective tools of discretionary policy E. the ability to achieve effective cooperation between fiscal and monetary policy makers 89. A passive approach to economic policy calls for the government to do nothing to offset unemployment because of A. a lack of any real concern for those who have no jobs B. a conviction that unemployment is relatively harmless C. a belief that active economic policy is likely to be either ineffective or harmful D. a desire to await further economic data before intervening E. belief in the law of diminishing returns 90. Which of the following is not a valid criticism of discretionary fiscal policy? A. Implementation of fiscal policy is sometimes difficult. B. Time lags in fiscal policy are long. C. Fiscal policy works only during periods of stagflation. D. Fiscal policy often affects only current income, but many economic decisions are made on the basis of permanent income. E. Fiscal policy might have undesirable long-term effects on aggregate supply. 91. According to the rational expectations school, people base their expectations about inflation on A. the announcement of a change in policy B. weighted averages of previous inflation rates, with the most distant getting the heaviest weight C. all information available to them D. changes in monetary policy only E. changes in both monetary and fiscal policy 92. According to the rational expectations school, A. on average people have very little idea of what to expect from government policy makers B. people form expectations by focusing only on the private sector C. changes in the expected price level shift the aggregate demand curve D. people do not consider likely government policies when forming expectations, choosing to remain rationally ignorant E. people form expectations, in part, by considering the probable future actions of government policy makers 93. One of the reasons fiscal and monetary policy can stimulate output and employment in the short run is that nominal wages increase faster than the price level. A. True B. False 94. If the price level increases by more than expected, output can be expected to decrease as a result. A. True B. False 95. If the price level increases more rapidly than expected, A. output will fall B. output will increase C. output will not change D. real wages will increase E. none of the above 96. If an economy is at potential GDP and an expansionary policy is correctly anticipated, the result will be A. both c and e B. little or no increase in GDP C. an increase in wages along with a dramatically falling price level D. a rapidly expanding economy E. a severe recession 97. The time inconsistency problem occurs when A. all of the following occur B. expectations are slow to adjust to reality, causing output to vary in the short run C. public officials' reelection goals generate short-term economic gains at the expense of long-term inflation D. execution lags are shorter than self-correction lags E. policy makers execute one type of policy after influencing the public to anticipate another type 98. Which of the following would eliminate the time inconsistency problem? A. Each of the following would eliminate the time inconsistency problem. B. When lags associated with monetary and fiscal policy are extremely short. C. When discretionary macro policy is replaced with fixed policy rules which are well publicized. D. When expectations about the economy adjust very slowly. E. None of the above. 99. Given the expected price level, policies for reaching potential GDP will work best if the money supply is A. large, so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment B. large enough that prices at potential GDP are above expectations and firms can afford to hire workers C. small, so that prices at potential GDP are below expectations and people can afford to buy enough goods to support the natural level of employment D. small, so that prices at potential GDP are above expectations and firms can afford to hire the workers E. exactly the size that makes prices equal to the prices people expected to prevail 100. Economists of the rational expectations school believe that expansionary monetary policy is fully effective only if 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 policy is totally unexpected 101. If rational expectations cause people's price expectations to be generally correct, active policy will influence the price level but not output. A. True B. False 102. The wage rate considered acceptable to workers engaged in collective bargaining will be determined in part by what monetary policy workers expect in the near future. A. True B. False 103. According to the rational expectations school, when monetary policy makers do exactly what is expected of them, their efforts to stimulate the economy will have no effect either on output or employment. A. True B. False 104. According to the rational expectations school, when the economy is operating at the potential output level, a temporary decrease in unemployment is possible through appropriate monetary policy—but only if workers and employers are aware in advance of the Fed's intentions. A. True B. False 105. According to the rational expectations school, which of the following can affect the levels of output and employment? A. an expansionary monetary policy, if it is fully anticipated B. a contractionary monetary policy, if it is fully anticipated C. monetary policy that is unanticipated D. fiscal policy that is anticipated E. the Fed's announcement of no change in monetary policy 106. If resource owners anticipated a monetary growth rate of 6 percent, but the money supply actually grew at only 2 percent, A. real wages would fall B. output would fall C. output would increase D. output would increase, but only if nominal wages were increased more rapidly than prices E. the expected inflation rate was less than the actual rate 107. According to the rational expectations school, if the Fed announces a policy of rapid growth in the money supply, but then puts the brakes on money expansion without any announcement, the short-run result is likely to be A. an unexpected surge in aggregate demand B. an unexpected drop in aggregate demand C. an anticipated surge in aggregate demand D. an anticipated drop in aggregate demand E. no change in aggregate demand 108. Suppose that in 2004 the Fed announced a policy of rapid growth in the money supply, but then put the brakes on money expansion without any announcement. If in 2005, Fed officials announce again that an expansion is planned, the most likely result is that A. people will believe the announcement since the conditions that created a need for the expansion are probably still in effect B. people will believe the announcement since they will believe that having failed to implement the expansion previously, the Fed still plans to do so C. people will not believe the announcement since they will believe that the conditions that created a need for the expansion must have changed in the meantime D. people will not believe the announcement since they will believe that having failed to implement the expansion previously, the Fed will probably fail again E. there will be more uncertainty about the Fed following through on the policies it announces 109. Some economists believe that when workers and firms come to expect an expansionary monetary policy and the resulting inflation, A. they act so as to prevent the inflation from occurring B. their actions lead to a further increase in output C. the expansionary monetary policy will have no effect on either output or employment D. the monetary authority will be forced to cancel its planned expansionary policy E. both output and employment will increase even more than was originally planned 110. A credible policy designed to lower inflation must throw the economy into recession. A. True B. False 111. For an economy to eliminate inflation once people have begun to anticipate inflation, A. all of the following could occur B. credibility of policy is crucial to the cost of lowering inflation C. actual inflation must be less than anticipated inflation D. cold-turkey solutions will reduce inflation relatively rapidly E. a recession will have to be endured until expectations have been reduced 112. The Fed is not completely independent because A. Congress could rewrite the laws that created the Fed B. it relies heavily on Congressional appropriations C. the president sits on the Board of Governors D. Congress must approve any new monetary policy E. the president must approve any new monetary policy 113. The time inconsistency problem arises when A. attempts are made to coordinate monetary policy throughout different time zones B. there is a lag between the announcement of a monetary policy and the implementation of it C. policy makers have an incentive to mislead people about their monetary policy intentions D. policy makers do not allow enough time for a new policy to take effect E. there is a deep conflict among monetary policy makers 114. There is little or no evidence that countries experience less inflation when their central banks are free from political pressures. A. True B. False 115. To say that the Fed has some independence means that it A. accepts deposits from whomever it desires B. can ignore the macroeconomic goals of the United States C. can adopt policies without the approval of the Congress and the president D. is a private commercial bank E. does not have to report its monetary policy to Congress 116. According to a recent study of central banks around the world, A. the more independent the central bank, the lower is that country's unemployment rate B. the more independent the central bank, the higher is that country's unemployment rate C. the more independent the central bank, the higher is the inflation rate D. the more independent the central bank, the lower is that country's inflation rate E. the higher the inflation rate, the more independent the central bank can be 117. The Federal Reserve A. is not considered one of the more independent central banks B. is insulated from politics by the staggered 14-year appointments of Board members and by having its own source of income C. is more concerned with generating income than it is with achieving price stability D. is answerable to Congress and must do its bidding E. is answerable to the President and must do his bidding 118. International evidence suggests that A. contrary to theory, there is little relationship between inflation and money supply growth B. the countries with the most independent central banks are the countries with the lowest inflation rates C. contrary to theory, there is little relationship between central bank independence and price stability D. the countries with the least independent central banks are the countries with the lowest inflation rates E. the most independent central banks are in Spain and Italy 119. Around the world, the tendency is toward A. ever-higher interest rates B. a weakening of the relationship between central bank independence and inflation C. greater central bank independence D. ever-higher inflation rates E. a weakening of the relationship between central bank independence and money supply growth 120. Evidence indicates that inflation rates are A. lowest when politicians control the central bank B. lowest in countries where the monetary authority has the most independence C. most effectively controlled by elected politicians D. highest in countries where the monetary authority has the most independence E. unaffected by the actions of monetary policy makers 121. Some of those who favor a passive approach to policy disapprove of government intervention in the economy because they think government policy makers do not know which policy is correct. A. True B. False 122. Advocates of policy rules rather than discretion believe that self-correction forces work too slowly when discretionary policy is used. A. True B. False 123. The active approach to monetary policy involves predetermined rules that are followed virtually without exception. A. True B. False 124. One often-cited rationale for a fixed-growth-rate monetary policy is that A. it is too expensive to pay a staff to continually make adjustments in policy B. although it's possible to determine what's happening in the economy, it's not possible to determine what to do about it C. it is not possible to determine with any certainty what's happening in the economy, so it's easy to make a mistake with active policy D. we know that the economy is increasing at a fixed rate year after year, so a fixed rate of growth in the money supply is justified E. then the Federal Reserve would be superfluous and we could eliminate one large bureaucracy 125. According to rational expectations theory, people's predictions about the future course of governmental economic policy influence the position of the short-run aggregate supply curve. A. True B. False 126. According to the rational expectations model, the only time active policy has an impact on aggregate output is when A. it is expansionary B. it is contractionary C. it is unannounced D. the economy has a recessionary gap E. the economy has an expansionary gap 127. If an economist of the rational expectations school were advising a policy maker, the advice most likely to be given would be: A. Don't use discretionary policy if recognition lags are long. B. Don't use discretionary policy if activity lags are long. C. Don't use fiscal policy if effectiveness lags are long. D. Don't use monetary policy if implementation lags are long. E. Don't use discretionary policy. 128. The main policy conclusion of the rational expectations school is A. fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can be helpful B. monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can be helpful C. both monetary and fiscal policy can be helpful if policy makers correctly anticipate the plans of firms and households D. both monetary and fiscal policy can be helpful if firms and households correctly anticipate the plans of policy makers E. neither monetary nor fiscal policy can be helpful if firms and households correctly anticipate the plans of policy makers 129. The rational expectations school advocates A. monetarism B. Keynesianism C. the use of fiscal policy D. the use of monetary policy E. a passive approach to policy 130. According to the rational expectations school, a correctly anticipated expansionary monetary policy will A. increase prices and real output B. increase real output in the short run only C. have no effect on prices or real output D. decrease prices and real output E. lead only to a higher price level 131. Those of the rational expectations school A. favor monetary rules because they believe we know too little about how the economy works B. favor monetary rules so that workers and firms do not get any unanticipated surprises from the Fed C. are those who favor an "active approach" to policy and therefore reject monetary rules D. oppose any monetary rules because they believe rules impede the natural self-correcting mechanism of the economy E. neither oppose nor favor monetary rules 132. Economists of the rational expectations school A. have no confidence in the ability of workers and firms to observe and react to economic events B. believe workers and firms behave the same regardless of what the Fed does C. have great faith in the ability of monetary policy makers to maintain a full employment economy with stable prices D. believe that effective monetary policy can shift the potential level of output to the right E. believe workers and firms make decisions based on what they think monetary policy will be in the future 133. The rational expectations school advocates the passive rule of a fixed-growth-rate monetary policy because A. we don't have enough information to pursue an active policy B. the economy is not in bad enough shape to require active intervention C. then the Federal Reserve Board would be superfluous and we could eliminate a large bureaucracy D. people render active policy ineffective by figuring out what it's going to be and taking actions to offset it E. they prefer to put their major emphasis on an active fiscal policy 134. In general, the Fed has not embraced a fixed-growth-rate monetary policy because A. its adoption would cost them their jobs B. no influential economists have yet come out in favor of it C. the Fed has to answer to Congress, and Congress is not in favor of it D. the Fed prefers active fiscal policy E. they believe the economy is too complex and too changeable to make such a policy work consistently 135. The early Phillips curve showed a tradeoff between unemployment and inflation because it was drawn for a period in which the main source of instability was aggregate demand. A. True B. False 136. In the early 1960s, the discovery of the Phillips curve relationship caused economists and policy makers to think that they understood the tradeoffs between A. aggregate supply and aggregate demand B. excess aggregate supply and excess aggregate demand C. inflation and unemployment D. monetary and fiscal policy E. rule-making and discretionary policy 137. On the Phillips curve graph, the immediate effects of a discretionary increase in government spending are represented by a A. rightward shift of the aggregate demand curve B. leftward shift of the aggregate demand curve C. rightward shift of the Phillips curve D. leftward shift of the Phillips curve E. movement along the Phillips curve 138. Economist A. W. Phillips believed that A. the Fed should follow a policy rule because it does not know the lag structure B. the Fed should follow a policy rule to avoid monetary surprises C. there is an inverse relationship between inflation and unemployment D. private sector spending is inherently unstable E. government spending is inherently unstable 139. The inflation associated with the oil embargoes of the 1970s illustrated the __________ of the downward-sloping Phillips curve in the long run, as unemployment __________. A. validity; fell B. validity; rose C. fallacy; rose D. fallacy; fell E. fallacy; did not change 140. The inflation associated with the oil embargoes of the 1970s resulted in A. reduced unemployment because aggregate demand increased B. reduced unemployment because aggregate demand fell C. increased unemployment because aggregate demand increased D. increased unemployment because aggregate demand fell E. increased unemployment because aggregate supply fell 141. Suppose the economy had been operating along a given short-run Phillips curve for several years and then experienced a year of stagflation. The year of stagflation would A. be represented as a move upward along the short-run Phillips curve B. be represented as a move downward along the short-run Phillips curve C. be represented as a point above the short-run Phillips curve D. be represented as a point below the short-run Phillips curve E. correspond to the origin 142. A Phillips curve shows the relationship between A. the price level and the number of workers unemployed B. the inflation rate and the unemployment rate C. the unemployment rate and the level of GDP D. the inflation rate and the supply of money E. the inflation rate and the level of government spending 143. In its original form, the Phillips curve depicted a situation in which an economy could reduce its unemployment rate by holding the inflation rate steady. A. True B. False 144. The short-run Phillips curve is drawn for a given expected inflation rate and so it shifts as inflation expectations change. A. True B. False 145. The short-run Phillips curve shows that A. the economy can have low inflation and low unemployment simultaneously B. the economy can have high inflation and high unemployment simultaneously C. a reduction in unemployment comes at the expense of lower inflation D. a reduction in unemployment comes at the expense of higher inflation E. a reduction in inflation comes at the expense of lower unemployment 146. An increase in the expected inflation rate will A. shift the short-run Phillips curve upward and to the right B. shift the short-run Phillips curve downward and to the left C. not shift the short-run Phillips curve unless the unemployment rate changes D. cause the unemployment rate associated with each inflation rate to decrease E. tend to increase production unless the actual inflation rate also increases 147. The short-run Phillips curve portrays a(n) A. direct relationship between total employment and the inflation rate B. inverse relationship between inflation and total employment C. direct relationship between the unemployment rate and the inflation rate D. inverse relationship between the unemployment rate and the inflation rate E. inverse relationship between the price level and the unemployment rate 148. Which of the following would correspond to movement downward along a short-run Phillips curve? A. The aggregate demand curve shifts rightward, moving up along a short-run aggregate supply curve. B. The aggregate demand curve shifts leftward, moving down along a short-run aggregate supply curve. C. The short-run aggregate supply curve shifts leftward, moving up along the aggregate demand curve. D. The short-run aggregate supply curve shifts rightward, moving down along the aggregate demand curve. E. Both the aggregate demand and the short-run aggregate supply curves shift leftward. 149. Suppose we observe several years of falling inflation rates for an economy. Which of the following would best explain this phenomenon? A. Unemployment is probably at the natural rate. B. The unemployment rate must be rising. C. The unemployment rate must be below the natural rate. D. The unemployment rate is probably above the natural rate. E. Aggregate output must be increasing. 150. Along the short-run Phillips curve, when the unemployment rate goes down, A. unemployment benefit payments go up B. prices go down C. the Phillips curve shifts outward D. the inflation rate goes up E. there is no change in the rate of inflation 151. One way of expressing the meaning of the short-run Phillips curve is to say that A. the cost of reducing unemployment is higher inflation B. nothing but good comes from reducing unemployment C. the cost of reducing inflation is lower unemployment D. aggregate supply and aggregate demand will always be equal at the potential output level E. the best economic policy is one that attempts to make the rate of inflation equal to the rate of unemployment 152. The short-run Phillips curve is based upon labor contracts that reflect a given expected A. price level B. unemployment level C. money supply D. aggregate demand E. unemployment rate 153. The long-run Phillips curve is located at the natural rate of unemployment. A. True B. False 154. The long-run Phillips curve suggests that changing the rate of unemployment in the economy has no impact on the inflation rate. A. True B. False 155. Some economists believe that in the long run the unemployment rate is independent of the inflation rate and so the Phillips curve becomes a vertical line. A. True B. False 156. Exhibit 16-4 In Exhibit 16-4, the most desirable of the points shown is A. point a B. point b C. point c D. point d E. point e 157. Exhibit 16-4 In Exhibit 16-4, if the economy started near point b, and government purchases increased, we would expect the economy in the short run to move to A. point a B. point e C. point c D. point d E. none of the above; the economy would remain at point b 158. Exhibit 16-4 In Exhibit 16-4, the natural rate of unemployment is A. 2 percent because it occurs at the intersection of the curves B. 4 percent because it is the midpoint of the short-run curve C. 4 percent because it is on the long-run curve D. 8 percent because it is the most the economy can attain with high inflation E. 10 percent because it is the most the economy can attain 159. Exhibit 16-5 Consider Exhibit 16-5. If the economy is initially at point c and aggregate demand increases, the economy will (in the long run) A. move toward point a B. move toward point b C. stay at point c D. move toward point d E. move toward point f 160. Exhibit 16-5 If the economy in Exhibit 16-5 is initially at point c and aggregate demand decreases, the economy will (in the long run) A. move toward point a B. move toward point b C. stay at point c D. move toward point d E. move toward point f 161. Exhibit 16-5 If the economy in Exhibit 16-5 is initially at point c and aggregate demand is stable, the economy will A. move toward point a B. move toward point b C. stay at point c D. move toward point d E. move toward point f 162. The long-run Phillips curve A. is vertical B. is the same as the short-run Phillips curve C. slopes downward D. slopes upward E. is horizontal 163. The long-run Phillips curve A. represents the fact that inflation is consistent with many unemployment rates B. represents the fact that inflation will not influence unemployment in the long run C. has a negative slope because the short-run Phillips curve shifts up and to the left D. shows that expected inflation can never equal actual inflation E. shows that unemployment is a short run, but not a long run, phenomenon 164. Along the long-run Phillips curve, A. the economy is at an unemployment level that corresponds to the potential output level B. expectations have not fully adjusted C. policy makers can have lower inflation only with higher unemployment D. a cut in taxes will lower inflation E. a tax cut will increase unemployment 165. All of the following are true along a long-run Phillips curve except one. Which is the exception? A. unemployment is at the natural rate B. employers and workers have the time and ability to adjust fully to unexpected changes in aggregate demand C. the only choices for policy makers are different levels of inflation D. inflation and unemployment are inversely related E. changes in aggregate demand will have no effect in the long run on unemployment 166. Which of the following is true about the long-run Phillips curve? A. No event can shift the curve rightward; it can only be shifted leftward. B. No event can shift the curve leftward; it can only be shifted rightward. C. No event can shift the curve either rightward or leftward. D. Only fiscal and monetary policy can shift the curve. E. Demand-side policy cannot shift the curve. 167. One implication of the Phillips curve analysis is that A. unemployment rates below the natural rate are only possible in the long run B. unemployment rates below the natural rate lead to falling rates of inflation in the long run C. if inflationary expectations are accurate, the economy is on the short-run Phillips curve but not on the long-run Phillips curve D. unemployment rates below the natural rate may be achieved only with rising inflation rates E. the natural rate of unemployment is strictly a short-run phenomenon 168. If the actual inflation rate exceeds the expected inflation rate, A. the economy is on the long-run Phillips curve B. unemployment exceeds the natural rate C. maintaining the existing unemployment rate will require increasing inflation in the long run D. the actual rate will tend to fall toward the expected rate E. unemployment will tend to decrease in the long run 169. Probably the most significant implication of the natural rate of unemployment hypothesis is that A. the natural rate of inflation tends toward zero B. long-run policy should be directed toward controlling inflation rather than unemployment C. the natural rate of unemployment can be reduced by accepting worsening inflation D. the natural rate of unemployment is consistent only with a zero inflation rate in the long run E. tax cuts stimulate the economy and lower inflation 170. If inflationary expectations increase, we can infer that A. unemployment is above the natural rate B. the economy is not on the long-run Phillips curve C. the short-run Phillips curve is shifting to the left D. output is below potential GDP E. the unemployment rate is at the natural rate 171. The unemployment rate can remain below the natural rate, but only A. in the long run B. with continuous deflation C. with a continuously increasing inflation rate D. with a series of adverse supply shocks E. if the money supply is constant 172. In general, the faster inflationary expectations adjust, A. the less macro policy can influence unemployment B. the better discretionary policy can be expected to work C. the slower the adjustment of the short-run Phillips curve D. the stronger the case for active policy E. none of the above 173. The long-run Phillips curve is A. downward-sloping B. vertical C. upward-sloping D. horizontal E. U-shaped 174. Current thinking on the Phillips curve suggests that it would be best for policy makers to A. focus on controlling unemployment B. stimulate permanent shifts in aggregate supply C. focus on controlling inflation D. stimulate permanent shifts in aggregate demand E. develop a two-pronged policy to control both unemployment and inflation 175. Unemployment cannot be maintained below the natural rate, no matter what inflation rate is tolerated. A. True B. False 176. The natural rate hypothesis claims that policy makers can have considerable success in reducing unemployment through monetary and fiscal policy. A. True B. False 177. According to the natural rate hypothesis, the economy tends toward A. the natural rate of unemployment in the long run B. the natural rate of unemployment in the short run C. potential output in the short run D. zero inflation in the long run E. a stable tradeoff between inflation and unemployment in the long run 178. The hypothesis that the economy tends toward the natural rate of unemployment in the long run is known as the A. cyclical unemployment hypothesis B. full employment hypothesis C. natural rate hypothesis D. economic stability hypothesis E. policy ineffectiveness hypothesis 179. According to the natural rate hypothesis, the natural rate of unemployment is A. largely independent of the level of aggregate supply stimulus provided by fiscal or monetary policy B. largely independent of the level of aggregate demand stimulus provided by fiscal or monetary policy C. dependent on the level of aggregate supply stimulus provided by fiscal or monetary policy D. dependent on the level of aggregate demand stimulus provided by fiscal or monetary policy E. dependent on the size of the federal budget deficit or surplus 180. According to the natural rate hypothesis, A. government policy makers can influence the tradeoff between inflation and unemployment in the long run but not in the short run B. government policy makers can target both stable interest rates and a stable money supply in the long run but not in the short run C. government policy makers can target both stable interest rates and a stable money supply in the short run but not in the long run D. the economy tends toward the natural rate of unemployment only when the government provides the appropriate demand stimulus E. government policy makers can influence the tradeoff between inflation and unemployment in the short run but not in the long run 181. According to the natural rate hypothesis, unemployment can A. never be maintained below the natural rate B. be maintained below the natural rate only at the cost of higher taxes C. be maintained below the natural rate while maintaining a constant low inflation rate D. be maintained below the natural rate only at the cost of ever-increasing inflation E. be maintained below the natural rate only at the cost of ever-increasing federal budget deficits 182. An important implication of the natural rate hypothesis is that regardless of concerns about __________, the government policy that results in __________ is generally the optimal long-run policy. A. unemployment; low inflation B. inflation; low unemployment C. unemployment; low interest rates D. inflation; low interest rates E. inflation; a stable foreign exchange rate 183. An important implication of the natural rate hypothesis is that the government policy that results in low inflation is generally the optimal long-run policy A. only if there is no cyclical unemployment in the short run B. only if there is no structural unemployment in the short run C. regardless of concerns about unemployment D. regardless of concerns about currency exchange rates E. only if the dollar's exchange rate is stable 184. In general, we would expect those who favor a passive approach to policy to believe in A. slow rather than rapid self-correction B. potentially incorrect rather than rational price expectations C. short, certain rather than long, variable policy lags D. a negatively sloped rather than vertical Phillips curve E. the natural rate hypothesis 185. The natural rate hypothesis states that in the long run, A. economic policy can reduce both inflation and unemployment B. the economy's natural rate of annual growth is approximately 3% C. monetary and fiscal policy have their greatest effect on the rate of unemployment D. the Phillips curve is horizontal E. the economy tends toward the natural rate of unemployment 186. As people come to expect higher inflation, the long-run Phillips curve shifts leftward. A. True B. False 187. Contrary to what the Phillips curve would have predicted, the U.S. economy in the 1970s experienced simultaneous increases in inflation and unemployment. A. True B. False 188. Before discovering that the short-run Phillips curve does not show the true long-run situation, policy makers were successful in trying to bring the economy to the zero-inflation, zero-unemployment point on the short-run curve. A. True B. False 189. An increase in price expectations shifts the long-run Phillips curve, but not the short-run Phillips curve. A. True B. False 190. After the 1960s, the short-run Phillips curve based on U.S. economic data A. began shifting inward B. began shifting outward C. shifted little or none at all D. became virtually horizontal E. became virtually vertical 191. During the period __________, the short-run Phillips curve for the United States was farthest from the origin. A. 1960 to 1964 B. 1964 to 1969 C. 1970 to 1973 D. 1974 to 1983 E. 1984 to 1989 192. According to the __________ approach, __________ policy may __________ the instability of the economy. A. passive, automatic, increase B. passive, discretionary, increase C. passive, discretionary, decrease D. active, discretionary, increase E. active, automatic, decrease 193. Which of the following is not a potential problem with active policy for policy makers? A. predicting what would happen with a passive approach B. lacking the tools needed to achieve the desired result quickly C. not predicting the effects of an active policy on the economy’s key performance measures D. fiscal and monetary policy makers not working together E. failing to implement the appropriate policy because of political obstacles 194. The economy may turn around on its own before a new policy registers its full impact primarily because of the A. recognition lag B. decision-making lag C. effectiveness lag D. implementation lag E. time lag 195. When policy makers have an incentive to announce one policy to shape expectations but then pursue a different policy once those expectations have been formed and acted on, there is A. no problem; this is normal behavior B. policy credibility C. a time-inconsistency problem D. rational expectation E. None of the answers is correct 196. An anti-inflation policy that involves announcing and executing tough measures to stop inflation is called A. cold turkey B. cold chicken C. hot water D. chokehold E. time-inconsistency 197. Opponents of inflation targets say that A. such targets encourage workers to plan on a low and stable inflation rate and hold down demands for wage increases B. the Fed will pay less attention to jobs and economic growth C. such targets encourage firms to plan on a low and stable inflation rate and hold down price increases D. such targets encourage investors to plan on a low and stable inflation rate and hold down demands for interest rate increases E. None of the answers is correct 198. The initial Phillips curve relationship implied that the opportunity cost of __________ __________ was higher __________. A. reducing, unemployment, inflation B. increasing, unemployment, inflation C. reducing, unemployment, deflation D. increasing, employment, deflation E. reducing, employment, inflation Test Bank for Macroeconomics: A Contemporary Introduction William A. McEachern 9781133188131, 9780538453776