Quiz 15: Stabilization Policy, Output, and Employment

In the twentieth century, fluctuations in real GDP were A)less severe during the last 50 years than was true during the first half of the century. B)virtually eliminated as the result of the countercyclical application of fiscal policy. C)more severe during the last 50 years than was true during the first half of the century. D)primarily the result of a fiscal policy that has persistently balanced the federal budget.

If the monetary authorities follow policies that keep the annual rate of inflation steady and low (for example, 2 percent), which of the following is most likely to occur? A)a high rate of unemployment because people will anticipate a higher rate of inflation B)considerable fluctuations in real GDP because the monetary authorities are not constantly adjusting monetary policy in light of current business conditions C)higher real interest rates because decision makers will fail to anticipate the 2 percent rate of inflation D)an unemployment rate that is at or near the natural rate of unemployment because the actual rate of inflation will not be much different than what people expect

Economic analysis suggests that countercyclical macro-policy will A)be difficult to time properly because of uncertainty about the future direction of the economy. B)be difficult to implement because we do not know whether monetary policy is transmitted through the interest rate, or whether it affects aggregate demand directly. C)reduce the natural rate of unemployment when macro-policy is persistently expansionary. D)help reduce economic instability if, and only if, we are willing to tolerate double-digit inflation.

Under the adaptive expectations hypothesis, how will a shift to a more expansionary monetary policy affect the economy? A)In the short run, the real rate of output will be unaffected, but in the long run, it will increase. B)In the short run, the real rate of output will increase, but in the long run, it will be unchanged. C)There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher. D)In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

The adaptive expectations hypothesis implies that people A)adjust their expectations quickly to policy changes. B)expect the next period to be pretty much like the recent past. C)will always be correct in their forecast for the next period. D)change their expectations about the future if policy changes.

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

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to expansionary monetary policy? A)a higher general level of prices but little or no change in real output B)a higher general level of prices and an expansion in real output C)no change in the general level of prices and a reduction in real output D)no change in either the general level of prices or real output

Why did many economists during the 1960s and 1970s believe that expansionary macroeconomic policy that resulted in inflation would reduce the rate of unemployment? A)They failed to realize that the expansionary policy would stimulate aggregate demand. B)They failed to realize that the expansionary policy would reduce real interest rates. C)They failed to incorporate expectations into their analysis. D)They thought that money growth would simply lead to a proportional increase in the price level.

Which of the following is an implication of the modern view of the Phillips curve? A)Higher rates of inflation always lead to lower rates of unemployment. B)Higher rates of inflation always lead to higher rates of unemployment. C)If actual inflation exceeds the inflation rate anticipated by decision makers, unemployment will temporarily fall below the natural rate. D)If actual inflation exceeds the inflation rate anticipated by decision makers, unemployment will temporarily rise above the natural rate.

Most economists believe that 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.

Which of the following is true regarding economic fluctuations in the United States? A)Prior to World War II, economic ups and downs were more moderate than after the war. B)Prior to World War II, annual increases in real GDP of more than 5 percent were unheard of. C)Real GDP grew rapidly during the 1930s. D)The 1930s was a period of prolonged economic stagnation and high unemployment.

During the 1900-1950 period, 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.

Prior to World War II, 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.

If monetary and fiscal policy are going to promote economic stability, they must _________ during a recession, and _________ during an economic boom. (Fill in the blank) A)add stimulus; apply restraint B)apply restraint; add stimulus C)add stimulus; add stimulus D)apply restraint; apply restraint

Activists and nonactivists both believe that 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.

Activists believe that A)the M1 money supply should be increased at a steady rate annually. B)taxes should be increased during a recession in order to balance the federal budget. C)the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment. D)discretionary changes in macroeconomic policy can help smooth the business cycle of a market economy.

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

Which of the following best reflects the nonactivist view of stabilization policy? A)Monetary and fiscal policies exert little impact on the economy. B)Discretionary policy changes often make matters worse. C)Fiscal policy should be used to help stabilize the economy; monetary policy should not. D)Expansionary monetary policy is the primary source of rapid economic growth.

Regarding the issue of economic stability, nonactivists believe that A)consumption is highly unstable over the business cycle. B)the highest possible level of investment must be maintained over all phases of the business cycle. C)minor economic disturbances often feed on themselves, leading to severe swings in the business cycle. D)the self-correcting properties of a market economy work reasonably well.

Which of the following is a major area of disagreement between activists and nonactivists? A)Activists believe discretionary macroeconomic policy can be applied in a manner that will enhance economic stability.Nonactivists disagree. B)Activists believe monetary policy is more potent than fiscal policy.Nonactivists disagree. C)Activists believe changes in monetary and fiscal policy exert their effects instantaneously.Nonactivists think they work only with a substantial lag. D)Nonactivists think macroeconomic policy is sometimes motivated by the pursuit of political gain.Activists disagree.

The time period between when economic conditions change and when policy makers are aware of the change is called the A)index of leading indicators. B)administrative lag. C)recognition lag. D)impact lag.

The time between implementation of a macro-policy change and when the change exerts its primary influence is called the A)impact lag. B)recognition lag. C)administrative lag. D)tax reform lag.

The index of leading indicators was developed to provide more reliable information on A)the expected future direction of the economy. B)the future profitability of the leading companies in various industries. C)where the economy has been in the recent past. D)the extent to which the economy's existing plant and equipment capacity is being used.

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

If the index of leading indicators and other forecasting devices suggested that the economy is moving into an inflationary boom, activists' economic policy would call for A)a decrease in money supply growth and a tax increase. B)an increase in money supply growth and a shift toward a budget deficit. C)an increase in money supply growth and a tax decrease. D)a continuation of the policies already in place.

Computer forecasting models are most accurate at predicting the economy when A)inflation is accelerating. B)there is a turn in the business cycle. C)economic conditions are relatively stable. D)supply shocks impact the economy.

Computer forecasting models have A)been able to forecast changes in the growth rate of real GDP with considerable accuracy. B)had only limited success predicting turns in key economic variables such as real GDP. C)been able to accurately forecast the future direction of inflation but not real GDP. D)been able to accurately forecast the future direction of real GDP but not inflation.

Which of the following would suggest that monetary policy is restrictive? A)falling commodity prices B)depreciation of the foreign exchange value of the dollar C)a rising M1 money supply D)an increase in the rate of inflation

A decrease in a broad index of commodity prices suggests to the Fed that A)money is plentiful, and the Fed should conduct restrictive policy. B)money is plentiful, and the Fed should conduct expansionary policy. C)deflation is a potential future danger, and the Fed should conduct expansionary policy. D)future prices will likely increase, and the Fed should conduct expansionary policy.

If indicators like weak demand and falling commodity prices caused concern about deflation (falling prices), what could the Fed do to head off the deflationary threat? A)increase the reserve requirements imposed on banks B)buy bonds in order to expand the money supply C)increase the discount rate D)increase the national debt

Which combination of signals is indicative that Fed policy is restrictive and that a shift to a more expansionary policy is in order? A)Commodity prices are falling, and the dollar is appreciating. B)Commodity prices are rising, and the dollar is appreciating. C)Commodity prices are rising, and the dollar is depreciating. D)Commodity prices are falling, and the dollar is depreciating.

Which of the following factors substantially reduces the effectiveness of discretionary changes in tax rates or government expenditures as a stabilization tool? A)Even though computer models have enhanced our forecasting ability, policy makers at the Federal Reserve have been reluctant to utilize information supplied by the models. B)When fiscal policy is altered, the Fed generally shifts monetary policy in a manner that offsets the impact of the fiscal action. C)Changes in government expenditures and taxes are always offset by equal changes in private spending. D)Since it takes time for fiscal policy to work and since the future is difficult to forecast, it is difficult to time fiscal policy changes correctly.

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

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

The variables in the index of leading indicators are included in the index because A)they turn down prior to a deflation and turn up prior to an inflation. B)they generally lag behind turns in the business cycle. C)they turn down prior to a recession and turn up before the beginning of a business expansion. D)they provide a comprehensive measure of the current state of the economy.

According to the rational expectations theory, 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)people do not consider likely government policies when forming expectations. D)people form expectations, in part, by considering the probable future effects of changes in government policy.

Under the adaptive expectations theory, people persistently A)underestimate inflation when it is slowing down. B)overestimate inflation when it is accelerating. C)underestimate inflation when it is accelerating. D)adapt to the prevailing inflation rate quickly.

The view that decision-maker expectations are based on actual outcomes observed during the recent past is called the A)rational expectations hypothesis. B)adaptive expectations hypothesis. C)permanent income theory. D)recognition lag.

According to the adaptive expectations hypothesis, A)inflation will cause the long-run unemployment rate to decline. B)the economic record during the current period strongly influences decision-maker expectations about the future. C)decision makers will consider the expected impact of policy changes when forming their expectations about the future rate of inflation. D)future inflation will adapt to conform with the expectations of decision makers.

Use the table below to choose the correct answer. According to the adaptive expectations hypothesis, at the beginning of period 3, decision makers would expect inflation during period 3 to be A)2 percent. B)5 percent. C)7 percent. D)8 percent.

Suppose the inflation rate of a country falls from 8 percent during 2002-2004 to 6 percent in 2005-2007, under the adaptive expectations hypothesis what will the expected rate of inflation at the beginning of 2008? A)2 percent B)4 percent C)6 percent D)8 percent

The view that individuals weigh all available evidence when they formulate their expectations about economic events (including information concerning the probable effects of current and future economic policy) is called A)the adaptive expectations hypothesis. B)the permanent income hypothesis. C)the rational expectations hypothesis. D)the Phillips curve.

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

The rational expectations hypothesis assumes that individuals will A)never make forecasting errors. B)be as likely to overestimate as to underestimate the future rate of inflation. C)continually make systematic forecasting errors. D)ignore past forecasting errors when formulating predictions.

Systematic overestimation or underestimation of inflation will A)occur under rational expectations but not under adaptive expectations. B)occur under adaptive expectations but not under rational expectations. C)occur under both rational and adaptive expectations. D)not occur under either rational or adaptive expectations.

(I) Rational expectations adherents believe that decision makers base their future expectations on actual outcomes observed during recent periods. (II) The adaptive expectations hypothesis states that decision makers weigh all available evidence when forming expectations about future economic events. A)I is true; II is false. B)I is false; II is true. C)Both I and II are true. D)Both I and II are false.

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

According to the theory of rational expectations, errors in predicting inflation will A)be biased upward more often than not. B)be purely random. C)tend to be biased downward when inflation is rising, and tend to be biased upward when inflation is falling. D)tend to be biased upward when inflation is rising, and tend to be biased downward when inflation is falling.

According to the rational expectations theory, 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 effects of the policy are unexpected.

According to the rational expectations theory, which of the following will affect the levels of output and employment? A)expansionary monetary policy that is fully anticipated B)contractionary monetary policy that is fully anticipated C)changes in monetary policy that are unanticipated D)changes in fiscal policy that are anticipated

The main policy conclusion of the rational expectations theory is A)fiscal policy lags are so long and variable that such policy is worthless, but monetary policy can stimulate output. B)monetary policy lags are so long and variable that such policy is worthless, but fiscal policy can stimulate output. C)both monetary and fiscal policy will affect real output if firms and households correctly anticipate the effects of changes in government policy. D)neither monetary nor fiscal policy will affect real output if firms and households correctly anticipate the effects of changes in government policy.

The proponents of adaptive expectations believe that 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.

Under the adaptive expectations hypothesis, which of the following is the effect of a shift to a more expansionary monetary policy? A)In the short run, the real rate of output will be unaffected, but in the long run, it will increase. B)In the short run, the real rate of output will increase, but in the long run, it will be unchanged. C)There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher. D)In the short run, the impact on the real rate of output is uncertain, but in the long run, output will increase.

Under adaptive expectations, the short-term effect of an unanticipated shift to a more expansionary macroeconomic policy will be a A)temporary reduction in the unemployment rate. B)permanent reduction in the unemployment rate. C)temporary reduction in the inflation rate. D)permanent reduction in the inflation rate.

Starting from an initial long-run equilibrium, under the adaptive expectations hypothesis, a shift to a more expansionary policy will increase A)prices and unemployment in the long run. B)real output in the short run but not in the long run. C)real output in the long run but not in the short run. D)real output in both the long run and the short run.

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

Under the rational expectations hypothesis, which of the following is the most likely effect of a shift to a more expansionary monetary policy? A)In the short run, the real rate of output will be unaffected, but in the long run, it will increase. B)In the short run, the real rate of output will increase, but in the long run, it will be unchanged. C)There will be a permanent increase in the real rate of output, but the inflation rate will also be a little higher. D)In the short run, the impact on the real rate of output is uncertain; in the long run, it will remain unchanged.

Starting from an initial long-run equilibrium, under the rational expectations hypothesis, an anticipated shift to a more expansionary policy will increase A)prices but not real output in the short run. B)real output but not prices in the short run. C)real output in the long run but not in the short run. D)real output in both the long run and the short run.

The rational expectations hypothesis implies that use of discretionary macro-policy as a stabilization tool will A)be ineffective, even in the short run. B)be effective in the short run but ineffective in the long run. C)be effective both in the short run and long run. D)make it possible to trade-off a higher rate of inflation for a lower rate of unemployment.

If the government accelerates money supply growth and enlarges the budget deficit to stimulate aggregate demand, the rational expectations hypothesis indicates that decision makers will A)ignore the policy until it exerts an observable impact on prices, output, and employment. B)quickly take steps to adjust their decision making in light of the more expansionary policies. C)be fooled at the outset but eventually adjust their decision making in accordance with the change in policy. D)be unaware that this policy change has been implemented until a higher rate of inflation is observed.

The rational expectations theory indicates that expansionary policy will A)stimulate real output in the long run but not in the short run. B)expand real output and employment if the public quickly anticipates the effects of the expansionary policy. C)equalize real and nominal interest rates during lengthy periods of inflation. D)fail to increase employment because individuals will anticipate it and take actions that will offset its impact.

Suppose Congress raises taxes and the monetary authorities slow the annual money supply growth from 10 percent to 5 percent. If decision makers accurately anticipate the impact of these policy changes on prices, A)unemployment will rise. B)unemployment will fall. C)there will be no effect on unemployment. D)unemployment will fall if the change in monetary policy dominates, but unemployment will rise if the change in fiscal policy dominates.

When the effects of a more expansionary macroeconomic policy are quickly and accurately anticipated, the policy will A)increase inflation without reducing unemployment. B)increase unemployment while exerting little impact on inflation. C)decrease unemployment while exerting little impact on inflation. D)fail to exert a significant impact on either unemployment or inflation.

Under the adaptive expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy? A)higher prices and no change in real output B)higher prices and expansion in real output C)no change in prices but an expansion in real output D)no change in either prices or real output

Under the rational expectations hypothesis, which of the following is the most likely short-run effect of a move to a more expansionary monetary policy? A)higher prices and no change in real output B)higher prices and expansion in real output C)no change in prices but an expansion in real output D)no change in either prices or real output

Under the adaptive expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy? A)higher prices and no change in real output B)higher prices and expansion in real output C)no change in prices but an expansion in real output D)no change in either prices or real output

Under the rational expectations hypothesis, which of the following is the most likely long-run effect of a move to a more expansionary monetary policy? A)higher prices and no change in real output B)higher prices and expansion in real output C)no change in prices but an expansion in real output D)no change in either prices or real output

Under the adaptive expectations theory, expansionary monetary and fiscal policies designed to reduce the unemployment rate will be A)ineffective in the long run. B)ineffective in the short run. C)noninflationary. D)all of the above.

The Phillips curve illustrates the relationship between A)change in the money supply and change in unemployment. B)tax rates and tax revenues. C)the equilibrium level of income and the employment rate. D)inflation and unemployment.

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

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

An unanticipated shift to a more expansionary macro-policy that leads to a higher-than-expected rate of inflation will A)place downward pressure on prices. B)temporarily reduce unemployment. C)temporarily reduce output. D)temporarily reduce the natural rate of unemployment.

According to the modern view of the Phillips curve, expansionary macroeconomic policy that leads to inflation will reduce unemployment A)only if people underestimate the inflationary side effects of the policy. B)only if people overestimate the inflationary side effects of the policy. C)if people accurately anticipate the inflationary side effects of the policy. D)only if monetary policy provides the macroeconomic stimulus.

If decision makers adjust fully to demand stimulus policies, persistent expansionary macro-policy will lead to A)inflation with no lasting reductions in unemployment. B)a permanent reduction in unemployment. C)lower interest rates. D)more rapid economic growth.

An unanticipated shift to a more expansionary monetary policy that permanently increases the rate of inflation from 2 to 6 percent will A)reduce unemployment in the short run, but unemployment will return to the natural rate in the long run. B)reduce unemployment in the short run, but unemployment will exceed the natural rate in the long run. C)increase unemployment in the short run, but unemployment will return to the natural rate in the long run. D)exert an unpredictable impact on unemployment in the short run, but unemployment will return to the natural rate in the long run.

The modern view of the Phillips curve suggests that 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.

Modern Phillips curve analysis indicates that if people A)underestimate inflation, actual unemployment will be below the natural rate. B)overestimate inflation, actual unemployment will be below the natural rate. C)accurately estimate inflation, actual unemployment will be less than the natural rate. D)accurately estimate inflation, actual unemployment will be below the natural rate.

According to the modern expectational Phillips curve, unemployment will temporarily rise above the natural rate of unemployment when A)any inflation is present. B)inflation turns out to be lower than what people expected. C)inflation turns out to be higher than what people expected. D)inflation turns out to be equal to what people expected.

According to the modern expectational Phillips curve, unemployment will temporarily fall below the natural rate of unemployment when A)any inflation is present. B)inflation turns out to be lower than what people expected. C)inflation turns out to be higher than what people expected. D)inflation turns out to be equal to what people expected.

According to the modern expectational Phillips curve, unemployment will equal the natural rate of unemployment when A)any inflation is present. B)inflation turns out to be lower than what people expected. C)inflation turns out to be higher than what people expected. D)inflation turns out to be equal to what people expected.

When persons underestimate inflation (when actual inflation exceeds the expected rate), actual unemployment will A)exceed the natural rate of unemployment. B)equal the natural rate of unemployment. C)fall below the natural rate of unemployment. D)increase if the government is running a budget deficit and decrease if a budget surplus is present.

Under which of the following conditions will the actual rate of unemployment tend to rise above the natural rate of unemployment? A)Prices are stable and have been for the last four years. B)Inflation is 3 percent and was widely anticipated more than a year ago. C)Expansionary monetary policies lead to an unexpected increase in inflation from 3 percent to 7 percent. D)Restrictive monetary policies lead to an unexpected reduction in inflation from 6 percent to 2 percent.

The modern view of the Phillips curve suggests that A)when inflation is less than anticipated, unemployment will fall below the natural rate. B)when inflation is steady, actual unemployment will equal the natural rate of unemployment. C)systematic demand stimulus policies will be unable to affect prices in the long run. D)there will be a trade-off between inflation and unemployment in the long run.

In terms of the Phillips curve, the experience of the 1970s indicates that macro-policy A)can permanently reduce unemployment if we are willing to tolerate higher inflation. B)can reduce unemployment in the long run if we are willing to tolerate higher inflation. C)may be able to reduce unemployment but cannot retard inflation. D)may be able to reduce unemployment in the short run, but there is little evidence that expansionary policies can reduce unemployment permanently.

(I) In the 1960s and 1970s, most economists believed that there was a permanent trade-off between inflation and unemployment. (II) Today, most economists believe there is no permanent trade-off between inflation and unemployment. A)Both I and II are true. B)Both I and II are false. C)I is true; II is false. D)I is false; II is true.

After an extended period of steady inflation at a constant rate, A)people will anticipate inflation. B)actual unemployment will approximate the natural rate of unemployment. C)actual unemployment will be less than the natural rate of unemployment. D)both a and b are true.

When there is an abrupt increase in the rate of inflation, A)the actual rate of inflation will tend to fall below the natural rate. B)the actual rate of inflation will tend to rise above the natural rate. C)the actual and natural rate of inflation will generally be equal. D)the natural rate of unemployment will tend to rise.

Which of the following is most important for the achievement of long-term prosperity and strong economic growth? A)expansionary monetary policy B)expansionary fiscal policy C)price stability D)a balanced federal budget

Most economists agree that A)fiscal policy is a more effective stabilization tool than monetary policy. B)it is difficult to time discretionary changes in macro-policy in a manner that will promote stability. C)monetary policy should focus on reducing unemployment, while fiscal policy should focus on the control of inflation. D)discretionary macro-policy can easily be instituted in a manner that will promote economic stability.

Since the 1960s, macroeconomists have become more aware A)that increases in government expenditures are more effective than tax reductions as a source of economic stimulus. B)that persistent inflation will reduce the unemployment rate. C)of both the potential and the limitations of fiscal and monetary policy as stabilization tools. D)of the fact that fiscal policy is more potent than monetary policy.

When it comes to macro-policy, most economists now agree that A)policy should be constantly changing in response to business cycle conditions. B)policy changes should exert stimulus during inflationary booms and restraint during downturns. C)given our ability to forecast economic conditions, policy changes easily can be implemented in a timely manner. D)policy changes are difficult to time correctly, and therefore constant shifts in policy are likely to be a source of economic instability.

Which of the following is an area of substantial agreement among macroeconomists? A)Expansionary policies that lead to inflation can keep the actual rate of unemployment below the natural rate. B)It is relatively easy to time shifts in monetary policy in a manner that will promote economic stability. C)Price stability is a proper goal of monetary policy. D)It is relatively easy to time shifts in fiscal policy in a manner that will promote economic stability.

Which group is most likely to argue that an increase in government spending will be more effective than a reduction in taxes as a tool to promote recovery? A)monetarists B)Keynesian economists C)supply-side economists D)new classical economists E)All of the above; there is a consensus on this issue.

Economists who believe that market economies are inherently unstable argue that the crisis of 2008 was primarily the result of A)the expansionary policies of the Fed that caused the housing boom. B)housing regulations that undermined sound lending practices. C)the leveraged lending practices of banks and the fear that retarded both consumption and investment in the latter half of 2008. D)persistently high interest rates during the decade leading up to the crisis.

Economists who believe that policy errors are the source of economic instability argue that the crisis of 2008 was primarily the result of A)housing regulations that undermined sound lending practices and Fed policies that generated the housing boom and bust. B)the stock market crash. C)the actions of speculators who drove up the world price of oil, the domestic price of gasoline, and other energy sources. D)persistently high interest rates during the decade leading up to the crisis.

The U.S. experience during the 1980s and 1990s illustrates that A)fiscal policy is substantially more potent than monetary policy. B)a balanced budget is essential for the achievement of price stability. C)a monetary policy that keeps the inflation rate low and steady will help promote economic stability. D)there is a trade-off between inflation and unemployment-the unemployment rate can be reduced if we are willing to tolerate higher rates of inflation.

Which of the following contributed the most to the economic stability and strong growth of real GDP during the 1980s and 1990s? A)the rapid growth of government expenditures throughout most of the period B)congressional policies that persistently balance the budget C)modifications in fiscal policy that stimulated aggregate demand during economic slowdowns and restrained it during periods of economic boom D)Federal Reserve policies that kept the inflation rate low and relatively stable

Which of the following was an important source of economic stability during the two decades following the recovery from the 1982 recession? A)countercyclical fiscal policy instituted by Congress B)a substantial increase in government spending as a share of the economy C)monetary policy that kept the inflation rate low and relatively steady D)balanced federal budgets throughout the period

Compared to the 1910-1960 period, during the past 50 years the severity of macroeconomic fluctuations has A)increased. B)decreased. C)changed little. D)increased, but the general level of prices has been more stable.

Compared to the 1910-1960 period, economic fluctuations during the past 50 years have been less severe. Most economists believe that this increased stability is primarily the result of A)more stable monetary policy. B)the smaller budget deficits of recent decades. C)regulations that promoted more affordable housing. D)greater stability of stock prices as measured by the Dow Jones Industrial Average.

The 25 years prior to the crisis of 2008-2009 were A)characterized by more instability than the first 50 years of the twentieth century. B)the most stable economic quarter of a century in American history. C)characterized by more monetary and price instability than any era other than the 1970s. D)a period of historically slow growth and high unemployment.

Which of the following occurred during and following the 2008-2009 recession? A)Unemployment benefits were extended from their normal 26 weeks to up to 99 weeks. B)The Federal Reserve more than doubled the size of the monetary base. C)The federal budget deficit expanded to approximately 10 percent of GDP. D)All of the above are true.

In response to the recession of 2008-2009, the fiscal policy of the federal government was A)highly expansionary, and this Keynesian stimulus promoted a rapid recovery. B)highly expansionary, but this was largely offset by the Fed's restrictive monetary policy C)highly restrictive, but this was largely offset by the Fed's highly expansionary monetary policy D)highly expansionary, but the unemployment rate nonetheless remained high during 2010 and 2011

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

The policy response to the recession of 2008-2009 provided an experiment on the potency of Keynesian fiscal policy. In what respect was this true? A)The money supply increased rapidly and the short-term interest rates were pushed to near zero just as the Keynesian model of fiscal policy recommends. B)Government spending increased sharply and the budget deficits were large just as the Keynesian model of fiscal policy recommends. C)The money supply increased rapidly and the budget was shifted toward a surplus just as the Keynesian model recommends. D)The federal budget was balanced just as the Keynesian model indicates would be prudent policy during a recession.

During and following the recession of 2008-2009, private investment was A)strong, and this should increase the future productivity of workers. B)strong, and this will tend to weaken the future productivity of workers. C)weak, and this will tend to reduce the future productivity of workers. D)weak, and this will tend to increase the future productivity of workers.

Compared to the severe recession of 1981-1982, the growth of real GDP during the first two years of recovery from the 2008-2009 recession was A)much more rapid and the unemployment rate fell by a smaller amount after the more recent recession. B)slower and the unemployment rate fell by a smaller amount after the more recent recession. C)more rapid but the unemployment rate fell by a smaller amount after the more recent recession. D)similar and the decline in the rate of unemployment was almost identical during the recovery from each of these recessions.

During the recession of 2008-2009, the length of time qualified workers were permitted to draw unemployment benefits was increased from 26 to up to 99 weeks. Economic theory indicates that this extension would A)reduce the opportunity cost of job search and lead to longer spells of unemployment. B)increase the opportunity cost of job search and lead to shorter spells of unemployment. C)reduce the long-term rate of unemployment. D)increase the current supply of labor and make it easier for employers to hire workers.

Compared with the recovery from the recession of 1981-82, the recovery from the recession of 2008-09 was characterized by A)more rapid growth of real GDP. B)a more rapid decline in the rate of unemployment. C)larger increases in both government spending and budget deficits as a share of GDP. D)higher interest rates and a more restrictive monetary policy.

Which of the following contributed to the weak recovery from the 2008-2009 recession? A)The restrictive monetary policy followed by the Fed. B)Government spending was increased by only a small amount. C)The temporary nature of the tax rebates and spending increases created uncertainty and exerted only a weak impact on aggregate demand. D)The budget deficits were too small to exert much impact on aggregate demand, output, and employment.

Which of the following reduced the effectiveness of the Fed's low interest rate policy during the aftermath of the 2008-2009 recession? A)The heavy indebtedness of households. B)The reduction in the earnings derived from savings accounts, certificates of deposits, and other forms of savings used by many Americans. C)The increased fear of inflation fueled by the Fed's expansionary monetary policy. D)All of the above.

Which of the following contributed to the weak recovery from the 2008-2009 recession? A)the restrictive monetary policy followed by the Fed B)constant policy changes that created uncertainty and thereby retarded private business investment C)sharp reductions in federal spending that were designed to achieve a balanced federal budget D)failure to run budget deficits that were large enough to exert an impact on aggregate demand

Which of the following reduced the demand stimulus effects of monetary policy during the years following the 2008-2009 recession? A)Failure of the Fed to provide sufficient reserves to the banking system for the extension of new loans. B)A substantial reduction in the velocity of money resulting from the historically low interest rates. C)The Fed's high interest rate policy that reduced private investment. D)Inability of the Fed to gain approval from Congress to purchase assets other than bonds issued by the federal government.

Which of the following contributed to the weak recovery from the 2008-2009 recession? A)constant policy changes that generated uncertainty and undermined private investment B)the restrictive monetary policy followed by the Fed C)the tax increases instituted by a Congress intent on balancing the budget D)the inability of the federal government to borrow because of the sharply higher interest rates

Use the figure below to answer the following question(s). Figure 15-1 -In Figure 15-1, AD₁ and SRAS₁ indicate initial conditions in the goods and services market. In the short run, which of the following will most likely result from a shift to a more expansionary monetary policy under the adaptive expectations hypothesis? A)price level P₁ and output Y₁ B)price level P₂ and output Y₂ C)price level P₃ and output Y₁ D)price level P₁ and output Y₂

Use the figure below to answer the following question(s). Figure 15-1 -In Figure 15-1, AD₁ and SRAS₁ indicate initial conditions in the goods and services market. In the short run, which of the following will most likely result from a shift to a more expansionary monetary policy under the rational expectations hypothesis? A)price level P₁ and output Y₁ B)price level P₂ and output Y₂ C)price level P₃ and output Y₁ D)price level P₁ and output Y₂

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will temporarily rise above the natural rate of unemployment when A)inflation turns out to be lower than what people expected. B)inflation turns out to be higher than what people expected. C)inflation turns out to be equal to what people expected. D)all of the above are true.

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will temporarily fall below the natural rate of unemployment when A)inflation turns out to be lower than what people expected. B)inflation turns out to be higher than what people expected. C)inflation turns out to be equal to what people expected. D)all of the above are true.

Use the figure below to answer the following question(s). Figure 15-2 -According to the modern expectational Phillips curve illustrated in Figure 15-2, unemployment will equal the natural rate of unemployment when A)inflation turns out to be lower than what people expected. B)inflation turns out to be higher than what people expected. C)inflation turns out to be equal to what people expected. D)all of the above are true.

Figure 15-3 -As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move A)directly from E₁ to E₃ and then remain at E₃. B)directly from E₁ to E₂ and then remain at E₂. C)from E₁ to E₂ initially and then eventually move back to E₁. D)from E₁ to E₂ initially and then eventually move to E₃.

Figure 15-3 -As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move A)directly from 100 to 110 and then remain at 110. B)directly from 100 to 105 and then remain at 105. C)from 100 to 105 initially and then eventually move back to 100. D)from 100 to 105 initially and then eventually move to 110.

Figure 15-3 -As shown in Figure 15-3, if people behave according to adaptive expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause A)labor to adjust nominal wages sluggishly. B)the aggregate supply curve to shift from SRAS₁ to SRAS₂ C)the price level to eventually rise from 100 to 110. D)All of the above.

Figure 15-3 -As shown in Figure 15-3, if people behave according to rational expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the price level to move A)directly from 100 to 105 and then remain at 105. B)directly from 100 to 110 and then remain at 110. C)from 100 to 105 initially and then eventually move back to 100. D)from 100 to 105 initially and then eventually move to 110.

Figure 15-3 -As shown in Figure 15-3, if people behave according to rational expectations theory, an increase in the aggregate demand curve from AD₁ to AD₂ will cause the economy to move A)directly from E₁ to E₃ and then remain at E₃. B)directly from E₁ to E₂ and then remain at E₂. C)from E₁ to E₂ initially and then eventually move back to E₁. D)from E₁ to E₂ initially and then eventually move to E₃.

Which of the following is true regarding economic fluctuations in the United States? A)Since World War II, economic ups and downs have been more moderate than before the war. B)Prior to World War II, real GDP annual increases of more than 5 percent were unheard of. C)Real GDP grew rapidly during the 1930s. D)The 1920s was a period of prolonged economic stagnation and high unemployment.

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

Activists believe that A)discretionary changes in macroeconomic policy can help smooth the ups and downs of the business cycle. B)balancing the federal budget is of primary importance to economic stability. C)the economy's self-correcting mechanism, if not stifled by perverse policies, will prevent prolonged periods of high unemployment. D)the M1 money supply should be increased at a steady annual rate.

Which combination of signals would be a strong indication that Fed policy is too expansionary and that a shift to a more restrictive policy is in order? A)commodity prices are falling and the dollar is appreciating. B)commodity prices are rising and the dollar is depreciating. C)commodity prices are rising and the dollar is appreciating. D)commodity prices are falling and the dollar is depreciating.

The interval between the recognition of a need for a policy change and when the policy change is instituted is called the: A)recognition lag. B)impact lag. C)policy lag. D)administrative lag.

According to the adaptive expectations hypothesis, people will 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.

The rational expectations hypothesis implies that discretionary macropolicy may be A)relatively effective in both the short run and long run. B)relatively effective in the short run but ineffective in the long run. C)relatively ineffective both in the short run and long run. D)effective in the long run since decision makers will continually make predictable, systematic errors.

According to the rational expectations theory, expansionary monetary policy will A)reduce inflation. B)lead to inflation and the higher rate of inflation will be quickly anticipated. C)reduce unemployment because people will generally underestimate the inflationary side effects of the monetary expansion. D)accelerate inflation in the short run, but in the long run the primary effect will be an increase in employment.

Which of the following is part of the modern view of the Phillips curve? A)When inflation exceeds what was anticipated, unemployment falls below the natural rate. B)When inflation is less than anticipated, unemployment will rise above the natural rate. C)Demand stimulus policies can temporarily reduce unemployment, but in the long run, their primary impact will be on prices (inflation). D)All of the above are correct.

Suppose the annual rate of inflation has been 3 percent and the annual growth rate of the money supply has been 5 percent during the last few years. In the last twelve months, however, the monetary authorities have increased the money supply at a 12 percent annual rate. The expected inflation rate for the next period will be: A)lower than 3 percent under both the adaptive and rational expectations hypotheses. B)3 percent under the adaptive expectations hypothesis. C)3 percent under the rational expectations hypothesis. D)higher than 3 percent under both the adaptive and rational expectations hypotheses.

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

In order to make effective policy changes, policy makers need to know A)where the economy is going to be six to twelve months from now. B)the magnitude of past recessions. C)Keynesian economics. D)the exact size of the current M1 money supply.

Which of the following variables are included in the index of leading indicators? A)new orders placed with manufacturers, length of average workweek, permits for new housing starts B)changes in the M1 money supply, number of new credit cards, political stance of current politicians C)average worker salary, average number of children per family, current standard of living D)labor-force participation rate, household debt as a share of disposable income, the real interest rate

The integration of expectations into macroeconomic analysis indicates that A)fiscal policy is more potent than monetary policy. B)monetary policy is more potent than fiscal policy. C)once people come to expect a given rate of inflation, the inflation will neither stimulate real output nor reduce unemployment. D)higher rates of inflation will lead to lower rates of unemployment in the long run but not in the short run.

Which of the following contributed to the weak recovery from the 2008-2009 recession? A)Government stimulus spending that was largely temporary and often directed toward unproductive activities. B)The restrictive monetary policy followed by the Fed. C)The tax increases instituted by a Congress intent on balancing the budget. D)The failure of the Fed to provide the banking system with sufficient reserves for the extension of new loans.

What is the index of leading indicators, and what is it used for?

Explain two reasons why economic forecasting can only be of limited use.

Explain the three lags that make it difficult to time changes in discretionary policy properly.

What are the two theories about how expectations are formed? Discuss each.

What are the macroeconomic policy implications of the rational expectations hypothesis? What should policy makers do and not do?

What is the Phillips curve? What is the difference between the original Phillips curve and the "modern" view of the Phillips curve? What problems caused the abandonment of the ideas behind the original Phillips curve?

What will actual unemployment be (in relation to the natural rate) in each of the following cases? Use a graph of the modern Phillips curve in your answer. a.Decision makers underestimate inflation. b.Decision makers overestimate inflation. c.Decision makers correctly forecast inflation.

How has macro-policy changed since the 1970s? How have the views of economists on the trade-off between inflation and unemployment changed?

What are the proper monetary and fiscal responses to a recession under the activist view and the nonactivist view?