Deck 17: Expectations, Output and Policy

Question 1

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue monetary expansion in the future. Given this information, we know with certainty that:

A) current output will decrease.
B) the current output effects are ambiguous.
C) the current interest rate will decrease.
D) current output and the current interest rate will both increase.
E) current output will increase.

Answer 1

current output and the current interest rate will both increase.

Question 2

An increase in expected future taxes will cause:

A) the LM curve to shift downward.
B) the IS curve to shift leftward.
C) the LM curve to shift upward.
D) the IS curve to shift rightward.
E) the IS curve shifts leftward and the LM curve shifts upward.

Answer 2

the IS curve to shift leftward.

Question 3

Assume individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to decrease. Given this information, individuals will expect:

A) a decrease in the expected future interest rate and no change in expected future output.
B) a decrease in the expected future interest rate and an increase in expected future output.
C) a decrease in the expected future interest rate and a decrease in expected future output.
D) a decrease in the expected future interest rate and an ambiguous effect on expected future output.
E) a decrease in the expected future interest rate and a constant expected future output.

Answer 3

a decrease in the expected future interest rate and an increase in expected future output.

Question 4

Assume individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, we know with certainty that:

A) future expected output will not change.
B) current output and the current interest rate will both increase.
C) current output will not change.
D) future expected output will decrease.
E) the future expected interest rate will decrease.

Question 5

Suppose there is a decrease in expected future output. This will cause which of the following to occur?

A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves to shift left in the current period.

Question 6

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue monetary expansion in the future. Given this information, we know with certainty that:

A) the current interest rate effects are ambiguous.
B) current output will decrease.
C) the current output effects are ambiguous.
D) current output and the current interest rate will both increase.
E) the current interest rate will decrease.

Question 7

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, we know with certainty that:

A) the current interest rate will increase.
B) future expected output will increase.
C) current output will increase.
D) current output and the current interest rate will both increase.
E) the expected future interest rate will increase.

Question 8

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

A) an increase in the expected future interest rate and no change in expected future output.
B) an increase in the expected future interest rate and an increase in expected future output.
C) an increase in the expected future interest rate and a decrease in expected future output.
D) an increase in the expected future interest rate and an ambiguous effect on expected future output.
E) an increase in the expected future interest rate and a constant expected future output.

Question 9

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

A) an increase in the expected future interest rate and an increase in expected future output.
B) an increase in the expected future interest rate and a reduction in expected future output.
C) an increase in the expected future interest rate and no change in expected future output.
D) an increase in the expected future interest rate and an ambiguous effect on expected future output.
E) an increase in the expected future interest rate and a constant expected future output.

Question 10

Which of the following will not cause aggregate private spending to decrease?

A) An increase in future taxes.
B) A decrease in expected future output.
C) A decrease in government spending.
D) An increase in government spending.
E) An increase in expected future real interest rates.

Question 11

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue monetary contraction in the future. Given this information, we know with certainty that:

A) the current output effects are ambiguous.
B) current output will increase.
C) the current interest rate will increase.
D) current output will decrease.
E) current output and the current interest rate will both decrease.

Question 12

Suppose current government spending decreases and that individuals expect future government spending to decrease. Given this information, in which of the following cases will output in the current period be more likely to increase?

A) Individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B) Individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C) Individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D) The output effects will be the same in A and B.
E) The output effects will be the same in B and C.

Question 13

Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, in which of the following cases will output in the current period be more likely to decrease?

A) Individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B) Individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C) Individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D) The output effects will be the same in A and B.
E) The output effects will be the same in B and C.

Question 14

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose policymakers announce a reduction in future government spending. Which of the following will occur as a result of this expected government spending reduction?

A) A decrease in the expected future interest rate and no change in expected future output.
B) A decrease in the expected future interest rate and an increase in expected future output.
C) A decrease in the expected future interest rate and a decrease in expected future output.
D) A decrease in the expected future interest rate and an ambiguous effect on expected future output.
E) A decrease in the expected future interest rate and a constant expected future output.

Question 15

Suppose there is a monetary expansion. This monetary expansion will always cause a greater increase in output when accompanied by:

A) an increase in expected future output.
B) a decrease in expected future interest rates.
C) a decrease in expected future taxes.
D) All of the above.
E) None of the above.

Question 16

Suppose there is an increase in the expected future interest rate. This will cause which of the following to occur?

A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves to shift left in the current period.

Question 17

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. A permanent decrease in the interest rate, with no other policy change implemented or anticipated, will most likely cause:

A) an increase in future output and an increase in the future interest rate.
B) an increase in the current interest rate.
C) an unknown effect on the current interest rate.
D) Both A and B.
E) Both B and C.

Question 18

Assume individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect future government spending to increase. Given this information, individuals will expect:

A) an increase in the expected future interest rate and a constant expected future output.
B) an increase in the expected future interest rate and an ambiguous effect on expected future output.
C) an increase in the expected future interest rate and a reduction in expected future output.
D) an increase in the expected future interest rate and an increase in expected future output.
E) an increase in the expected future interest rate and no change in expected future output.

Question 19

Suppose there is a decrease in the expected future interest rate. This will cause which of the following to occur?

A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves to shift right in the current period.

Question 20

Which of the following would be a violation of the rational expectations assumption?

A) "Over the past twenty years, people have consistently over- predicted the inflation rate for the following year."
B) "Over the past twenty years, people have never once accurately predicted the inflation rate for the following year."
C) "The RBA's announcement that it might ease interest rates caused an immediate decrease in short- term rates, even before the RBA took any action."
D) Both A and B.
E) Both A and C.

Question 21

An increase in which of the following variables will cause a decrease in money demand in the current period?

A) The expected future nominal interest rate.
B) The expected future income.
C) The current income.
D) The current nominal interest rate.
E) The current real interest rate.

Question 22

Which of the following will cause aggregate private spending to increase?

A) A decrease in expected future interest rates.
B) A decrease in government spending.
C) An increase in government spending.
D) A decrease in expected future output.
E) An increase in expected future taxes.

Question 23

Suppose that the RBA raises the current interest rate by decreasing the money supply, with no other policy change implemented or anticipated. Which of the following shifts in the IS and/or LM curves will take place in the current period?

A) no shift in IS; LM up.
B) IS right; LM down.
C) IS left; LM up.
D) IS left; LM down.
E) IS right; LM up.

Question 24

Assume individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose policymakers announce a reduction in future government spending. Which of the following will occur as a result of this expected government spending reduction?

A) A decrease in the expected future interest rate and no change in expected future output.
B) A decrease in the expected future interest rate and an increase in expected future output.
C) A decrease in the expected future interest rate and a decrease in expected future output.
D) A decrease in the expected future interest rate and an ambiguous effect on expected future output.
E) A decrease in the expected future interest rate and a constant expected future output.

Question 25

Suppose there is a decrease in expected future taxes. This will cause which of the following to occur?

A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves to shift right in the current period.

Question 26

Which of the following individuals was responsible for introducing rational expectations into macroeconomic models?

A) Lucas.
B) Phillips.
C) Tobin.
D) Solow.
E) Keynes.

Question 27

Which of the following will cause the LM curve to shift down?

A) A decrease in the expected future interest rate.
B) A decrease in the price level.
C) A decrease in expected future taxes.
D) A decrease in current income.
E) A decrease in expected future income.

Question 28

Adaptive expectations assume that individuals:

A) base predictions on random events (i.e., animal spirits).
B) make predictions based on the past behaviour of the economy.
C) form their predictions of macroeconomic variables randomly.
D) can accurately predict the future.
E) use all available information in predicting the future.

Question 29

Suppose current government spending decreases and that individuals expect future government spending to decrease. Given this information, in which of the following cases will output in the current period be more likely to decrease?

A) Individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B) Individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C) Individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D) The output effects will be the same in A and C.
E) The output effects will be the same in B and C.

Question 30

Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, in which of the following cases will output in the current period be more likely to increase?

A) Individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
B) Individuals consider only the medium- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
C) Individuals consider only the long- run effects of changes in future macro variables when forming expectations of future output and future interest rates.
D) The output effects will be the same in A and C.
E) The output effects will be the same in B and C.

Question 31

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose individuals expect the central bank to pursue monetary contraction in the future. Given this information, we know with certainty that:

A) current output will increase.
B) the current interest rate will increase.
C) current output and the current interest rate will both decrease.
D) the current output effects are ambiguous.
E) the current interest rate effects are ambiguous.

Question 32

Assume individuals consider only the short- run effects of changes in future macro variables when forming expectations of future output and future interest rates. Suppose current government spending increases and that individuals expect future government spending to increase. Given this information, we know with certainty that:

A) the current output effects are ambiguous.
B) the current interest rate will decrease.
C) current output and the current interest rate will both increase.
D) the current interest rate will increase.
E) current output will increase.

Question 33

A change in which of the following variables would have a direct effect on money demand in the current period?

A) The current nominal interest rate.
B) The expected future nominal interest rate.
C) The expected future income.
D) The current real interest rate.
E) The expected future real interest rate.

Question 34

Changes in future expected interest rates can affect current consumption. Suppose individuals expect future interest rates to increase. Consumption will change as a result of this expectation when which of the following change?

A) Human wealth.
B) The value of bonds.
C) The value of stocks.
D) All of the above.
E) None of the above.

Question 35

A decrease in the expected future interest rate will cause:

A) a rightward shift of the IS curve.
B) an upward shift of the LM curve.
C) the LM curve to become steeper.
D) a downward shift of the LM curve.
E) the IS curve to become flatter.

Question 36

Suppose individuals expect that interest rates will fall in the future. Also assume that the RBA wants to prevent any change in current output. Given this goal of the RBA, the RBA should implement a policy in the current period that:

A) shifts the IS curve leftward.
B) shifts the IS curve leftward and the LM curve upward.
C) shifts the LM curve downward.
D) shifts the IS curve rightward.
E) shifts the LM curve upward.

Question 37

Suppose policymakers pass a budget that reduces the budget deficit. A deficit reduction package such as this has a greater chance of increasing current output when:

A) financial markets believe that taxes will not increase in the future.
B) the policy features larger cuts today and smaller cuts in the future.
C) financial markets believe that RBA will raise interest rates in the future.
D) financial markets believe that output will not increase in the future.
E) financial markets believe the RBA will lower interest rates in the future.

Question 38

Rational expectations assume that individuals:

A) can accurately predict the future.
B) make predictions based on the past behaviour of the economy.
C) do not make systematic forecast errors.
D) have perfect foresight.
E) form their predictions of macroeconomic variables randomly.

Question 39

Suppose there is an increase in expected future output. This will cause which of the following to occur?

A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves to shift right in the current period.

Question 40

"Animal spirits" refers to:

A) the stubborn refusal of many economic decision- makers to use rational expectations.
B) the impact of tax- evasion on the budget deficit.
C) the often- observed central banks' refusal to cooperate with the government in setting its monetary policy.
D) movements in investment that cannot be explained by changes in current variables.
E) an exotic alcoholic drink favoured by Wall Street traders.

Question 41

Suppose there is an increase in expected future taxes. This will cause which of the following to occur?

A) The IS curve to shift left in the current period.
B) The IS curve to shift right in the current period.
C) The LM curve to shift up in the current period.
D) The LM curve to shift down in the current period.
E) Both the IS and LM curves shift left in the current period.

Question 42

Discuss the three possible channels that credit or quantitative easing may affect the economy.

Question 43

Explain why the new IS curve that takes into account expectations is likely to be steeper than the original IS curve that ignored expectations.

Question 44

What is quantitative easing?

A) The central bank decreasing money supply when interest rates are negative.
B) The central bank decreasing money supply at the zero interest rate bound.
C) The central bank increasing money supply at the zero interest rate bound.
D) The central bank increasing money supply when interest rates are negative.
E) The central bank increasing interest rates at the zero money supply bound.

Question 45

Explain what effect a decrease in the future expected interest rate will have on the IS curve and LM curve in the current period.

Question 46

Suppose fiscal policy makers pass a budget that raises taxes in the current period and are expected to increase taxes in the future. Use the IS- LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Question 47

The IS curve becomes steeper when:

A) government spending is relatively small.
B) changes in the current real interest rate cause small changes in current demand.
C) the income tax rate in the current period is relatively small.
D) changes in the current nominal interest rate cause small changes in current demand.
E) current changes in the real interest rate cause large changes in current real output.

Question 48

Explain whether a fiscal policy that causes an increase in current and future government spending can cause a reduction in current output.

Question 49

Assume that the current demand for goods depends on expectations in the IS- LM model. A monetary expansion in the current period will cause a rightward shift in the IS curve if:

A) current and expected future real interest rates are negatively related.
B) current and expected future real interest rates are positively related.
C) current and expected future real interest rates are unrelated.
D) monetary policy cannot affect, directly or indirectly, the position of the IS curve in the current period.
E) the central bank is expected to reverse any current movements in monetary policy in the future.

Question 50

Which of the following will cause a rightward shift of the IS curve?

A) A decrease in expected future output.
B) An increase in current taxes.
C) An increase in expected future real interest rates.
D) A decrease in expected future taxes.
E) A decrease in government spending.

Question 51

Suppose the central bank announces that it will pursue monetary contraction in the current period and continue with the same policy in the future. Explain how the credibility of the central bank might influence the effectiveness of this monetary policy action and announcement of a future monetary policy action.

Question 52

Compare the following three ways to model expectations: animal spirits, adaptive expectations, and rational expectations.

Question 53

Suppose the central bank implements monetary expansion in the current period and is expected to continue this monetary expansion in the future. Use the IS- LM model to illustrate graphically and explain the effects of this policy on current output and the current interest rate.

Question 54

A change in which of the following variables will cause a shift of the IS curve in the current period?

A) Current taxes.
B) Current output.
C) The current interest rate.
D) All of the above.
E) None of the above.

Question 55

Explain the determinants of aggregate private spending.

Question 56

Suppose there is a fiscal expansion in the current period. This fiscal expansion will tend to cause a smaller increase in current output when:

A) an increase in the current interest rate causes expectations of expansionary monetary policy in the future.
B) an increase in the current interest rate causes an increase in expected future interest rates.
C) an increase in current output causes an increase in expected future output.
D) Both A and B.
E) Both B and C.

Question 57

Explain what effect an increase in future expected output will have on the IS curve and LM curve in the current period.

Question 58

Explain whether a policy that results in a larger budget deficit in the current period can lead to a reduction in current output.